Is it right that Metro Bank is really a value trap?

Is Metro Bank a bargain or a bargepole-job? This is what I reckon…

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Last week’s further plunge in the Metro Bank (LSE: MTRO) share price certainly grabbed the attention of investors, with the stock ending the week more than 30% down from where it started.

But that move is just the latest spurt of a downward trend in the stock that’s seen the price reduce by around 95% over eighteen months – practically a wipe-out for those shareholders unfortunate enough to have bought at the peak and held until now.

Cash-strapped and accident-prone

The latest piece of bad news to kick the share price is the 24 September announcement that the firm can’t get its recently proposed bond issue away. That’s grim. Metro needs the money to fund its compliance with new EU regulations. But it seems even with a ‘generous’ interest rate of 7.5% heading the proposed issue, nobody wants to touch it. Metro Bank is just too risky for many, it seems.

Perceptions about the bank have travelled a long way over a relatively short time. When the company first arrived on the stock market during 2016 it was hailed as a new breed of fast-growing ‘challenger’ banks, set to disrupt the stodgy old banking industry in the UK. And the valuation shot to exuberant heights based on the high expectations of investors.

But the firm has proved to be particularly prone to miss-steps since those heady days. For example, at the beginning of the year, the firm revealed it had discovered an accounting error, which led to a £350m call for cash from the stock market in May. It seems some loans and mortgages provided by the company had been assessed as being less risky than they are. That led to the figure for risk-weighted assets being almost £1bn higher than previously calculated.

Call me old fashioned, but I don’t think making accounting errors is a good ‘look’ for a banking outfit. At a fundamental level, banks rely on the trust of lenders, customers and shareholders more than perhaps any other type of business in order to thrive. And Metro has been attracting the interest of shorters – those betting that the share price will fall –for some time.

Heading lower still?

However, despite the bank’s problems and the almost total collapse of the stock price, it’s natural for investors to wonder whether the lower valuation makes the stock attractive. In answer to that question, one popular share research website I use has the firm labelled as a ‘value trap’ and, in all honesty, I think that’s a fair assessment.

For starters, I don’t trust any bank right now because they all operate with horrendously cyclical businesses that could see a plunge in earnings, cash flow and dividends at any time if the macro-economic picture deteriorates. And on top of that, with Metro, we have a business with an apparent hunger for capital that it can’t satiate.

There’s no dividend for shareholders to enjoy either, and little immediate prospect of one appearing anytime soon. It wouldn’t surprise me to see the company fall into an existential crisis down the road, and the downside risk for shareholders looks huge to me, even after such big falls in the share price. I’m avoiding the stock.

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.

Kevin Godbold has no position in any 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.

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