The latest quarterly review of the FTSE indices saw the promotion of challenger bank Metro Bank (LSE: MTRO) to the mid-cap FTSE 250 index after share prices rose 5% from their March IPO. Metro Bank has been riding the momentum of a strengthening domestic economy and a customer service-focused marketing campaign that led to deposits jumping 15% quarter-on-quarter in Q1 alone.
Analysts and management are expecting the bank’s momentum to continue and have pencilled-in its first profit for fiscal year 2017, a major success for a six-year-old bank. Still, with only 41 branches open and £5.9bn in deposits, it remains some way behind the target management originally set to have 200 branches and £50bn in deposits by 2020. The bank’s slower-than-expected rollout can be blamed on the relative stickiness of customers who rarely shop around for better deals once they’ve chosen a bank.
Yet the UK’s retail banking industry is massive and challenger banks have significant room to grow market share in the coming years. If Metro Bank can continue to grow loans faster than deposits, as it did over the past year, I see no reason for momentum to slow as long as the economy continues expanding.
Growth play
Online spread betting and contract for difference trader CMC Markets (LSE: CMCX) also vaulted into the FTSE 250 on the back of a 15% rise in share prices from its February IPO. CMC has taken advantage of the growing market among retail investors for forex, commodity and equity trading.
The company releases its annual report later this week, but its pre-close trading update raised expectations with the disclosure that the number of clients grew 13% and revenue per customer increased as well. Much of this higher revenue will filter straight down to the bottom line thanks to enviable adjusted pre-tax margins of 36% in the last fiscal year. As long as regulators don’t crack down on retail investors betting on the movement of currencies or commodities on margin, CMC’s growth doesn’t look set to stop anytime soon.
Rocketing shares
The holding company for Clydesdale Bank and Yorkshire Bank, CYBG (LSE: CYBG), joined the FTSE 250 this week thanks to shares rocketing 46% from their February IPO price. Recently spun off from its Australian parent, CYBG is looking to establish itself as a relatively boring retail lender, much like Metro Bank. Going forward though, CYBG has significant fat to cut in order to match the returns that the larger domestic banks post.
The combined banks’ underlying cost-to-income ratio in the past six months was a worryingly high 72%. Bringing down these significant operating costs will be key for management going forward as the persistent low interest rates from the Bank of England limit lender’s net interest margin, the difference between the rate it charges for loans and the amount it pays on deposits. If the bank can make progress on cutting costs and continue to grow its loan book, CYBG should continue to perform well as long as the bottom doesn’t fall out of the domestic economy.
