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Are Metro Bank shares too cheap to ignore?

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Metro Bank (LSE: MTRO) shares have fallen heavily this year. The stock is off around 50% year-to-date. After this slump, the once high-flying financial stock is now dealing at the lowest level since its 2016 IPO. 

However, following this decline, shares in the lender appear cheap, which suggests now may be a good time to snap up a bargain. 

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Metro Bank shares 

Investor sentiment towards the lender has soured over the past year for several reasons. Metro Bank was once considered to be the UK’s most promising financial business. However, following an accounting scandal and a significant slowdown in growth, the lender has now lost this title. 

Over the past 12 months, the group has been fighting for survival. It’s been forced to tap investors for emergency funds and put growth plans on ice. 

It now looks as if the lender has put at least some of these problems behind it. The group now appears to be so confident in its outlook it’s considering the acquisition of peer-to-peer lender RateSetter

A deal could make much sense for both parties. RateSetter has an £800m loan portfolio and has a lot of experience in the personal loan space. The company has also made the most of technology to improve and streamline the lending process. That would give Metro a significant advantage over its larger peers. 

RateSetter has had its fair share of problems over the years. Still, by combining with Metro, the pair can lower costs and hopefully overcome some of the problems they’ve both faced in the past. 

Problems not over 

Of course, a deal with RateSetter won’t mean Metro Bank will suddenly become problem-free. The group has a relatively high cost base compared to the rest of the industry, due to its extensive branch network.

At the same time, low-interest rates are hurting all banks’ profit margins. It does not look as if rates are going to increase any time soon, suggesting that Metro and its peers will have to learn to live with this problem. 

Still, Metro Bank shares look cheap, and this makes up for some of the company’s problems. The stock is currently dealing at a price to book value of just 0.1. That’s compared to the broader financial services sector average of 0.6, indicating Metro Bank shares are undervalued by around 80% compared to the rest of the sector. This suggests the stock offers a wide margin of safety at current levels.

As such, while Metro Bank shares may continue to face uncertainty in the near term, buying the stock at such a low valuation as part of a well-diversified portfolio could produce high total returns over the long run.

Owning the stock in a diversified portfolio would allow you to profit from any upside while minimising downside risk if the company continues to struggle in a low-interest-rate environment.

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Rupert Hargreaves 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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