The Metro Bank share price has fallen 95% since the beginning of 2019. After private equity giant Carlyle pulled out of a takeover proposal last week, what are its prospects for 2022?
At its launch in 2010, Metro Bank (LON: MTRO) was the first UK high street bank to open in over a century. Six years later, its IPO on 10 March 2016 saw the challenger bank’s share price open at 2,200p. And by 28 February 2018, it had soared to its all-time high of 3,952p. But after falling to 2,196p by 18 January 2019, disaster struck for the retail and commercial banking outfit.
The Prudential Regulation Authority (PRA) discovered that it had misclassified hundreds of millions of pounds of high-risk commercial property and buy-to-let loans. Metro Bank was forced to issue an additional £350 million of shares to meet its capital requirements in case some of its debtors defaulted. Chairman Vernon Hill resigned, and the bank also had to scale back its growth plans.
By March 2019, it was one of the most shorted shares on the UK market. Some customers were starting to close their accounts and withdraw their deposits. The Metro Bank share price is now down 95% from 2,196p to 101p and has hovered around that level since the market mini-crash of March 2020.
Carlyle exits takeover plan
On 4 November the Metro Bank share price rose 29%, from 103p to 133p on the news that private equity giant Carlyle had entered into buyout talks with the struggling challenger bank. But on 17 November, Carlyle informed investors that it had ‘agreed to terminate discussions.’ In response, Metro said that its board ‘strongly believe in the standalone strategy and future prospects.’ The bank’s share price promptly fell back to its current price of 101p.
When Carlyle announced the plan, Goodbody analyst John Cronin suggested that it could be a ‘deep value play’ for the private equity group, as a combination of Metro’s repositioning and the prospects of increasing UK interest rates could see profits begin to soar. And as it now appears that a rate rise is almost inevitable, it may leave investors wondering why Carlyle would pull out of the proposed deal.
However, it may simply be that Metro Bank’s board considered the private equity bid to be too low. Arguably, it could one day return to its former valuation. Or the bank thinks it can secure an improved bid in the near future. But without further information, investors can’t know for sure. And this ongoing uncertainty is another problem for the struggling stock.
Metro Bank share price: Q3 2021 results
Last month’s third-quarter results did not impress investors. Total deposits fell again, to £16.412 billion, a 1% drop quarter-over-quarter. Meanwhile, total net loans of £12.315 billion were £200 million less than in Q2. However, this also represents an 18% increase over Q2 2020.
And CEO Daniel Frumkin remains positive, commenting that ‘the Bank has continued to deliver against its strategic priorities during the quarter. We have seen improvements in our lending mix from our expanded product offering.’
And H1 2021 results were more encouraging. Adjusted underlying revenue rose 14% compared to H1 2020 and was up 47% year-on-year. Moreover, customer accounts rose 20% from 2.0 million in H2 2020 to 2.4 million, reversing the prior downwards trend.
But with new online-only competition, including Monzo, Starling, and Wise, Metro Bank's physical presence may prevent it from being the prime challenger it once was. The pandemic has driven more people online than ever before, at the cost of high street foot traffic. Many of its traditional competitors, including Barclays, HSBC, and Lloyds, have all reported record results recently. And they’ve all been closing branches in response to new digital trends.
A comeback next year for the Metro Bank share price is not impossible. The bank has repositioned its finances, is growing customer accounts, should grow profits when interest rates rise, and is receiving private equity interest. And its low valuation means there’s plenty of room for share price growth. But it’s been a penny stock at times over the past year. And in the face of stiff competition, it could even have further to fall.
*Based on revenue excluding FX (published financial statements, June 2020).
Charles Archer | Financial Writer, London
23 November 2021