Are we in for a mini banking crisis? That’s what I wondered when I just saw the Metro Bank (LSE: MTRO) share price plunge 25%.
Stories emerged on 5 October claiming the so-called challenger bank is facing a financial crisis. Some newspapers report that it needs to raise as much as £600m.
Bank regulators declined Metro Bank’s request to lower the capital requirements of its mortgage business last month. And that led to a bit of a share price rout.
Metro Bank shares have now lost 70% of their value so far in 2023. And they’re down a whopping 98% in the past five years.
Debt
The latest crisis stems from £350m of debt that will need to be refinanced. Sky News reckons the bank has brought in Morgan Stanley to help with plans to raise that sum. There could also be a new stock issue on the cards.
These are numbers that wouldn’t mean so much to a big FTSE 100 bank. But the sums look huge compared to Metro Bank’s market cap of only around £70m.
If I bought its shares today, I’d be buying a huge pile of debt with a very small bank attached. It’s down at a penny stock valuation now, and that can mean some exciting/disturbing volatility.
But if the bank can secure the financing it needs, might we see the share price rapidly rising again?
Back in profit
To back up its chances, Metro Bank points out that it has recorded underlying profits for three quarters in a row now.
And its response to these press rumours was that “Metro Bank continues to be well positioned for future growth.”
Replying to the specific claims, Metro said: “The company continues to consider how best to enhance its capital resources, with particular regard to the £350m senior non-preferred notes due in October 2025.“
It also reminded us that it still meets its regulatory capital requirements.
Make or break?
What do I take from all of this? Will the coming months turn into make-or-break time for it?
Well, with the share price and market cap down on the floor, I think a lot of investors fear the worst.
If broker forecasts for the next few years come good, we could see the bank’s earnings pushing the price-to-earnings (P/E) ratio down below three.
It really does look to me like Metro Bank is priced to go bust.
Recovery buy?
We’ve seen quite a few companies come close to the edge in recent years. But some of those that pulled through made fat recovery profits for shareholders.
Can Metro Bank do the same? If it can get the cash injection it needs, I see a fair chance it could. But if it doesn’t secure the funding? Hmm.
I’m seeing big risk and volatility here, but a possible win for the brave. Typical of penny stocks, I’d say. But I don’t like tiny challenger banks, I just want the big banks with solid finances.
