Numis 'baffled' by Metro Bank's valuation premium over sector

Broker Numis said the share price of Metro Bank was trading at a significant unjustified premium to the rest of the UK banking sector and so reiterated its 'sell' recommendation.

"We continue to be baffled by Metro’s valuation which in our view, could only be justified if it far exceeded management's already lofty 2020E targets," analyst Jonathan Goslin wrote.

He and his colleagues estimated Metro shares were trading for 3.7 times expected 2018 tangible net asset value and 48 times forecast earnings for that year.

Even based on management's 2020 return on equity target of 18%, this still implied 2.4 times 2020 TNAV and a p/e ratio of 14.

This contrasts with a UK banking sector as a whole that has been trading nearer 1.2 times 2018 TNAV and roughly 7.0 times forward earnings, with an average ROTE of 14%.

On the upside, Numis hiked its earnings estimates to reflect the 2016 results and its assumption of more benign near-term impairments, lifting adjusted EPS 24% to 28p for 2017, by 7% to 72p for 2018 and 5% to 132p for 2019.

The target price was also lifted to 2,000p from 1,800p.