Coming out of the banking crisis, I thought the so-called challenger banks could offer an attractive alternative investment. Starting from a small size and without the legacy baggage of the big banks, small inroads into the lending market could grow their businesses nicely.
But one downside of being small in a financial business is that when you do get something wrong, it can do disproportionate damage. That’s what happened to Metro Bank (LSE: MTRO) after it was revealed that the bank had mispriced the risk of a chunk of its loans, including some commercial mortgages, forcing it to have to raise more than £350m to shore up its balance sheet.
For a big bank, such a sum would be relatively small change and the market reaction would probably be relatively subdued. But for Metro Bank, the result was a share price collapse. Today we’re looking at an 85% slump since a peak in March 2018, with Metro’s market capitalisation down to a little over £800m.
Loan sale
On Monday, however, the Metro share price blipped up 6% after the bank confirmed press speculation that it is in “discussions regarding the potential sale of a loan portfolio.” Commentators are suggesting the potential purchaser of a mortgage portfolio is hedge fund Cerberus Capital Management, and the deal could be worth around £500m.
That could result in a serious balance sheet improvement and put Metro Bank on a solid footing for a second attempt. But until earnings start growing again, the P/E valuation drops to something sensible, and there’s some sign of a dividend on the horizon, I’m keeping away.
First-half results are due Wednesday afternoon.
Cheap bank?
Bank of Georgia Group (LSE: BGEO) is on a similar market cap to Metro Bank, but other than that it looks a very different prospect to me. Its share price has been pretty erratic over the past five years, showing an overall loss of 35%.
The effect on the bank’s valuation has been to push its forward P/E multiple, based on forecasts for the current year, to only around 6.5. There’s a dividend yield on the cards of 5.1%, and that would be covered 3.1 times by forecast earnings.
The current prognosis for 2020 is even better, with a predicted 14% rise in EPS dropping that P/E ratio to under six, and analysts are expecting a 13% hike in the dividend to yield 5.7% (while maintaining 3.1 times cover).
That’s actually a very similar valuation to Lloyds Banking Group, whose shares are slightly more highly valued at a P/E of 7.5, and whose dividend yield is a little better at 6% (though cover by earnings is lower at 2.2 times).
Stronger economy
But other than valuation, I’m really not seeing a lot of similarity here. Lloyds shares are surely depressed by the potential economic catastrophe we could face in the UK in the event of a no-deal Brexit (the chances of which will be significantly higher should Boris Johnson take charge of the negotiations).
By contrast, the economy of Georgia is looking strong, with annual economic growth predicted to rise from 4.6% this year to 5% by 2021. I’m sure some of the low valuation is due to most Brits being unable to find Georgia on a map (and I only can because I’ve looked it up). It looks cheap to me.