Metro Bank shares drop as growth lags frothy expectations

We've had our best quarter ever: Metro Bank Chairman

Shares in Metro Bank traded lower on Wednesday morning despite the bank delivering impressive deposit growth of 1 billion pounds in the first quarter as heady valuations tempered investor appetite.

The shares were off by around 1 percent by 11:00 a.m. local time, interpreted as being on account of both lofty valuations and product pricing weakness. The bank's deposits rose 13 percent for the quarter to 9 billion pounds ($11.4 billion), their cost slipped from 66 basis points (bps) in the last quarter of 2016 to 61 bps for the latest three month period.

Vernon Hill, founder and chairman of the U.K. challenger bank told CNBC's Squawk Box on Wednesday that his company was firing on all cylinders.

"We've had the best quarter we've ever had. The momentum has really grown with Metro Bank every quarter. Whether its deposits or loans, our earnings are growing. We're very excited that this month we'll pass one million accounts - that's sort of a magic number for a company that started from scratch," he enthused.

Yet it was not only investors displaying apprehension – analysts at Panmure Gordon also expressed their concerns that valuations may have run ahead of operational reality in a note to clients on Wednesday morning.

"Although we expect Metro Bank's profitability to trend towards their stated return on equity (RoE) target of around 18 percent by FY2020 driven by good loan growth and improving operating leverage, at a price-to-total book value multiple (P/TBV) of 4.0 we believe that this is more than discounted in the current share price," said Shailesh Raikundlia, equity analyst at Panmure Gordon.

"We prefer banks that are already generating around 20 percent returns and trading at much lower valuations," she added.

Simon Dawson | Bloomberg | Getty Images

Metro Bank is one of the new batch of challenger banks that are a relatively small retail set up seeking to exploit the advantage of not being saddled with unwieldy legacy systems and structures versus the traditional high street banking competitors.

"This is not meant to be a better U.K. bank, this is a complete reinvention of how banking is delivered in Britain," said Metro Bank's Hill.

"This model is about taking market share from the Big Four. Even today we only have 1 percent of the Greater London market so there's lots of room for us to take market share," he added.

While operational growth has been impressive, the 60 percent run up in the share price since the company's public market launch in May 2016 has been almost as significant.

Despite describing this quarter's deposit growth as "stellar" and stating that the bank is "on the road to profitability" by full year 2017, Joseph Dickerson, equity analyst at Jefferies, reserved his enthusiasm.

"We would have preferred to see a rising loan/deposit ratio and view asset growth as critical to achieving 2020 profitability targets," said Dickerson.

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