Now that a crisis has been averted at Metro Bank, is it time for investors to take a look at the beleaguered high street lender? A third-quarter trading update from the bank this week suggested that conditions at Metro had stabilised since it clinched a £925 million rescue deal last month.
While deposit withdrawals increased in early October, when fears escalated about Metro’s financial health, the bank said on Tuesday that “daily flows have returned to more normal ranges” since it announced an emergency refinancing on October 8.
Yet the bank gave no details of the scale of the outflows it suffered last month before the fundraising was agreed, or a figure for where its deposit levels stood now. Instead, it said deposits had amounted to £15.6 billion on September 30, which was before worries about the bank erupted. They were up 1 per cent compared with the second quarter but down 5 per cent year on year. The bank also said it had generated a “modest” statutory post-tax profit in the period but did not give details.
It means investors will have to wait for Metro’s annual results next year for a proper insight into the damage that last month’s crisis inflicted on the business which, when it opened its doors in 2010, had hoped to shake up Britain’s banking industry.
Metro was founded by Vernon Hill, an American entrepreneur, and Anthony Thomson, a Briton who later set up the digital lender Atom. It was the UK’s first new high street lender in more than a century.
The aim was to take market share by enticing customers from the big incumbent lenders. While many rivals have been closing branches as customers move online, Metro built out a presence on high streets and promised superior customer service, with its sites open seven days a week. Shares in the bank, which were listed in London at £20 apiece in 2016, traded above £40 in March 2018.
Yet the stock tumbled in January 2019 after an accounting blunder. Dan Frumkin became its chief executive in 2020 and has tried to revive its fortunes. The departure of Hill as its chairman in 2019 also alleviated corporate governance concerns harboured by some investors.
A recovery under Frumkin has been derailed by the turmoil. The crisis began in September when Metro said an attempt to loosen its capital requirements had been opposed by the Bank of England. This prompted a slump in its shares and upended Metro’s plans to refinance £350 million of bonds, which it had needed to complete by next October.
When it emerged that the bank was seeking to raise capital, worries about its health escalated. Bosses then scrambled to pull together the October 8 rescue package. It involves a £325 million capital raise, including a £102 million equity injection by Jaime Gilinski, a Colombian billionaire who is Metro’s biggest shareholder. This will take his stake from 9.1 per cent to a controlling 52.9 per cent. Debt investors are also refinancing £600 million of the lender’s outstanding bonds.
Although the deal buys Metro breathing space, some investors might fear it will face another similar crunch in 2028, when it will need to refinance some of its new debt.
While the backing of Gilinski is a vote of confidence in Metro, existing shareholders will be painfully diluted by the fundraise. Even so, it seems very unlikely that shareholders will reject the deal when they vote on it at a meeting that Metro revealed on Thursday that would be held on November 27, because the alternative will be even worse for shareholders and involve regulatory intervention.
Still, the rescue does not alter the fact that Metro’s branch-based model, which Frumkin and Gilinski have signalled they will continue to pursue, looks increasingly outdated in the world of online banking.
Advice Avoid
Why Rescue is not a long-term solution to Metro’s problems
Auto Trader
A “cyclical sweet spot” is how one broker described the position Auto Trader finds itself in (Robert Lea writes). The company provides a digital marketplace for motor dealers to sell second-hand cars and gets paid for allowing them to do so. This, by the way, is not far different from selling ad space as the old magazine, from which it takes its name, did. What it boils down to is this: more used cars are coming on to the market.
After all the disruption of Covid-19 and the lack of supply in the market, a recovery in used car volumes is good for Auto Trader, even if tumbling second-hand prices make life a little more complicated for dealers in the ever-changing economics of peddling motors.
For the six months to the end of September, Auto Trader reported a 10 per cent rise in operating profits to £164 million on revenues 12 per cent higher at £280 million from the 440,000 cars advertised for sale on its site at any one time.
The modern Auto Trader doesn’t just sell advertising space but makes additional money by packaging up propositions for traders to get the best deal and for buyers to bundle in the financing of their new acquisition.
Buying and selling cars will always be with us. For car users this is not discretionary spend. With the pound in the pocket not going as far as it used to, though, buyers are having to cut their cloth, maybe going for a cheaper older vehicle or altering their financing. An added dimension is the increase of battery vehicles into the used market, priced at the equivalent of their petrol alternative when the electric premium differential in the new market can be huge.
Shares in Auto Trader, which is valued at more than £6 billion on the stock market, were motoring on Thursday, up by more than 8 per cent. Approaching 700p again within a few percentage points of its all-time high, it is on a rating of 30 times this year’s expected earnings.
At that level, the dividend yield gets to a skinnier 1.3 per cent. But this is a company committed to getting returns from its rich cash harvest and supporting the share rating by buying back and cancelling shares.
Advice Hold
Why Reliable growth equals reliable returns
