I’d avoid the rebounding Metro share price in favour of this FTSE 250 growth stock
Financial services is one of the UK’s stand-out industries, but it’s also been one of the most volatile sectors of the last dozen-or-so years.
That seems unlikely to change, judging by the problems affecting Metro Bank (LSE: MTRO). Challenger banks like this one were supposed to shake up the financial services sector, offer serious competition to the big high street banks, and give customers a better deal. But investors who put their money in Metro now wish they’d deposited it elsewhere.
The Metro share price has halved over the last 12 months after it admitted commercial buy-to-let loans and loans worth up to £1.5bn had been wrongly classified in risk terms, forcing it to ask shareholders for £375m to strengthen the balance sheet. Tougher trading conditions, particularly in the mortgage market where margins are now wafer thin, also hit profits.
The bad news rattled customers who withdrew £2bn of net deposits in the first half of 2019, although deposits have since returned to growth. The group’s underlying pre-tax profit slumped to £13.6m, down from £24.1m in 2018.
Many investors would continue to dump Metro, and that’s understandable, given the massive self-inflicted reputational damage. Last month, it was forced to cancel a £250m bond sale, despite offering a juicy 7.5% yield. Investors just don’t want to know. This also suggests Metro could struggle to raise extra funding if it ran into further trouble.
Despite the bank’s troubles, the share price has bounced 21% in the last week. No doubt some have been lured in by its rock-bottom valuation of around five times earnings and news departing founder and chairman Vernon Hill is seeking backers to take the bank private.
But I would urge caution, especially as the Financial Conduct Authority’s investigation has now been widened, and there’s been talk of criminal charges. Now’s not the time to take unnecessary risks in the financial services sector.
Sometimes it’s the quiet ones you have to watch out for. Like FTSE 250 financial services technology grafter Equiniti Group (LSE: EQN), which offers regulatory support, pension scheme administration and benefits scheme management for companies around the world.
It’s all dry back-office stuff, but if you like excitement, the group delivered 222% growth in pre-tax profit to £11.6m for the first six months of the year, with revenues up 8.3% to £275m. Equiniti also posted strong client retention, with new wins across all divisions, as 7.2% growth in Intelligent Solutions and 5% in Investment Solutions in its US division helping to offset the 8.6% decline in Pension Solutions.
Management reckons the strength of its franchise can withstand Brexit uncertainty, while it’s also accelerating growth in the US, where its presence is growing following a recent acquisition.
Although the Equiniti share price has disappointed, with the stock down 30% over two years, that leaves it trading at around 10.9 times earnings, which could make a tempting entry point.
The group recently hiked its interim dividend by 7% to 1.95p per share, and yields a forecast 2.9% with cover of 3.3 leaving scope for growth. Forecast earnings per share growth of 4% this year and 7% next also show promise. It looks a lot more solid than Metro, anyway.
Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK owns shares of Equiniti. 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.
Motley Fool UK 2019