It’s roughly 10 years since the beginning of the financial crisis and many private investors remain wary of banking stocks. When you consider the proliferation of scandals, giant fines and boardroom shake-ups since 2007, perhaps this isn’t all that surprising.
Nevertheless, it must be frustrating for holders of stock in FTSE 100 banking behemoth Barclays (LSE: BARC). Just when you think the company may be turning a corner and sentiment returning, momentum is lost. Trading at 250p last October, the last 12 months have seen the shares fall as low as 127p before recovering to trade today at just under the £2 mark.
Notwithstanding any impact from ongoing Brexit negotiations, a rise in base interest rates at the start of November could be the much-needed catalyst for a more sustained rise. Put simply, this will allow the £34bn-cap juggernaut to charge borrowers higher rates while paying only slightly more to savers – a state of affairs that will clearly help its bottom line.
Barclays still looks cheap in terms of its valuation. Trading on 11 times earnings for the current year, this reduces to just nine times earnings in 2018, based on current analyst growth estimates. Another positive is the great improvement in free cash flow in recent times, thereby making it highly likely that next year’s forecast 3.4% yield will be realised.
But is there a better option?
It may lack Barclays’ history, but seven year-old challenger Metro Bank (LSE: MTRO) continues to win new admirers. Following a “strong trading performance” reflected in today’s Q3 update, I think it may also be a better choice for growth-focused investors.
Over the three months to the end of September, customer deposits at the £3.2bn-cap rose 10% to £955m. At £858m, lending was also 11% higher than seen in Q2. Perhaps most impressively, Metro reported a 77% jump (to £7.2m) in quarter-on-quarter profit, bringing year-to-date underlying pre-tax profit to £13.2m — a huge improvement on 2016’s £12.4m loss.
When you consider just how popular the bank is becoming, the aforementioned figures make a lot of sense. Over Q3, Metro welcomed 79,000 more customers, bringing its tally of accounts to just over 1.1m — a 33% rise year-on-year. Much of this may be due to the company’s decision to buck the trend seen in the wider banking industry and open new branches. In addition to opening its 50th “store” over the reporting period, the bank has 17 more scheduled before the end of next year, lending substance to chairman Vernon Hill’s comment that Metro was giving customers “a real alternative and a reason to love their bank at last“.
So is Metro a better growth pick than Barclays? So long as recent price momentum continues, my answer would be in the affirmative. Since coming to the market in March last year, shares have climbed almost 66% in value. With analysts already estimating a huge jump of more than 200% in earnings per share growth in the next financial year (and Metro likely to benefit as much as Barclays from a rate rise), I think the shares still warrant attention, even if a lot of positive news appears already priced in. The fact that the company was able to conduct a £278m placing of 8m ordinary shares in July, at no discount, should give an indication of just how confident the market appears to be on its outlook.
