The Metro Bank share price: here’s what I’d do now

The Metro Bank share price remains heavily shorted. Is now the right time to start buying?

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The Metro Bank (LSE: MTRO) share price has fallen by more than 90% over the last year, as the firm has been battered by financial problems and poor trading.

But the challenger bank is still in the game. The stock rallied 30% last week after it managed to secure new funding from the bond market, which is traditionally a harsh critic of troubled companies.

With the stock still trading at a big discount to its book value, I’ve been drilling down into the figures to see if this could be a buying opportunity.

The good news

Last week’s surge came after the bank announced that founder and chairman Vernon Hill will leave by the by the end of the year. This can only be seen as good news, in my opinion.

Mr Hill’s presence was widely seen as preventing the bank from securing fresh funding or making changes to its strategy. For example, last week’s £350m funding deal had previously been postponed, but was confirmed within hours of Mr Hill’s decision to leave.

The good news is that Metro’s board should now have the freedom to consider making changes to the bank’s strategy to improve its profitability.

What could go wrong?

Metro Bank has been one of this year’s most heavily-shorted stocks. That means that short sellers — usually hedge funds — are betting the stock will fall.

You might expect that news of Mr Hill’s departure and the bank’s strengthened balance sheet would have persuaded some short sellers to close their positions. However, this hasn’t yet happened. Instead, short-selling of Metro stock has actually risen over the last month.

According to short-selling data published by the FCA, 10.7% of Metro Bank stock is now out on loan to short sellers, up from 8.7% one month ago.

This tells me that a number of pretty clever investors still believe that the bank is either overvalued, or heading for further problems.

What about the value?

In Metro Bank’s last set of accounts, management reported a book value of 1,024p per share. At the time of writing, the shares are trading at 201p, a discount of more than 80% to book value.

This discount could be a sign of hidden value. But it also suggests to me that the market believes the bank’s mortgages and loans are likely to be less profitable than expected. When assets are on sale at such a huge discount, there’s often some risk involved.

Should I buy MTRO stock?

What will happen next? One possibility is that Metro Bank could attract a takeover bid from a private buyer that might see value in its £21bn loan book and £14bn of deposits.

However, I struggle to see anyone wanting to take on Metro’s expensive branch network. During the first half of the year, 92% of the bank’s income was spent on costs. The equivalent figure for Lloyds was just 45.9%.

Larger banks have an in-built advantage over smaller rivals, thanks to lower funding costs and economies of scale. I think that Metro Bank will continue to struggle unless it can reinvent itself as a specialist lender, probably in the sub-prime or property sectors.

On balance, I see MTRO stock as a high-risk speculative buy that could double — or halve — over the next six-to-12 months. I won’t be buying the shares.

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.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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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