Metro’s differentiated model revolves around retail ‘shops’ (not branches), which offer vastly superior customer service – from its interaction with clients and its seven-day opening, to its children and pet-friendly environment.
It is working, 93% of customers recommend the bank. Metro had 136,000 accounts in London at the end of 2012, and expects to more than double this figure in 2013, driving customer deposits to £1.4bn. Metro Bank is not listed, but worth keeping an eye on.
One of the many levers Metro Bank has used to build competitive advantage is its state-of-the-art information system – which allows its employees to view everything about a customer on a single screen, reportedly something no other large UK bank can do.
Behind the scenes
This so-called ‘core banking’ system is powered by Swiss software vendor Temenos. In what has turned out to be a very synergistic relationship, Temenos enables Metro Bank to deploy its innovative business model and Metro Bank pushes Temenos to implement the innovative features it requires.
Temenos shares have been flying the past few months, rising 117% since the CEO change in July 2012, which brought its focus back to day-to-day execution. There is an enormous market opportunity for Temenos – as many of the 20,000 or so worldwide banks still rely on custom-coded systems dating back twenty years or more.
Temenos offers to replace these clunky systems with a modern, off-the-shelf product, which can dramatically reduce running costs and guarantee up-to-date functionality. This is analogous to the replacement of bespoke accounting and production systems by off-the-shelf ‘Enterprise Resource Planning’ systems from SAP in the nineties. Competition in core banking is limited, and offers only inferior products (SAP, Misys) or bespoke development capability (Oracle).
Back on track
The current Temenos chief executive, ex-CFO David Arnott, has refocused the company’s energy towards delivering results after a brief period when the business lost its way. With market opportunity, product positioning, and executive team all scoring highly, it is no wonder that the stock has performed so well.
The shares are now priced at a hefty multiple of 17x next year’s earnings. However, near-term expectations are under control, and the long-term growth potential remains very significant. The broader market for banking software could soon come back to life, after several years of depressed activity. SAP recently said it expects to add $10bn in revenue from banks going forward, on a base of $2.5bn.
Temenos retains speculative appeal, with 100% free float and a dominant position in the banking vertical. It would fit very neatly into many global tech companies’ portfolios.
We believe Temenos is one of those companies that can compound returns for a long time, even in a sluggish growth environment. It will do this through its sustainable competitive advantage, based on innovation in this case. Our funds at Alken Asset Management continue hold a significant position in the shares.
