The Curious Case of Metro Bank
Itās impossible to imagine how 2020 could be worse for Metro Bank shareholders. In 2019, Metro managed to lose its charismatic owner and founder, Vernon Hill, several key members of the board, 96% of its market value and presumably Shirley Hillās (wife of Vernon) architectural firms key revenue streamā¦
To most companies, this would mean the end is nigh, but to Metro, it could just be the fresh start it needs. Iāve had a peek in the vaults, hereās what Iāve found:
Metromanā¦I shit you not
Intro & Background
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Metro Bank was founded in 2010 by Antony Thompson and Vernon Hill, at the time it was the first bank to achieve a full banking license in over 150 years. Metro opened its first branch in July of that year in Holburn, Camden.
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In 2012, in need of capital to expand, Metro sought the help of Fidelity, Steve Cohen (remember the name!) and several other partners to successfully raise Ā£200 million.
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Fast forward to 2013, using this money Metro doubled its number of current accounts and now has over 15,000 business accounts.
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Late 2013 Metro acquires SME Finance and reiterates its aim to have over 200 branches by 2020.
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Between 2013 and Jan 2019 Metro wins multiple banking and customer service awards and looks set to be a major player on the UK Banking scene, receiving credit for revitalising an industry often accused of being in slumber. Despite looking set to miss its 2020 branch opening targets Metro had become vastly overvalued trading at over Ā£40 a share and yet is the darling of the LSEā¦
A Broken Bond
If there are two things investors do not tolerate at a bank, itās missing targets and accounting errors. Metro managed to do both in a short period. Falling well short of its often re-asserted branch target was somewhat excusable given the climate. However, when you add to this misclassifying 10% of its loan book, leading to a need to raise emergency capital, it becomes inexcusable. To compound matters, Metro insinuated that it was themselves that identified the error, when in fact it was the regulators. A mistruth told at a time brutal honesty was needed.
Towards the end of 2019 Metro was forced to issue a bond for the Ā£200 million needed to cover capital from the misclassified loans. The coupon price was an attractive 7.5%. Incredibly, with returns on general savings accounts at an all-time low, Metro failed to raise the desired amount of capital, leaving red-faced bosses forced to pull the coupon and rethink, leading an already depressed share price showing hints of recovery to return to freefall.
Metro then became the UKās second most shorted stock.
Finally Metro managed to secure the desired funding later in 2019, with a nose-bleedingly high coupon of 9.5% over 6 years, callable in 5. One of the highest bond issues for a European bank in decades, obviously investors lapped this up and the bond was oversubscribed to the tune of Ā£350 million. Finally Metro had the capital it needed.
Vernon was understandably over the moon - but this was to be short-lived.
Vernon announced his tenure was over, intending to formally leave at the end of 2019. Craig Donaldson CEO, followed shortly afterwards. If you thought that was bad, the FCA decided to widen their investigation into Metro Bank, any share price rise experienced was to be short-lived.
So Who Is In Charge?
Well actuallyā¦next to nobody is permanent at the moment! The current board list reads as follows:
Pay special attention to the term āinterimā it features quite a bit.
Interim Chairman Sir Michael Snyder, unfortunately, does not inspire confidence in the long term. Whilst his biography includes a huge list of achievements including being an advisor to the government. Itās hard to ignore that, despite being a qualified accountant, Metroās accounting blunders were made on his watch as he served as Non-Executive Director over the period.
There have been rumours and links to ex Tesco Bank boss Benny Higgins, you may remember him as the CEO who spent an average Tesco workers yearly salary (Ā£18,000) on taxis in a mere 8 month period. Whilst undoubtedly a character, I doubt that Benny would lead to a good outcome for the share price, at least in the short term.
Weāre unlikely to see a new chairman until the FCA investigation is concluded.
Gawdā¦Iām so sorry for this one
Investors
Remember Steve Cohen from the opening? Well, heās seemingly all but given up on Metro and is rapidly dispensing of his stake.
https://contrarianinvestor.net/posts/2019/12/8/glinski-ups-stake-in-metro-as-cohen-sells-down
This has led to a somewhat bizarre twist of events, famed South American banker and Colombiaās second-richest person, Jaime Gilinski Bacal, through his investment vehicle Spaldy Investments, has taken up a 6%+ position in Metro, becoming the largest individual investor in the process. Bacal is famed in South America for taking failing banks and turning them around, is he poised for a takeover? Metro would be a prime candidate.
Not just limited to Bacal, Lloyds is also reportedly weighing up a bid:
And lately, Virgin Money has sounded out an offer:
https://contrarianinvestor.net/posts/2019/11/5/virgin-money-move-into-metro-bank-takeover-fray
With a price to book value of around Ā£7 as of 2018 figures at least. It makes you wonder just what offer would be on the table for a buyout of Metro.
Whilst all this is going onā¦
Metro just keeps expanding:
Now in Liverpool:
https://www.metrobankonline.co.uk/about-us/press-releases/news/metro-bank-arrives-in-liverpool-as-it-opens-its-first-store-in-the-north/#
Now in Manchester:
https://www.metrobankonline.co.uk/about-us/press-releases/news/metro-bank-arrives-in-manchester/
Now in Wolverhampton:
https://www.metrobankonline.co.uk/about-us/press-releases/news/metro-bank-opens-new-store-in-wolverhampton/
Now in Cardiff:
https://www.metrobankonline.co.uk/about-us/press-releases/news/metro-bank-opens-first-store-in-wales/
And Metro keeps hiring key talent:
Sally Clark, Chief Internal Auditor from Barclays
https://www.metrobankonline.co.uk/about-us/press-releases/news/metro-bank-plc-board-changes/
Jessica Myers, Marketing Director from RBS:
https://www.metrobankonline.co.uk/about-us/press-releases/news/metro-bank-appoints-jessica-myers-as-new-brand--marketing-director/
And Metro keeps launching new products:
Zero product fee mortgages:
https://www.metrobankonline.co.uk/about-us/press-releases/news/metro-bank-brings-back-no-product-fee-mortgages--for-existing-customers/
Metro keeps growing their loan book - up 25% year on year with net interest income up 6% and net interest margin up 23bps. Non-performing loans are steady at 0.17%.
Net deposits are back in growth after the initial run on the bank in 2019 and commission income is up 60%+.
To my eyes, not the signs of business under the huge financial distress the papers would lead you to believe.
The Bears Case
Firstly, how do we not have a bull and bear emoticon?
- The weight of this coupon will affect Metro for a long time, I wouldnāt expect a return to profitability until 2022/23 at the earliest.
- The FCA could levy a hefty fine to make an example of Metro leading to more capital issues.
- Further poor news and falling share prices could cause a run on the bank, similar to what happened to Northern Rock.
- Metroās CASS stats, when added to the neo-bank uprising, could mean there isnāt a future for Metro Bank: https://www.wearepay.uk/wp-content/uploads/2019/04/Q1-2019-CASS-Dashboard.pdf
- Metro could be one bad chairman away from oblivion.
- And of course Metro could spend all the bond money on Benny Higgins taxi journeysā¦
What to take away from all of thisā¦
Well, Iāll have to leave you to draw your conclusions from the information. I think youāll agree, an awful lot hinges on the FCA delivering a favourable outcome.
But I canāt help but ask myself if I worked for the FCA and I knew Metro was in for a life-threatening kickingā¦would I join the company as their new risk Directorā¦?
https://www.fintechfutures.com/2020/01/metro-bank-raids-fca-for-new-risk-director/
So there we have it, my research on Metro Bank. A little different to the Greatland Gold one, but hopefully no less enjoyable! As ever please donāt make decisions solely on the above information, make sure you do your own research and always fully understand the implications of investing beforehand.
