Even though shares in Metro Bank (LSE: MTRO) may have soared last week it barely even puts a dent in the steep decline in the price over the last 12 months. The challenger bank has lurched from scandal to scandal, chipping away at investor and possibly consumer trust. The share price is down 76% in just the last year.
What’s gone wrong? A Telegraph headline has described the company as a circus and investors will certainly feel like they’ve been taken for a ride. This bank, which was supposed to shake up the sector, is in the spotlight for serious mistakes.
The biggest of these is no doubt an accounting error made public at the start of this year. Metro had wrongly classified loan risks, with implications for the capital it’s required to set aside. The mistake immediately wiped £800m off the value of the bank’s shares which at the time just before the announcement were trading at around £22. The shares have continued to fall since the start of the year as they can now be bought for nearer £8. Ouch! The issue won’t go away either as regulators are now looking into the blunder meaning uncertainty will continue, likely dragging the shares down further.
Another serious failing seems to be around governance. Sounds boring I know, but if you invest in a listed company, you don’t expect the founder to do something like using his wife’s company for architecture and design work, funnelling £25m to her company over just eight years. All the while, the bank has been asking for ever more cash from investors. The two issues aren’t linked, of course, because the business has bigger problems than how its branches look, but nonetheless it doesn’t look like good management.
The other challenger banks – a wider problem? Retail banking is a tough market with often pretty low margins, and it’s dominated in the UK by the big names such as HSBC and Lloyds. There seems to be a wider problem with the shares of challenger banks. They are meant to be growing fast and challenging the dominance of the more established industry players, but their share prices are often reversing. Metro has serious issues that are self-inflicted, but even better-run banks aren’t doing well. The share price of CYBG is down 36% in the last year.
Others have felt they’ve needed to merge to gain the scale needed to achieve market share. OneSavings Bank and Charter Court Financial Services Group are in the process of merging to create a bigger, stronger player with fingers in more pies. Charter Court has residential market expertise while One Savings’ strength is in commercial and development lending.
Other deals for Aldermore (LON:ALD) and Shawbrook add to the feeling that challenger banks are not performing that well as public companies and not generating good returns for shareholders, which brings us back to embattled Metro Bank. The result is that I wouldn’t even consider investing in Metro, or indeed any of the other declining number of challenger banks out there.
Andy Ross owns shares in HSBC. The Motley Fool UK has recommended HSBC Holdings (LON:HSBA) and Lloyds Banking Group (LON:LLOY). Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019