Metro Bank — Profitability achieved and targets reiterated

Metro Bank (LSE: MTRO)

Last close As at 03/12/2024

GBP0.99

−2.10 (−2.09%)

Market capitalisation

GBP663m

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Research: Financials

Metro Bank — Profitability achieved and targets reiterated

Metro Bank (Metro) has published a trading update that shows that it returned to profitability in October. This is consistent with previous guidance of a return to profitability during Q424 and the bank has reiterated its guidance for a mid- to upper single-digit FY25 return on tangible equity (RoTE). The October net interest margin of 2.48% also points to faster improvement than we had anticipated. Separately, the bank reported that it has resolved Financial Conduct Authority (FCA) enquiries into legacy transactions monitoring systems and control. The £16.7m financial penalty is non-recurring and equivalent to c 2.5p of tangible book value per share. At this stage, we have not adjusted the forecasts set out in our recent initiation note and will review these with the full year results.

Martyn King

Written by

Martyn King

Director, Financials

Financials

Metro Bank

Profitability achieved and targets reiterated

Q324 trading update

Banks

14 November 2024

Price

92p

Market cap

£646m

H124 tier 1 ratio

12.9%

H124 total capital ratio

15%

H124 tangible book value per share

138p

H124 MREL ratio

22.2%

Shares in issue

672.8m

Free float

43%

Code

MTRO

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

Business description

Metro Bank is a community bank that serves both retail and commercial customers in major cities in the UK. It operates a network of more than 70 ‘stores’ in prime locations, a key source of new lending and low-cost deposits. Metro is in the process of a strategic repositioning towards a mid- to upper-teens return business model focused on commercial and specialist mortgage lending.

Analyst

Martyn King

+44 20 3077 5700

Metro Bank is a research client of Edison Investment Research Limited

Metro Bank (Metro) has published a trading update that shows that it returned to profitability in October. This is consistent with previous guidance of a return to profitability during Q424 and the bank has reiterated its guidance for a mid- to upper single-digit FY25 return on tangible equity (RoTE). The October net interest margin of 2.48% also points to faster improvement than we had anticipated. Separately, the bank reported that it has resolved Financial Conduct Authority (FCA) enquiries into legacy transactions monitoring systems and control. The £16.7m financial penalty is non-recurring and equivalent to c 2.5p of tangible book value per share. At this stage, we have not adjusted the forecasts set out in our recent initiation note and will review these with the full year results.

Year end

Underlying PBT (£m)

TBVPS*
(p)

ROTE**
(%)

DPS
(p)

Yield
(%)

P/TBV
(x)

12/23

(16.9)

140

3.7

0.0

N/A

0.66

12/24e

(28.2)

120

(16.6)

0.0

N/A

0.77

12/25e

65.9

130

7.8

0.0

N/A

0.71

12/26e

130.1

149

14.0

0.0

N/A

0.62

Note: *Tangible book value per share. **Return on tangible equity.

With its interim results in late July, Metro substantially upgraded its financial guidance for the next three years and beyond. Based on its current expectations for the UK economy and interest rate progression, as well as competitive dynamics in the market, it expects a mid- to-upper-teens RoTE by 2027 and beyond, driven by net interest margin (NIM) expansion, capital optimisation and cost efficiencies. Metro expects a significant expansion in NIM over the period, from 1.64% in H124 to approaching 4% in FY26. The NIM increase to 2.48% in October indicates significant progress towards the bank’s expectations and reflects the run-off of relatively high-cost deposits, the sale of lower-margin retail mortgages and early repayment of base-rate linked Bank of England TFSME funding. The sale of a lower-margin £2.5bn book of retail mortgages, completed in late September, is reflected in the 22% decline in Q3 lending to £9.1bn, supporting Metro’s strategic repositioning of its balance sheet towards higher-yielding SME, commercial, corporate and specialist mortgages. Q3 deposits reduced by £0.6bn, or 4%, to £15.1bn and are now down £1.4bn from the February peak, primarily reflecting the focus on lower-cost core deposits.

The financial penalty levied by the FCA relates to its enquiry into the bank’s historical transaction monitoring systems and controls. The enquiry began in 2016, was remediated in 2020, and the issue has now been brought to a close.

Metro shares and bonds have risen strongly since the interim results but do not reflect the improvements in RoTE that Metro guides to. We see upside potential as confidence in the bank’s strategy builds. Based on a medium-term mid- to high-teens RoTE, even a modest c 0.7x FY28e P/TBVPS, discounted at conservative 15% pa underpins the current share price. While it is too early to predict the outcome and impact of the recently launched Bank of England consultation on the setting of minimum requirements for own funds and eligible liabilities (MREL), any softening of Metro’s requirement would lend further support to RoTE. The bank’s existing £525m MREL bonds pay a coupon of 12% pa.

General disclaimer and copyright

This report has been commissioned by Metro Bank and prepared and issued by Edison, in consideration of a fee payable by Metro Bank. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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New Zealand

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United Kingdom

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London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

General disclaimer and copyright

This report has been commissioned by Metro Bank and prepared and issued by Edison, in consideration of a fee payable by Metro Bank. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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