This bank stock is down 96% in two years. Is it a good contrarian buy?

Following a series of issues over the past couple of years, this bank stock is now down 96%. Stuart Blair looks at whether it is now a good contrarian buy.

| 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 disastrous couple of years for Metro Bank (LSE: MTRO). Its share price has been driven down by reporting errors, regulatory investigations, and currently, the pandemic’s severe impact upon banks. But with new management from the start of this year, and the recent acquisition of RateSetter, is it now time to buy the bank stock?

The bank is plagued with problems

Metro Bank came to the UK 10 years ago with major expectations. In fact, the co-founder, Vernon Hill, stated that it was the start of a “revolution in the banking business”. In many ways the bank has succeeded. For example, consumer satisfaction has always been very high, and the number of personal banking customers has greatly increased.

Nevertheless, this model has led to its own problems. In fact, the new chief executive, Dan Frumkin, has said that the branches are “too large” and they have “consumed capital and were a driver of fixed costs”. As a result, in the current climate of low interest rates and a large number of loan defaults, large capital expenditures have crippled the bank stock. This meant that in the first half of 2020, it declared a loss of £240.6m.

But the problems for Metro Bank preceded the pandemic. In fact, last year, the bank posted a pre-tax loss of £131m after an accounting scandal, two regulatory inquiries, and a class action lawsuit. As a result, it’s clear that the problems with the bank stock extend beyond just the impacts of the pandemic.

Are things starting to look up for Metro Bank?

The last couple years have seen the Metro Bank share price decrease from highs of around 4,000p to its current price of just 109p. This has left the stock with a price-to-book ratio of just 0.13, a very cheap valuation.

The bank has also recently acquired the peer-to-peer lender RateSetter. This is part of a strategy to grow unsecured lending and in turn increase profits. Although potentially risky, if it can help grow Metro Bank profits, this acquisition could help incite a sharp rise to its share price.

Would I buy this bank stock?

Metro Bank shares are definitely very cheap. But with the bank losing money even before the pandemic, this is really not surprising. Dramatic changes are needed in order for any significant recovery to start.

The question is whether it can achieve this recovery. Personally, I’m not convinced. Although there has been some positive news recently, it has been outweighed by a stream of negative news. As seen in the recent poor performances of other large banks, this is also an incredibly difficult period for banks. I’d prefer a bank stock that is in better shape than Metro Bank. Even with its potential upside, Metro Bank shares are just too much of a risk 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.

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

Google office headquarters
Investing Articles

1 reason I like buying S&P 500 shares – and 1 reason I don’t

Will this investor try to improve his potential returns by focusing more on S&P 500 shares instead of British ones?…

Read more »

Young woman holding up three fingers
Investing Articles

3 SIPP mistakes to avoid

Our writer explains a trio of potentially costly errors he tries to avoid making when investing his SIPP, on an…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Here’s how (and why) I’d start buying shares with £25 a week

Our writer uses his investment experience and current approach to explain how he would start buying shares on a limited…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s my 5-step approach to earning passive income of £500 a month

Christopher Ruane explains the handful of steps he uses to target hundreds of pounds in passive income each month.

Read more »

Investing Articles

2 UK shares I’ve been buying this week

From a value perspective, UK shares look attractive. But two in particular have been attracting Stephen Wright’s attention over the…

Read more »

Investing Articles

A lifelong second income for just £10 a week? Here’s how!

With a simple, structured approach to buying blue-chip dividend shares at attractive prices, our writer's building a second income for…

Read more »

Investing Articles

Here’s how I’d use a £20k Stocks and Shares ISA to help build generational wealth

Discover how our writer would aim to turn a £20k Stocks and Shares ISA into a sizeable nest egg by…

Read more »

Investing Articles

Billionaire Warren Buffett just bought shares of Domino’s Pizza. Should I grab a slice?

Our writer takes a look at a few reasons why Domino's Pizza stock might have appealed to Warren Buffett's Berkshire…

Read more »