Despite being highly rated in customer satisfaction surveys, nothing is going right for Metro Bank (LON:MTRO) at the moment. At its launch in 2010, the challenger bank’s co-founder Vernon Hill promised a revolution.
Back then, the first UK high street bank to launch in over 150 years came in on a high. Its brightly lit pet friendly branches were labelled ‘stores’ by management and its growing base of users as ‘fans’ not customers. Unlike established rivals, Metro Bank was open on weekends and even bank holidays at prime locations. The allure of a different customer offering catapulted the bank to the FTSE 250 index and its impressive customer satisfaction ratings have remained largely intact.
However, investor satisfaction is an entirely different matter and it is here that Metro Bank has committed some outrageous slip ups. On 27 February, the bank’s shares took a hammering that wiped out a fifth of its value on plans for a £350m shareholder cash call, a month after revelations of accounting errors surfaced which led to an increase in the volume of higher risk assets on its balance sheet.
The news overshadowed a release of its financials pointing to a more than doubling of 2018 pre-tax profits to £40.6m, from £18.7m the year before. The circumstances around the accounting errors are now being probed by both the UK Financial Conduct Authority and Prudential Regulatory Authority.
If investors weren’t spooked enough, the bank has stunted its expansion plans because its capital ratio of 13.1% (at the end of 2018), while above its 12% target, is insufficient to fund 30% headline growth target, which has since been lowered to 20%.
In my opinion several factors point to odds being stacked against the bank, and there are reasons for deeming it to be a short. Problems had surfaced long before Metro Bank’s recent woes, with glaring accountability niggles at the company.
For instance, it recently paid £21m for design work to founder Vernon Hill’s wife’s firm – InterArch – deemed inappropriate in the eyes of many. Royal London Asset Management and Glass Lewis voted against Hill's re-election as chairman, but were convincingly outvoted.
This brings us to the make-up of the board deemed too cosy by analysts as six of its nine non-executive directors have been at the table since Metro Bank’s launch nine years ago, touching the maximum recommended time-frame under the corporate governance code.
Despite revelations of the recent accounting blunder, Metro Bank’s Chief Executive Craig Donaldson survived in his post as he “retained the confidence of the board.”
He would, however, forego his bonus as a consequence, given that a billion pounds have been wiped out of the bank’s market valuation, and the company is trading around 30% below its tangible book value (including the proposed additional share issuance for which a price has not yet been set).
Given this backdrop, there is little to be upbeat about the stock over the short to medium term, despite belated calls for the bank’s board and management to be overhauled finally being heard. Individual investors should note that new institutional investors or family firms are all but guaranteed to demand a substantial discount for buying in to Metro Bank as things stand.
Many would have been scalded by Metro Bank's last offering in July 2018 as they have lost 80% of their invested capital at current valuation of the company. That too for a bank with a lacklustre net interest margin, ~3% return on tangible equity in its financial year, and no hopes of double-digit returns at least until 2023-24.
There also appears to be no short term prospect of a dividend either given its problems. Even a revised growth rate of 20% looks optimistic. That means over the medium term investors might well be paying to own this niche bank that is expensive to run, rather than being paid returns.
Conclusions: From where I sit, Metro Bank is staring at more negatives than positives that don’t make a convincing case for buying its stock. If not a sure short, it is at best a holding stock should its share issuance not go according to plan, leading to an offer or two from a private equity firm. However, things are likely to get a lot worse before they get better, as the second wave of Metro Bank’s revolution is likely to be a lot more painful.
Disclosure:
I have no positions in any of the securities referenced in the contribution
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To the best of my knowledge, the views expressed in this contribution comply with UK law
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This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.
Gaurav S.