Citi ups Metro Bank to 'buy' on more balanced risk/reward

Metro Bank got a boost on Monday as Citi upgraded the stock to 'buy' from 'neutral', saying the risk/reward now looks more balanced.

The bank, which has long-argued that Metro shares should not be bought given overly-optimistic targets, said it still thinks this is true. However, with the shares underperforming the Stoxx 600 banks index by more than 25% since early March, the price now overly discounts negatives.

Growth delivery remains "excellent" and should remain strong as Metro enters new markets, Citi said. Among the positives, it noted that the challenger bank should also be a big beneficiary from the adoption of IRB, given a strong bias to mortgages and highlighted the potentially successful outcome on the Williams & Glyn switching scheme and innovation fund bid.

Citi cut its price target on the stock to 2,590p from 3,040p to reflect a high sensitivity of valuation and lower assumed terminal growth.

On the downside, it said the stock's valuation may not be enough in a market where most banks look cheap. It also pointed to weak margin trends due to competition and said the bank's third-quarter results did little to indicate that 2020/23 targets are achievable.

"We see Metro as most exposed to no-deal Brexit (not our base case but a non-negligible risk), given how sensitive valuation is," Citi added.

At 1440 BST, the shares were up 4% to 2,158p.