The Metro Bank (LSE: MTRO) share price has really struggled over the past year. Over the past 12 months, shares in the challenger bank have declined by around a third. By comparison, shares in some of the company’s larger competitors, such as Lloyds Bank, have produced a positive return.
Shares in Lloyds have produced a 2% return excluding dividends over the past year.
Even after the recent market volatility, shares in many financial institutions have outperformed over the past 12 months as interest rates have started to move higher. Higher interest rates will allow these companies to charge more to borrowers, boosting their bottom lines.
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After more than a decade of ultra-low interest rates, this could bring some much-needed interest rate relief to the sector.
Unfortunately, it looks as if the Metro Bank share price has missed out on most of this performance. The question is, why?
Metro Bank share price challenges
Ever since the company’s accounting scandal several years ago, the bank has struggled to regain investor confidence. In 2019 the group announced that it had misreported the value of its commercial loan portfolio. The corporation lost a number of senior managers as a result of this error and had to raise additional cash. The lender’s reputation also took a significant hit.
Soon after this accounting error was announced, the coronavirus crisis began. The crisis had a significant impact on the company’s growth plans.
And it looks as if the crisis has left scars on the group.
According to the company’s 2021 financial update, while revenue increased by 17% in the year, overall operating costs only declined by 1%. As a result, the enterprise reported a statutory loss before tax of £245m. It is also expecting further fines from regulators over its accounting error.
Metro Bank’s growth has also taken a hit after the business disposed of its mortgage arm. This was part of its plan to recover from the accounting error. By shifting away from mortgages, the company would be able to target higher-margin personal loans. That was the theory anyway.
This means the company missed out on last year’s housing market boom, and it has its work cut out to restore lending margins and profits.
Missing out
Considering all of the above, it is clear to me why the Metro Bank share price has underperformed over the past 12 months. The company has made a series of strategic missteps. It is going to be some time before it regains the market’s confidence.
Still, rising interest rates could act as a significant tailwind for the business. If management is able to navigate the current economic turbulence and capitalise on higher rates, the company’s sales and profits could recover. This is something I will be keeping an eye on over the next few years.
However, for the time being, considering the company’s troubles, I am not going to add the stock to my portfolio anytime soon. I would like to see further progress on the turnaround before buying in.
