vernon hill metro bank

SWOT analysis for Metro Bank - good punt or too risky

metro logo

Note next quarter financial results October 23 2019.

Strengths

  • Highly capitalised - after ¢350 million bonds fundraise in September and $375 million equity raise in May to meet MREL (Minimum Requirement for Own Funds and Eligible Liabilities) requirements, oversubscribed. See more on MREL, SRB, and BRRD in link: Is the Bank of England behind the Metro Bank Chaos?

  • Deposits of £13,7 billion, net outflows of £2 billion in H1 2019 caused by bad publicity (buy July has seen £700 million in net in-flows)

  • Year on year loan growth of £3 billion to £15 billion

  • Number one bank in UK for quality of service according to latest Competition and Market Authorities Survey. Watchdog BBC calls them the No.1 UK bank for customer service.

  • Customer account growth of 190,000 to over 1.8 million, though rate of growth down from 201,000 in H1 2018.

  • Net book value over £10 per share, compared with £2.10 share price

  • Full banking licence in the UK

  • Increasing number of UK branches

  • Good initiatives with Fin Tech companies to improve service and customer analytics.

Metro bank financial summary

Weaknesses

  • Weak share price - 210p now vs £40 in March 2018.

  • Declining profits, but still profitable, Underlying profit before tax of £13.1 million in H1 2019 (£24.1 million H1 2018), statutory profit before tax of £3.4 million in H1 2019 (H1 2018 £20.8 million)

  • Management issues - but Vernon Hill departing shortly

  • Too reliant on expensive branch network

  • £33 million cost of 9.5% coupon September bond issue, no profit until 2021

Threats

Shorts over time Metro Bank
  • High level of shorts. By March 2019, the BBC reported that Metro Bank shares were the second most shorted shares on the UK stock market. Given level of decline from £30-40, I am surprised they have not taken profits as given capitalisation, risk of outright bankruptcy seems low and more downside risk for shorts of good news from bank e.g. appointment of new Chairman, OK third quarter results

  • Larger depositors, worried about the bad publicity caused by the commercial loan classification error, began withdrawing funds. Metro Bank revealed that there had been a 4% drop in its deposits in the first quarter of 2019 because of “adverse sentiment”. Recently the bank has been forced to issue reassurances to worried depositors that it wasn’t going bust.

  • FCA investigation into categorisation of loans which caused financing problems. In January 2019, Metro Bank admitted classifying a portfolio of commercial loans for capital purposes incorrectly, thereby failing to hold sufficient capital to meet regulatory requirements. The error applied to around 10% of its loan book. The miscalculation was identified through a review by the Prudential Regulation Authority (PRA), but Metro Bank erroneously gave the impression that the bank had identified the incorrect classification itself. To correct the error in the capital classification. A regulatory investigation was started by the FCA and PRA causing a share price collapse and they have fallen almost 90 per cent since the start of 2019

  • Hard Brexit - damage to economy and sentiment on chaotic exit from EU - loan impairments etc on bad loans

Opportunities

  • Private buy out by Vernon Hill - very low market cap of £330 million versus assets and recent $350 bond sale

  • Elliott Investors investment

  • Divestment of assets eg. excess loan book

  • Slowing down of branch expansion

  • Cost cutting

Further reading