The Metro Bank share price hit a record low this week and the shares are trading at an incredible 40% discount compared to seven days ago.
So is this a bargain or a fire sale? How much life is left in the nine-year-old challenger bank? At last call, City analysts at Goldman Sachs and RBC Capital Markets said the shares were still worth buying, after all.
Look wider
The rapid rise of UK app-first, digital-only banks like Starling, Monzo and Revolut speaks to structural changes in banking, with customers flocking to their slick UIs and the ability to open a bank account with a few taps on a smartphone.
High street bank bosses are also falling over themselves to slash costs, cut back on staff and on opening hours: a third of all UK bank branches closed in the last five years, according to research from Which?
Word is bond
The failure to find enough investors for a late-September £200m bond sale reminds me of the money-raising troubles over at Sirius Minerals and a chart of the share price over the last 12 months resembles the same crushing slide towards zero pence.
Even with the promise of a juicy 7.5% yield on the bond, Metro could only scrape up £175m and had to cancel the issue.
This lack of interest in stumping up cash “is quite remarkable” according to AJ Bell investment director Russ Mould. “It suggests investors don’t trust the bank, or believe the yield is simply not high enough to compensate for the risks,” he said.
Coming up short
I think the Metro Bank share price can sink a lot further now the market has lost faith. You need only look at the rising number of short-sellers: those betting that the share price will fall. According to shorttracker.co.uk the company is now second on the list of the most-shorted FTSE members, behind collapsed travel operator Thomas Cook.
It’s worth noting that Metro’s market cap — its share price multiplied by the number of shares outstanding — is £286m at time of writing. It raised £375m from an emergency cash call in May.
There’s little confidence left that CEO Craig Donaldson can pull the business out of this quagmire. Management is hemmed in by a lack of capital and it doesn’t look like sentiment is on their side.
Problems at the challenger bank go back much further. Founder Vernon Hill stepped down as chairman in January after a major accounting issue when Metro Bank put the wrong risk rating on some of its commercial loans, wiping millions of pounds off the company’s value.
The bank then reported an 80%+ drop in pre-tax profits for the first half of 2019.
What now?
I’ve written before on the problems of averaging down, or adding more to your shareholding as a share price falls.
There must be significant reasons why you think a stock can bounce back from a nosedive — for example a well-thought-out turnaround plan, a takeover bid in the works, or a change of management.
To my eyes none of this is happening at Metro Bank. There are much better investments out there for bargain hunters and I would avoid this stock like the plague.
