To say that Metro Bank's [MTRO] share price has been under pressure over recent times is a severe understatement, as a barrage of controversies have kept the bank’s name in the headlines. Has Metro Bank done enough to turn its fortunes around, or will this week’s full-year results serve as a stark reminder of past misdemeanours?
Metro Bank’s Q3 results in review
In its third-quarter update, Metro Bank registered an underlying quarterly loss-before-tax of £2.2m, which compared with a £6.7m profit in Q2. Total underlying revenue was also down year-over-year by 5.3% to £99.4m. Despite these negative results, the bank managed to increase its number of customer accounts by 13.9% to 106,000, to a total of 1.9m. However, Metro Bank’s share price has continued to struggle since the Q3 results in October, and is still down over 85% from where it started in 2019. At the time of writing, the share price stands at 193.7p, an even more significant drop from peak levels at over £40 a share in March 2018.
A costly blunder slashes Metro Bank’s share price
Metro Bank remains a bank to be cautious about. Last year, the company managed to raise £300m at an eye-watering yield of 9.5%, as concerns swirled around the governance of a bank where an accounting error threatened its very existence. A major mistake in how the bank classifies its loan books sheared off £900m from the company’s value. This mishap sent Metro Bank’s share price plummeting nearly 40%, from £22 to close to £13.45.
Following the news, founder and chairman, Vernon Hill, decided to leave the bank by the end of 2019. The decision to vacate his position saw the share price rise by 26.7% to 228p, yet this was worth less than a tenth of the value from a year before. Although the former founder said he would “probably die” before leaving the bank, he initially had plans to resign as chairman but was anticipated to stay on the board as an independent director. The departure of Mr Hill, as well as CEO Craig Donaldson, due to the accounting scandal, could be the catalyst to restore confidence in an institution that saw account holders withdraw £2bn in the first half of 2019, after the bank announced it was short on cash because of the incident.
Synonymous with scandal
Metro Bank’s name has been plastered with controversy over the past year. In May 2019, it cut ties with the architecture firm, InterArch, after the bank was criticised over a conflict of interest. InterArch, owned by the wife of Mr Hill, Shirley Hill, received £25m worth of payments from the bank to work on branch designs. Despite Metro Bank routinely defending the arrangement, pressure from several major proxy advisers has forced the relationship to end
A significant review of the bank’s compliance controls is taking place, after strict US and EU sanctions were breached following the bank handling money from the blacklisted countries Iran and Cuba. The bank has appointed law firm DLA Piper to conduct the probe, after the discovery of payments being received from Iran last year, and a banking relationship in Cuba in 2017. The bank has since ended these affiliations, and reported itself to the US Office of Foreign Assets Control concerning the Cuba relationship.
The big test for Metro Bank and its long-term share price is not whether the worst is behind it, but whether the management under new CEO, Dan Frumkin, can turn around market perceptions of competence, and restore trust during a time when the competition is fierce, and UK banking margins are tight. The smart money suggests it’s going to be a difficult task. The damage is done, and it will be a long road back.
Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.