Metro bank has suffered huge revenue losses that have seen its share price drop off a cliff. What will happen to the embattled challenger bank in 2020?
In what the Telegraph describes as Metro Bank’s [MTRO.L] “annus horribilis”, the challenger bank saw its share price slowly crumble from lofty highs of 1,719.00 at the start of 2019 to close the year at just 206.20p — a drop of 87.9%.
The bank underwent a “challenging period” last year, and it’s share price mirrored this ailing performance. Metro announced major accounting issues involving the misstatement of the value of its loan book — for which it is under investigation by the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) —, was hit by a scandal involving chairman Vernon Hill and his wife’s architecture firm, and saw the exit of CEO Craig Donaldson.
To make matters even worse, Metro Bank saw its share price plummet again by as much as 15% in early trading yesterday (26 February) following its full-year results report that stated the bank had made a statutory loss before tax of £130.8m.
With all this bad news behind it, will the bank’s share price recover by the end of the year, or will 2020 be another annus horribilis for Metro bank?
Challenges for the challenger
The bank announced that it had made a loss of £130.8m for 2019, a 131% drop compared to the profit of £40.6m the bank announced the year previously. The biggest factor in this was the £68m write-down in the value of intangible assets.
On an underlying basis, the bank posted a loss of £11.7m for 2019 compared to a profit of $50m in 2018, while revenue shrank 1% to £400m. While the bank pointed to healthy customer accounts, which increased from 1.6 million in 2018 to over two million for 2019, for the year deposits shrank 8% to £14.5m.
Metro Bank's loss for 2019
The bank also announced a 123.9p loss of earnings per share compared to the year ago figure of 29.1p.
Turning the ship around
Last week, Metro Bank announced that it had appointed Dan Frumkin — who joined the bank in 2019 as chief transformation officer — as the CEO with immediate effect. In its earnings announcement, Frumkin acknowledged the “very challenging year” for the bank but suggested that the actions taken would “put the business on a more positive trajectory”.
The bank stated that it expected mid-single digit growth in deposits for 2020, while it also expected a net interest margin — which fell from 1.81% to 1.51% for FY2019. Frumkin will look to slow growth and cut costs, according to Yahoo Finance, focussing more heavily on small business customers in favour of less profitable approaches, such as mortgages to optimise its balance sheet. The bank highlighted a £250m–£300m investment spend, as part of its turnaround efforts.
“The bank will seek a better yielding asset book and improved returns on regulatory capital by rebalancing its lending mix towards areas such as specialist mortgages, SMEs and unsecured loans,” Metro Bank stated in its earnings statement.
“The bank will seek a better yielding asset book and improved returns on regulatory capital by rebalancing its lending mix towards areas such as specialist mortgages, SMEs and unsecured loans” - Metro Bank
It also announced that it will return £50m out of the £120m prize it had been awarded last year by the Banking Competition Remedies’ Capability and Innovation Fund. Metro Bank revised its growth targets and reduced the number of stores it planned to open by 2025 from 30 to 15.
Outlook for 2020
“We are not saying that it is impossible to resuscitate Metro Bank but we reiterate our view that radical action with the help of third party loan assets (or potentially a fast injection of much lower cost deposits, which feels unlikely) is needed,” John Cronin, analyst at Goodbody, told CityAM.
He said that this was potentially what the board will want to, however, he says “it’s hard to start believing without seeing such action”.
With the FCA and PRU investigations rumbling on in 2020 too, it feels like Metro Bank is not out of the woods yet.
|PE ratio (TTM)||16.14|
|Quarterly Revenue Growth (YoY)||15.10%|
Metro Bank share price vitals, Yahoo Finance, 26 February 2020
Meanwhile, a higher cost base and lower interest margin mean “the road back to respectability is likely to be a long one for [Frumkin]” Michael Hewson, chief market analyst at CMC Markets, says.
According to analysis from MarketScreener, “the timing seems perfect for purchasing the stock close to the 166p support”. However, the site does warn that recent downward revisions of sales outlook for the coming years and that “no recovery of the group’s activities is yet foreseen”.
In February, RBC Capital Markets reiterated its sector performer rating for Metro Bank, setting a price target of 290.00p. The six-month price target among four analysts polled by Shares Magazine, meanwhile, was 240.00p.
The consensus rating among analysts polled by MarketBeat is a hold and the consensus 12-month target price is 395.22p.
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