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Why I think the Metro Bank share price could be past the worst

In my time I’ve seen plenty of share prices plummeting by 90% over the course of 12 months, though it’s rare that such a thing happens to a bank. But Metro Bank (LSE: MTRO) managed to pull it off.

Since a low of 155.2p on 27 September, however, Metro Bank shares have gained a third, to stand at 208p at the time of writing.

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The bank’s accounting error that came to light early in the year initially looked like it might have been a one-off from which it could recover reasonably quickly, even though it needed an early cash-call of £350m to shore up the balance sheet. But since then, the confidence of both customers and investors has been severely damaged.

Withdrawal run

After the series of catastrophes that kicked off the banking crisis, a bank really can’t expect customers to leave their money untouched if there’s even the slightest hint of insolvency, and it should have come as no surprise that Metro Bank suffered a run on savings in the following months.

By the interim stage, the bank had seen net outflows of £2bn which left total deposits standing at £13.7bn, while a £3bn increase in lending had pushed total loans up to £15bn. That was a worrying shortfall in deposits, and it would have been even bigger had it not sold off a £521m loan portfolio that it acquired in 2017.

Still, at the time, at least the run of withdrawals seemed to have been stemmed, as Metro reported a return to deposit growth with net inflows in the eight weeks to the announcement of more than £700m.

City shun

The lack of confidence in the City was highlighted by Metro’s initial failure to get a big new debt issue off the ground, even when it was offering a huge 7.5% interest rate. A later attempt was successful, but only at an even bigger 9.5%.

The bank’s attempts to regain some respectability in the City required the departure of founder and chairman Vernon Hill, and it seems investors really couldn’t wait to see the back of him. So much so that, on the day of the Q3 trading update Wednesday, came the news that Hill had stepped down with immediate effect, ahead of his initial plan to remain in position until the end of the year. He apparently “agreed to accept the honorary position of Emeritus Chairman.” I guess some small degree of face-saving is understandable.

Turned the corner?

The positive I take from the quarterly figures is the improving loan-to-deposit ratio. The firm attracted 106,000 new customers in the quarter, taking the number to 1.9m, and enjoyed net deposit growth of £528m to take the total to £14.2bn. Flat net loans at £14.9bn bring the critical ratio down to 105% — not a huge drop from the 109% at the halfway stage, but in the right direction.

The bottom line for me is that Vernon Hill has gone, Metro’s new borrowings should significantly steady its solvency, and the net movement of funds is reversing in direction.

I’ll wait to see full-year results, but I think the chances of a catastrophic ending to the Metro Bank saga have receded considerably.

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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.