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Metro Bank - regulation, reporting and market sentiment

Several things will need to happen before MetroBank is allowed to recover. I'll divide these into two categories: 1) regulatory and reporting 2) emotional

1) Regulatory and reporting. 

Having done a bit of research it seems to me that the relevant regulatory authorities are The Bank, FCA and PRA. The Bank of England did a handy announcement on the day of the new share sale saying that Metro are profitable, have enough money and this new money is for growth.

The Prudential Regulation Authority seem to judge the appropriateness of board members in banking and can ban people. Metro have 6 or their 9 board members who've been in position since the beginning in 2010 and are now nearing the end of their 9 year "maximum" term. These mates are seen as a bit too insider-ish it would seem. Usually people don't get banned per se, but withdraw their application for continued tenure and step aside gracefully. We'll probably see some new blood appearing on the BOD (and potentially some on the carpet).

The Financial Conduct Authority levy the fines and collect them.  They've raised £319m so far this year as per this page and this money helps to keep banking regulation self sufficient and not a drain on number 11 as I recall. Have a look at these fines and see what order of magnitude you think Metro will be fined. I was thinking in the £10m to £25m to possibly higher range just looking at the various infractions. Of course there is usually interest from both sides in a speedy fine and acceptance thereof to get this done and dusted. There may be a bit of American litigious thinking which may slow things down, but hopefully this will be settled this year. From a reporting perspective I've previously calculated in a blog post that losses for Q2 should be no more than £15.1m. I think they might be lower than this, potentially even £5m to £10m

2) Emotional. 

Once all that other stuff is out of the way, the market will take some time to forgive Metro Bank, and might require one or two quarters of results before allowing the SP to recover a bit. For full share price recovery it might be 1 or 2 years before reaching the full net asset value of 1033p per share. After some fines and losses that NAV might be a bit lower, but I don't think it will be more than £100m lower. If it was £100m then a quick calculation [ (1681/1781)x 1033 = 975p ] puts the NAV at 975p per share.

As such you might think that the current price of 558p represents good value. Most banks trade above their Net Asset Value as that's just the cash they have in the bank. So if you think there's any value in the MetroBank story in years to come try starting with £22.57bn in assets take away £20.79bn in liabilities, take away £0.015bn Q2 loss and take away £0.085bn as a massive potential fine. You're left with £1.68bn. Divide this by the new number of shares 172,420,458 and you get 974p  per share.

The question is, how fast will the water flow under the bridge. We know some of it will be done by 24th July. When will that 1 or 2 year emotional clock start ticking. I haven't mentioned Brexit and its effect on the consumer and business loan market in the UK, but even Lloyds bank trades at 8% above its 53p NAV. If you like the Metro Bank story bought today at 558p and sold at 974p in a couple of years time that would be 74.5% growth. One thing I've learnt about the Metro Bank share price recently is that it moves quickly both upwardly and downwardly so not one for the faint-hearted.

This is not investment advice, please do your own research. I own shares in Metro Bank and Lloyds Bank.

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