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Warning: investors are still betting against FTSE 250 loser Metro Bank

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The Metro Bank (LSE: MTRO) share price has fallen by 85% over the last year. Back in June, the company was one of the most heavily-shorted stocks on the UK market, with 12.5% of shares out on loan to short sellers.

Since then, the situation has eased. The latest FCA data provided by research-tree.com indicates that short interest in Metro stock has halved to 6.3%. But that’s still enough to make Metro the 19th most heavily shorted stock in the UK.

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Short sellers sometimes get a bad name, but shorting a stock carries a lot of financial risk. If the price rises, your losses are theoretically unlimited. A fair amount of research usually goes into such decisions.

I’m worried too

I share the short sellers’ scepticism towards this business. In January, the company revealed that a chunk of its loans were more risky than it had previously thought. This contributed to the bank’s decision to raise £350m in fresh cash from shareholders in May. Such misjudgement is a warning flag for me.

I also have some concerns about the bank’s rapid expansion of its branch, or ‘store’ estate. Most banks are closing branches. Are Metro’s really so different that they will be more profitable than those of other banks? I don’t know, but I do note that new store openings are now being slowed.

Analysts’ forecasts for Metro’s 2019 earnings have been cut by a staggering 83% to 19.8p per share over the last 12 months. That leaves MTRO stock trading on 25 times forecast earnings.

In my view, that’s too much to pay for a bank that’s only been marginally profitable in each of the last two years. I’d stay away.

How profitable is P2P?

Peer-to-peer lending has exploded in popularity in recent years. One of the biggest players is Funding Circle Holdings (LSE: FCH), which dropped straight into the FTSE 250 when it floated on the stock market in September.

However, there may be trouble in paradise. In its half-year update, the lender said that it now expected 2019 revenue growth to be 20%, down from previous guidance of 40%. Demand for new loans from small and medium-sized businesses is said to have weakened. And Funding Circle has decided to tighten its lending criteria, in response to an increasingly “uncertain economic outlook”.

Losses are expected to continue for at least the next two years. Analysts’ forecasts indicate that an after-tax loss of £42.7m is expected on revenue of £175.4m this year.

Should we be worried?

I’m not suggesting that there is anything amiss with the performance of Funding Circle’s loans or with the credit quality of its customers. But I would note that the peer-to-peer lending model and this company’s high-tech credit scoring system have not yet been tested in a recession.

Looking at the latest data from the company, I can see that the expected loss on the firm’s loans has risen from 1.3% in 2012 to between 2.1% and 4% for the first half of 2019.

The FCH share price has now fallen by more than 70% from its IPO level of 440p, last October. This has reduced the group’s market cap to £425m, but that’s still a slight premium to its last-reported book value of £402m.

In my view, that’s not cheap enough for a loss-making lender at this point in the economic cycle. This is another stock I’d avoid.

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Roland Head has no position in any of the 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.

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