Despite this poor performance, some encouraging trends did emerge. And even with this recent decline, the Metro share price is still up around 40% compared to a year ago. So, is this an opportunity to buy the stock at a discounted price? Let’s take a look.

A popular high street bank

Metro is a bank that offers services to the retail, business, commercial, and private sectors via a network of 77 locations throughout the UK. The firm, which has 2.2 million customers, sees its strong focus on customer service as part of its unique selling proposition (USP). And it has won multiple awards for doing so, including Bank of the Year at the 2020 MoneyAge Awards and Banking Brand of The Year at the 2021 Moneynet Personal Finance Awards.

The impact of Covid-19 caused some severe disruptions to Metro’s cash flow. After all, the bank makes money by charging interest on loans. But due to the lockdown restrictions, many of its customers weren’t able to keep up with payments.

Yet despite this, Metro was able to stay afloat without taking on any additional debt. Instead, it sold £3.1bn of mortgages to NatWest Group for a small profit. This surge of capital undoubtedly helped mitigate the impact of the pandemic. But it has also enabled Metro to change its strategy and focus on more profitable products in specialist mortgages and unsecured lending.

As such, CEO Daniel Frumkin is forecasting Metro will become profitable by 2024 and has recently bought £1.1m of Metro shares. While this certainly sounds promising, there are some risks to consider.

Is the Metro share price a value trap?

Banks are pretty complex businesses and are quite tricky to value. Based on the latest results, Metro has a net book value of £7.49 per share. That’s almost 85% higher than the current share price. At first glance, this looks like a fantastic opportunity for value investors.

However, trading significantly under book value is quite a common occurrence for bank stocks. And in my experience, when the discount is as high as Metro’s, it indicates that the quality of the loans being made is questionable. Given that the bank has been unprofitable for most of its recent history, the low share price could be a red flag. 

The bottom line

Metro is heading in a new direction that may lead to profitability within the next five years. While it’s too soon to draw any conclusions, the preliminary forecasts for unsecured lending and specialist mortgage income do look promising.

But it’s worth noting the firm has run into trouble in the past. In 2018, an accounting scandal broke out, causing the Metro share price to plummet 90% by the end of 2019. Metro’s aggressive lending versus customer deposits brought the bank’s total capital ratio dangerously close to the minimum regulatory requirements. And that was even after numerous rounds of fundraising.

For now, I’m waiting to see how the company performs over the next year. And so I won’t be adding Metro to my portfolio today, even at its currently reduced share price.

The post The Metro share price is down 25% in 1 month. Should I buy now? appeared first on The Twelfth Magpie.

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Zaven Boyrazian does not own shares in Metro Bank. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The bank is plagued with problems

Metro Bank came to the UK 10 years ago with major expectations. In fact, the co-founder, Vernon Hill, stated that it was the start of a “revolution in the banking business”. In many ways the bank has succeeded. For example, consumer satisfaction has always been very high, and the number of personal banking customers has greatly increased.

Nevertheless, this model has led to its own problems. In fact, the new chief executive, Dan Frumkin, has said that the branches are “too large” and they have “consumed capital and were a driver of fixed costs”. As a result, in the current climate of low interest rates and a large number of loan defaults, large capital expenditures have crippled the bank stock. This meant that in the first half of 2020, it declared a loss of £240.6m.

But the problems for Metro Bank preceded the pandemic. In fact, last year, the bank posted a pre-tax loss of £131m after an accounting scandal, two regulatory inquiries, and a class action lawsuit. As a result, it’s clear that the problems with the bank stock extend beyond just the impacts of the pandemic.

Are things starting to look up for Metro Bank?

The last couple years have seen the Metro Bank share price decrease from highs of around 4,000p to its current price of just 109p. This has left the stock with a price-to-book ratio of just 0.13, a very cheap valuation.

The bank has also recently acquired the peer-to-peer lender RateSetter. This is part of a strategy to grow unsecured lending and in turn increase profits. Although potentially risky, if it can help grow Metro Bank profits, this acquisition could help incite a sharp rise to its share price.

Would I buy this bank stock?

Metro Bank shares are definitely very cheap. But with the bank losing money even before the pandemic, this is really not surprising. Dramatic changes are needed in order for any significant recovery to start.

The question is whether it can achieve this recovery. Personally, I’m not convinced. Although there has been some positive news recently, it has been outweighed by a stream of negative news. As seen in the recent poor performances of other large banks, this is also an incredibly difficult period for banks. I’d prefer a bank stock that is in better shape than Metro Bank. Even with its potential upside, Metro Bank shares are just too much of a risk for me!

The post This bank stock is down 96% in two years. Is it a good contrarian buy? appeared first on The Twelfth Magpie.

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The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Unfortunately, that’s exactly what’s happened to a household name from the FTSE 250, at least according to shorttracker.co.uk. And, no, it’s not a struggling retailer or a risky oil play. 

Debt-ridden

Shares in Cinema chain Cineworld (LSE: CINE) have fallen heavily in recent months and, based on shorting activity (11.5% at the time of writing), a significant minority of traders think there’s more pain to come. 

Much of the concern appears to stem from the company’s takeover of US rival Regal Entertainment and the huge impact this has had on its balance sheet. In August, Cineworld sought to quell these fears by announcing that reducing this burden was “ahead of schedule” following the repayment of $570m in term loans. Nevertheless, recent share price action (and the fact that adjusted net debt of $3.3bn is still almost 20% more than the company’s entire market cap) suggests that not everyone is convinced this sort of progress will continue. Nor does everyone think that synergies from the acquisition will come in as high as the estimated $150m. 

But debt isn’t the only potential weakness in the investment case. 

As star fund manager Terry Smith remarked during a speech earlier this year, most companies involved in the entertainment industry in some capacity have very little visibility when it comes to predicting earnings. Even critically-acclaimed films can do badly and ‘guaranteed blockbusters’ can bomb. On top of this, cinema operators have to contend with the growth in popularity of streaming services such as Netflix, Amazon Prime and, more recently, Disney+ (although the last of these won’t become available in the UK until next year). This doesn’t necessarily spell doom for trips to the flicks, but it must be considered by anyone thinking of investing. The more popular streaming becomes, the more management need to drop prices to lure people out of their homes. That’s particularly problematic for companies such as Cineworld considering the amount of money it is spending refurbishing its screens. 

Contrarian bet?

Having lost a third of their value since April, the shares currently trade on just 8 times forecast earnings. That’s usually the sort of valuation that gets value investors salivating. The company is also expected to return a total of 18.3 cents per share in the current financial year, which equates to a chunky yield of 7.1%. At the moment, it looks like profits will cover this amount. However, the aforementioned risk of earnings underperformance if presumed hits like the new Star Wars, James Bond and Top Gun films fail to grab audiences could make the threat of a cut more likely. 

There’s something in the suggestion that cinemas might be more resilient in the event of an economic downturn when compared to other, more expensive forms of entertainment, but I struggle to believe that operators such as Cineworld will thrive in such a scenario. Factor in the short interest, and I’m content to let this ‘opportunity’ pass me by.

The post There’s a NEW most-hated stock on the market. Do you own it? appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Since then, its shares have surged off the back of speculation the UK’s largest mortgage lender, Lloyds Banking Group, is weighing up a bid for the challenger bank to take advantage of its depressed share price.

Merger speculation

The Evening Standard was the first to report the merger speculation last Friday. Citing an unnamed source, the paper reported Lloyds would look to make an offer in the New Year as it attempts to take advantage of Metro’s recent problems. 

With a market capitalisation of £405m (compared to Lloyds’ £41bn), it could certainly afford its smaller peer, and a deal would likely be encouraged by regulators. The additional capital backing of Lloyds’ balance sheet would remove all concerns about Metro’s financial position. 

Metro’s board is also likely to welcome an offer. The lender recently had to offer investors an interest rate of 9.5% to take a £300m bond, which was required to help shore up its balance sheet. When a bank is having to pay nearly 10% to borrow money, but only earning 4.25% from its customers (the rate for a five-year fixed mortgage), it’s a big red flag. 

By merging with Lloyds, Metro should be able to lower its costs of capital which should improve profitability.

Will a deal go ahead?

At the time of writing, there’s no certainty any offer will be made for Metro, but if one doesn’t merge, how much would the company be worth? Well, currently, shares in Metro trade at a price to book ratio of 0.2. So, if Lloyds offered book value, the stock could jump three-fold. 

However, I think it’s unlikely Lloyds will want to pay full price. It will have to pump new capital into the business, and there’ll be extra costs associated with the merger as well. On this basis, I think the bank will want a substantial discount for the assets of its smaller peer. 

There’s also been some speculation Metro’s founder Vernon Hill could come back to instigate a management buyout of the business, and this could upset Lloyds’ plans. 

Time to buy 

So, with two potential suitors eyeing up Metro, is it worth piling into the stock ahead of a bidding war? The answer to this question depends on your risk tolerance. The merger and buyout rumours are currently just that, rumours, and there’s no certainty any offer will be made, or deal agreed.

On this basis, I think it’s best to assume no offer will emerge and evaluate Metro on its own merits. If you feel the bank looks attractive as a stand-alone investment, it might be worth buying. If not, it might be better to stay away. 

The post Could now be the time to pile into the Metro Bank share price? appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Reasons to be optimistic

One reason to think the share price could bounce back to form over time is that Metro remains financially strong. The bank has Common Equity Tier 1 Capital of almost £1.5bn at the end of September, representing 16.2% of risk-weighted assets — far more than the minimum required by regulators of 10.6%.

Put simply, this means Metro should have no issue dealing with any financial stress and remaining solvent. 

Recent board changes could also be a reason to be hopeful. The fact its founder and chairman Vernon Hill will now leave earlier than expected (with Sir Michael Snyder taking his place) is indicative of a company wanting to turn things around as soon as possible. 

A final reason is simply that expectations are already as low as they can get, evidenced by last week’s share price action. If the bank is able to convince the market that a new business strategy — which looks likely to be revealed next year — will be enough to stop the rot, the shares could fly.

Shorters’ delight

The arguments against Metro Bank doubling your money, however, are compelling. First, the business has not yet returned to normal. Indeed, things could get worse before they get better.

It may be attracting more customers (106,000 over Q3) but this is being achieved at a cost. Offering higher rates of interest in an effort to grab market share from the established players has a knock-on effect on profits.

Whether reducing operating expenses is sufficient to cope with this remains to be seen, especially as the bank will be making high interest payments on its bonds going forward. Total deposits are also rising at a slower pace compared to the same period last year and there’s practically no lending growth.

Secondly, Metro Bank continues to attract short sellers — those who bet on a company’s share price falling. For perspective, only Thomas Cook and oil services firm Wood Group are higher when it comes to ranking the most hated shares on the London Stock Exchange.

Shorters can be get things spectacularly wrong sometimes (which can lead to share prices soaring as they attempt to close their positions), but I’d be wary, especially as the company is still to face the music from regulators over an accounting error.

A final argument is simply that Metro has become a plaything for both bearish and bullish traders. That’s a recipe for volatility — something many investors struggle to deal with. Will you be able to remain composed if, as I suspect it will, Metro Bank’s share price jumps around over the coming weeks and months?

Bottom line

While it’s certainly feasible you could double your money in Metro Bank, it’s quite possible you could lose a lot as well. That’s streets away from the Foolish philosophy of purchasing quality stocks at fair prices and holding for the long term.

If you simply must buy, I’d recommend keeping any position small and only using money you can afford to lose. Save the majority of your capital for strong, dependable businesses that don’t require constant vigilance.

The post Can the Metro Bank share price double your money? appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

However, as I explained last time I covered the challenger bank, Metro’s accounting scandal, which was revealed earlier this year, has shaken confidence in the business.

What’s more, the scandal has raised the prospect the bank doesn’t actually know how much its assets are worth. That suggests the published book value might not be an accurate representation of its balance sheet position. 

Moving on 

Metro is trying to move on from its mistakes, but progress is slow. Last month, the company announced its chairman and founder Vernon Hill will be stepping down at the end of the year following pressure from bondholders. The bank has also been trying to raise more capital to bolster its balance sheet. 

Investors initially rebuffed Metro’s first attempt to increase its capital position by £350m, using senior non-preferred loans (with an interest rate of 9.5%). The market relented when Hill stepped aside. The firm got the issue off the ground with an interest rate of 10%. 

In a time when many companies across Europe can borrow money at a negative rate of interest, the fact that Metro has had to offer investors 10%, clearly shows those investors are sceptical. Probes into the bank by the Financial Conduct Authority and the Prudential Regulation Authority continue.

Meanwhile, Metro is facing an increasingly hostile business environment with falling interest rates and rising loan impairments. All of its peers are having to deal with the same issues, but at least they’re starting from a stronger financial position. 

Growth slowdown

Since its IPO in 2016, investors have always viewed Metro as a growth enterprise, and so have its customers and managers. Now that the business is on the back foot, I’m sceptical it can ever return to its former glory. 

The accounting scandal earlier this year seriously affected the bank’s reputation. Customers voted with their feet, pulling £2bn of deposits, weakening its growth and profitability metrics. Metro now faces an uphill struggle to attract new customers. And it’s going to have to do this while restructuring the business. 

Overvalued 

While shares in Metro might look undervalued on a book value basis, from an earnings perspective, they look quite expensive. City analysts believe the bank will report earnings per share of 12.6p for 2019, rising to 13.9p in 2020. Based on these targets the stock is currently trading at a 2020 P/E of 14.2, roughly double the UK banking industry sector average. 

With so many headwinds buffeting the business, I’m not convinced the stock deserves this multiple. I think a more reasonable valuation would be around seven times earnings — in line with the rest of the sector. On that basis, there’s a good chance the stock could fall another 50% from current levels. 

Even if it doesn’t, I think there are plenty of other stocks out there that offer a much better risk/reward profile.

The post Could the Metro Bank share price double from current levels? appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Metro Bank

That seems unlikely to change, judging by the problems affecting Metro Bank (LSE: MTRO). Challenger banks like this one were supposed to shake up the financial services sector, offer serious competition to the big high street banks, and give customers a better deal. But investors who put their money in Metro now wish they’d deposited it elsewhere.

The Metro share price has halved over the last 12 months after it admitted commercial buy-to-let loans and loans worth up to £1.5bn had been wrongly classified in risk terms, forcing it to ask shareholders for £375m to strengthen the balance sheet. Tougher trading conditions, particularly in the mortgage market where margins are now wafer thin, also hit profits.

The bad news rattled customers who withdrew £2bn of net deposits in the first half of 2019, although deposits have since returned to growth. The group’s underlying pre-tax profit slumped to £13.6m, down from £24.1m in 2018.

Many investors would continue to dump Metro, and that’s understandable, given the massive self-inflicted reputational damage. Last month, it was forced to cancel a £250m bond sale, despite offering a juicy 7.5% yield. Investors just don’t want to know. This also suggests Metro could struggle to raise extra funding if it ran into further trouble.

Despite the bank’s troubles, the share price has bounced 21% in the last week. No doubt some have been lured in by its rock-bottom valuation of around five times earnings and news departing founder and chairman Vernon Hill is seeking backers to take the bank private.

But I would urge caution, especially as the Financial Conduct Authority’s investigation has now been widened, and there’s been talk of criminal charges. Now’s not the time to take unnecessary risks in the financial services sector.

Equiniti Group

Sometimes it’s the quiet ones you have to watch out for. Like FTSE 250 financial services technology grafter Equiniti Group (LSE: EQN), which offers regulatory support, pension scheme administration and benefits scheme management for companies around the world.

It’s all dry back-office stuff, but if you like excitement, the group delivered 222% growth in pre-tax profit to £11.6m for the first six months of the year, with revenues up 8.3% to £275m. Equiniti also posted strong client retention, with new wins across all divisions, as 7.2% growth in Intelligent Solutions and 5% in Investment Solutions in its US division helping to offset the 8.6% decline in Pension Solutions.

Management reckons the strength of its franchise can withstand Brexit uncertainty, while it’s also accelerating growth in the US, where its presence is growing following a recent acquisition.

Although the Equiniti share price has disappointed, with the stock down 30% over two years, that leaves it trading at around 10.9 times earnings, which could make a tempting entry point.

The group recently hiked its interim dividend by 7% to 1.95p per share, and yields a forecast 2.9% with cover of 3.3 leaving scope for growth. Forecast earnings per share growth of 4% this year and 7% next also show promise. It looks a lot more solid than Metro, anyway.

The post I’d avoid the rebounding Metro share price in favour of this FTSE 250 growth stock appeared first on The Twelfth Magpie.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK owns shares of Equiniti. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Following this decline, the stock looks attractive as a value investment. However, while the shares might seem cheap at first glance, it is essential to remember why investors have turned their backs on the business in the first place. 

Struggling business

At the beginning of 2018, Metro was flying high. The bank was meeting or exceeding its growth objectives, and it looked as if the group’s growth was unstoppable.

For the first quarter of 2018, Metro reported a 41% year-on-year increase in customer deposits, lending growth of 69% and an underlying profit before tax of £10m for the quarter. 

The firm’s growth story began to unravel in the first half of 2018. Soon after commenting that the group had plenty of capital to fulfil its expansion plans, management announced a £9m placing of new shares representing approximately 10% of the company’s issued share capital to bolster its balance sheet at the end of July.

Then in the third quarter, growth started to slow. Deposit growth halved in Q3 2018. 

Metro’s problems only got worse in the first half of 2019. The company revealed that it had miscalculated the strength of its balance sheet and was forced to ask shareholders for £350m of extra capital in May. The revelation shocked investors and customers. 

A better buy 

Since May, Metro has been working hard to try to restore investor and customer confidence. Nevertheless, it’s clear to me that this bank will never be able to rebuild the sort of reputation it had at the beginning of 2018. 

And with this being the case, I think it would be wise for investors to avoid the challenger bank altogether and invest in Royal Bank of Scotland (LSE: RBS) instead.

You see, while Metro looks cheap, trading at a price-to-tangible-book-value of just 0.3, RBS is just as undervalued. Shares in the bank are currently dealing at a price-to-tangible-book-value of 0.6 and RBS has other attractive qualities, such as dividends. 

For 2019, City analysts believe that the bank will return a total of 24p per share, giving a dividend yield of 12.2% on the current price. Analysts are expecting a total dividend of 16.7p for 2020, a potential dividend yield of 8.6%. 

Rising profits 

What’s more, unlike Metro, RBS is highly profitable. Analysts believe the bank will report a net income of £3.4bn for 2019. That puts the stock on a forward P/E of 7.6.

Of course, RBS does also have its own problems. Brexit uncertainty, regular IT problems and a low return on equity are all issues for the bank, but compared to Metro, it looks to me to be the much better bet. The group’s balance sheet is much stronger, it is much more profitable, and RBS is returning capital to shareholders.

Overall, if you are looking for an undervalued banking stock to add to your portfolio today, I reckon RBS would be a better buy than Metro. Even though Metro looks deeply undervalued, it’s questionable if the bank can ever return to its former glory.

The post Why I’d dump the Metro Bank share price and buy the RBS share price right now appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The former has lost 95% of its value in just 18 months due to a major accounting error, savers rushing to withdraw their cash and a poorly received (and subsequently pulled) bond issue. To say that the challenger bank finds itself challenged is putting it lightly.

Kier’s recent performance is equally shocking. Over the last 12 months, the share price has fallen 86% for many of the same reasons: an emergency cash call, an accounting error, and a profit warning. Restructuring costs remain a drag and Brexit continues to cast a shadow over the property, residential, construction and services firm.

With things looking so bleak, it’s natural that some should try to find a way of profiting. As I type, both Metro and Kier rank among the most shorted stocks on the London Stock Exchange. In other words, investors are making sizeable bets that the share prices of both are likely to fall further. 

Regardless of what you feel about the ethics of short-selling, it can be very lucrative. Many of those that wagered against market casualties like Carillion and Debenhams made a lot of cash in the process. That’s not to say it isn’t high-risk — losses are technically infinite if they get their calls wrong and share prices rise.

There is, however, another business that’s more hated than either Metro and Kier. 

The silver medal goes to…

With 9.7% of its stock currently being shorted, FTSE 250 member and oil services provider Wood Group (LSE: WG) ranks second in the leaderboard and above both Kier and Metro. Worryingly, the only company with more short positions hanging over it is Thomas Cook. 

At first glance, this all seems a bit harsh, especially when you take the company’s recent interim results into account. Back in August, the Aberdeen-based business revealed a $13m profit over the first six months of 2019 compared to a $52m loss over the same period last year (despite logging a 2.6% decline in revenue to $4.8bn). Wood also maintained its outlook for the full year and stated that it was “well-positioned for growth across the energy and built environment markets” beyond this.

Unfortunately, the market just doesn’t seem interested, with the fall in Wood’s share price over the last year showing no signs of abating just yet. Arguably the biggest concern is the amount of debt the company still carries.  

Net debt stood at $1.77bn by the end of June, 14% higher than at the same point last year. And while the sale of its nuclear business for $305m is expected to reduce leverage once the deal is completed in Q1 2020,  it would appear some also have concerns about Wood’s limited exposure to the recovering offshore and liquid natural gas markets compared to rivals.

A price-to-earnings (P/E) ratio of just over eight might look cheap, but there’s certainly an argument for saying that even this valuation might come under review if the health of the global economy were to deteriorate. At 8.3%, the yield is one of the highest in the FTSE 250 but dividends are, somewhat ominously, barely growing.

The shorters have been wrong in the past — Ocado being a perfect example. Could they have got Wood Group wrong as well?

The post This FTSE 250 stock is even more hated than Metro Bank and Kier Group! appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

However, despite recent problems, Metro’s figures appear to show that the bank is now profitable, growing and adequately capitalised. If that’s true, then the shares might soon find support.

This view seems to be gaining strength with hedge fund investors who’ve previously been betting that the stock would fall. The percentage of the firm’s stock loaned out to short sellers has dropped from 12.5% in June to 5.2% today.

Indeed, forecasts produced by City analysts suggest that Metro Bank’s profits could bounce back next year, rising to a new record high.

Is it time to start buying this troubled challenger bank?

I’m still worried

News that savers have withdrawn £2bn from Metro Bank since the start of the year concerns me. This run of withdrawals has left Metro Bank with loans of £14,989m, but deposits of just £13,703m.

Although this is allowed, it’s not ideal. Metro Bank’s own target is for loans to be maintained at 85%-90% of deposits. When this ratio rises above 100%, it means the bank has loaned out more cash than its received in deposits.

Any rise in bad debts or a further run of withdrawals could leave the bank forced to raise cash from other lenders or even from shareholders. But in a situation like that, lenders might be wary about lending to Metro. That would push up the cost of any debt.

Metro Bank doesn’t expect its loan-to-deposit ratio to fall below 100% until at least 2020. I see this as an extra risk that’s likely to put further pressure on the bank’s profit margins.

Despite this, the shares are still trading on 19 times 2019 forecast earnings, and 16 times 2020 forecast earnings.

In my opinion, this suggests that MTRO stock is priced for strong growth and no further problems. That seems very optimistic to me. In my view, this remains a stock to avoid.

A financial stock I’ve bought

One financial stock I own myself that’s much more profitable than any UK bank is spread betting and CFD trading firm IG Group Holdings (LSE: IGG).

Since August last year, companies in this sector have been operating under new EU regulations which restrict the amount of leverage — or credit — they can offer retail customers.

However, these restrictions don’t apply to professional traders, who form a large part of IG’s customer base. To give an idea of how profitable these are, IG’s professional clients in the EU generated fee income for the business of nearly £27,000 each last year.

A very profitable business

IG’s latest results show that it generated an operating profit margin of 39% and a return on equity of 19% last year. Although earnings fell by 30% due to the new rules, chief executive June Felix is confident she can return the business to growth.

In the meantime, IG’s strong cash generation suggests to me that the dividend can be maintained. At 43p per share, this gives the stock a tempting yield of 7.5%.

This business will always carry the risk of being disrupted by new regulations. But in my view it’s the best of its kind and should be a good dividend growth buy at current levels.

The post Forget the Metro Bank share price! I’d buy this FTSE 250 dividend growth stock today appeared first on The Twelfth Magpie.

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Roland Head owns shares of IG Group Holdings. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.