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Why is the Metro Bank share price tumbling?

Man putting his card into an ATM machine while his son sits in a stroller beside him.

It has been a rewarding 12 months for investors in Metro Bank (LSE: MTRO), with the shares moving up 31%. But March is looking horrible so far. As I write this on Monday morning, the Metro Bank share price has tumbled 26% so far this month.

Could this be a buying opportunity for my portfolio?

Improving business performance

One reason for this month’s share price dive could be disappointment at the bank’s annual results published earlier in March. Assets fell slightly compared to the year before and the bank made a loss after tax of £73m. That is equivalent to around 37% of its market capitalisation.

But things were not all bad.

After all, that loss was still 71% lower than the prior year number. Last year also saw total underlying revenue at Metro Bank rise 31% year on year. That could be a good basis for future growth. While assets fell, the loan book grew by 7%.

Ongoing uncertainty

I think part of the explanation for the recent price fall is ongoing investor uncertainty about whether the transformation at Metro will ultimately deliver the desired results. The bank has described 2023 as a “transitional year”.

While financial performance looks like it is improving, the bank remains loss-making. In fact, its last profit was in 2018.

Although it turned in a profit on an underlying basis in the final quarter of last year, Metro is not out of the woods yet. I think a lot still needs to be done to return the bank to consistent profitability. Its ongoing focus on opening new branches adds an attractive point of customer differentiation compared to many peers. But it could also add costs, eating into profitability.

Is the Metro Bank share price a bargain?

Still, if it can indeed move back into profit on a sustained basis, the current Metro Bank share price could look like a bargain. After all, the shares today cost less than 3% of what they did five years ago, despite climbing in the past 12 months.

That dramatic price fall is a reminder that investors have been upbeat about the prospects at Metro before, only to be later disappointed.

Takeover discussions in 2021 amounted to nothing in the end. As a long-term investor, I think the bank’s shares need to be valued on their underlying basis rather than in the hope that a competitor will try to buy out Metro. In the current environment I think rival banks are likely focused more on their own businesses than growth through acquisition.

To be a bargain at today’s share price, Metro Bank needs to prove in coming years that it can again be consistently profitable. I think it is still far too early for me to believe that confidently. The risks involved mean that I do not see the shares as a bargain.

Right now I am wary of the whole banking sector. There are potential problems ranging from growing customer defaults to possible systemic problems stemming from last week’s collapse of a large US bank. So I will not be buying any bank shares in the near future – including Metro.

The post Why is the Metro Bank share price tumbling? appeared first on The Motley Fool UK.

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C Ruane 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.