The Motley Fool

The Metro share price is down 25% in 1 month. Should I buy now?

Image source: Getty Images.

The Metro Bank (LSE:MTRO) share price has dropped by nearly a quarter over the past month after it released results for 2020 in February. This saw it reporting a record loss of £271.8m.

Despite this poor performance, some encouraging trends did emerge. And even with this recent decline, the Metro share price is still up around 40% compared to a year ago. So, is this an opportunity to buy the stock at a discounted price? Let’s take a look.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

A popular high street bank

Metro is a bank that offers services to the retail, business, commercial, and private sectors via a network of 77 locations throughout the UK. The firm, which has 2.2 million customers, sees its strong focus on customer service as part of its unique selling proposition (USP). And it has won multiple awards for doing so, including Bank of the Year at the 2020 MoneyAge Awards and Banking Brand of The Year at the 2021 Moneynet Personal Finance Awards.

The impact of Covid-19 caused some severe disruptions to Metro’s cash flow. After all, the bank makes money by charging interest on loans. But due to the lockdown restrictions, many of its customers weren’t able to keep up with payments.

Yet despite this, Metro was able to stay afloat without taking on any additional debt. Instead, it sold £3.1bn of mortgages to NatWest Group for a small profit. This surge of capital undoubtedly helped mitigate the impact of the pandemic. But it has also enabled Metro to change its strategy and focus on more profitable products in specialist mortgages and unsecured lending.

As such, CEO Daniel Frumkin is forecasting Metro will become profitable by 2024 and has recently bought £1.1m of Metro shares. While this certainly sounds promising, there are some risks to consider.

Is the Metro share price a value trap?

Banks are pretty complex businesses and are quite tricky to value. Based on the latest results, Metro has a net book value of £7.49 per share. That’s almost 85% higher than the current share price. At first glance, this looks like a fantastic opportunity for value investors.

However, trading significantly under book value is quite a common occurrence for bank stocks. And in my experience, when the discount is as high as Metro’s, it indicates that the quality of the loans being made is questionable. Given that the bank has been unprofitable for most of its recent history, the low share price could be a red flag. 

The Metro share price has its risks

The bottom line

Metro is heading in a new direction that may lead to profitability within the next five years. While it’s too soon to draw any conclusions, the preliminary forecasts for unsecured lending and specialist mortgage income do look promising.

But it’s worth noting the firm has run into trouble in the past. In 2018, an accounting scandal broke out, causing the Metro share price to plummet 90% by the end of 2019. Metro’s aggressive lending versus customer deposits brought the bank’s total capital ratio dangerously close to the minimum regulatory requirements. And that was even after numerous rounds of fundraising.

For now, I’m waiting to see how the company performs over the next year. And so I won’t be adding Metro to my portfolio today, even at its currently reduced share price.

Fortunately I've found another growth stock that looks far more promising...

FREE REPORT: Why this £5 stock could be set to surge

Are you on the lookout for UK growth stocks?

If so, get this FREE no-strings report now.

While it’s available: you'll discover what we think is a top growth stock for the decade ahead.

And the performance of this company really is stunning.

In 2019, it returned £150million to shareholders through buybacks and dividends.

We believe its financial position is about as solid as anything we’ve seen.

  • Since 2016, annual revenues increased 31%
  • In March 2020, one of its senior directors LOADED UP on 25,000 shares – a position worth £90,259
  • Operating cash flow is up 47%. (Even its operating margins are rising every year!)

Quite simply, we believe it’s a fantastic Foolish growth pick.

What’s more, it deserves your attention today.

So please don’t wait another moment.

Get the full details on this £5 stock now – while your report is free.

Zaven Boyrazian does not own shares in Metro Bank. 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.