Metro looks to reassure customer and investors with a £375 million fund raising

Russ Mould
17 May 2019

“Quite why it has taken Metro Bank nearly three months to get around to arranging the fund raising it first suggested on 26 February is a bit of a mystery. The perceived stock overhang has done a lot of damage to the share price and today’s trading update reveals that some customers have lost faith, too, judging by the 4% drop in deposits in the first quarter and further outflows between 10 and 13 May,” says Russ Mould, AJ Bell Investment Director. “However, demand has been so strong that Metro has been able to raise £375 million, more than the £350 million originally planned. This should lay to rest the more lurid headlines about the company’s financial health and allow it to focus on reassuring customers and shareholders and get back to the day job of accepting deposits and making loans.

“Some may be surprised to see such strong demand for the new shares, which will begin trading on 5 June, pending approval for the issue from shareholders on 3 June, and is unlikely that those investors who funded last July’s £300 million placing at £34.22 are too thrilled by subsequent events.

“But the plunge in Metro’s shares from £40 last March may mean some investors think the placing price of £5 a share represents a bit of a bargain. The issue of 75 million shares takes the total to 172.4 million, so buyers of the new stock are in effect taking a 43% stake in the bank and they are doing so at a price that comes in below the stated book value per share.

“Before the placing, Metro had a book value, or net asset value, per share of £12.06. Adjusting for the new share count, the fresh cash infusion and the theoretical ex-rights price (TERP) of the stock, this number is now likely to come in at around 900p, to put the shares on barely 0.6 times book value. This means that Metro is easily the cheapest of the challenger banks and is probably just about the cheapest of all of the major UK-listed banks, using the price/book metric.

 

2019E

2018

2019E

2019E

 

P/E

Price/book

Dividend yield

Dividend cover

Charter Court

7.5 x

1.88 x

4.0%

3.31 x

OneSavings Bank

7.2 x

1.71 x

3.9%

3.60 x

Paragon Banking

9.2 x

1.68 x

4.5%

2.41 x

Secure Trust Bank

8.7 x

1.34 x

5.6%

2.06 x

HBSC

11.3 x

1.20 x

6.0%

1.47 x

Lloyds

8.2 x

1.13 x

5.7%

2.15 x

Royal Bank of Scotland

8.3 x

0.79 x

5.3%

2.28 x

Standard Chartered

13.2 x

0.76 x

2.3%

3.26 x

CYBG

7.8 x

0.74 x

3.6%

3.52 x

Barclays

7.3 x

0.61 x

4.7%

2.94 x

Metro Bank

19.3 x

0.58 x

0.0%

0.00 x

Source: Sharecast, consensus analysts’ forecasts

“You can argue that Metro’s accounting blunder, rapid downgrade of its growth plans and corporate governance issues all mean that the stock deserves a discounted valuation relative to its peers. 

“But if the company can deliver on its targets of 20% trend growth in deposits, a cost/income ratio of 60% to 65% by 2023 (compared to 100% in 2018) and a low double-digit return on equity by 2023 then it could prove to be a cheap stock – although after the misadventures of the last year the burden of proof now lines with the management team.”

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