Metro Bank (MTRO) share price: Can you bank in on Metro’s results?

It started off with a vision to revolutionise British banking, intent on disrupting the stagnant high street banking industry by enhancing service levels and investing in state-of-the-art IT software. But now Metro Bank (MTRO) is in turmoil.

The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results

Not only have five of the challenger bank’s founding directors left within the last year but the firm also pulled a £250 million bond sale citing ‘poor market conditions’, despite offering a yield of 7.5%. As a result, Metro Bank’s share price has tumbled -90% since floating at 2000 pence per share in 2016.

The table below shows that Metro Bank’s share price has been the fifth most volatile amongst shares in the FTSE All-Share Index, which captures 98% of the UK’s market capitalisation.

Figure 1. Top ten most volatile UK shares over the 360 days

Equity 360-day Volatility (%)
1. Indivior PLC (INDV) 140.795
2. Tullow Oil PLC (TLW) 123.499
3. Kier Group PLC (KIE) 104.882
4. Sirius Minerals PLC (SXX) 99.478
5. Metro Bank PLC (MTRO) 97.377
6. Intu Properties PLC (INTU) 92.466
7. Amigo Holdings PLC (AMGO) 86.754
8. NMC Heath PLC (NMC) 81.446
9. Ted Baker PLC (TED) 80.78
10. Allied Minds PLC (ALM) 79.991

Source: Bloomberg, February 2020

If at first you don't succeed, try, try again

Failing to secure funding in September last year was a huge blow to Metro Bank as it needed to raise finance to meet the Minimum Requirements for own funds and Eligible Liabilities (MREL) regulation by January 2020. MREL intends to ensure firms have the capacity to take on losses so that they can fail safely, removing the need for public funding. The bank went back to the market in October with an enhanced offer: that they would remove Vernon Hill, the chairman of Metro Bank, and a higher coupon of 9.5%.

Metro Bank managed to secure the £350 million it required, but at a large cost. An accounting scandal revealed in January last year was another reason why bond investors demanded such a yield. Analysts have since raised their concerns about the constraints the business faces due to the bond terms at their third quarter results, to which David Arden, chief financial officer (CFO), responded: 'I fully accept that the cost was somewhat elevated, but I think it was the right thing to do for the long term of the bank.'

A recipe for disaster: rising costs and subdued growth

Whilst Metro Bank has satisfied MREL regulations, for now, there are still difficult times ahead with rising operating expenses, potential fines by two regulators and, as outlined previously, substantial costs to finance their recent debt issue.

The lender is still under investigation from the Financial Conduct Authority (FCA) over its reporting scandal in January last year whereby it miscalculated loans in risk terms, consequently overstating its capital ratios. As a result, investors have been warned that Metro Bank could potentially face financial penalties which could well be 'significant'. Adding to this, the bank is also being scrutinised by the Prudential Regulation Authority (PRA) in a separate investigation.

Operating costs that are higher than average in the industry is part and parcel of Metro’s business model. The bank’s core mission is to 'change the way Britain banks' by offering customers access to its branches (now 70 in total) seven days a week. It is this that creates a huge dilemma for Metro. Costs need to be reduced, even more so due to its recent bond issue, but equally the bank must stick to its promise that made customers switch over to them in the first place. In conjunction with this, the firm needs to grow in order to return to profitability which in itself is a significant challenge in the current low interest rate environment. To achieve growth Metro Bank will need to battle on two fronts, against the 'big four' on the high street and the influx of new wave digital banks online.

The graph below illustrates the consequence of Metro’s strategy. It displays the cost to income ratio, a measure commonly used to compare banks, for Metro Bank and the FTSE All-share Banks Index (Ex-Metro). We can see that Metro’s higher operating cost base has consistently resulted in a greater cost to income ratio than the average of its peers. Having said this, Metro Bank has recognised the need to focus on cost efficiency and has managed to reduce this ratio in Q3 2019. Encouragingly, the improvement occurred despite adding three new stores during the quarter as well as developing further sites in Liverpool and Manchester – the firm is sticking to its core mission.

Figure 2. Cost to Income Ratio: Metro Bank vs FTSE All-Share Banks (Ex-Metro)

Source: Bloomberg, February 2020. Virgin Money and Close Brothers Group have been omitted from Index average due to insufficient data

Potential for a short squeeze?

The market is not optimistic that the challenger bank can turn its fortunes around. Currently, Metro Bank is the sixth most shorted stock in the UK of all short positions that have been disclosed under short selling regulations set out by the FCA, with Premier Oil PLC (PMO) topping the list.1 Note, the requirement to publicly disclose short holdings is when the position concerned equates to 0.5% of total shares outstanding. Still, this is a good indication as to how popular a share is to short.

The combined position of the six funds that have reported a short position in Metro equates to -9.59% of total shares outstanding, after Voleon Capital Management recently registered its bet on the company share price to fall on 17 February 2020. It comes after well-known hedge funds Odey and ENA added to their short positions at the start of 2020, with both having had short exposure for over a year.

Figure 3. Disclosed short positions in Metro Bank

Fund Shares outstanding (%) Reported date
1. ENA Investment Capital LLP -3.22% 05.02.2020
2. Odey Asset Management LLP -2.62% 14.01.2020
3. Marshall Wace LLP -1.38% 29.01.2020
4. Connor Clark & Lunn Investment Management -1.22% 05.09.2019
5. Voleon Capital Management LP -0.62% 17.02.2020
6. Samlyn Capital LLC -0.53% 05.06.2019

Source: Bloomberg, February 2020

Metro Bank 2019 results preview

Since listing in March 2016, we have seen a steady decline in the percentage of analysts who have issued a buy recommendation. The chart below depicts this, as well as the sharp decline in Metro Bank’s share price. The most recent consensus indicates a twelve-month target price of 232.33 pence, calculated from fourteen different analysts. Its share price closed at 205.20 pence on 20 February 2020.

Metro Bank: Monthly share price and analyst recommendations

Source: Bloomberg, IG, February 2020

Rumours have been circulating since last year, after its reporting miscalculation, that Metro Bank was considered as a takeover target for several large private equity firms. The Financial Times reported at least six takeover firms contemplated whether it would make economic sense to buyout the bank.2 One analyst at Metro’s Q3 results posed this question directly to the leadership team to which they didn’t give anything away but did outline 'should something occur, we will treat it with the right respect because that's the fiduciary duty of the board'. An update on plans to balance growth and cost efficiency will be communicated during its full year results on the 26th February 2020.

Metro Bank 2019 results update

Earlier today, Dan Frumkin delivered a colourful and upbeat presentation in which he outlined the future strategy of the lender and even, jokingly, swore in his debut as the new Metro Bank CEO. Frumkin described himself as someone who fixes things, something he will certainly have to live up to if he’s to turn Metro Bank’s fortunes around as the firm is currently growing costs at a faster rate than revenue.

In its full-year results, Metro Bank reported a £130.8 million statutory loss before tax and an overall reduction in overall deposits of £1.2 billion, lead mainly by outflows from commercial customers. The firm blamed the loss on the write-down of intangible assets, such as the discontinuation of IT projects – its commercial lending platform is one example. Revenue also fell by 1% down to £400 million, a worrying sign considering its high fixed cost structure.

Having said this, Metro Bank increased deposits from retail clients and SME’s in 2019 by £1.7 billion and £100 million respectively. Furthermore, Frumkin was clear on his plans for the firm to return to future profitability, reducing costs and improving processes. In terms of reducing costs, the bank will focus on less expensive store designs for future branches and drastically cutting back on the use of external consultants. Frumkin estimated that Metro Bank spends close to a nine-figure sum on consultancy services. Looking at enhancing efficiency, Frumkin highlighted that branch staff shy away from offering credit cards, overdrafts and unsecured personal lending due to significant inefficiencies with back-end systems. To illustrate this point, out of all Metro Bank branches the firm only compete, on average, two unsecured loans each month and just 3% of its current account clients have a credit card with them. At of the time of writing the share price is down 17.1% from its previous close.

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1. ShortTracker

2. Financial Times

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