The challenger banks have yet to break the big four’s stranglehold but they are getting stronger by the day. Should you follow the money?
Metro Bank (LSE: MTRO) floated in March 2016 at £20 a share and today trades at £37.16, an increase of around 85%. This is partly down to global factors: Metro was forced to cut its float price from £24 due to global market turbulence, and has cashed in as stock markets recovered across the board. But it also has plenty to be proud of.
Earlier this month, Metro revealed that it now has a million customer accounts, less than seven years since launch. Targeting superior levels of service and convenience has proved a successful strategy, with 91% of its retail and business customers saying they would recommend the bank to a friend. Not everybody is willing to pay extra for superior service, but clearly, plenty of people are.
The FTSE 250 bank now has 48 stores across the UK with another 10 planned this year, and first achieved profitability in the second half of 2016. This year it expects to see its first full year of profitability. Recent Q1 results showed record growth in deposits, which exceeded £1bn for the first time, while lending rose 11% to £6.5bn and it also attracted 72,000 new accounts.
Some carped at the dip in net margins to from 2.03% to 2.02% over the quarter, although that still marked an increase from 1.96% a year earlier. These are impressive results and Metro’s market cap is now pushing £3bn. My concern is that there are only so many people who want the personal touch Metro offers, which could put a lid on growth, while Brexit could prove a burden if the economy continues to slow. But forecast earnings per share (EPS) growth of 130% in the year to 31 December 2018 looks compelling.
Recent share price performance at Virgin Money Holdings (LSE: VM) is less compelling. It is down almost 10% over the last 12 months, to today’s 308p. In fact it is only slightly higher than it was in November 2014, when the shares debuted at 283p. However, there could be a value opportunity here, with the share price valued at just 10.15 times earnings.
That is despite a promising first quarter update last month, with the bank claiming continued “strong progress” as gross mortgage lending hit £2bn, taking its market share to 3.4%. Net mortgage lending of £900m gives it a market share of 12.3%. Credit card balances were 8% higher at £2.65bn and deposits were up 3% to nearly £29bn. Customer satisfaction was also high.
Room to grow
This followed a strong 2016, with the FTSE 250 company reporting a 33% jump in pre-tax profit. Forecast EPS growth of 17% this year and 13% in 2018 looks promising, while a forecast yield of 2.4% shows progression. Perhaps investors are nervous about its proposed takeover bid for Co-operative Bank.
Today’s low rating is largely down to the Brexit effect, with Virgin’s share price destroyed the day after the referendum, and still vulnerable. That aside, this looks like another banking bargain.
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Harvey Jones has no position in any shares mentioned. 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.