Source: Philafrenzy/CC BY-SA 4.0.
A bank without money is like an ice cream van without ice cream or a trading broker that doesn’t offer trading. It’s a bit redundant. Of course, Metro Bank doesn’t exactly have no money. In actuality, the capital the firm holds as a bank will be much greater than the average high-street store. As a bank, this needs to be the case. But in relative terms, for a bank that prior to 2019 was performing well, it’s in desperate need of some investment. Here’s the story of Metro Bank.
Metro Bank's story
In 2010, Anthony Thomson and Vernon hill founded a new high-street bank to launch in the UK. It secured a license from the Financial Services Authority, the first of its type to be granted to a high-street bank in over 150 years. Plans to have over 200 branches in Greater London alone by 2020 demonstrated the ambition of what was named Metro Bank, and the firm became the loud newcomer to the industry.
At present, it has just 67 stores that employ over 3,500 people, with its flagship branch residing in Holborn – Central London.
Six years after its launch, Metro Bank floated on the stock market at £20 a share, giving a total valuation of £1.6 billion. At its peak, Metro Bank’s price had risen to more than double what it floated at, but recent developments mean it’s now trading at just a quarter of that original £20 price.
The 2019 partial-demise
Metro Bank was continuing to head in the right direction into 2019. However, in January, a seemingly simple ‘accounting error’ would go on to cost the bank billions in equity.
The mistake was down to how it classifies its loan book. It wrongly classified the risk weighting of commercial loans, not recognising them as ‘risk-weighted assets.’ In essence, this meant additional capital would have had to be set aside in order to counter what, on paper, was seen as greater risk.
The price of Metro Bank instantly fell nearly 40%, as investors braced for what was expected to be a period of turmoil and austerity. In May 2019, Metro Bank shares plummeted to a new low amidst fears over its financial health impacting the ability to safeguard customers’ assets.
People queued in branches throughout London last weekend, requesting to withdraw assets from safety deposit boxes in fear of the bank not being able to financially secure them. This was following what Metro Bank has claimed are ‘false rumours’ that had circulated around social media, suggesting the bank was facing severe financial difficulties and could even go bankrupt. It explicitly urged anyone with a deposit box or Metro Bank account to empty them immediately.
What’s Metro Bank’s situation now?
It’s said that Metro Bank now needs £350 million in investment to rectify the initial error. News from the inside is that they are well on their way to securing the necessary investment. The market would suggest that’s true, as it’s recently seen an increased back towards the £6-mark.
But it seems like Metro Bank has simply got either unlucky or careless. A mistake of this magnitude back in January has proven to be very costly, but there’s nothing to suggest that it couldn’t happen to any other firm. It seems that the right plans are in place to turn the bank back in the right direction.
Should I invest in Metro Bank?
Adverse sentiment has been shared and blown out of proportion, to the detriment of social media, but the ball was set off rolling back in January. It doesn’t help that the purpose of a bank is to protect assets, so financial stability is even more paramount in comparison to other firms. Customers and investors alike have been spooked by the situation, causing a snowball effect to cripple Metro Bank’s price.
Therefore, this could be seen as a decent trading opportunity to invest in. Similar price falls of this magnitude would usually come as a result of negligence, a major change in personnel or an equity simply not performing. In this case, it’s a simple error that’s proven to be very costly. Put this aside, and you have a bank that was performing well, was growing where other banks are closing stores and has ambition to continue to grow in the future.
So, what traders have is an already-established equity, with a business model that was working. If reports are to be believed, it also has secured the funding needed to get back to business as usual, and even kick on to see its price rise as more stores continue to open. AND, more importantly, Metro Bank is currently at 1/8 of the price in which it floated at.
There’s always risk in trading, and nothing is certain, but it seems like with Metro Bank’s price at an all-time low (which incidentally cannot possibly fall too much lower – currently at £5), there’s a smaller limit to what traders can lose compared to other, more expensively-priced equities, and the potential still remains for Metro Bank to return to its former price highs. So, if you believe in the firm and its future potential to grow and get back to being successful, it seem as though now would be a good time to invest in Metro Bank, given its attractive share price.