The share price of FTSE 250 lender Metro Bank (LSE: MTRO) fell by 8% in early trade on Wednesday, making it the biggest faller in the mid-cap index.
The sell-off came after the bank announced a 21% increase in first-quarter profits and deposit growth of 41%. So why have the shares sold off? In this article I’ll explain what might be happening and consider whether big-cap rival Barclays (LSE: BARC) offers better value for investors.
There doesn’t seem to be much doubt about the strength of the challenger bank’s growth. Deposits rose by £1,033m to £12.7bn during the first quarter. Net deposit growth per branch increased to £6.3m a month, compared to £5.9m a month last year.
Customer numbers rose by 7.2% or 88,000 to 1,305,000 and the size of the loan book rose by £1,354m to £11bn.
Total lending grew faster than deposits into savings accounts during the period, causing the group’s loan-to-deposit ratio to rise from 82% to 86%. I see this as a comfortable level, as it shows that lending is covered amply by the value of its deposits. A loan-to-deposit ratio of more than 100% indicates that a bank relies on borrowed money to fund its lending. This can cause liquidity problems if demand for cash withdrawals rises unexpectedly.
Why I’d sell
Metro Bank isn’t the only challenger bank that’s growing fast by offering attractive savings and loan rates. But while customer demand still seems strong, profitability seems pretty average to me.
Metro’s net interest margin of 2.24% is no better than most of the big high street banks. And its Common Equity Tier 1 (CET1) ratio — a key regulatory measure — has fallen from 18.1% to 13.6% over the last 15 months. This has prompted analysts to suggest the group could might need to raise more capital this year.
Despite this, the shares now trade on 50 times 2018 forecast earnings and at 2.6 times their book value. Although profits are growing fast, this valuation doesn’t leave much room for disappointment. I would consider taking some profits at this point.
The right time to buy Barclays
On the other hand, I believe now could be the perfect time to buy into the long-awaited turnaround at FTSE 100 stalwart Barclays.
After a frustrating few years for shareholders, the outlook finally seems to be improving. The bank has resolved most of the legacy issues it faced and profits are expected to rise sharply this year. Despite this, the shares still trade at a discount of about 22% to their tangible net asset value of 276p per share.
This discount has been justified because for some years Barclays has failed to generate the kind of sustained profits needed to support a higher valuation. As a result, FTSE 100 banking stocks have remained fairly unpopular with most institutional investors.
A turning point?
According to consensus forecasts, the bank is expected to generate an adjusted after-tax profit of £3,486m this year. This translates into adjusted earnings of 20.7p per share, a 27% increase on last year’s figure of 16.2p per share.
Chief executive Jes Staley has also promised to return the dividend to 6.5p per share, a level last seen in 2015. On these numbers, the stock trades on 10.4 times forecast earnings with a 3% yield. Although Barclays isn’t without risk, I’d rate the shares as a buy in today’s market.
Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. 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.