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I’d sell this bank after 25% fall and buy the RBS share price today

In August I pondered the question of whether Metro Bank (LSE: MTRO) was likely to beat the Royal Bank of Scotland (LSE: RBS) share price.

After a 25% price drop for Metro on Tuesday, the answer, in the short term at least, has turned out to be a resounding no.

The history of Metro Bank since it floated on the London Stock Exchange in 2016 has been a string of disasters. A massive accounting error to the tune of £900m, based on an incorrect risk assessment of a chunk of the bank’s lending, shattered investors’ confidence. It’s the kind of thing we hear of from companies very occasionally, but that kind of blunder should be unthinkable for a bank.

Shoring up

A share placing was needed to strengthen the balance sheet, and the bank even had customers queuing to withdraw their cash — a shocking sight we hadn’t seen since the banking crisis. Founder Vernon Hill is being edged out as Metro seeks an independent chair, and investing organisations are shorting the company’s shares.

It can’t get much worse than that, can it? It just did.

To raise funds, Metro Bank had been trying to borrow by issuing a senior non-preferred bond, offering a seriously big interest rate of 7.5%. If a major bank offered such a thing, I expect it would have its hand bitten off down to the knee. But it seems nobody wants to lend Metro the cash, even for 7.5%, and the plan has been abandoned. Should Metro sink into further trouble and be put into resolution, such a bond could be liable to write-down or conversion to equity, so I can see why there’s no interest — I wouldn’t lend Metro Bank a fiver myself.

Much better

While we’re so close to what could still be a disastrous no-deal Brexit, I think I’d keep away from banking in general for now, including Royal Bank of Scotland. But if I had to make a choice between Metro Bank and RBS, I’d jump at the latter every time.

RBS, incidentally, has become the first of the UK’s big four to appoint a female chief executive after lining up Alison Rose to take over the top job on 1 November. But what about the value of the shares?

Well, RBS has also been hit with a bigger PPI bill than it expected, it’s still in the process of pursuing cost savings, and our poor current economic state is scattering more hurdles in the bank’s path than many of us would have expected a few years ago when it looked like recovery from the banking crisis was coming along nicely.

Still, after all that, the shares are on P/E multiples of 8 to 8.5, and the 2020 dividend is expected to yield 6.8%. Predicted cover of 1.8 times does not offer quite the margin of safety that I’d really like to see at this stage, but RBS is very much a long-term buy for me, even if we might be in for a volatile few months.

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Alan Oscroft 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.