Why I’m interested in the Metro Bank share price after recent declines

The market hates Metro Bank plc (LON: MTRO), but this could be an opportunity for value hunters, says this Fool.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I think it’s fair to say that the Metro Bank (LSE: MTRO) share price is the most hated stock in the FTSE 250 right now.

According to data from the Financial Conduct Authority, Metro Bank was the most shorted stock on the London market at the beginning of this month, with 12.5% of its outstanding shares out on loan to short sellers.

A hated company 

It’s easy to understand why the market hates the company. In March 2018, shares in the bank charged to an all-time high of 4,000p as investors rushed to buy into the group’s growth story.

However, towards the end of last year, this growth story started to unravel. It began with analysts raising concerns about the pace of its growth, and the strength of its balance sheet. To start with, management waved aside these concerns. However, in January the business admitted it had miscategorised a large number of commercial loans, meaning it didn’t have as much capital against them as it should.

This was a massive blow for the highly-rated company. The stock slumped, and customers started to desert the bank. At the beginning of May, Metro revealed a 4% quarter-on-quarter decline in customer deposits during the first three months of 2019.

To bolster its balance sheet and try and restore investor, as well as customer confidence, Metro asked shareholders for £350m to prop up capital levels and allow it to resume lending. And it seems they were more than happy to provide support. There were about $1bn of orders for the stock, which allowed Metro to raise more than expected. The group added £375m to its coffers as a result of the capital call.

A change in fortunes

The last time I covered Metro, I warned it might be worth avoiding the stock ahead of further declines as management worked through the capital raising. That was back at the beginning of May. Since then, the stock is up 41% and, based on the fact that the bank wasn’t only able to raise as much as it wanted but an extra £25m as well, my opinion of the group has changed over the past four weeks.

The way I see it, Metro has stumbled, but it’s now back on a firm footing and, more importantly, it has shareholder support.

If this is the end of the group’s capital issues, and the company returns to growth in the second half of the year, then the shares could be a steal at current prices. The stock is currently trading at around 80% of book value, which reflects all of the bad news over the past six months. However, generally speaking, profitable businesses deserve to trade at, or above, book value.

Metro is profitable and, despite all of its troubles, City analysts reckon it will report a profit of £33m for 2019. If it can meet this lofty target, then I reckon investors will start to return and push the shares back up to a more reasonable valuation. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

A front-view shot of a multi-ethnic family with two children walking down a city street on a cold December night.
Investing Articles

Want to make your grandchildren rich? Consider buying these UK stocks

Four Fool UK writers share the stocks that they believe have a lot of runway to grow over the long…

Read more »

Investing Articles

1 penny stock with the potential to change the way the world works forever!

Sumayya Mansoor breaks down this potentially exciting penny stock and explains how it could impact food consumption.

Read more »

Investing Articles

2 FTSE 250 stocks to consider buying for powerful passive income

Our writer explains why investors should be looking at these two FTSE 250 picks for juicy dividends and growth.

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Growth Shares

This forgotten FTSE 100 stock is up 25% in a year

Jon Smith outlines one FTSE 100 stock that doubled in value back in 2020 but that has since fallen out…

Read more »

Middle-aged white man pulling an aggrieved face while looking at a screen
Investing Articles

2 dividend shares I wouldn’t touch with a bargepole in today’s stock market

The stock market is full of fantastic dividend shares that can deliver rising passive income over time. But I don't…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Investing Articles

Use £20K to earn a £2K annual second income within 2 years? Here’s how!

Christopher Ruane outlines how he'd target a second income of several thousand pounds annually by investing in a Stocks and…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

Here’s what a FTSE 100 exit could mean for the Shell share price

As the oil major suggests quitting London for New York, Charlie Carman considers what impact such a move could have…

Read more »

Two white male workmen working on site at an oil rig
Investing Articles

Shell hints at UK exit: will the BP share price take a hit?

I’m checking the pulse of the BP share price after UK markets reeled recently at the mere thought of FTSE…

Read more »