The Motley Fool

The Metro share price is down 25% in 1 month. Should I buy now?

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.

Chalk outline of two arrows pointing in opposite directions
Image source: Getty Images.

The Metro Bank (LSE:MTRO) share price has dropped by nearly a quarter over the past month after it released results for 2020 in February. This saw it reporting a record loss of £271.8m.

Despite this poor performance, some encouraging trends did emerge. And even with this recent decline, the Metro share price is still up around 40% compared to a year ago. So, is this an opportunity to buy the stock at a discounted price? Let’s take a look.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

A popular high street bank

Metro is a bank that offers services to the retail, business, commercial, and private sectors via a network of 77 locations throughout the UK. The firm, which has 2.2 million customers, sees its strong focus on customer service as part of its unique selling proposition (USP). And it has won multiple awards for doing so, including Bank of the Year at the 2020 MoneyAge Awards and Banking Brand of The Year at the 2021 Moneynet Personal Finance Awards.

The impact of Covid-19 caused some severe disruptions to Metro’s cash flow. After all, the bank makes money by charging interest on loans. But due to the lockdown restrictions, many of its customers weren’t able to keep up with payments.

Yet despite this, Metro was able to stay afloat without taking on any additional debt. Instead, it sold £3.1bn of mortgages to NatWest Group for a small profit. This surge of capital undoubtedly helped mitigate the impact of the pandemic. But it has also enabled Metro to change its strategy and focus on more profitable products in specialist mortgages and unsecured lending.

As such, CEO Daniel Frumkin is forecasting Metro will become profitable by 2024 and has recently bought £1.1m of Metro shares. While this certainly sounds promising, there are some risks to consider.

Is the Metro share price a value trap?

Banks are pretty complex businesses and are quite tricky to value. Based on the latest results, Metro has a net book value of £7.49 per share. That’s almost 85% higher than the current share price. At first glance, this looks like a fantastic opportunity for value investors.

However, trading significantly under book value is quite a common occurrence for bank stocks. And in my experience, when the discount is as high as Metro’s, it indicates that the quality of the loans being made is questionable. Given that the bank has been unprofitable for most of its recent history, the low share price could be a red flag. 

The Metro share price has its risks

The bottom line

Metro is heading in a new direction that may lead to profitability within the next five years. While it’s too soon to draw any conclusions, the preliminary forecasts for unsecured lending and specialist mortgage income do look promising.

But it’s worth noting the firm has run into trouble in the past. In 2018, an accounting scandal broke out, causing the Metro share price to plummet 90% by the end of 2019. Metro’s aggressive lending versus customer deposits brought the bank’s total capital ratio dangerously close to the minimum regulatory requirements. And that was even after numerous rounds of fundraising.

For now, I’m waiting to see how the company performs over the next year. And so I won’t be adding Metro to my portfolio today, even at its currently reduced share price.

Fortunately I've found another growth stock that looks far more promising...

FREE REPORT: Why this £5 stock could be set to surge

Are you on the lookout for UK growth stocks?

If so, get this FREE no-strings report now.

While it’s available: you'll discover what we think is a top growth stock for the decade ahead.

And the performance of this company really is stunning.

In 2019, it returned £150million to shareholders through buybacks and dividends.

We believe its financial position is about as solid as anything we’ve seen.

  • Since 2016, annual revenues increased 31%
  • In March 2020, one of its senior directors LOADED UP on 25,000 shares – a position worth £90,259
  • Operating cash flow is up 47%. (Even its operating margins are rising every year!)

Quite simply, we believe it’s a fantastic Foolish growth pick.

What’s more, it deserves your attention today.

So please don’t wait another moment.

Get the full details on this £5 stock now – while your report is free.

Zaven Boyrazian does not own shares in Metro Bank. 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.