Metro Bank (LON:MTRO) shares slumped after the company announced its first-quarter update after the London close yesterday. Frist-quarter profit before tax halved to £4.3 million, and revenue jumped by 17% to £107.5 million. Net interest margin in the first three months was 1.64%, and that compares with the 1.76% in the final-quarter of 2018.
The negative publicity the company endured in recent months in relation to the accounting error prompted a ‘small number of large commercial and partnership customers’ to take their business elsewhere. That client base accounted for approximately a 4% decline in quarter-on-quarter in deposits.
The bank acknowledged that sentiment has been soured by the accounting error, and it confirmed that progress has been made in relation to ‘implementing strategic initiatives’. Ultimately, the firm needs to convince investors there won’t be repeat of that accounting error.
In February, the bank confirmed that it swung to an annual profit of over £10 million – its first ever profit since the bank was founded in 2010. The company is growing at an impressive rate, as revenue jumped by 51% and the loan book saw an increase of 64%. Given how new the group is, it is no surprise that customer account, deposit and lending growth were at ‘record levels’ ,and the outlook is bullish as it aims to increase the headcount by 900 this year. The cost to revenue is high though, it is 90p in every pound earned. Metro hopes to have a loan book of £24 billion by 2020, and that would suggest very aggressive growth between now and then. Net interest margin slipped to 1.93% from 1.97%, and given the flattening of the yield curve, we are likely to see pressure on margins.
The political uncertainty surrounding Brexit is likely to keep interest rates low, and it turn it will be harder for banks to make money due to the flattening of the yield curve. Personal debt is already high in the UK, and Metro might struggle to expand at the rate it wants on account of the economic climate.
The group is seen as a challenger bank to the old guard. Lidl and Aldi have shaken up the UK supermarket sector, but as some established supermarkets found out, you can be over zealous in your price cuts, and end up hurting the bottom-line. Metro Bank needs to be careful they don’t become too competitive, and wind up spreading themselves too thin.
The firm’s reputation has taken a knock in the past year. It raised £300 million in funds in July in order to beef up its balance sheet, and in February, it announced a £350 million cash call as an accounting error revealed that the bank underestimated its loan exposure. To make matters worse, the finance house is being investigated by the regulators because of the accounting error.
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