focusIR May 2024 Investor Webinar: Blue Whale, Kavango, Taseko Mines & CQS Natural Resources. Catch up with the webinar here.
Not a new poster. You may remember back in November I was pointing out that your post where you said "Gilinksi planning to grow Metro Bank through acquisitions thereby strengthening the balance sheet and doubling revenues and profits that's what the £3 billion mortgage book sale will fund something the current mgt team failed to deliver following the last mortgage book sale to NatWest..." contained a fundamental misunderstanding of what the sale would do to the bank's capital position (i.e. it resulted in less rather than more core equity-doh- which was way they abandoned it). Today i am pointing out that a statutory profit built on a one off haircut to Tier2 was not going to prompt a re-rate because it actually exposed ynderlying losses of £10m a month in Q4. Both of these suggest i do infact know what i am talking about. But otherwise you raise some great points, reflecting i am sure, a firm grasp of financial analysis.
It is not a one off cost. it is a one off uplift to income i.e. there is £74m of income (net of transaction costs) in the 2023 numbers that will not be in the 2024 numbers. That is why you have a statutory profit and an underlying loss (since teh income uplift is just accounting) The 2024 numbers start with a run rate £10m a month loss. If the costs come out that might get to £5m. But that is your start point. You then have to believe a story that says deposits will keep flowing in, despite slashing the front line staff, the bank will pivot to higher yielding assets (despite the last pivot being teh purchase of Ratesetter that is being shut down) and the bank wont need to invest a load of money to upgrade its systems like everyone else. This is all basic stuff. if you cant understand what the bank is reporting hard to understand why you can hold any credible opinion
The £100m is the write down of tier 2 debt going through the P&L. In other words it is a one off uplift to income at the expense of the debt holders. Less the £26m of costs associated with the recapitalisation, they statutor profits are inflated by £74m. Which is why the business is loss making on an underlying basis. which is why, when you consider it was profitable on an underlying basis to the tune of £16m in H1 the results are not good. Q4 was a £30m loss
Question for you Cyberdoggy I think your observations on the recapitalisation look on the money (i.e. who lent the shorters the stock to drive the price down to where Galinski wanted it in october?) But how does a stock that is so closely held find a genuine price point if it is so open to manipulation. Or more pertinently, where do you think Galinski wants to take it? Would you agree that the challenge he has is that he could try and ramp it up, but that would increase the takeout price if he has to put more in and essentially take private? So he is probably fine with it bumping around the mid-30s and hoping that either someone buys at say 40p, or slash and burn actually works and he gets a but more profit to avoid the recap? Regulator cant be happy- as the Autonomous lady also alluded to
So in the prospectus in November, on which we had to vote on recapitalisation, the bank guided mid-single digit ROTE in 2024 and 9% ROTE in 2025. Less than 4 months later, guidance is we are loss making in 2024 and low single digit in 2025. No credibility at all. The lady from Autonomous called it. They will need more capital. Has to come from Galinski and he will have to take private. He wont do that for any more than the 30p he put in last time so no chance of a rerate.. We need someone to come in for this bank and take it out. But my fear is that buyers will will wait until it is right up against it again, and the bank may be too damaged to pass the diligence. Only good news is that my maths says current price effectively prices in another £100m of equity taking on 30% of the bank. So it only goes down further if there are solvency issues. I don't think the press will drive any broad customer reaction based on these results. So its wait and see i guess
So the big chunks of the first £50m cost savings look like they come from closing Ratesetter, which the CEO heralded as the saviour of the bank, but now "only works in a low rate environment" (erm. I don't think so.) and changing the opening hours of stores (which he was highlighting as the key differentiator in the half year). Next chunk probably comes from not investing in all the digital upgrades which were the future but maybe now..... Honestly, i agree that £550m cost base looks too high. But any fool can fire people. The question is either why were they there in the first place (in which case why didn't you do it earlier) or why can you get rid of them now when you couldn't before (jwhen low cost deposits are now far more valuable). Any which way it is incompetence
Not a shorter- I bought in at 2019 "low point" and have watched the mismanagement thereafter. I hope, like you, that there is a sale soon with someone like Shawbrooks taking on the business on with a reasonable premium (they affered >£1 a share before the recapitalisation). But the worst case scenario is that we have a poor CEO driving the business towards another recapitalisation with the new owner now willing to let the shareprice slide as cover in case he has to take private-as he should have been forced to do in October. Its impossible to tell what is going to drive performance of a stock which is 75% owned by less than 20 institutions . But I doubt it will be based on fundamentals. But someone has to call them out to keep them as honest as possible
I would argue Q4 performance (post the issues in October) is the better predictor of near term future and it looks like £5m a month losses AFTER the cost reduction. The big question over the medium term is whether the bank can slash £80m from the cost base and continue to have a differentiated service proposition. If you look at what Frumkin was saying at the half year it was all about the growth in low cost deposits built on teh service model- highlighting the growth in accounts during the extended hours! All of a sudden that doesn't matter? Hard to see how you could look to a positive future with this CEO in place. Over last 4 years the cost base grew by £150m and Frumkin had no interest in cost reduction- it was all about growth. Now, having mismanaged the recapitalisation, promising IRB to the market and then "having" to announce he wasn't getting it, prompting a shareprice collapse and £1.5b of current account balances to leave the bank, its all about taking out cost with no impact on the top line. Really?
Looks like they lost £1.5b of current account balances in H2. Not as bad as it could have been but explains a lot of the Q4 loss- i.e. 1.5b x 5.25% = £75m annual hit to the P&L. The new current account performance stated in Q4 (50k) is positive but notable it is not a net new number. And big question is whether that is the same quality of accounts. Looks from the disclosure that they lost proportionately more higher balance SME/commercial deposit balances.
So the bank made underlying losses of £17m. Given the half year profits were £16m and Q3 had a "small profit" suggests the bank has lost over £30m in the last 3 months. £10m a month underlying losses is a pretty nasty place to be. The cost reduction wont have kicked in- but £50m annual savings, so £4m a month, isn't going to offset it all. You get to the same place looking at statutory- i.e. the bank got a one off gain of £61m from the T2 restructure (net of transaction costs). SO add in Q1-3 profits it would have been at £80m profit. If you take out the £15m restructuring costs that is £65m profit. So they must have lost £30-£35m in Q4. Cant see how structural unprofitability justifies a re-rating. But as a highly manipulated, closely held stock, who knows?
What sort of financial result would you think underpins a re-rating? The recap is going to obscure underlying performance with c.£100m of one-off upside from the T2 haircut going through the P&L. For me you need to look at core franchise performance i.e. what balance of non-interest/low cost deposits have left the bank since half year given the hints dropped by management that quite a lot left in October? I reckon anything less than a net £1b would underpin a re-rate. Anything >£1.5b would look pretty bad. If they lost £1.5b yielding 1% replaced at 5.5% then its going to hit the P&L to the tune of £70m -more than offsetting the cost reduction . That would put the bank on a fairly rapid path back into buffers and further dilution at whatever the Chair and CEO think they can get away with. The alternative will be someone buying it, But would you want a business with a franchise in decline? I worry what new business they are now generating in current accounts- particularly business current accounts. If the opening hours weren't generating new business why did the CEO insist on keeping them for the last 4 years?
As others on here note- pointless to predict the near term path of such a manipulated stock. I can only comment on the likely trajectory of the bank finances, so people who are looking at whether it is under/over valued can take a longer term view. I had previously been of a view that it was a long term buy. However, the price of the recapitalisation (both in terms of shareholder dilution and likely low cost deposit outflows) have shifted that view . The near term financials will be challenging and what i am highlighting is that what we are likely to see is a pretty blunt attempt to control the narrative by dumping lots through 2023 financials (expect a statutory loss despite a £100m write up from the debt restructure) so that 2024 looks better. But you need to look at how quickly they burn through this new capital rather than underlying profitability, because they are just robbing peter to pay paul. Some sort of transaction will have to happen, probably in 2025, and managements' bet is that they can pump up the share price through this strategy. That is high risk, because higher credit losses could well see the bank back in buffers less than a year after the recap
Correction below meant to say this deal is cet 1 ratio accretive but reduces CET1 in £ terms so reduces lending capacity. IN short- in teh original deal the idea was to redeploy mortgage assets into higher yielding ratesetter loans but most got stuck in gilts at 0.5% that are still killing NIM. This time you are redeploying low yielding mortgages into higher yielding cash which is P&L accretive in 2024 (but essentially paying for that through the equity hit in 2023). In short both deals will turn out to be value destructive but for different reasons. This deal is not going to allow the bank to lend more. It reduces lending capacity. But they are looking to massage 2024 results and this is the simplest way to do it (alongside dumping restructuring charges, writing off intangibles and other technical accounting stuff that hits in 2023).
This time it is at a discount (at 97p in £ it will deplete CET1 by c£90m) so reducing lending capacity (although because of teh rwa release it is CET 1 accretive). But they can redeploy the loans yielding 3% into cash at 5.25%. Overall probably value destructive but helps the optics in 2024 (and cash balances)`
First point to note is that the Natwest sale was at a premium (i.e. above par). That creates an increase in core equity (worth c.£80m) so increases RWA capacity
But it created a hole in the P&L as the bank essentially took assets that were yielding 2%+ and parked them in 5 year gilts at
Thank you. that was what I thought, But surely would question why any current shareholder would vote in favour of the rule 9 waiver, given that we now discover a recapitalised Metro is worth a lot more than the placement participants are getting it for. Presumably requires an anchor investor for an alternative rights issue?
Maybe a dumb question. But with SP at 50p and 172m shares in issue the implied MV is £86m. But we all know there will be 672m shares when the recapitalisation closes. So surely if you are willing to offer current shareholder 50p you must be valuing the business at £336m. which one is it?