Shares in embattled Metro Bank (LSE: MTRO) jumped recently after its founder quit and investors backed a new fundraising effort. I suspect there are also strong hopes that with Brexit driving down the pound and plenty of M&A activity going on among the challenger banks, backers hope for an opportunistic bid for the business to drive up the share price.
A bank in trouble
From my point of view, the risks are just too great to justify investing in the bank right now. It’s unclear who will replace Vernon Hill, Metro’s outgoing chair and if that person is an outsider – as I think they should be given the problems the bank faces – then what issues will they reveal at the beginning of their reign?
Known as ‘kitchen sinking’, it’s not uncommon for new leaders to reveal bad news when they first arrive at a company, in order to clear the decks and give themselves fewer trip hazards in the future. Rather than take the blame for problems themselves, they blame the previous (mis)management. The flurry of bad news does tend to hurt investors, however.
That’s one risk then. Another for me has to be the processes in place at the bank. Is it built on solid foundations with the kind of robust systems you’d expect from a bank, when it can misclassify £900m worth of loans?
Investigations into this issue are still ongoing so any outcome is uncertain and the bank could ultimately be heavily penalised, which wouldn’t be good for shareholders. Its attempts to raise additional finance are also a worrying sign which must raise a red flag over its financial health.Â
A recovering bank
Another bank, Royal Bank of Scotland (LSE: RBS) has much greater potential for investors I think. It too is undergoing change at the top, with Alison Rose promoted to become its new chief executive officer.
An internal appointment means less likelihood of kitchen sinking and a CEO who understand the business and the challenges and opportunities the bank faces.
The results for the first half, ending 30 June 2019, showed operating profit before tax of £2,694m versus £1,826m in the same period in 2018. RBS is also on track to meet a £300m cost reduction target for 2019.
There was a special dividend of 12p for shareholders announced alongside the interim ordinary dividend of 2p, meaning the bank was able to return £1.7b to its backers. I think this is a sign of its recovery and improving financial strength.
The main piece of bad news in my view was the even larger provision made for payment protection insurance (PPI) claims. A last-minute spike in claims resulted in an extra charge of £600m to £900m in the third quarter. The better news is the deadline for claims expired on 29 August so investors won’t have to endure any more provisions going forward, leaving more room for RBS to keep growing its dividend.