Here’s one penny stock I’m avoiding like the plague right now!

If I’m being blunt, Metro Bank (LSE: MTRO) shares have fallen off a cliff since the company’s initial public offering (IPO). The recent descent has pushed them into the penny stock category. Let’s take a closer look at what’s happened and I’ll explain why I’m steering clear of the shares.

Sinking shares and a sinking ship?

Metro Bank was founded in 2010 and was one of the first of the new so-called challenger banks. It was the first bank to open retail branches in the UK for many decades. Many believed it could even threaten the status quo of the big four established banks. It experienced rapid growth and then in 2016, an IPO took place.

The shares haven’t experienced the best of times since it went public. Regulatory and accounting issues haven’t helped the share price. Over a 12-month period, the shares are down 51% from 82p at this time last year to 40p as I write. Since February, they’re down 73% from 153p to current levels.

Since the IPO, the shares have slipped 97% from 1,880p to today’s levels. Hopefully you’re beginning to get the picture as to why I’m not keen on this penny stock. But let me dig deeper, beyond the share price drop.

A penny stock value play?

Some more optimistic investors may view the decline of Metro Bank’s shares as an opportunity to buy the dip. This would be with the hope that the business can recover in the longer term. I’m not one of those investors.

A weak balance sheet and fears of the bank disappearing altogether became very apparent in recent months. The business stated it needed to raise fresh capital as well as refinance its existing debt obligations not to mention bond repayments due next year.

The bank recently secured a £925m rescue package that allayed fears, for now. It managed to refinance £600m worth of debt, as well as raise £325m in capital from shareholders. This includes £150m of fresh equity.

More optimistic investors may look at the fact that Metro Bank is considering selling parts of its residential mortgage book. This could help raise close to £3bn and help it stage a turnaround. I’ll keep a close eye on developments on this front.

When I review the balance sheet in more detail, I’m put off by the net debt obligations. This is heightened due to the high interest rate economy we find ourselves in. After all, debt is much costlier to service when rates are higher.

Better penny stock opportunities

I’m steering clear of Metro Bank shares for now but I am going to keep a close eye on developments out of sheer curiosity. Its struggles could have an impact on the wider banking sector in the UK.

There were rumours that Lloyds, the UK’s biggest residential mortgage lender, was considering buying some of Metro Bank’s mortgage book. This could be interesting for both sides and one story I’ll keep an eye on.

I believe there are better penny stocks out there that could boost my holdings.

The post Here’s one penny stock I’m avoiding like the plague right now! appeared first on The Motley Fool UK.

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More reading

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Is the Metro Bank share price crash a buying opportunity?

Sumayya Mansoor has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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