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Why I think Metro Bank’s share price will continue to struggle

As Metro Bank (LSE: MTRO) became the first new high street bank to launch in the UK in 150 years, it quickly became clear something new, exciting and perhaps unusual was happening in the world of UK retail banking.

Metro Bank, Atom Bank, Starling Bank and Monzo Bank are a few of the challenger banks looking to shake up the UK banking industry, offering consumers a digital, technology-led alternative approach to banking.

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Inception and initial successes

Metro Bank is the brainchild of Vernon Hill and Anthony Thomson, and opened the first of its approximately 70 high street branches in July 2010 in Holborn, central London. Metro Bank dubbed this its flagship branch, almost akin to a retail giant unveiling its crowning jewel amongst a plethora of smaller stores.

Metro Bank has adopted a customer-centric approach, with the style, design and accessibility of branches (some seven days a week, 12 hours a day) akin to that of a shopping experience. This modern-day outlook seemed to work: in 2019 the Financial Conduct Authority (FCA) and Competition and Markets Authority (CMA) ranked Metro Bank second amongst UK lenders for customer satisfaction.

Problems, scandals and decreasing consumer confidence

In 2012 Metro Bank raised $200 million in funding from a number of sources. However, in 2013 a reported loss of £8.8 million in the first quarter of 2013 meant Metro Bank’s pre-tax losses had exceeded £100 million in less than three years since its launch, but this was played down as planned losses due to aggressive growth plans.

Fast forward to 2019 and a reporting error was uncovered, which sent shares plummeting. In simpler terms, Metro Bank wrongly classified the risk rating of some of its loans, underestimating the amount of capital necessary to underpin them. The necessary adjustments to account for the error laid bare to investors that the bank was exposed to riskier loans than was previously thought.

On January 23rd 2019 Metro Bank’s shares plummeted 40%. This represented the biggest single day decline in a bank’s stock since the Royal Bank of Scotland bailout during the financial crisis.

A month on from the first scandal and Metro Bank was the target of a cyber attack targeted at mobile network operators. Metro Bank, among others, was affected and it compounded further misery to the bank who was still reeling from the accounting issue and plummeting share prices.

What next for Metro Bank?

At time of publication, founder and chairman Vernon Hill has left the company, and has been swiftly followed by the CEO Craig Donaldson. In total the company has had 90% wiped off its stock market value after the tough year. Many private investment firms have passed on the opportunity to take over the troubled bank, with reluctance due to a potentially costly branch network as well as other well-documented issues.

With an interim chairman in place, declining customer confidence coupled with millions in customer withdrawals, one must ponder the long-term viability of such a stock. It has been reported Metro Bank does not foresee any profits until 2021. The rehabilitation process is underway, with the banking community watching intently. However, I would not have confidence in share prices increasing much over the coming months.

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Jabran Khan 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.