Metro bank has had a bad year with its price falling from c.4000p in March 2018 to 508p yesterday fuelled by management incompetence that understated the risks of c.£1.9bn of lending and twitter rumours of bank failure.
Metro Bank has moved on from recent twitter rumours and management verbal rebuttals. This morning, Metro Bank published its prospectus of an upsized underwritten capital placing of £375m (from £350m) to address the misclassification of lending. The market has taken this well with price up 18% this morning. On the valuation front, the metrics are now potentially quite attractive (e.g. P/B x0.37) as compared with a year ago (e.g. P/B x2.97).
Given the recapitalisation, the question is whether the bank has become a more viable investment proposition?
Certainly the company is arguing that the strategy remains viable. Its investor presentation presents the bull case – the message being that ‘sticky’, low-cost retail deposits fund low risk lending. ( presentation can be found at: https://www.metrobankonline.co.uk/globalassets/documents/investor_documents/metro-bank-may-2019-investor-presentation.pdf )
The presentation assumes that:
- Governance structures remain as is. (NB There have been no board or management changes announced).
- Balance sheet structures remain as currently is. i.e. The experience of the last few weeks and the recapitalisation does not dent retail depositors confidence and that a very high rate of deposit growth (c.20% pa) can be maintained.
- The strategy of growing the branch network and expanding SME banking products continues unabated.
- Customer acquisition continues to remains high.
- Regulatory initiatives are approved by the regulator. eg AIRB approval to model risk and capital requirements.
[ Aside: The risk factors section in today’s placing prospectus are very cautious and provide a contrast to this slick narrative. ]
In my view, after the last year’s 88% value destruction (which I thankfully avoided), a short relief rally will likely continue which could be traded until more news is announced. However as an investment proposition, it seems sensible to remain cautious as:
- the board and management do not appear to be being held accountable and changes made;
- that regulators are not using their powers to impose risk mitigation programs to address obvious inadequacies – calibre of senior managers, conflicts of interest between board and shareholders, deficiencies in risk management capabilities, etc;
- and that clients (particularly depositors) could become more cautious in their assessment of banking with Metro.
In conclusion, although investors/underwriters have committed to put…
