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3 points I’d consider before investing in Metro Bank today!

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The past year has been a perfect storm for the fledgling Metro Bank (LSE: MTRO), resulting in it being dropped from the FTSE 250 index. This happened as the bank’s market capitalisation, which is the total value of a company’s shares at current market prices, suffered due to a free fall in its share price over the past year. At the time of writing, its average share price for the year is 67% less compared to last year.

I am tempted to consider it as an investing prospect now, but only after taking stock of all that’s gone on for the company in recent times. Here are three key developments that have impacted its performance.

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Instability at the top

Metro Bank’s founder and chair, Vernon Hill, is on his way out after being associated with the bank since its inception nine years ago. While his replacement had been in the offing since late July this year, the exact date wasn’t known. It was also announced that the bank’s finance director, David MacLean, was stepping down for opportunities elsewhere.

The double whammy impacted share price (as did its financial performance, mentioned in #3), which plunged by over 35% from the start of the month to the end. I think critical as leadership is for any organisation, it’s even more so for a relatively young company facing competition from far more established rivals. It’s not yet known who will replace Hill, but it’s worth watching out for.

Meeting fund-raising challenges

The bank’s share price fell by 25% in September after it put a pause on its £200m bond issue. Metro Bank needed to raise the necessary funds before the January 1, 2020, to comply with new regulations, indicating the urgency of the matter. In light of this, I like how swiftly the bank acted to turn this situation around. Along with announcing Hill’s exit date, it successfully made another bond issue, resulting in a 30% share price rise for MTRO.

A failure to raise adequate capital would have had implications for the bank’s future, including a future buy-out from another bank. Even without a looming capital raise deadline, I found the initial inability to raise funds disappointing, given that it’s a fully functional bank that had successfully raised funds earlier in May.

Financial aspects

No talk of developments that have recently impacted the bank can be complete without mentioning the embarrassing accounting error it admitted to at the start of the year. Its capital adequacy stood on shaky ground after announcing that it had categorised loans on its books as less risky than they were, which resulted in it having to raise more funding to achieve adequate reserves. The last quarterly results, announced in July, were also disappointing as the bank reported a loss and lower deposits.

With its capital now secure, I think the tide could well turn for Metro Bank. But I would wait to see its next financial results and the new leadership before taking a plunge.

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Manika Premsingh 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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