Metro Bank share price could trade higher thanks to RateSetter deal

The UK-based challenger bank is in talks to acquire peer-to-peer lender RateSetter, with the deal capable of lifting Metro Bank shares higher by helping it diversify away from mortgage lending.

Metro Bank entered into an exclusivity deal with peer-to-peer lender RateSetter in mid-June, with the deal representing a major turning point for the troubled challenger bank that would see it diversity away from mortgage lending and help lift its downtrodden share price.

It is still unclear whether Metro Bank wishes to acquire the lending platform developed by RateSetter or if it is interested taking over its loan book, valued at around £800 million. But the acquisition could help the UK challenger bank to recover from the economic fallout of Covid-19 and its accounting error scandal which wiped millions of its market value and created a £350 million capital shortfall for the lender.

The RateSetter deal is valued at around £50 million, though analysts have said that Metro Bank could acquire the company’s tech platform at a ‘knockdown price’.

‘[Metro Bank’s] principal challenge is profitability given the low-yielding nature of its assets and we previously opined that an acquisition of RateSetter at a ‘knockdown price’ would provide some help in this respect, while also providing a lending platform that [Metro Bank] can leverage to drive further higher-yielding lending growth,’ John Cronin, an analyst at Goodbody, told P2P Finance News.

‘The c.£50m price tag implies that [Metro Bank] has ample capital to execute such a transaction (CET1 ratio of 15.6 per cent at end-FY19), though it is understandable why the board is weighing up the risks of a transaction in the current climate,’ he added.

Metro Bank is trading at 110p per share, with the stock down 47% year-to-date. However, it is important to note that the stock has shown signs of a recovery with the bank’s share price up 50% since 1 June and capable of trending higher as lockdown restrictions begin to ease in the UK and economic activity picks up.

Metro Bank hires dealmaker chairman

Last week, Metro Bank announced that it had appointed Robert Sharpe as its new chairman, a man capable of helping the challenger bank’s boss Dan Frumkin to turn the business around and considered a proven dealmaker in the retail banking sector.

Sharpe has a wealth of board and executive-level experience in retail banking, with him leading the transformation of West Bromwich Building Society and heading up Bank of Ireland's consumer business in the UK.

‘As we navigate the new economic environment caused by Covid-19, community banking has never been more important as people, businesses and communities adapt to this new normal,’ Sharpe said in a statement.

‘It is this community banking model that sets Metro Bank apart and will enable us to continue to grow,’ he added.

Sharpe will take over from Michael Snyder as Metro Bank’s new chairman on 1 November.

Bad debts continue to rise across UK lenders

News of the RateSetter deal will no doubt please investors, even if they have been told that Metro Bank is unlikely to return to profitability until at least 2022.

However, the challenger bank and its peers have an uphill battle ahead of them, with Metro Bank warning shareholders in May to brace themselves for a significant increase in bad loans as a result of the economic fallout from Covid-19.

Snyder told onlookers at the lender’s annual general meeting in May that low interest rates and government intervention will support loan repayments but that bad debts are likely to rise.

‘Nonetheless, we are seeing short term economic disruption which will naturally result in significantly higher credit risk impairments than in recent years, with the actual quantum depending largely on the magnitude and length of the economic slowdown,’ Snyder said.

‘We have also seen behavioural changes, such as a reduction in transaction volumes, which may result in lower than expected fee income for a while,’ he added.

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