Metro Bank (LON: MTRO) share price crawled back on Friday as some investors attempted to buy the dip. The stock bounced back by more than 6% and settled at 40p. Still, it has retreated by more than 75% from its highest level this year, giving it a market cap of over 70 million pounds.
Here we go again
The banking sector is facing numerous headwinds this year. Liquidity is drying up as depositors move their funds to the higher-yielding money market funds. A report published in August revealed that deposits in the Big Four had crashed by more than 80 billion pounds, the steepest drop in over 4 quarters.
These challenges are hitting most banks but smaller ones like Metro Bank are more exposed. On Thursday, I wrote that the bank had contracted Morgan Stanley (NYSE:MS) to help it raise additional capital through bonds and equities. In total, the bank is seeking to raise at least 600 million pounds to boost its capital levels.
Investors hate capital raises especially by banks. As you recall, Silicon Valley Bank (SVB) collapsed in March when it announced plans to raise capital. The bank was struggling with low liquidity because of its huge exposure to long-dated government bonds that were plunging.
Metro Bank is also facing other challenges. The primary one is that it has failed to convince regulators that it can use its internal models to assess how much capital it needs. This leaves it at a disadvantage when competing with larger banks like Lloyds (LON:LLOY) and Barclays (LON:BARC).
Is Metro Bank a good stock to buy?
In my last article on Metro Bank, I noted that the stock had become highly undervalued and oversold. However, I also recommended that investors should avoid the stock because of the rising risks in its business.
History suggests that investors should avoid a bank in trouble. We recently saw this happen during the collapse of Credit Suisse (SIX:CSGN), which was seen as being too big to fail because of its huge assets.
We then saw it again in the collapse of First Republic Bank (FRC), one of the biggest regional banks in the country.
I suspect that many Metro Bank customers will start withdrawing their funds as the share price collapses. Metro Bank was already seeing outflows before this week’s events. Customer deposits dropped from 16 billion pounds in December to over 15.2 billion in the first half of the year.
Therefore, the current 6% jump of the MTRO share price could be a dead cat bounce. This is a situation where a plunging stock bounces back temporarily as some investors attempt to buy the dip.
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