The challenger banks haveyet to break the big fours stranglehold but they are getting stronger by the day. Should you follow the money?
Metro Bank (LSE: MTRO)floatedin March2016 at 20 a shareand today trades at 37.16, an increase of around 85%. This is partly down to global factors: Metrowas forced to cut its floatprice from 24 due to global market turbulence, and has cashed in as stock markets recovered across the board. But it also has plenty to be proud of.
Earlier this month, Metrorevealed that it now has amillion customer accounts, lessthan seven years since launch. Targetingsuperior levels of service and convenience hasproveda successful strategy, with 91%of its retail and business customers sayingthey would recommend the bank to a friend. Not everybody is willing to pay extra for superior service, but clearly, plenty ofpeople are.
The FTSE 250 bank now has 48 stores across the UK with another 10 planned this year, and firstachieved profitability in the second half of 2016. This year it expects to see its first full year of profitability. Recent Q1 results showed record growth in deposits, which exceeded 1bn for the first time, while lending rose11% to 6.5bn and it also attracted 72,000 new accounts.
Some carped at thedip innet margins to from 2.03% to 2.02% over the quarter, although thatstill markedan increase from1.96% ayear earlier.These are impressive results and Metrosmarket cap is now pushing 3bn. My concern is that there are only so many people who wantthe personal touch Metro offers, which could put a lid on growth, while Brexit could prove a burden if the economy continues to slow. But forecast earnings per share (EPS) growth of 130% in the year to 31 December 2018 looks compelling.
Recent share price performance atVirgin Money Holdings (LSE: VM) isless compelling. It isdownalmost 10% over the last 12 months, to todays 308p. In fact it is only slightly higher than it was in November 2014, when the shares debuted at 283p. However,there could be a value opportunity here, with the share price valued at just 10.15 times earnings.
That is despite a promising first quarter update last month, with thebank claiming continued strong progress asgross mortgage lending hit 2bn, taking its market share to3.4%. Netmortgage lending of 900m gives ita market share of 12.3%. Credit card balances were 8% higher at 2.65bn and deposits were up 3% to nearly29bn. Customer satisfaction was also high.
Room to grow
This followed a strong 2016, with the FTSE 250 company reporting a 33% jump in pre-tax profit.Forecast EPS growth of 17% this year and 13% in 2018 looks promising, while a forecast yield of 2.4% shows progression. Perhaps investors are nervous about its proposed takeover bid for Co-operative Bank.
Todays low rating is largely down tothe Brexit effect,with Virginsshare price destroyed the day after the referendum, and still vulnerable. That aside, this looks like another bankingbargain.
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