- AJ Bell estimates that Metro Bank is valued at only 13% of assets
- The major High Street banks however are priced at some 80% of assets
- Will Metro Bank close that gap in 2022 or is it truly a dog?
Metro Bank PLC (LON: MTRO) shares have been a dreadful investment over recent years, falling from a peak of £40 and change to today’s hovering just under £1. The basic plan, to build a new retail bank in Britain, was always ambitious. This wasn’t helped by messing up the capital calculation, something that required emergency fundraising to cover. The big question though is what happens next? Will Metro manage to pull out of the spindive or not?
That capital question was simply something that should not happen to a bank. When lending some certain amount of capital must be put aside to be the reserve against a possible default. How much should be put aside for which type of loan is something that is regulated. What Metro did – and it doesn’t really matter which type of loan it was now – was put too little aside for a considerable portion of that loan book.
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Metro has just been hit with a £5.4 million fine from the regulator for having done this. But the damage is far, far greater than that. As with any emergency capital raise the terms – the price – were high so that led to significant dilution of the original shareholders. But worse even than that was the realisation that the management could be such muppets as to make such a mistake. It’s not as if the regulatory capital requirements are some secret, nor that the calculation is difficult. But they managed to get that wrong which doesn’t engender great confidence.
Of course, management has changed since then. So the question becomes whether they’ll be able to reconstruct the prospects of Metro Bank. Which is where that AJ Bell calculation comes in. They’re estimating that the current price values Metro as 0.13 – 13% – of its assets. The major High Street banks all trade at around 0.80 – 80% – of their assets. That’s a very large difference in valuations.
The thing is Metro doesn’t make profits and there’s no real great prospect of their doing so imminently. They’ve been buying in loan books to try to make the leap to scale but that obviously has a cost to it as a method of growth. It’s possible that macroeconomic factors will come to the rescue. Both inflation and higher interest rates improve banking margins but that applies to all banks, not just Metro. So there’s no real reason to think that these would close that gap in valuations.
The net effect here is that Metro is, by conventional valuation yardsticks, really very cheap indeed. But then the big question becomes is that valuation still the correct one? Given prospects, perhaps it should be and should remain this cheap? Or, perhaps there is some way out for them and thus a significant revaluation is on the cards?
The general market view is that it might be worth a punt but this isn’t a value stock. It’s a gamble that something unexpected – on the good side this time – happens, not an obviously misaligned and too low price.
For anyone other than risk loving speculators this is probably too much of that risk even if the rewards of a rerating to other banking valuations would be large.