Metro Bank shares have been one of the most heavily shorted UK stocks over the course of the summer months, and canny CFD traders will have realized profits of up to 200% if they caught the bank’s stock when it started to slide from over 800p in June to its current position of 208p.
The question many traders will be asking themselves is whether Metro Bank is going to give up some more opportunity on the short side or whether it will turn the corner soon.
Metro Bank, a so-called challenger bank in the UK, saw a £2.2 million loss in the third quarter which has been struggling ever since an accounting error undermined investor confidence earlier this year. But despite what has been an epic drop in its share price, there seem to be a number of factors now supporting it above 200p.
Recent data from Metro Bank indicate that it is signing customers with 106,000 new accounts opened in Q3 which bring its total to 1.9 million. Deposits have risen from £528 million to £14.2 billion, in just three months.
The bank has also made considerable progress in reducing costs, increasing fee incomes and strengthening its capital and liquidity position, according to its CEO Craig Donaldson. But has admitted a 71% drop in profits before tax for the first nine months of the year. Its net interest margin, a measure of overall profitability, is also down.
Short positions on Metro Bank
This has not stopped some hedge funds, like Marshall Wace, from raising their short positions, but we think they may be late to the party on this one. The analysts can’t agree – Barclays Capital thinks Metro Bank shares have further to fall, and has sent out a price target of 150, while Royal Bank of Canada has set a target of 370.
There is no consensus between the analysts and the hedge funds here, which points to plenty of confusion about where Metro Bank is headed next.
There are now rumours circulating that Lloyds Bank may be contemplating a purchase of Metro Bank, but the question is why would it want to? Metro set out to be a challenger bank that would open high street branches and pick up customers from the traditional names in UK banking at a time when they were struggling after the Global Financial Crisis. Metro has not been hampered by the PPI costs that the likes of Lloyds and Royal Bank of Scotland have been shouldering.
But Metro may have missed the opportunity represented by next generation digital banks which we think represent the future of banking on the go. It has adopted a traditional banking model at a time when that might be going out of fashion. In this respect, it may be a less attractive proposition for Lloyds.
We think the hedge funds and short sellers are wrong when it comes to the short side opportunity for Metro Bank. It is making progress on the key factors of more customers and more deposits which is what banks need to be judged on. True, profitability may be down but the Q3 financials now represents a more accurate picture of the bank.
On the watch list
Metro Bank shares are at their cheapest level ever. We are adding it to our watch list because we think there is still a future for an alternative brand like this in UK high street banking. It has had its struggles and the share price may still operate in a range of between 190p and 230p for the time being.
Investors should keep an eye on any possible momentum reversals that see it break the 280p level in the next couple of months as this could signal a serious acquirer is moving on the bank. Reductions in the short positions held by the likes of Marshall Wace and Odey will also be significant as they won’t want to be caught on the wrong side of this one.