Interactive Investor

Insider: a £1m bet on Metro Bank’s turnaround

9th November 2020 11:41

Graeme Evans from interactive investor

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It’s hugely out of favour with investors, but the main man at this bank is in buying mood.

The boss of Metro Bank (LSE:MTRO) has staked £1 million of his own money on the lender's turnaround after seeing shares in the heavily-shorted stock fall to fresh lows in recent days.

Dan Frumkin bought Metro shares on Wednesday and Thursday at below 60p, which compares with more than 4,000p in March 2018 before the challenger bank was sent into a tailspin by an accounting error and then the impact of Covid-19 on industry sentiment.

Having taken the helm at the start of this year, Frumkin has embarked on a five-point restructuring under which he wants to make Metro the UK's best community bank and to achieve a return on equity of 8.5% within four years.

The acquisition of peer-to-peer lender RateSetter has given a boost to those ambitions, although a recent trading update failed to soothe the City's balance sheet concerns.

Investec Securities recently described the bank's shares as remaining “speculative” and said a return to profit may not happen until 2024, reinforcing the case of hedge funds who have made Metro one of the ten most shorted stocks on the London market. About 7.6% of the share register is currently out on loan, compared with 9.4% for Cineworld as the most shorted overall.

Frumkin has used the latest weakness in the share price as an opportunity to fulfil his obligation to hold shares worth twice his £740,000 annual salary. He bought £570,000 of shares at 114p in July and has reached the threshold much earlier than required after a strong end to trading last week helped the value of his most recent purchases to jump 14% by Friday night.

New chairman Robert Sharpe, who has 45 years' experience in retail banking, also bought £17,660 worth of shares last week to mark starting his new role. During his executive career, Sharpe led the transformation of West Bromwich Building Society, having also been CEO at the Portman Building Society and boss of Bank of Ireland's consumer business in the UK.

The latest lockdown has presented the new leadership team with an immediate test, given that Metro racked up an underlying loss of £183.4 million in the first six months of 2020 after Covid-19 disruption cost the company an estimated £109 million.

Lower levels of economic activity in the first lockdown impacted fee income, with margins compressed by lower interest rates and credit provisions higher due to the consumer outlook.

The company's most recent trading update in October had painted a more encouraging story after the number of active payment deferrals reduced to less than 3.5% of the retail mortgage portfolio, compared with 16% at the half-year stage.

Total net lending grew by 2% to £15.1 billion, aided by the bank extending more than £1 billion of government-backed business loans to more than 33,000 customers.

Metro's Common Equity Tier 1 ratio, which measures capital against assets, was materially in excess of regulatory requirements, but once additional buffers were included the capital benchmark was below the minimum threshold. Metro did not provide figures with its Q3 update.

Frumkin, however, did report further progress on the strategic priorities he set out in February, including the launch of initiatives aimed at meeting more customer needs. This includes the addition of RateSetter, whose technology platform built over the past decade will help Metro to significantly enhance its offer in unsecured lending.

Stocking up on AB Foods 

In the week Primark shuttered 57% of its store estate, the purchase of £150,000 worth of shares by Associated British Foods (LSE:ABF) chairman Michael McLintock should offer investors some comfort that the conglomerate is confident it can ride out the latest UK lockdown.

The company expects this month's Primark closures to come at a cost to sales of £375 million, on top of the £2 billion of revenues and £650 million lost by the retail chain due to global Covid-19 disruption in the financial year to September.

Last week's full-year results underlined the value of having a diversified business model, with the company's Ryvita and Twinings grocery division delivering a strong improvement in adjusted profit. That wasn't enough to justify a dividend payment, which AB Foods is keeping suspended due to the uncertainty caused by the latest Primark disruption.

The share price has unsurprisingly borne the brunt of the lower revenue and profit figures and has declined 23% over the last year. At Tuesday's 1,718p, which is where McLintock bought his 9,000 shares, the company is trading at close to its lowest level in more than seven years.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Related Categories

    UK shares
    Consumer goods and services
    Financials

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