Challenging times for bank investors

As Metro goes into free fall, where can punters turn?

by Jill Treanor

What a week it’s been for Metro Bank investors. the shares were in free fall on tuesday, losing more than a third of their value in one day, and by the end of the week were at 192.7p.

Compare that with their peak of 4000p in March 2018 and the 2000p at which they were sold to investors in the 2016 stock market float and it demonstrates that it is not a journey for the faint-hearted.

Russ Mould, investment director at stock broker Aj Bell, says shareholders thinking about what to do next will be governed by two schools of thoughts.

‘One is,’ he says, ‘never catch a falling knife; and the other is, you’re only going to make money by making the hardest decisions.’

the shares have now lost 90pc of their value this year.

The big jolt down was sparked by the announcement in January about serious accounting errors, and then given a fresh impetus by Monday’s shock decision to pull a bond issue because of insufficient demand, despite a very attractive 7.5pc interest rate.

Lingering anxiety about regulatory issues – the accounting matter is being investigated – contributed to the nervousness.

at these prices, Metro’s stock market value has crumbled to below £400m. that’s for a bank which says its assets are valued at £1.8bn. the discrepancy helps explain why there are suggestions Metro ( foundedbydog-loving american Vernon hill, pictured) could be taken over, although Mould cautions that holding a share in the hope of a bid requires enormous patience.

Bids often don’t materialise and come at a lower price than the market hopes (think insurer Royal and Sun alliance, he says, touted as a target for two decades).

So what about shares in other challenger banks? the reality is that for investors seeking out exposure to rivals to the big four – Lloyds Banking Group, Barclays, hSBC and Royal Bank of Scotland – there are fewer options than there used to be.

a number of the best known names have been bought in the last few years. tSB – spun out of Lloyds – was taken over by Spain’s Sabadell in 2015.

Shawbrook has been sold back to the investors that first floated it, BC Partners and Pollen Street Capital. aldermore, which floated in 2015, was sold to South africa’s largest bank First Rand in 2017 for 313p a share, which compares with its listing price of 192p.

and some of the high-profile new entrants which are popular with their customers – the likes of Monzo and Starling Bank – are not listed on the stock market (at least, not yet).

that leaves buy-to-let lender One Savings (whose roots lie in the Kent Reliance building society) which is in the process of taking over buy-to-let rival Charter Court, Secure trust, Paragon and CYBG, the owner of Clydesdale and Yorkshire banks, which has bought Virgin Money.

CRUCIALLY, not all are ‘banks’ in the traditional sense of running current accounts and granting loans, with different business models and different exposures.

Richard hunter, head of markets at interactive investor, points that they also differ from the big incumbent players.

‘Challenger banks don’t have things like legacy regulatory issues – most notably payment protection insurance,’ he says.

Neither do they have creaky it systems nor vast and expensive branch networks, hunter adds.

it means they also have different things to offer: Mould says Secure trust has the highest yield while Paragon has a lean cost base and One Savings looks cheap when its stock market value is compared with the value of its assets.

the one thing they do have in common, says helal Miah at the Share Centre, is their exposure to the uK economy, which is facing uncertainty over Brexit.

this ‘difficult’ environment is one of the reasons the broker is not that keen on the challenger bank sector.

even the mainstream banks are not at the top of its list – although hSBC, with its exposure outside the uK, is one that Miah highlights. But hSBC also has exposure to hong Kong where government protests have dominated the news coverage of late.

and all of the banks are grappling with low interest rates. this affects their net interest margin – essentially the profit they make on the difference between what they pay savers and the rate they are able to sell loans.

‘unfortunately for the time being in the uK, it’s does not look like [net interest margin], is going to be going up,’ says Miah.

that matters, says Mould, as ‘that’s the bread and butter, that’s what banks do’.