The Metro Bank share price has crashed in 2019…I’d buy this FTSE 250 bank instead

I’d sell Metro Bank shares and invest in this company instead, writes Thomas Carr.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

It’s been a torrid year for investors in Metro Bank (LSE: MTRO). Those that bought into the company at the beginning of the year are nursing losses of up to 90%, with performance blighted by a deluge of issues that culminated in the resignation of the challenger bank’s founder.

It was forced to go cap in hand to investors for additional equity in each of the last three years to shore up its capital levels. This has effectively diluted existing investors’ share of company profits. More worrying though is the fact that aren’t any profits to dilute anyway.

Unprofitable 

The bank reported a £5m loss for the third quarter after rising costs and a deteriorating net interest margin. And this comes after customers pulled out £2bn in deposits (13% of the total) in the first half of the year.

As well as an equity raise earlier this year, Metro Bank more recently raised debt in the form of high-yielding bonds with a coupon rate of 9.5%. While this will help to meet its capital requirements, it means that interest costs will eat into future operating profits at a time when the company is already struggling with profitability.

Taking all of this into account, I expect the bank to report a loss for the full year and struggle to see how it will return to profitability in 2020. Metro Bank has some serious underlying profitability issues that need to be addressed, and if I was a shareholder, I reckon I’d sell out and put my money to better use.

A better option

Sticking with challenger banks, I think One Savings Bank (LSE: OSB) is a much better company to invest in.

In the last month, it has completed a combination with Charter Court Financial Services Group, that brings together two specialist mortgage providers, with growing loan books and lean cost structures.

As standalone banks, financial performance was impressive. Revenues at One Savings have more than doubled from £125m in 2014, to £287m last year, with after-tax profits rising from £51m to £140m over the same period. Over at Charter Court, after-tax profits have more than tripled in just two years, from £37m in 2016, to £120m in 2018.

This financial performance is underpinned by strong banking metrics. Both boast industry-leading net interest margins and cost-to-income ratios of under 30%, while return on equity is over 20% at both.

Post-combination, the company should be even stronger. Management believes that there will be additional operating and cost synergies as a result of the merger, which has the potential to improve operating models that are already very good. Cost savings from the merger are expected to be in the region of £22m a year, for the first few years. The combination should also make it easier to raise finance, as well as reduce the cost of debt.

With the combined group’s shares priced at just over six times last year’s earnings, I think they look remarkably cheap, considering growth prospects and profitability. A dividend payout of 25% of after-tax profits and a yield of over 4% is the icing on the cake for me.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Thomas has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

After it crashed 25%, should I buy this former stock market darling in my Stocks and Shares ISA?

Harvey Jones has a big hole in his Stocks and Shares ISA that he is keen to fill. Should he…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »