MTRO.L - Metro Bank Plc

[samwise]

Bank at 0.2 book. Colourful history obviously needed to get to this level. Lots of buyers before the 95% fall, when this was a favourite growth stock at 4xbook. But I’ll skip that. All the board and management is changing, strategy is changing. So what matters now is the future possibilities. If you are interested, read the VIC threads to see how the old thesis unravelled.

 

Fun fact: Greek banks are 50% more expensive on P/b.https://finance.yahoo.com/quote/ALPHA.AT/key-statistics?p=ALPHA.AT

 

 

And no one can actually say what the true book value of the Greek banks is because of the massive bad loans they need to estimate. That’s the one good thing still in metro bank’s favour: their assets are still fine. This could change: they grew loans very fast, and they paid little attention to the asset side of the balance sheet as an explicit part of their strategy. So bad stuff could surface as loan growth slows or a recession happens. Counteracting this is the other part of their strategy: they did not reach for yield on assets, but tried to stay safe. Their focus was always the deposits. So it’s possible (and so far looks probable) that they got decent loans on their balance sheet, but didn’t calculate their regulatory risk weights correctly.

 

Parts of the book is the branch real estate and fixtures, so you could haircut for those. But it’s still very cheap.

 

With the “good” news out of the way, everything else is hair.

1. Regulators are pissed off and are probing how the risk weight screw up happened. Silver lining: nothing more has emerged on problems in the accounting or reserves. The probe is on the events that happened. In a way the regulators have done some due diligence for us.

2. Deposit run. On and off deposits have grown or contracted with news flow. Seems to be focused on commercial deposits (possibly not insured?). Deposits from retail customers are still growing strongly. +14% in the quarter ended September 30, 2019. Loans grew too much, given lower deposits, and now their loan/deposits ratios is higher than their plan.

3. Funding costs have increased for the next half decade as they were forced to issue MREL debt (which converts to equity in a crisis) at 10%!

4. Everyone expects them to make losses for at least the next 3 years because of these funding costs and branch costs.

5. Shareholders are pissed as they were forced to issue equity at 0.5 book, about 80% below the peak from the previous year. The people who bought the equity have since lost 60% of their investment!

6. FT has reported bad news repeatedly: private equity doesn’t want to buy this, no candidate for CEO can be found until the regulatory probe ends, no other bank will buy this until the regulatory probe ends. Most comments in FT are negative too.

7. Hearsay from another internet discussion (possibility ft comment, but I cannot recall): to balance the loans/deposits ratio they should get more deposits. But deposits growth will trigger a regulatory requirement to issue more MREL debt. Which will worsen their costs problem. So between costs and regulators, they may be truly screwed.

8. I could have missed something, e.g currently there isn’t a CEO. Even the board seems to be changing.

 

Obviously not many buyers, hence the current price.

Given all this hair, I have a pretty small position, but I do think that at 0.2 P/B, there are decent possibilities.

 

One possibility is a zero, probably extending over many years of losses, or brought on by a recession.

Another possibility is a takeover by a bank which can

(1) have better relations with the regulators, specially useful to have AIRB I.e risk capital based on internal models, which would solve their issues with RWA and CET1 ratios.

(2) cut costs at the branches. TD did the same with commerce bank. Which they bought after regulatory issues forced the founder out. Same founder, same model. History is rhyming. Google Vernon Hill if interested. There are also interesting bits in Ed Clark’s (CEO TD) biography.

 

Or they could try and fix this themselves.

Not claiming any insight here. But running a plain vanilla bank is pretty low tech and lots of bankers could probably right the ship. They could control costs and make better loans, over time. Without a takeover, getting relief on the risk capital will be a slow process. Only question is if they have enough time and leeway; or is metro too deep in the regulatory and costs hole now.

 

Anyone else following? Just based on FT coverage, I believe this is a much more popular stock than the previous London stock I posted.

[samwise]

Now there is a VIC writeup on the bonds, with a lot of details and updates on current state, post-pandemic. The bonds are probably a good bet for someone who is happy getting a lot of the return via coupons, which may be more tax-efficient for some.

 

Also shows how the regulatory framework doesn't really favor challenger banks in the UK, since they get charged higher rates for regulatory capital.

 

https://valueinvestorsclub.com/idea/Metro_Bank/

(needs a free login.)

 

 

[Anglozurich]

"Also shows how the regulatory framework doesn't really favor challenger banks in the UK, since they get charged higher rates for regulatory capital."

 

I have responded on OSB. This statement is just incorrect. The Bank of England and PRA treat every bank differently on MREL requirements hence the difference in treatment of Metro and OSB. In addition the bank of england offer beneficial funding schemes hence why OSB has accessed £2.6bn of practically zero cost funding.

 

Metro was a bank ran by a management with questionable integrity. When that happens, capital flees (rightly so) and the PRA will come down on you with force to the point of death by forcing you to increase MREL through the debt capital markets which means cost of funding becomes uncompetitive. This was all because Metro screwed up and seriously breached RWA reporting which meant they were overstating their MREL. In the PRA's eyes this is equivalent to first degree murder. This has nothing to do with Metro being a challenger bank. They are just a terrible bank.

[samwise]

"Also shows how the regulatory framework doesn't really favor challenger banks in the UK, since they get charged higher rates for regulatory capital."

 

I have responded on OSB. This statement is just incorrect. The Bank of England and PRA treat every bank differently on MREL requirements hence the difference in treatment of Metro and OSB. In addition the bank of england offer beneficial funding schemes hence why OSB has accessed £2.6bn of practically zero cost funding.

 

Agree with the second part of what you said. As for the first, I think you are saying that regulators can relax the conditions, just as they did for OSB.  True. But The VIC author says the conditions are set very hard to begin with. Bail in capital is required at £15B assets vs €100 B in Europe. Read the paragraph just before summary.

 

But unless you are a regulator and someone offers to pay me a fee for lobbying you, it is pointless to continue this part of the conversation. So let’s just accept things as they are in UK’s regulatory world.

 

 

Metro was a bank ran by a management with questionable integrity. When that happens, capital flees (rightly so) and the PRA will come down on you with force to the point of death by forcing you to increase MREL through the debt capital markets which means cost of funding becomes uncompetitive. This was all because Metro screwed up and seriously breached RWA reporting which meant they were overstating their MREL. In the PRA's eyes this is equivalent to first degree murder. This has nothing to do with Metro being a challenger bank. They are just a terrible bank.

I agree that Metro is not a good business today, and was considered good enough to trade at 4xbook a couple of years back. My read of the situation is stupidity rather than fraud, but either way the results were the same for shareholders. If everything depends on regulatory good graces, then do you think metro’s new management has mended the relationship and will be allowed to survive? Or stepping up the capital ladder, do you agree with the VIC thesis that the bonds are a good investment?  The thesis is basically this: They either survive or are sold, and the bonds go with the sale. Either case the bonds are good. The bonds will not be converted to equity, since the problem is a shortfall in equity+MREL, so converting MREL to equity doesn’t solve that problem.

 

FD: no position today.

[Anglozurich]

I have no special insights into the bonds or the likely outcome of the PRA decision. I am old school with banks. I like to watch management for a few years for consistency, integrity, underwriting standards/charge-offs, focus and cost control. Metro recently bought a peer to peer lender. That whole sector is just grimy. Along with their major mistake around regulatory submissions there is just too much to question. I just avoid all together with insurers and banks when i smell smoke as from experience, things can snowball into big scale problems quickly