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Why the Metro Bank share price fell 25% in September

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A 25% share price fall over the course of a single month might be a bit of a shock for some stocks, but when it happens to the troubled Metro Bank (LSE: MTRO) it’s perhaps less of a surprise.

Metro Bank, once seen as a high-flying challenger bank ready to make big inroads into a sector left in turmoil after the financial crisis, had, by the end of September, seen its shares lose a whopping 95% of their value since the heady days of March 2018. And some of us think shareholders are lucky to have held on to even that much.

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A share price fall of this magnitude really only happens after a series of disasters, and that’s exactly what Metro Bank has managed to pull off.

Catastrophic error

It all started when the bank discovered a serious accounting error. It had, it seemed, incorrectly assessed some of its loans and mortgages as less risky than they really were, meaning its true figure for risk-weighted assets was almost £1bn higher than previously thought.

That led to a cash call for £350m to shore up its balance sheet. But worse than that in my view, it badly hit confidence. This was really not the kind of blunder that a bank should ever make.

On top of that, there’s been a run on deposits at the bank, with savers having withdrawn more than £2bn since the start of the year. That leaves the bank with a loan book significantly in excess of its deposits, which doesn’t make things look any better.

As part of its attempt to get itself back on track and reassure investors, Metro announced that founder Vernon Hill was to step down as chair.

Failed bond issue

More recently, Metro has turned back to the markets to seek a cash injection of £200m through a bond issue, to pay for compliance with new EU regulations. But that’s fallen flat too. Despite a very attractive 7.5% interest rate, the markets weren’t interested and Metro just couldn’t find enough takers.

On 24 September, the bank told us it’s pulled the issue, and that news was behind the bulk of the month’s share price fall. For many investors, this sea of troubles has led to questioning Metro’s fundamental competence.

The questions now are whether Metro shares have fallen as far as they’re going to, and should we be buying the shares?

As it happens, though Metro shares fell further on 1 October, on the day I’m writing these words they’ve managed a bit of a rebound with a 10% rise. It comes after news that chair Vernon Hill is quitting sooner than originally intended, and will be gone by 31 December.

Goodbye chair

The company told us “Mr Hill believes that the bank has now reached a size and scale where it is appropriate to appoint an independent chairperson.” Maybe he means before it gets any smaller.

Even though analysts are expecting earnings per share to crash this year, Metro is forecast to carry on in profit with EPS recovering in 2020. But the shares are heavily shorted, and the bank is seemingly unable to raise the funding it needs. I’m keeping well away.

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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.

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