This bank stock is down 96% in two years. Is it a good contrarian buy?

Following a series of issues over the past couple of years, this bank stock is now down 96%. Stuart Blair looks at whether it is now a good contrarian buy.

| 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.

It’s been a disastrous couple of years for Metro Bank (LSE: MTRO). Its share price has been driven down by reporting errors, regulatory investigations, and currently, the pandemic’s severe impact upon banks. But with new management from the start of this year, and the recent acquisition of RateSetter, is it now time to buy the bank stock?

The bank is plagued with problems

Metro Bank came to the UK 10 years ago with major expectations. In fact, the co-founder, Vernon Hill, stated that it was the start of a “revolution in the banking business”. In many ways the bank has succeeded. For example, consumer satisfaction has always been very high, and the number of personal banking customers has greatly increased.

Nevertheless, this model has led to its own problems. In fact, the new chief executive, Dan Frumkin, has said that the branches are “too large” and they have “consumed capital and were a driver of fixed costs”. As a result, in the current climate of low interest rates and a large number of loan defaults, large capital expenditures have crippled the bank stock. This meant that in the first half of 2020, it declared a loss of £240.6m.

But the problems for Metro Bank preceded the pandemic. In fact, last year, the bank posted a pre-tax loss of £131m after an accounting scandal, two regulatory inquiries, and a class action lawsuit. As a result, it’s clear that the problems with the bank stock extend beyond just the impacts of the pandemic.

Are things starting to look up for Metro Bank?

The last couple years have seen the Metro Bank share price decrease from highs of around 4,000p to its current price of just 109p. This has left the stock with a price-to-book ratio of just 0.13, a very cheap valuation.

The bank has also recently acquired the peer-to-peer lender RateSetter. This is part of a strategy to grow unsecured lending and in turn increase profits. Although potentially risky, if it can help grow Metro Bank profits, this acquisition could help incite a sharp rise to its share price.

Would I buy this bank stock?

Metro Bank shares are definitely very cheap. But with the bank losing money even before the pandemic, this is really not surprising. Dramatic changes are needed in order for any significant recovery to start.

The question is whether it can achieve this recovery. Personally, I’m not convinced. Although there has been some positive news recently, it has been outweighed by a stream of negative news. As seen in the recent poor performances of other large banks, this is also an incredibly difficult period for banks. I’d prefer a bank stock that is in better shape than Metro Bank. Even with its potential upside, Metro Bank shares are just too much of a risk for me!

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.

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

Investing Articles

2 industry-leading value stocks investors should consider buying

These value stocks are at the top of their respective industries, and look like current bargains with the potential to…

Read more »

Black father and two young daughters dancing at home
Investing Articles

Just released: our 3 top small-cap stocks to buy before August [PREMIUM PICKS]

Small-cap shares tend to be more volatile than larger companies, so we suggest investors should look to build up a…

Read more »

Investing Articles

If I’d put £5k in a FTSE 100 index fund 10 years ago, here’s what I’d have now!

Charlie Carman explores the performance of the FTSE 100 index over the past decade and the merits of passive versus…

Read more »

Investing Articles

£15K stashed away? I could turn that into a second income worth £49 a day!

This Fool explains how she would look to gain a second income through investing in UK stocks, and the steps…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

With the Apple share price near an all-time high, would I be crazy to buy more?

After touching all-time highs yesterday, the Apple share price is on a roll. But is there still enough growth ahead…

Read more »

Investing Articles

Nvidia stock has fallen 13% from its 52-week high! What next?

Our writer explains why Nvidia stock has dipped recently and highlights some risks associated with investing in the AI leader…

Read more »

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

The AstraZeneca share price is up 88% in 5 years, but is it just getting started?

The AstraZeneca share price has had a great few years, as acquisitions and clinical trials delighted shareholders. So is there…

Read more »

Investing Articles

Here’s why I’m watching the Anglo American share price

The mining sector has always interested investors. But after a flat few years, I'm wondering what's next for the Anglo…

Read more »