Stockwatch: is the UK bank share boom over?

A drop in the FTSE 250 shares of Metro Bank Holdings (LSE:MTRO) – closing down 8% at 90p – in response to yesterday’s 2024 annual results, came as FTSE 100 constituents such as NatWest Group (LSE:NWG) edged up, Lloyds Banking Group (LSE:LLOY) was flat and Barclays (LSE:BARC) slightly lower.

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Major UK bank shares remain at long-term highs since the 2008 crisis, having approximately doubled in the last year. Metro – still a relative turnaround situation – hit 107p last November and 105p earlier this month, having soared from around 40p last July.

I drew attention as a “buy” last August at 53p after a £2.5 billion mortgage portfolio sale laid the base for a shift into higher-yielding loans. There was also a 60% discount to net tangible net assets and Metro’s chart from October 2023 depicted an extended “bowl” – as if those investors liable to sell already had, and confidence was starting to build.

Source: TradingView. Past performance is not a guide to future performance.

But despite no caution from Metro on its outlook, the shares were marked down initially and sold off to 85p before recovering somewhat. Perhaps Metro nowadays has holders who are edgy to take profits given the company has yet to publish clean accounts – free of exceptional charges. But the drop made me consider whether it is a rational action considering the UK’s dodgy economic outlook? 

We might escape recession but demand for credit relates significantly to business confidence where surveys have been gloomy in recent months given April’s coming rise in business costs. Metro holders have to hope its tailor-made mortgage lending – still the majority group earner – can offset any reduction in demand for commercial credit. Lloyds is also significantly exposed to mortgages, but at least the UK housing market appears firm.

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Barclays has greater international exposure than NatWest or Lloyds, but all continue to test fresh highs, whereas in the US this week, financial shares were initially pressured. Bank shares in particular are a proxy on expectations for the economy, and the US has polled lower consumer confidence.

Source: TradingView. Past performance is not a guide to future performance.

Can we dismiss Metro’s drop as a special situation – or does it imply momentum in UK bank shares has become complacent? Re-ratings were due on modest valuations internationally but their spikes lately are showing confidence at odds with the UK economy.

NIM is a key factor in bank profits

Net interest margin (NIM) is the difference between what banks earn from their assets (loans) and pay out on liabilities (deposits). The rise in UK interest rates in response to post-Covid inflation was thus medium-term bullish, although the stock market took until a year ago to start pricing in its effects. Now would therefore be a curious time for bank shares to spike if UK interest rates have peaked. The Bank of England is known to be “dove-ish” – more concerned about boosting the economy than inflation risks. At the very least it would be unlikely to raise the central lending rate.

This has been significant to Metro’s return to underlying profitability despite its reported numbers sullied by charges - £12.8 million pre-tax profit in the second-half year was a swing from a £26.8 million loss in the first half “primarily driven by improvements in net interest income”. While 2024 margin was 1.91%, slightly down on 1.98% in 2023, Metro exited the period at 2.65%.

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It still meant underlying net interest income fell 8% to £378 million due to higher cost of deposits in the first half. This was mitigated by a 4% reduction in operating costs. A reported annual loss of £212 million was the effect of a £102 million loss on the mortgage book sale, £44 million write-off of intangibles, £31 million transformation costs and £21 remediation costs that included a near £17 million regulatory fine for mis-reporting liabilities by past management.

Possibly all that affected the response to these results, although Metro’s underlying trend appeared pretty clear – maintaining “strong guidance” on key performance measures.

“Bottom-up” then, Metro looks promising so long as “top-down” the UK economy and property market oblige. Retail mortgages remain its largest aspect of lending at 56% of accounts versus 63% in 2023. Yet over the first to second half-year, new commercial loans rose by 40% to constitute 36% of the loan book versus 28% year-on-year; and contra to gloomy business surveys, the pipeline is said to be up 50% this year.

With remarkable coincidence, a whopping £254 million tax credit has turned Metro’s bottom line into a £76 million annual net profit. Note 7 in the results cites this as “origination and reversal of temporary differences” of deferred tax.

Tangible book value should limit downside risk 

While the mortgage book sale explains a reduction from 140p a share to 121p, this represents a 26% discount to current market price of around 90p – similar to what prevails at Barclays, while Lloyds trades at a slight discount and NatWest Group at a slight premium.

Barring a recession leading to asset (loan) write-downs, it should be supportive of Metro shares and, if the CEO’s turnaround continues to gain traction, then further closing of the discount is possible. It obviously is not as stark as six months ago.

Metro Bank Holdings - financial summary
year end 31 Dec

Source: historic company REFS and company accounts.

Material director share purchases around current share price

These director acquisitions were late last year but affirm management’s confidence in Metro’s value as a recovery situation. Mid-November, the chair bought £27,000 worth at 94p and another non-executive director, £197,000 at 90p. A third non-executive director then bought £98,000 at 98p. The bank’s situation has not worsened since its trajectory as they understood it three months ago, if anything it is better.

It helps explain why I am inclined to maintain a “buy” stance on Metro. Uncertainty remains about whether the UK economy and property market allows this bank to capitalise on its stronger base, which also includes stores as “a key element of the group’s service”. It is a differentiator versus major UK banks substantially closing down their branches. Two new ones in Chester and Gateshead are due to open in the second quarter, plus one in Salford later this year. All Metro’s locations target local consumers plus commercial banking.

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Time to lock in gains on other banks?

It is substantially a macro call, admittedly very hard as President Trump blows hot and cold on tariffs, and with what that uncertainty alone implies for economic activity.

But if yesterday’s talks at the White House can be taken literally, a trade deal with the US could result fairly soon, which keeps us out the European tariff net. That could boost business sentiment even if not directly affecting demand for UK commercial loans or mortgages, so would bringing the Ukraine conflict to some end, possibly easing energy prices.    

Hopefully, such would offset UK-specific macro risks, which increasingly look to involve further tax rises. The story can so easily change from week to week.

Be of no doubt, bank shares are front line for any material sentiment change on the economy; hence, if you are risk-averse and believe the UK is challenged, then a measure of profit-taking on the sector is justified. It helps explain why enough holders banked gains on Metro yesterday.     

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.