Metro Bank set for suburban slowdown, cautions Macquarie

Metro Bank's rapid growth and margins will begin to decline as it expands into "less wealthy" London suburbs, said Macquarie Capital as it initiated coverage on the challenger bank with an 'underperform'.

The Australian investment bank, which began with a 2,700p share price target, said targets of achieving 14% return on equity by the end of the 2020 financial year through 40% loan growth and lifting net interest margins from 230 basis points to 300bp, "seems optimistic", especially considering Virgin Money’s experience, for example.

"Metro’s deposit funding cost is now comparable to UK high street banks but we remain unconvinced that this represents an enduring competitive advantage, as we expect challenger banks to ultimately be price-takers in the deposit market," Macquarie said in a note to clients on Wednesday.

The customer proposition of Metro's 'stores' acting as 'points of sale' runs counter to the trend for increased digitisation and off-branch service delivery, and leaves Metro "well positioned" as customers visit banks mostly to open accounts and do business banking.

"However, we argue that although this is positive for customer and deposit growth, delivering loan growth will need Metro to tap into the price-sensitive intermediated market."

Having deferred its initial 18% ROE target to 2022 when it raised £280m of new equity in July, analysts see a risk that Metro will likely tap the market again, "likely delaying ROE delivery and further reduce fair values".

On valuation, Macquarie modelled a 2,400p price based on its the 2020 financial targets, or 2,700p when using the new internal ratings-based approach allowed under regulatory guidelines, though its valuation would be a much lower 1,600p based on residual income valuation over credit cycles and proprietary modelling puts Metro in the fourth quartile of Macquarie's global banks universe.