Will Metro Bank’s nightmare run come to an end?
Metro Bank was established in 2010 by Vernon Hill as a so-called ‘challenger bank’ to the big high street names in the wake of the financial crisis. The company’s alternative approach – which includes being open seven days a week – struck a chord with investors and consumers alike and it was highly successful for some time.
Shares even hit an all-time high of 4,000p last year as punters rushed to buy into the group’s growth story. However, as analysts began to raise concerns about Metro’s balance sheet strength and the pace of its growth, the threads started to unravel.
Since the turn of the year, the group has released an almost-constant stream of disastrous newsflow. This began in January when it announced that it had underestimated the risk level of some of its commercial loans by almost £1bn. This meant that it did not have the required cash buffer to protect it from a larger pool of risky loans in the event of a downtown. The news led its shares to collapse by 34.2pc in a day.
As well as prompting an investigation by City regulators, the mistake forced Metro to tap its shareholders for £350m in May to strengthen its balance sheet and support further growth. With shares priced at 500p- a 36pc discount to their market value at the time – the placing was oversubscribed, ultimately leading the bank to raise £375m.
However, the bull run that followed this placing was short-lived. In July, Metro announced that it was replacing founder Hill as chairman following pressure to overhaul its leadership in the wake of the accounting error. Hill remains as a non-executive and ‘president and the search for his replacement continues.
Elsewhere, the business reported an 84pc drop in pre-tax profits to £3.4m over the first half of the year. This arose from the costs of introducing an efficiency programme and improving internal controls in response to the blunder. The firm also revealed that the negative headlines it had attracted over the period had dented consumer confidence. Indeed, £2bn of deposits were withdrawn largely by commercial customers.
Unsurprisingly, the wave of bad news has decimated Metro’s share price this year. It currently sits near all-time lows at 290p with a £500.4m market cap – down more than 90pc from the beginning of the year when it was trading at close to 1,700p. This decline led it to tumble out of the FTSE 250 earlier this month alongside names like Ted Baker, Intu Holdings, and Woodford.
The negative sentiment has also attracted large amounts of attention from short-sellers. Regent Street-based Ena Investment Capital increased its short position by 11pc to 3.4m shares last week. This is equivalent to 2pc of Metro’s total stock. With Marshall Wace, Odey Asset Management, Connor, Clark & Lunn Investment Management also looking to profit from Metro’s continuing decline, the company is currently one of the most shorted stocks out there.
The question, then, is whether the short sellers are right or Metro has finally found a bottom and is primed for a change in sentiment. Let’s look at it from both sides’ points of view.
The bear case is that the firm is on its knees – it has lost considerable amounts of public trust, and its founder leadership has been compromised irreparably. If Brexit – or indeed any major macro event – goes against the bank, it will be an even more difficult sell to investors and the situation could worsen.
On the other hand, the business continues to generate profit and recently confirmed plans to sell off its loan portfolio – potentially putting it onto a more solid footing. A proper ‘recovery’ seems a long way off, but it is not necessarily inconceivable.
If we see Metro begin to take some convincing positive steps over the coming months, then its astronomical decline could make it worth a look. However, given the bank’s current outlook – as well as being roundly shorted it was recently downgraded by Goldman Sachs we remain cautious, however, fortunes favour the brave.
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The author was remunerated but does not hold shares in the company