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.

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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.

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