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A ‘****tail’ of sticky inflation and a tight labor market boosts Bank of England rate hike bets

https://www.cnbc.com/2023/02/16/a-****tail-of-sticky-inflation-and-a-tight-labor-market-boosts-bank-of-england-rate-hike-bets.html

So perhaps that’s the narrative from the short seller?

Firstly, old CEO, Chairman, Founder’s wife company are no longer with the company.

It’s been 3 years, situations have changed, a lot:
- New CEO in Jan 2020 with a clear turnaround plan, which has been well executed.
- Metro went into the specialist mortgage market and gets higher yields on its loans.
- Acquired Ratesetter, a consumer lending platform, at a bargain price during the 2020 pandemic. This too generates higher yielding loans.
- Costs are falling/flat.
- And Growth investment (recorded as expenses) near its end.
- PRA and FCA investigation into the scandal has recenty concluded (the latter in Dec 2022).
- Closed underperforming branches with plans to grow after reaching profitability.
- Profits will fund the company’s Growth going forward, i.e. No equity capital raise.
- AIRB is progressing (if achieved, a bonus that will be a further upside from the plan)
- The company becomes profitable in September 2022, ahead of expectations.

- And finally, one of the further upsides that was NOT on the CEO’s turnaround plan is the increase in BoE rate.

Since Metro was founded in 2010, BoE rate had been below 1.0%, until May 2022 last year (9 months ago) when it reached 1.0%.

Subsequently, BoE rate increased further and is now at 4.0%. This is a game-changer!
one that serves as a tailwind to the well executed turnaround plan.

Net interest margin (NIM) increased to 2.86% from 2.52%.

Barclays expects Net Interest Margin to be greater than 3.20% in 2023.

Profits beat consensus but suffer due to a costly trading blunder in the U.S.

Barclays reward shareholders with a 21% increase in the dividend to 7.25p, and announced plans for a new £0.5 Billion share buy-back.

Barclays' Net Interest Income increased by ~2.5 Billion to 10.57 Billion! Up ~31%

https://home.barclays/content/dam/home-barclays/documents/investor-relations/reports-and-events/annual-reports/2022/AR/Barclays-PLC-Annual-Report-2022.pdf

Metro btw has a Cost of Deposit of 0.15% (H1 2022), and most recently, the bank lends at 4.89% - 6.79% for mortgages.
mortgage was only 2.09% in Dec 2021. and Metro's lending yield has been on the uptrend as BoE rates increased.
At H122, it has ~21 billion of Loans + Cash & Treasury portfolio. (~12.3B + ~9B respectively)

And this is keeping aside the personal loans from RateSetter which have higher yields.

indeed.

a 40-fold increase in BoE rate from 0.1% to 4.0% in 13 months (Nov 2021 - Feb2023).
consider the difference in interest for 'money'

~13 months ago when interest rate was razor thin at 0.1%:
0.1% x 20 billion = 20 million a year of interest

Now BoE at 4.0%:
4.0% x 20 billion = 800 million a year of interest

800 million VS 20 million.

the difference of a 40-fold increase in interest rate for a 20 billion 'money' is huge... 780 Million a Year.
plainly a lot more room/potential to make money.

correction:

a 40-fold increase from the 0.1% rate in November 2021.
(13 months)

Now that Metro is profitable there certainly are more options on the table. Thus the recent activist stake.

IMO the CEO, with Bacal's support, wants to bring the company back to Growth mode, this time funded by the company's profits, unlike previous mgmt.

"What I can tell you is whatever we do, we will live within our means. We do not anticipate doing an equity capital raise and we believe we can fund the growth going forward."

This comment was made on July 28th 2022, when BoE rate was still 1.25% (up from 0.1%) and the company was expected to break even during Q1 2023.

Turns out, BoE rate went up to 2.25% during Q3 2022, and on Nov 2nd 2022, the company announced that Metro is "profitable on both an underlying and statutory basis for September, ahead of previous guidance"

After that, BoE rate continued to rise and now BoE rate is at 4.0%.

a 40-fold increase from the 0.1% rate in November 2022

MTRO at 142p, market cap is only 245 million.

to repurchase 10% of its shares, it will only cost Metro ~25 million.

Of course buyback didn't make sense when Metro was loss making, but now that it's profitable... should it?

Metro has the fund to repurchase its shares.

btw at this price, market cap is only 245 million,

Metro has 9 BILLION of Cash and Near Cash (treasury portfolio) extra liquidity!

this extra liquidity seems to be overlooked by many and less talked about.

so much noise here. focus on the fundamentals. metro will likely make more money than planned because boe rate rose from 0.1% to 4.0% in last 13 months. more significant income will flow this year.

Exciting time ahead!

another 50bps increase in BOE rate.

so rate went up from 0.1% to 4.0% in slightly more than a year.

Here’s what Dan Frumkin said in 2020 when he was appointed as the new CEO:

“And everybody knows in every bank in the world, I'm a liability-led franchise, please, God, let rates go up. Because if rates go up, we make a lot more money. Not in the plan, but there are a couple of drivers in here that are beyond the plan that give you further upside.”

the share price cannot stay low for too long. the market will finally figure out that the forward PE ratio is potentially 2 or maybe 1.

Aside from the ~12.3 billion loan book (H1) that benefited from higher yielding loans and interest rate hikes,

less talked about, and was overlooked by many, is the 9 billion of cash and near cash (treasury portfolio), the extra liquidity that Metro Bank holds.

that 9 billion treasury portfolio produced little income when interest rate was 0.1%-0.25% (2021), rate has significantly increased since then, and now BOE rate is 3.5%. (going to be 4% this week.)

3.25% INCREASE compared to the 0.25% in Dec 2021.

if Metro Bank could just capitalize on the reinvestment of this portfolio at say 1.7% net,

the POTENTIAL ADDITIONAL INCOME overtime would be:
1.7% x 9 billion= 153 million/ year from this treasury portfolio alone. (89p/share income… wait... what? the stock price is 141p!)

this additional income has started flowing in 2022 but will be more significant from 2023 onwards.

What’s their plan? one thing they could do is pressure metro bank to put itself up for sale.

https://www.thetimes.co.uk/article/activist-builds-stake-in-metro-bank-qpv2zm0zh

Imo Interest rates will return to its historical normal. This is excellent for metro bank plc. In addition to the stand alone prospect, a bid would likely be closer to book value, which makes MTRO a multi bagger from this price.

back to profit !

“Since the beginning of 2019, the share price has lost 95% of its value, though rising interest rates should help the bank’s shares to recover some, if not all, their former value. ”

January 2019 MTRO was trading as high as 2,196p

Metro Bank (LON: MTRO) non-executive director Nicholas Winsor has bought 50,000 shares at 82p, for £41,055.

The bank, currently engaged in a two-year turnaround strategy launched after regulators discovered a major accounting error in 2019, has announced record revenue growth and a cut in pre-tax losses in the first quarter of this year, and is expecting to reach monthly breakeven by 1Q 2023.

Since the beginning of 2019, the share price has lost 95% of its value, though rising interest rates should help the bank’s shares to recover some, if not all, their former value.

link:
https://www.thearmchairtrader.com/director-dealings-touchstone-exploration-afc-energy-metro-bank/