One of the sectors hit by the pandemic has been financial services. Large banks that had loans outstanding to businesses and individuals naturally were concerned about the default risk. With spending also reduced as people tightened their belts, profits for most banks fell last year. Metro Bank (LSE:MTRO) was no exception. With the share price trading close to all-time lows, what do I need to know before making an investment decision?
A sad tale
For Metro Bank, the issues started before the pandemic even began. In early 2019, it was revealed that there was an accounting issue regarding different types of loans. In short, the bank classified millions of pounds worth of loans wrongly. This meant that they had a lower risk rating than they should have. With tight regulations on the level of risky loans to bank capital, investors were worried new funds would need to be raised to give more of a capital buffer.
This issue caused the Metro Bank share price to fall from 39% in a day. Since then, the trend has been downwards. From trading at levels around 2,200p at the start of 2019, it opened 2020 at 200p. Then came the pandemic!
Although it recorded 11% growth in deposits last year, overall results were poor. Like most banks, it recorded a loss, in this case of £271.8m. The estimated hit from Covid-19 was £124m, with around £100m of this being expected credit losses. This shows to me that even without the pandemic, the bank would have likely been loss-making anyway.
With this being the case, the share price continued moving lower last year, reaching 58p in October.
Could the Metro Bank share price reach historical levels?
When I look back to the share price levels of 2,000p+ in 2019, it’s incredible to think about the level of the fall in a fairly short period. The shares currently trade around 94p. So this could be a great long-term value play.
One reason this could be the case is because of the tide turning. H1 2021 results were released last week. Adjusted underlying revenue was up 14% versus the previous half-year and up 47% year-on-year. The disposal costs of the mortgage portfolio did see the company record another loss for H1, but I think this is a step in the right direction. Since the issue back in 2019, reducing exposure to this area, I think, is a positive.
On the flipside, the Metro Bank share price could be a value trap. Competition in the banking space is high, particularly in retail and corporate banking, which are the two main areas Metro operates in. Add into the mix new competitors including Starling Bank and Wise, and this space is only going to get harder. As Metro Bank is starting on the back foot anyway, it might find it hard to tackle such competition.
On balance, I do see value in the Metro Bank share price sub 100p, but I think it could still head lower before bouncing. Therefore, I’m not going to buy the shares now, but am putting it on my watch list.
