Metro Bank (LSE: MTRO) shares have been getting a lot of attention from investors. Last week, the beaten-up penny stock was the third-most bought security on Hargreaves Lansdown by number of trades.
Should I follow the crowd and buy the shares for my own portfolio? Let’s discuss.
Share price crash
Last Thursday (5 October), Metro Bank’s share price plunged around 30% to record lows. This seemed to attract investors.
As to why the shares tanked, it was down to reports that the company was trying to raise as much as £600m to strengthen its balance sheet (at the time it had about £350m worth of debt maturing in 2025).
“The company continues to consider how best to enhance its capital resources, with particular regard to the £350m senior non-preferred notes due in October 2025“, said the bank in response to the reports.
Capital raise completed
The good news is that a deal to bolster its finances was completed over the weekend. Not only did Metro Bank secure £325m (£150m of new equity) from a capital raise but it also sorted £600m of debt refinancing.
The company believes the deal will “significantly strengthen” its CET1 ratio and support delivery of a RoTE (return on tangible equity) in excess of 9% in 2025 and then low-double-digit to mid-teens thereafter over the medium term.
It’s worth noting that the equity raise was led by Spaldy Investments (the bank’s largest shareholder), which is contributing £102m.
As part of this equity deal, Spaldy Investments – owned by Colombian billionaire Jaime Gilinski – will become the group’s controlling shareholder with a 53% holding.
“The opportunity to become the Bank’s major shareholder is driven by my belief in the need for physical and digital banking underpinned by a focus on exceptional customer service,” said Gilinski.
Should I buy?
The market clearly likes the deal as Metro Bank’s share price is up more than 20% this morning.
I won’t be buying the penny stock however. That’s because I have a few concerns over its business model.
For a start, the bank has a ton of expensive physical branches at a time when banking is going digital. Secondly, higher interest rates could present challenges attracting deposits.
Today, there’s a lot of competition in the personal banking space (new digital banks are popping up everywhere) and customers are happy to shop around for better interest rates.
It’s worth noting that Metro Bank currently offers an interest rate of just 1.65% on its instant-access savings account. By contrast, Marcus is offering 4.6%.
Additionally, the company has had quite a few problems. Back in 2019, an accounting error blew a major hole in its balance sheet. More recently, it has struggled to get regulator approval to use its own capital requirement models in its residential mortgage business.
Finally, the stock remains heavily shorted. In other words, hedge funds and other sophisticated investors expect the share price to keep falling.
Of course, at 55p, the stock could turn out to be a bargain. It does look cheap right now from a valuation perspective (forward-looking P/E ratio of about six). And the group has said the capital raise should provide the opportunity to grow its assets significantly over the company years.
However, all things considered, I think there are safer penny stocks to buy.
