The Metro Bank (LSE: MTRO) share price has taken a huge hit in the last week. The UK high street challenger bank’s stock has fallen almost 40% in the last five days, including 28% yesterday (October 5) alone.
The fall came after news that the bank is seeking to raise capital to shore up its balance sheet. As an avid value investor, such a drop makes me wonder whether now’s the time to buy some cheap shares. Let’s take a closer look.
The lowdown
Launched in 2010, Metro Bank has rapidly grown to serve 2.7m customers through its 76 UK branches. It currently holds a substantial £15.5bn in UK customer deposits. The problem is that the bank now faces a pressing need for additional funding to sustain its expansion plans and safeguard its lending capabilities. However, its issues have been exacerbated by the company reaching the edge of its capital requirements.
Metro hoped to remedy these requirements by using internal models to assess its mortgage risk. However, this was declined by the UK central bank, triggering concern among investors.
While Metro Bank is technically within the regulator’s capital limits, it’s currently operating within a ‘buffer’. It must escape this in order to realistically execute growth plans.
Current capital raising plans include a refinancing of £350m of debt, which falls in 12 months’ time, alongside raising over £100m in new equity. However, the recent decline in the stock has complicated the share sale aspect of the plan, leaving the bank with a market value well below £100m.
It was announced late last night that a potential sale of over £3bn of mortgages may happen in order to remedy the increasingly urgent situation. Selling these mortgage assets would reduce its earnings, but also significantly diminish the amount of capital Metro Bank is obligated to hold.
Analysts have raised questions about the bank’s ability to execute these plans, suggesting the possibility of a forced takeover or financial collapse.
It’s not all bad news
Metro Bank recently released positive H1 23 results, which seemed at the time to mark the successful completion of its turnaround initiated in 2022. Revenues increased by £50m year on year to £286m, filtering down to a profit before tax of £15m, a significant shift from the previous year’s losses. This was Metro’s third consecutive quarter of underlying profit. These results looked promising and the bank expects this momentum to continue moving forward.
In addition, Metro maintained its position as the highest-rated high-street bank for overall service quality in the CMA’s latest survey, emphasising its commitment to customer satisfaction.
Should I be steering clear or buying in?
Metro Bank’s renewed profitability is great news for potential investors. However, its fragile balance sheet overshadows these positive results. With the current situation still playing out day by day, this stock is way too risky for me to consider buying.
If the bank can find a way to stabilise itself in the near future, then I will consider taking another look, however, I won’t be buying its shares any time soon.
