Before the financialcrisis, Lloyds (LSE: LLOY) was one of the UKs most respected and trusted banks. The group had a reputation for stability, prudent capital allocation and customer service. The banks reputation with clients drew new business to the group and profits expanded rapidly. In fact, Lloyds was generating so much cash in the run up to the crisis that its dividend yield often exceeded 7% as management returned as much cash to investors as possible.
Unfortunately, Lloyds success turned out to be its downfall. The banks cash-rich balance sheet and desire for growth gave management the confidence to bid on collapsing banks during the crisis, but these banks turned out to have toxic balance sheets, which floored Lloyds.
Today, its only just beginning to rebuild its reputation, but the group now has to compete with the new kid on the block,Metro Bank (LSE: MTRO).
Challenger growth
Metro Bank was founded in 2010 and at the time of its founding was the firstnew high street bank to launch in the UK in over 150 years. Founded bymulti-billionaireVernon Hill, Metro Bank set out to be different from the start. With a customer-focused attitude, the bank has attracted 7.3bn of customer deposits, up270% in just two years. Over the same period, lending has grown from 1bn in 2014 to 5.2bn today. Clearly, this kind of growth cant last forever, but the banks growth may have some way to go before it reaches saturation.
In an interview last year, Mr. Hill highlighted that the size of the UK retail deposit base in the south of England could be as much as 1trn. If Metro Bank can capture just 5% of this total market, the groups deposit base can grow sixfold from current levels. With approximately750 people a day opening accounts at the bank during the third quarter, it looks as if the demand is there and the skys the limit for Metro Bank.
Maiden profits
Metro Bank reported its maiden profit only a few weeks ago. For the third quarter, the group reported a profit before tax of 567,000 on revenue of 53.4m. Costs are high at the group as it concentrates on expansion and customer acquisition but over time customer numbers should grow to the level where escape velocity is possible. City analysts expect the bank to achieve this next year. A pre-tax profit of 30m is pencilled-in for 2017, up from a full-year pre-tax 16m thats planned for 2016. Revenues are expected to hit 295m next year, up from 195m for 2016.
As Metro Bank grows, it appears Lloyds is shrinking. The company is cutting costs by removing staff from its stores and shutting branches around the country. Unfortunately, this seems to be hurting the companys sales. Lloyds revenue is expected to fall to 17.1bn next year, from 17.3bn for 2016. Pre-tax profit is expected to increase to 6.5bn from 6.3bn but this appears to be a result of cost cutting alone, not sales growth.
Catching up
Metro Bank is still a tiddler compared to high-street giant Lloyds but the group is growing rapidly, and its appeal with customers will continue to drive growth. If the company hits its target of 50bn in deposits, its likely the shares could double or even triple from current levels.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
