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Why I’m interested in the Metro Bank share price after recent declines

I think it’s fair to say that the Metro Bank (LSE: MTRO) share price is the most hated stock in the FTSE 250 right now.

According to data from the Financial Conduct Authority, Metro Bank was the most shorted stock on the London market at the beginning of this month, with 12.5% of its outstanding shares out on loan to short sellers.

A hated company 

It’s easy to understand why the market hates the company. In March 2018, shares in the bank charged to an all-time high of 4,000p as investors rushed to buy into the group’s growth story.

However, towards the end of last year, this growth story started to unravel. It began with analysts raising concerns about the pace of its growth, and the strength of its balance sheet. To start with, management waved aside these concerns. However, in January the business admitted it had miscategorised a large number of commercial loans, meaning it didn’t have as much capital against them as it should.

This was a massive blow for the highly-rated company. The stock slumped, and customers started to desert the bank. At the beginning of May, Metro revealed a 4% quarter-on-quarter decline in customer deposits during the first three months of 2019.

To bolster its balance sheet and try and restore investor, as well as customer confidence, Metro asked shareholders for £350m to prop up capital levels and allow it to resume lending. And it seems they were more than happy to provide support. There were about $1bn of orders for the stock, which allowed Metro to raise more than expected. The group added £375m to its coffers as a result of the capital call.

A change in fortunes

The last time I covered Metro, I warned it might be worth avoiding the stock ahead of further declines as management worked through the capital raising. That was back at the beginning of May. Since then, the stock is up 41% and, based on the fact that the bank wasn’t only able to raise as much as it wanted but an extra £25m as well, my opinion of the group has changed over the past four weeks.

The way I see it, Metro has stumbled, but it’s now back on a firm footing and, more importantly, it has shareholder support.

If this is the end of the group’s capital issues, and the company returns to growth in the second half of the year, then the shares could be a steal at current prices. The stock is currently trading at around 80% of book value, which reflects all of the bad news over the past six months. However, generally speaking, profitable businesses deserve to trade at, or above, book value.

Metro is profitable and, despite all of its troubles, City analysts reckon it will report a profit of £33m for 2019. If it can meet this lofty target, then I reckon investors will start to return and push the shares back up to a more reasonable valuation. 

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Rupert Hargreaves owns no share 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.