Launched in 2010, Metro Bank (LSE:MTRO) was the first new high street bank in the UK in over 150 years. It had high hopes and sleek decor, with long opening hours and appeal for the younger generation. Nine years later and it seems like a fly-by-night failure with little to look forward to.
A string of profit warnings, board changes, a major accounting error, legal issues, and failure to issue bonds sent the Metro Bank share price sliding down a devastating 93% in the past year. However, yesterday’s news that founder Vernon Hill had finally left and confirmation that a previously failed bond issuance was now going ahead, sent the share price increasing by as much as 30%. All very exciting, but I imagine it’s a temporary bounce, as I see little to get excited about.
Risky mortgages
Providing retail and commercial bank services in the UK is a competitive environment at best and if profit warnings aren’t bad enough, I think the news that Metro had been issuing loans and mortgages that are riskier than they were sold to be, is downright scandalous. The company revealed this back in January after it was discovered by the Bank of England’s Prudential Regulation Authority.
The news knocked more than £1bn off the bank’s value. To help solve this problem and reestablish faith in the bank, £350m had to be raised from shareholders, further diluting the Metro share price.
Shortly after the accounting scandal came to light, Metro’s founder Vernon Hill agreed to step down as chair but stay on as non-executive director. Yesterday’s announcement confirms he will now exit completely by 31 December.
High-interest bonds
To comply with new EU regulations, last month the bank proposed a £250m bond issuance with a generous interest rate of 7.5%. But the issuance was deemed too risky and failed to get off the ground. As of late September, it had been put on hold. Yesterday, a £300m bond was issued at a higher yield of 9.5% and managed to secure orders worth £475m.
The purpose of these new regulations, called MREL, is to prevent the need for government bailouts in the event a bank fails. Metro has to comply with MREL by the end of the year. Unfortunately, I fear it may already be too late.
These are sad times for those investors that bought in at the beginning of the year when the share price was over £22. Their shares are now worth around £2 each. It is even more devastating for investors who bought in last year, at the peak price of over £40 per share.
Today the price-to-earnings ratio is less than 7 and, understandably with sky-high debt, Metro Bank offers no dividend yield to investors. All in all, there is little to entice investors to buy or hold. Rumour has it that US activist investor Elliott may be interested in acquiring a stake in the bank. There is no doubt drastic measures are required at this point.
Perhaps bad timing makes this just yet another victim of the retail fallout from Brexit, or perhaps it was too ambitious in the first place. The accumulated impact of several serious events has led to the demise of Metro Bank and as each is not insignificant on its own, together I think they scream “steer clear”.
