Short Selling | MTRO - Too Expensive

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24th Sep '18 by countless

17 comments 2962 reads

Market Cap T/O Net Income Enterprise Value Fwd PE StockRank
MTRO 2971m 352 8.4x 22 135x 1227 34.7 19
VM. 1756m 674 2.6x 195 9x 909 11.1 84
BGEO 923m 296 3.1x 131 7x 1401 6.2 39
CYBG 2933 m 1042 2.8x 76 38.6x 1496 12.1 42

MTRO is very expensive and continues to issues shares – some 8.8m a few days ago – to help open more branches when the trend is to close. Fully understand they need a foot print in highstreets but this comes at a cost which could see shareholders further diluted. I am not convinced a branch net work is the way forward, especially one that is not self-funded. The price to obtain the network seems too high - even with recently declared six months profit of 24.1m at 67.7x market cap is way off its peers.

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Countless

Premium Member

17 comments

Asagi

24th Sep '18

Hi countless and board,

I am also shorting Metro Bank (LON:MTRO).

Their business model seems to be based on high street operations, this way of doing business was rejected by its competitors ten years ago! Yet Metro Bank (LON:MTRO) seem to think they can make it work. As discussed with a friend only yesterday, I smell hubris.

Next up:
Metro Bank chairman faces rebellion after handing millions to wife's company
https://www.independent.co.uk/news/business/news/metro-bank-chairman-rebellion-payment-wife-company-vernon-hill-a8301451.html
Metro Bank chairman Vernon Hill is facing the prospect of an embarrassing shareholder rebellion after an investor hit out at more than £21m of payments from the lender to his wife’s architecture firm...
Royal London’s head of responsible investment Ashley Hamilton Claxton said: “In a year when large corporate failures dominate the headlines, boardrooms should pay especially close attention to related party transactions, such as the payments by Metro Bank to InterArch, owned by the wife of the bank’s chairman, for design and branding services.”

the article demonstrates that Metro Bank (LON:MTRO) Founder and Chairman Vernon Hill has a bit of form here!

But perhaps biggest concern of all that I am hearing is that Metro Bank (LON:MTRO) is having to pay much more interest for deposits than planned.

According to Stockopedia, Price:Tangible Book Value is 3.2. EPS forecasts for the year ending December have also been falling, from 69.5p this time last year to 54.1p now.

It looks like the wrong business model, at a stretched valuation, with deteriorating fundamentals and questionable governance.

Asagi (short MTRO)

countless

24th Sep '18

Thanks Asagi. Have to say I agree - with technology moving in leaps and bounds I can see branches becoming irrelevant. My niece and nephew, both in their 20s, has never been inside a bank! Google pay, paying cheques in by their smart phone etc etc will continue to see branch foot prints decline and branches become even smaller to help reduce costs / staff numbers. Online banks with no branch net work will tap into demands from the younger generation - just think how something like Apple Bank would disrupt this industry

Rusty2

24th Sep '18

That is all very well but I do need a bank sometimes, my local branch closed down this year, it's a pain, there is a mobile bank twice a week for 2 hours. My nearest branch is now 12 miles away. The ATM has gone also, fortunately at the moment there is another ATM but if that bank closes? How do you get £50 notes or new £20s? How do you get change if you have a shop? The building societies have all gone as well. The branches that are closing are in the small towns/villages or where they have many branches. A lot of older/poor people don't have have smart phones.

Rusty2

24th Sep '18

duplicate deleted.

Gromley

24th Sep '18

Interesting discussion on branch networks.

I think it is reasonable to say that the board of Metro Bank (LON:MTRO) have more on information on branch usage and why they are opening branches than we do. That is not of course to say that they are automatically right, but it is worth remembering.

In terms of branch closures I think customer opinions fall into two categories : those that hate it and those that are indifferent; I'm not aware of a significant grouping that love branch closures.

I have no idea of course what the split is between those groups but it seems to me that by showing a commitment to branches (which incidentally open into the evenings and on Sundays and most Bank Holidays) Metro are creating a USP.

I'm not in the market to switch my bank account currently, but if I were Metro would be on my short-list.

Of course the key question is whether they can "monetize" this point of differentiation; can the costs of running the branch network be justified by the benefits?

On that point I also have no idea, but I don't think the possibility should be dismissed out of hand and perhaps, this point of differentiation is why Metro shares trade at a premium to there peers.

No position currently.

countless

24th Sep '18

My thoughts are that footfalls in branches will continue to decline as we loose the elderly and as technology increases. This is an interesting article

Https://www.telegraph.co.uk/business/2018/08/20/high-street-banks-could-go-way-department-stores-says-hedge/

MTRO open all hours approach will not beat the 7am British Rail from Paddington brigade who will only increase in numbers. An expensive folly.

DurhamMike

24th Sep '18

Metro have a very interesting model to help cover the cost of the branches - safety deposit boxes! They have hundreds of them in every branch and they are very popular, and my understanding is they cover something like 75% of the overhead of having the branch. Then they are able to offer unrivalled customer service in branch, the reason the deposit boxes work so well is that they are open all hours, so you can collect your expensive Jewellery in time for the posh party on Saturday and put it back in the safe on Sunday. I'd be interested to know what the quality of their online offering is to Joe public, but I know the business online banking is simple and clear. I think they are still very highly valued but I don't think the model is as flawed as the posts here are suggesting. I have no position by the way.

Asagi

24th Sep '18

Hi gromley and board,

I think it is reasonable to say that the board of Metro Bank (LON:MTRO) have more on information on branch usage and why they are opening branches than we do. That is not of course to say that they are automatically right, but it is worth remembering

I often like to take that line myself. But remember, we have evidence to the contrary from the other banks, who it seems cannot get shot of their branches quick enough.

Asagi (short MTRO)

countless

24th Sep '18

But are safety boxes a crowd puller? A good income stream with the smallest box £200pa but not for the ordinary man on the street I would have thought.

Gromley

24th Sep '18

Hi Asagi,

Let me just play devil's advocate on that.

But remember, we have evidence to the contrary from the other banks, who it seems cannot get shot of their branches quick enough.

The Metro management will be very much as aware as you or I that they are taking a contrarian position.

One could perhaps characterise the "evidence" you cite as being that essentially the incumbent oligopoly decided that they could continue to exploit their existing customers with the need to spend money actually physically meeting them, because "no-one ever switches" and besides how are they going to switch, when we are all doing the same thing.

On the other hand Metro are effectively saying, "yes we are happy to meet you and not only that but we are prepared to do it at a time that may actually be convenient to you." [which has never really been done before].

Having customers that think you are great (as opposed to customers that think you are probably no worse than the rest) is a powerful differentiator and maybe, just maybe that is what Metro are trying to key into.

I am not. by any means. trying to create the bull case for Metro (with an SR of 19 they are a potential candidate for my Strategic Ignorance Short Portfolio), but I do just wonder - if someone is doing something "obviously stupid" are they stupid or are they inspired? You don't break in to an established market by simply doing the same as the incumbents).

countless

25th Sep '18

Interesting thought Gromley. Ten years ago other banks were opened on Saturdays but not Sundays, and definitely not the extended hours that Metro offer. My local LLoyds Bank customer service could not be better now and I expect that would be true for the other majors. The banking landscape has changed a lot in the 10 years that Metro came to the market. It may have a different shop front and a bowl of water for your pet but is it really that different now? I don't think so apart from store opening times and sofa's. We seem to be rushing more these days than ever before and use technology to facilitate that. 10 years ago I would agree customers were dealt with a kind of contempt - the financial crash helped change that As NatWest say - We are what we do! Right I must rush now to work...……….

DurhamMike

25th Sep '18

Probably not a massive crowd puller but so far it works. I would imagine it works better in London than other places where more people might have items to deposit, and more events to attend, but this is where we get beyond my knowledge. Broadly I assume that a high street presence is better for attracting business than not having a presence, if you can then basically cover the cost of that presence then you have a competitive advantage. They would need the online element too obviously, but they keep opening accounts at a fantastic rate and a huge amount of them happen in branches

countless

2nd Oct '18

I can see why they Share price is falling here. MTRO is valued at some £2.7B with 61 branches and 20 in the pipeline, which in part are being funded from profit (before tax - £24.1m in the last six months). Compare this with Lloyds and you cannot help but think that the MTRO current valuation is way too high. Although they are growing at an impressive rate I wonder if things are all rosy. Loans are growing more than despots and therefore require expensive funding, whilst at the same time the amount of profit from their mortgage book is falling as competition bites – some 6.5% fall in six months from mortgages, which represent 65% of their lending booking (standing at £7.6B). This book is funded by deposits and looking at their last set of results 31% is sitting on their current accounts (£4.2B) – cheap but the easiest to take flight. Operating costs are up some 33% at £161m for the last 6 months. I also find it interesting that MTRO say they now have 1,418,000 accounts whilst Lloyds, and all the other large banks, talk about customers who will hold more than one account. Growth is being fuelled by shareholder dilution – some 10% this year and about the same last year. Worrying given that promises were made that a share placing would not occur this year to help support growth. Something tells me this pattern will continue. MTRO are opening expensive branches that will not be attrative to a competitor who in this day and age are all about reducing costs and reducing their expensive branch net work. I therefore think this will fall a lot futher. To me this smacks of twitter and snapchat - a high valuation that is not attractive in a crowded market. A business that offers more of the same.

countless

8th Oct '18

Interesting article in this weeks IC. It states that any cooling in new mortgage may add to pressures in an already competitive mortgage market. Some challenger banks have already blamed a reduction in consumer demand for squeezing mortgage lending yields during the first half year. I think this is one reason why profit from MTRO mortgage book is already down in the last six months - that trend I think will continue.

IC goes on to say the impact of a significant fall in house prices would result in in a negative impact on revenue performance and higher impairments. This is very relevant to MTRO given that their profit margin is so slim. Just £24m in 6 months. Further, banks would be required to increase capital requirements so MTRO would have to consider seeking more debt or dilute shareholders once again.

Rusty2

8th Oct '18

I have the opposite view about Lloyds. My local branch has closed this year, not only that but so have some of the other branches nearby. Now all I have is a mobile bank for 2 hours twice a week. Even before it closed the service went down hill, only open a few hours a week, not have any forms in stock etc. I'm seriously thinking of closing my account after 40 years with them, what is the point. At least another bank have a branch in the town.
Do Metro still have a decent ATM card for overseas use?

countless

8th Oct '18

Nationwide credit card is what I use - no fee, unless you take out cash. Cash is free with their debit card if you have a flexplus account where you get travel / phone insurance etc. Hope that is helpful.

Rusty2

9th Oct '18

I use Halifax credit card, no fees but interest on cash. Barclays also do a free credit card for overseas which did not any fees and did not charge interest on cash until statement payment date, not sure if that’s still available. On debit cards think Metro one. Is among the best, it’s free in Europe, certainly cheaper than the high street banks.

countless

9th Oct '18

Found this herbie.....
https://www.metrobankonline.co.uk/bank-accounts/i-want-some-information-about/using-my-card-abroad/

Free purchase transactions on the Metro Debit Card in Europe only - otherwise it's 2.75% a pop! I think they charge for cash too and that their fees went up recently. Still look on the bright side you can ask for a nice safety deposit box to stash your foriegn memorabillia!

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MTRO - too expensive

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Countless

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