Metro Bank Holdings PLC: Interim results for half year ended 30 June 2023
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Metro Bank Holdings PLC (MTRO)
Metro Bank Holdings PLC Interim results Trading update H1 2023 1 August 2023
Metro Bank Holdings PLC (LSE: MTRO LN) Interim results for half year ended 30 June 2023 Highlights
Daniel Frumkin, Chief Executive Officer at Metro Bank, said: “I am encouraged by the activity across the business. Our statutory profitability in H1, making this the third consecutive quarter of underlying profitability, demonstrates that our strategy is working. We continue to win new customers every day through our service-led franchise, at the same time as showing ongoing cost discipline and pursuing our targeted store expansion. Whilst we remain watchful of macro-economic headwinds, we have the expertise, capability and infrastructure in place to unlock our future growth potential.”
Key Financials
Investor presentation A presentation for investors and analysts will be held at 9.30AM (UK time) on 1 August 2023. The presentation will be webcast on: https://webcast.openbriefing.com/mb23h1/ For those wishing to dial-in: From the UK: 0800 358 1035 From the US: +1 855 979 6654 Access code: 332501 Other global dial-in numbers: https://www.netroadshow.com/events/global-numbers?confId=52736
Financial performance for the half year ended 30 June 2023 Deposits
Loans
Profit and Loss Account
Capital, Funding and Liquidity
Outlook and Guidance
Metro Bank Holdings PLC Summary Balance Sheet and Profit & Loss Account (Unaudited)
Enquiries For more information, please contact:
Metro Bank PLC Investor Relations Jo Roberts +44 (0) 20 3402 8900
Metro Bank PLC Media Relations Tina Coates / Mona Patel +44 (0) 7811 246016 / +44 (0) 7815 506845
Teneo Charles Armitstead / Haya Herbert Burns +44 (0) 7703 330269 / +44 (0) 7342 031051 ENDS
About Metro Bank Metro Bank services 2.8 million customer accounts and is celebrated for its exceptional customer experience. It is the highest rated high street bank for overall service quality for personal customers and the best bank for service in-store for personal and business customers, in the Competition and Markets Authority’s Service Quality Survey in February 2023. Metro Bank has also been awarded “2023 Best Lender of the Year – UK” in the M&A Today, Global Awards, “Best Mortgage Provider of the Year” in 2022 MoneyAge Mortgage Awards, “Best Business Credit Card” in 2022 Moneynet Personal Finance Awards, “Best Business Credit Card 2022”, Forbes Advisor, “Best Current Account for Overseas Use” by Forbes 2022 and accredited as a top ten Most Loved Workplace 2022. It was “Banking Brand of The Year” at the Moneynet Personal Finance Awards 2021 and received the Gold Award in the Armed Forces Covenant’s Employer Recognition Scheme 2021. The community bank offers retail, business, commercial and private banking services, and prides itself on giving customers the choice to bank however, whenever and wherever they choose, and supporting the customers and communities it serves. Whether that’s through its network of 76 stores open seven days a week, 362 days a year; on the phone through its UK-based contact centres; or online through its internet banking or award-winning mobile app, the bank offers customers real choice. Metro Bank Holdings PLC (registered in England and Wales with company number 14387040, registered office: One Southampton Row, London, WC1B 5HA) is the listed entity and holding company of Metro Bank PLC. Metro Bank PLC (registered in England and Wales with company number 6419578, registered office: One Southampton Row, London, WC1B 5HA) is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. ‘Metrobank’ is a registered trademark of Metro Bank PLC. Eligible deposits are protected by the Financial Services Compensation Scheme. For further information about the Scheme refer to the FSCS website www.fscs.org.uk. All Metro Bank products are subject to status and approval. Metro Bank is an independent UK bank – it is not affiliated with any other bank or organisation (including the METRO newspaper or its publishers) anywhere in the world. Please refer to Metro Bank using the full name.
METRO BANK HOLDINGS PLC Interim report for the half year ended 30 June 2023
Forward-looking statements This interim report contains statements that are, or may be deemed to be, forward-looking statements. Forward-looking statements typically use terms such as ‘believes’, ‘projects’, ‘anticipates’, ‘expects’, ‘intends’, ‘plans’, ‘may’, ‘will’, ‘would’, ‘could’ or ‘should’ or similar terminology. Any forward-looking statements in this interim report are based on Metro Bank Holdings PLC’s (“the Group”, “the Bank”, “we” or “our”) current expectations. By their nature, forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control, that could cause our actual results and performance to differ materially from any expected future results or performance expressed or implied by any forward-looking statements. As a result, you are cautioned not to place undue reliance on such forward-looking statements. Past performance should not be taken as an indication or guarantee of future results, and no representation or warranty, expressed or implied, is made regarding future performance.
No assurances can be given that the forward-looking statements in this interim report will be realised. We undertake no obligation to release the results of any revisions to any forward-looking statements in this interim report that may occur due to any change in its expectations or to reflect events or circumstances after the date of this announcement and we disclaim any such obligation.
Basis of preparation Financial information in this interim report is prepared on a statutory (taken from our financial statements) and underlying basis (which we use to assess performance on a management basis).
Further details on how we calculate underlying performance, as well as our other alternative performance measures can be found later in this release. To meet Bank of England’s resolution requirements, on 19 May 2023, Metro Bank Holdings PLC was inserted as the new ultimate holding company and listed entity of the Group. Prior to this date Metro Bank PLC was both a banking entity and the ultimate parent company of the Group but has subsequently become a 100% subsidiary of Metro Bank Holdings PLC. These financial statements are have been prepared as if Metro Bank Holdings PLC had been the parent company throughout the current and prior years, to treat the new structure as if it has always been in place. Further details on the insertion of Metro Bank Holdings PLC can be found in note 1 to the condensed consolidated interim financial statements.
sumMarised interim results
officers and external auditors As at 30 June 2023
Board of Directors
Executive Directors
Non-executive Directors
(A) Member of the Audit Committee (N) Member of the Nomination Committee (P) Member of the People and Remuneration Committee (R) Member of the Risk Oversight Committee
Company Secretary
On 31 July 2023 Clare Gilligan joined as our new Company Secretary, taking over from Stephanie Wallace (our General Counsel) who was filling the role on a temporary basis following the departure of our previous Company Secretary, Melissa Conway in December 2022. Independent auditors PricewaterhouseCoopers LLP 7 More London Riverside London SE1 2RT
BUSINESS review
The first six months of 2023 mark our first set of results since we completed our turnaround at the end of 2022 and has seen us deliver our strongest financial performance in several years. I am pleased to report our first half year of statutory profitability, with a profit before tax of £15.4 million (half year to 31 December 2022: loss of £10.5 million; half year to 30 June 2022: loss of £60.2 million), as well as our third successive quarter of profitability on an underlying basis. This was delivered whilst retaining the top spot as the highest rated high street bank for overall service quality for personal customers in the CMA’s latest Service Quality Survey, for the tenth time running.
This momentum is evidence that our business model works, and that combined with continued execution of our strategic priorities is seeing us deliver on our ambition to be the number one community bank.
Progress against our strategic priorities We have always been clear that we are building a business for the long-term, that can meaningfully scale and unleash its full capabilities as and when we are able to access additional growth capital. Our return to profitability on a statutory basis is an important milestone in this journey.
Key to this has been the continued delivery of our strategic priorities. At the start of the year, we refreshed these to move our focus from fixing the problems of the past to leveraging the strengths of our business model for future growth, whilst keeping the headline priorities the same.
Revenue Total revenue increased year-on-year to £286.4 million from £236.5 million, but remained flat compared to the second half of 2022 (£287.0 million). We continued to see increased momentum in interest income as rate rises continued to flow through to our variable rate and front book lending pricing, although net interest income was constrained by a rise in our cost of deposits, which was impacted by our return to the fixed term deposit market, as previously guided. Fixed term deposits increased to £1,205 million (31 December 2022: £625 million) and now represent 8% of balances (31 December 2022: 4%) and provide additional duration into our deposit base.
Overall, we saw our total deposits fall 3% to £15,529 million (31 December 2022: £16,014 million) as cost of living pressures saw customers draw down balances. Whilst the competitive savings environment put pressures on pricing, our service-led proposition continues to ensure we maintain a high-quality deposit position. In the second quarter of the year we saw balances stabilise with inflows in June, a trend that continued in July. Although average balances have reduced we continue to win customers, with new personal and business currents of 106,000 and 23,000 respectively, demonstrating our proposition continues to resonate in a competitive marketplace.
Costs Our total operating expenses fell 7% year-on-year to £259.7 million (half year to 31 December 2022: £275.5 million; half year to 30 June 2022: £278.8 million), despite a backdrop of persistently high inflation. This helped drive positive jaws of 28% year-on-year and 6% half-on-half.
The cost reductions have been achieved through our continued focus on cost discipline and the successful implementation of initiatives that enable the Bank to scale appropriately. Operating costs were aided by roll-off of legacy issues as well as the ending of our transformation plan.
We incurred additional costs in the first half of the year from the insertion of our new holding company, Metro Bank Holdings PLC. We completed this in May and it marks another key step in delivering our requirements under the Bank of England Resolution Framework.
Balance sheet optimisation Over the past three years we have built a suite of products that will allow us to compete in any interest rate environment, allowing us to appropriately react to market conditions. A clear example of this is our RateSetter capabilities, where we were able to appropriately scale this whilst interest rates were low. As rates have increased and the economic outlook remains uncertain, we have been able to moderate originations within this portfolio. This has seen the average borrower salary increase to £49,000 (half year to 30 June 2022: £46,000) ensuring we continue to maintain a strong level of credit quality.
Our continued discipline to focus on return on regulatory capital has instead seen us put a greater emphasis on building our mortgage pipeline as well as focus on the treasury portfolio, both of which provide meaningfully higher returns than at the start of the year. As part of this focus we also continue to progress our AIRB application for residential mortgages.
We continue to let balances in our commercial book attrite, particularly in the commercial real estate sector, where we have significantly reduced our exposure over the past few years. This combined with the run-off of COVID-related government backed lending has seen commercial lending as a proportion of the total book fall marginally to 30% of total loans as at 30 June 2023 (31 December 2022: 31%; 30 June 2022: 36%). Despite this fall we continue to remain committed to maintaining a strong commercial lending offering but are focused primarily on higher-quality relationship driven business. This includes the strengthening of our business overdraft product which we launched in 2022 and a new business credit card offering that we will launch in the second half of the year, which as well as supporting lending growth offers the potential for increased fee income.
Infrastructure We maintain our focus on building out our digital and physical infrastructure to both ensure that we keep the Bank safe and secure today, and invest for the growth of tomorrow. The first half of the year has seen us lay the groundwork for the expansion of our store network in the North of England. Whilst competitors continue to shrink their branch numbers and reduce hours, we are continuing to see the benefits of being rooted in the communities we serve and believe this will continue to differentiate our proposition in the years ahead.
Alongside our physical offering we have worked to enhance our digital infrastructure. This included a major transformation of our mortgage origination platform, which will streamline the process for both mortgage intermediaries and customers. As well as being beneficial for customers it will allow us to be much more flexible in the markets we choose to operate in, including our upcoming products for shared ownership and limited company buy-to-let.
Alongside this we have continued our investment in automating customer journeys and working to deliver end-to-end digital products. This includes our auto-finance proposition which we launched at the end of 2022 and our soon to be launched business credit card. Ensuring this fully digital approach will allow us to scale these lending streams up as well as drive greater productivity and efficiency across the Bank.
In addition to our investment in our lending streams we are focused on enhancing our deposit proposition, to ensure we retain a competitive suite of products. This investment will improve our switching capabilities to better compete within the ISA market as well as offer a broader range of savings accounts including a savings-boost propositions and RateSetter branded savings account. Given earlier investment prioritisation elsewhere, our market share in these products is lower than for other core products and therefore represents an opportunity for growth.
Communications We continue to focus on engaging our colleagues, communities and other stakeholders to push forward our story.
I am pleased that in the first half of the year we have seen record levels in colleague engagement scores. We continue to focus on our culture of promoting from within, with over 40% of the positions filled in the first half of the year, partly as a result of colleagues being promoted or moving around the business. For the remaining hires we have amplified our community focus when recruiting talent, increased opportunities available for apprentices from disadvantaged backgrounds into new areas of the Bank, run a series of roadshows for professional returners trying to get back into the workplace, and engaged with later in career populations to support our diverse workforce. We have also introduced a new optional shift pattern, whereby store colleagues can now take a three-day break benefiting those colleagues who need more flexibility in their working week.
We have worked harder than ever for our local communities and become even more inclusive by rolling out our BSL Sign Language service which customers can now access in any of our 76 stores, or on the phone, in app or online.
Our financial education programme Money Zone has now been delivered to 2,800 schools and 250,000 children – we were even invited to deliver Money Zone to 1,100 children in just one day at the Hertfordshire Agricultural Society Food & Farming Day. Later this year we are extending the scheme with bespoke programmes for our armed forces’ communities as well as to teenagers aged 16-18.
52 of our stores are now designated as Safe Spaces – places where those suffering domestic abuse can go to safely go to start the process of rebuilding their lives.
Our colleagues remain supportive of their local communities and have helped collect and donate thousands of items to local foodbanks. Colleagues have also volunteered to feed the homeless, care for abandoned dogs, walked up hill and down dale for charity, picked up litter, ran miles – sometimes over obstacle courses, celebrated Pride in London, Birmingham and Cardiff and even organised our first charity golf day.
We continue to provide support to our customers who are struggling and during the year we signed up to the government’s recently announced Mortgage Charter.
I’m also delighted that Metro Bank has become the first ever champion partner of women’s and girls’ cricket. It represents a real partnership with purpose built on Metro Bank’s commitments to local communities and diversity and inclusion and will help to deliver a lasting legacy for women’s and girls’ cricket.
Capital I am pleased to say that in the first half of 2023, our return to profitability and our strategic management of risk-weighted assets (RWAs) both supported organic capital accretion. Whilst we continue to operate in capital buffers, we remain in close dialogue with the regulators regarding our future plans and also the ongoing work relating to our AIRB application.
The regulators remain supportive and on 1 January 2023 the Prudential Regulation Authority (PRA) reduced our Pillar 2A capital requirement from 0.50% to 0.36%. This was followed by a further extension to the pre-existing adjustment (announced 9 December 2022) with respect to the existing £250 million 9.139% Tier 2 Notes issued by Metro Bank PLC regarding minimum requirement for own funds and eligible liabilities (MREL) eligibility. The Bank of England’s Resolution Directorate has agreed the adjustment now extends the MREL eligibility to the instrument’s maturity date on 26 June 2028.
On 5 July 2023, however, the scheduled increase in the Bank of England’s Countercyclical Buffer (CCyB) came into effect, increasing the level from 1% to 2%. Accordingly, our Tier 1 requirement, including the combined public buffers, increased from 9.8% to 10.8% and we are therefore now operating within buffers for Tier 1 capital as well as MREL, however we remain above all of our minimum capital requirements.
We continue to consider all options, across the capital stack, that could strengthen our capital base.
Outlook Over the past few years we have built a stable business foundation, fixing issues of the past whilst positioning ourselves for the future. I am pleased our return to profitability in the first six months, the first since our transformation plan completed, demonstrates that our approach is working. We have delivered this despite challenging headwinds and I would like to acknowledge the dedication and unwavering hard work of each and every colleague who has helped us to get where we are today.
Our proposition continues to resonate with customers and is providing a force for good in UK banking. We have created the infrastructure and capability to enable us to provide a differentiated customer offering as well as meaningful alternative to further communities in the years ahead.
Daniel Frumkin Chief Executive Officer 31 July 2023
Finance review
Our results for the first six months of 2023 mark an important milestone in our journey, as we report our first full half year of profitability since 2019. The statutory profit before tax of £15.4 million (half year to 31 December 2022: loss of £10.5 million; half year to 30 June 2022: loss of £60.2 million) reflects the improved performance of the business, driven by the actions taken as part of the turnaround plan and more recent measures to optimise the return on the balance sheet and mitigate the impact of cost inflation.
The Bank’s return to profitability, combined with a reduction in RWAs, supported our capital ratios in the first half, although were impacted by a step down in the IFRS 9 transition relief on 1 January 2023. We ended the period with CET1 capital ratio of 10.4% and an MREL ratio of 18.1%. These compared to the regulatory minima including buffers as at 30 June 2023 (excluding any confidential buffer) of 8.2% for CET1 and 20.2% for MREL. We therefore continue to operate within our capital buffers, although remained above regulatory minima throughout the period.
The underlying business has continued to attract new customers, totalling 129,000 new business and personal current accounts in the first half of the year. This inflow of new customers has partially offset the market-wide reduction in average current account balances. We have started to see our deposits stabilise with increases in balances in June and July partially offsetting the outflows seen earlier in the year, aided by our return to the fixed-term deposit market.
Whilst the performance for the first six months of the year is positive, we remain cautious given the continued volatile external economic conditions, the impact of inflation on cost of living and the increasingly competitive deposit market as interest rates rise.
Income statement review Table 1: Summary income statement
Net interest income The continued increase in base rate over the past 18 months has driven growth in net interest income, which rose to £221.5 million, up 23% compared to a year ago (half year to 30 June 2022: £180.8 million) aided by a continued disciplined approach with respect to both pricing and mix.
Half-on-half net interest income reduced marginally from £223.3 million, as a continued increase in asset yield was offset by increased deposit pricing, in part due to our decision to re-enter the fixed term deposit market, and the market-wide reduction in average current account balances. This trend was also reflected in muted net interest margin growth, which increased slightly to 2.14% half-on-half (half year to 31 December 2022: 2.11%; half year to 30 June 2022: 1.73%).
The Bank of England base rate rises in the period have flowed through to our front book loan pricing and variable rate lending. This has driven an increase in interest income both year-on-year and half-on-half to £400.1 million (half year to 31 December 2022: £324.0 million; half year to 30 June 2022: £239.7 million).
As at 30 June 2023 91% of our retail mortgages were fixed rate (31 December 2022: 90%, 30 June 2022: 87%) with a weighted average life of 2.40 years before they reprice (31 December 2022: 2.45 years; 30 June 2022: 1.97 years). In our consumer term lending and BBLS (closed to new borrowers) portfolios, all of the loans are fixed rate, limiting the impact of rising rates on these portfolios. As our fixed-rate lending rolls-off it will be replaced with higher-yielding loans. We therefore anticipate seeing continued interest income growth.
The rise in base rates has also partially flowed through to deposits, with cost of deposits increasing to 0.66% in the first six months of the year, up from 0.14% in the first half, and 0.25% in the second half of 2022. This increase has been driven in part by our return to the fixed-term deposit market as previously guided due to the market-wide decline in average balances.
Interest expense was £178.6 million in the period, up from £58.9 million in the first half of last year and £100.7 million in the six months to 31 December 2022. The rise in interest expense over the period also reflects the increase cost of wholesale funding, notably the amounts borrowed from the Bank of England under the Term Funding Scheme for SMEs. As the cost of this funding is directly linked to base rate it has increased significantly in the first half of the year to £78.0 million, compared to £13.1 million in the first half of last year and £42.4 million in the last six-month of 2022. We do not rely on this funding for operational activities and our lending remains entirely deposit funded. It does however provide an additional form of stable funding which, whilst dilutive to net interest margin, can be deployed into high quality floating rate securities or assets.
Fee, commission and other income Statutory net fee, commission and other income has increased year-on-year to £64.1 million from £55.7 million and remained broadly flat from the last six months (half year to 31 December 2022: £63.7 million).
Service charges and other fee income increased year-on-year as we continue to see increasing customer activity through account acquisition, although growth slowed in comparison to the second half of the year as transaction volumes reduced, driven by a decline in consumer spending, resulting from cost of living pressures.
Operating expenses Total statutory operating expenses decreased to £259.7 million from £278.8 million in the first six months of 2022 and from £275.5 million in the second half of 2022, reflecting our continued cost discipline despite high inflation conditions. The reduction also reflects a continued lessening in our use of contractors, leading to a reduction in our spend on professional fees. People-related costs at £120.4 million during the period were broadly flat compared to £119.9 million a year earlier and £116.7 million in the second half of 2022, despite delivering an average pay rise across our workforce of 5% in April 2023.
The reduction in statutory operating expense was aided by the reduction in non-underlying expenses as we completed our transformation program and closed outstanding legacy issues. Most of the non-underlying costs recognised during the period related to the implementation of our holding company in May this year and as such are not forecast to recur going forward.
Expected credit loss expense We recognised an expected credit loss (ECL) expense of £11.3 million for the period (half year to 30 June 2022: £17.9 million; half year to 31 December 2022: £22.0 million). The ECL charge in the period reflects the challenging external economic conditions and the maturation of the loan books, offset by ECL releases from commercial repayments and management’s actions to constrain lending growth. As part of our approach to calculating ECL we continue to maintain management overlays and adjustments of £24.1 million (31 December 2022: £30.9 million) which represent 12% of the total ECL stock (31 December 2022: 17%). As at 30 June 2023 our coverage ratio increased to 1.54% (31 December 2022: 1.41%).
Despite the challenging external conditions, we have recognised fewer individual impairments in the first six months of the year, particularly in the commercial space as customers remain resilient despite the economic environment and we have also seen repayments which have resulted in ECL releases in the period. We continue to have high levels of collateral with average debt to value for retail mortgages and commercial term loans as at 30 June of 58% and 55% respectively (31 December 2022: 56% and 55% respectively). Within our consumer lending portfolio, we undertake a robust approach to credit decisioning and have seen few signs of deterioration in credit quality. At a total level non-performing loans (NPLs) representing 2.86% of gross lending (31 December 2022: 2.65%).
Balance sheet review Table 2: Summary balance sheet
Deposits The Bank remains highly liquid and deposit funded. The Bank’s loan to deposit ratio was 81% as at 30 June 2023 compared to 82% at the end of 2022. The Bank’s deposit mix remains focused on core deposits (covering current and interest-bearing savings accounts), representing 92% of total deposits.
During the first six months of the year deposits reduced from £16,014 million to £15,529 million, primarily driven by a reduction in average account balances. This reduction reflects increased costs of living, including interest costs, paying down borrowing, as well as seasonal factors such as tax payments in January and a greater propensity to transfer surplus current account balances into higher yielding accounts.
Although average balances have reduced our core deposit franchise remains resilient to increased competition in the market and continues to attract new customers, opening 106,000 Personal Current Accounts and 23,000 Business Current Accounts in the first half. The more recent deposit trajectory has been positive with net inflows towards the end of the period.
As guided at the full year we have started to re-enter the fixed term deposit market, after several years of letting these balances reduce. As at 30 June 2023, fixed term deposits were £1,205 million (31 December 2022: £625 million) representing only 8% (31 December 2022: 4%) of total deposits. We intend to continue to gradually increase fixed term deposits as we introduce more tenure into our deposit profile.
During the period the Bank has invested in building out a competitive range of products for the current rate environment. This investment will improve our switching capabilities to better compete within the ISA market as well as offer a broader range of savings accounts including savings-boost propositions. Given earlier investment prioritisation elsewhere, our market share in these products is lower than for other core products and therefore represents an opportunity for growth.
Lending As previously guided the Bank is actively constraining the new lending to around or below replacement levels. Accordingly, net lending decreased during the period to £12,572 million compared to £13,102 million at the end of 2022.
Gross commercial lending made up the largest component of the reduction, decreasing 9% to £3,768 million from £4,160 million at 31 December 2022. This reflects the continued reduction in the professional buy-to-let portfolio and commercial real estate portfolios which reduced by 13% from £1,412 million to £1,234 million in the period. We also continue to see a reduction in government-backed lending, which are closed to new borrowers, as these loans are paid back, with balances reducing from £1,313 million as at 31 December 2022 to £1,109 million at the end of June 2023.
Gross consumer lending reduced to £1,410 million (£1,480 million at 31 December 2022) Whilst the Bank has not sought to build the consumer lending portfolio during the period, it remains an important product area through the cycle and we continue to build out the breadth of our offering including through the launch of a new motor finance proposition towards the end of 2022.
Gross mortgage balances also reduced slightly to £7,591 million from £7,649 million at 31 December 2022 as originations were kept broadly in line with repayments. Our retail mortgage portfolio continues to be primarily focused on owner occupied loans. These make up 72% of balances at 30 June 2023 (31 December 2022: 72%) and continue to have a low loan to value profile. We continue to progress our AIRB application in respect of our retail mortgages portfolio.
Property, plant & equipment and intangibles Non-current assets and intangible asset balances continued to decrease during the period as depreciation and amortisation charges exceeded the level of additions. Property plant and equipment ended the first half of the year at £733 million, down from £748 million at year end, as we did not open any additional stores in the period. Stores remain core to our service offering and we continue to evaluate a pipeline of sites to deliver on our commitment of 11 new stores in the North of England, which we expected to open in 2024 and 2025, expanding our reach into new markets.
Intangible assets also continued to decrease to £207 million from £216 million as at 31 December 2022, reflecting how we have reduced the levels of investment from the peaks during the turnaround period. Alongside key regulatory enhancement projects we have invested more recently in our deposit proposition as well as enhancing our core service offering, which includes the delivery of confirmation of payee which was launched in July 2023, enhanced business overdrafts which are delivered entirely electronically and the roll out of our new mortgage platform.
Capital Our return to profitability in the first half of the year combined with moderated asset origination, and therefore moderated RWA deployment, has seen us generate organic capital through the period. Risk weighted assets ended the period at £7,802 million, a reduction of 2% from £7,990 million as at 31 December 2022. The reduction has been driven by a decrease in lending volumes partly offset by an increase to our annual operational risk adjustment.
Table 3: Capital ratios and requirements
The MREL requirement of 16.7% reflects the reduction of our Pillar 2A requirements from 0.50% to 0.36%, from the 1 January 2023, and the decision by the Bank of England to set our binding MREL requirement as the lower of 18% and two times the sum of Pillar 1 and Pillar 2A, which were announced in June 2022.
On 5 July 2023 the scheduled increase in the CCyB came into effect, increasing the level from 1% to 2%. Accordingly, the Bank’s Tier 1 requirement, including the combined public buffers, increased from 9.8% to 10.8%. The Bank’s Tier 1 ratio as at 30 June 2023 (including profits) was 10.4% and we are therefore now operating within buffers for Tier 1 capital as well as MREL, however the Bank remains above all of its minimum capital requirements.
In May we completed the implementation of our holding company marking an important milestone in meeting our requirements in respect of the Bank of England’s resolution framework. Upon the implementation of the holding company our existing MREL debt moved up to sit within the new holding company entity. This consists of £350 million of 9.5% Senior Non preferred notes which have a call date on 8 October 2024. The Board continues to review our options, across the capital stack, to strengthen our capital base, including the refinancing of this MREL debt.
Our Tier 2 notes however have remained within the existing banking entity (Metro Bank PLC), although following the agreement by the Bank of England’s Resolution Directorate on 28 July 2023, these will continue to contribute to our MREL requirements up until their maturity on 26 June 2028. The Tier 2 notes had a call date during the first six months of the year and we took the decision not to exercise this. As a result the coupon on this instrument reset from 5.500% to 9.139%. By not calling the notes their Tier 2 eligibility will amortise over their remaining life at a rate of 20% each year, calculated on a daily basis. Following the insertion of the new holding company, these notes are also now subject to a haircut at the Group level.
Liquidity and wholesale funding We continue to maintain strong levels of liquidity. We ended 30 June 2023 with a Liquidity Coverage Ratio (LCR) of 214% (31 December 2022: 213%) which continues to be significantly in excess of the regulatory requirements of 100%.
We remain primarily deposit funded with our loan to deposit ratio at the 30 June 2023 being 81% (31 December 2022: 82%). Whilst we utilise wholesale funding in the form of the Bank of England’s Term Funding Scheme (TFSME) and repurchase agreements, these act as additional stable forms of funding and liquidity.
As at 30 June 2023 the Bank held £2,708 million in cash and balances at the Bank of England (31 December 2022: £1,956 million) with a further £5,315 million in high quality investment securities (31 December 2022: £5,914 million), which nearly all are AAA rated or are UK Gilts. Of our total investment securities £4,826 million, 91% are held at amortised cost (31 December 2022 £5,343 million; 90%). Given the rising rate environment the fair value of these securities is £4,502 million (31 December 2022: £5,009 million). As we have no intention to sell these securities, their fair value will pull back to carrying value as they approach maturity.
The weighted-average repricing duration on the portfolio (excluding cash) is 1.1 years and virtually all the securities are Bank of England eligible so are available for entering into repurchase agreements, should we need additional liquidity. The remaining £489 million of our investment securities are held at fair value and therefore market movements on these assets are already reflected in our reserves and capital ratios.
Going concern and outlook These condensed consolidated interim financial statements are prepared on a going concern basis, as the Directors are satisfied that the Group has the resources to continue to operate for a period of at least twelve months from when the interim financial statements are authorised for issue. In making this assessment, the Directors considered a wide range of information relating to present and future conditions, including future projections of profitability, liquidity and capital resources as well as factoring in the uncertainties relating to the economic and market outlook and future financing requirements.
Given the Bank’s year to date performance and taking account of the external environment, we reiterate the guidance that we are targeting mid-single digit return on tangible equity by 2024.
James Hopkinson Chief Financial Officer 31 July 2023
RISK review As at 30 June 2023, our business model, risk management framework and risk appetites remain consistent with our 2022 Annual Report and Accounts. The key risks we face (our ‘principal risks’) are unchanged:
We continue to actively monitor and regularly reassess our exposure to each of these risks, with particular focus on those that could result in events or circumstances that might harm our customers, threaten our business model, solvency or liquidity, and reputation. Top risks Our top risks are defined as risks which are considered to be the most material to the Bank with the potential for the greatest impact during the forthcoming 12 months and currently consist of:
Further information on our top and emerging risks are outlined below. Credit risk Credit portfolio performance has remained resilient during the first half of 2023 despite a challenging external environment for our customers. Notwithstanding the recent increases in market expectations for interest rates, the overall macroeconomic outlook has improved since the end of 2022. The overall impact of risk profile, credit performance and macroeconomic outlook has resulted in a cost of risk of 0.18% (six months to 31 December 22: 0.33%). Expected credit losses
Table 4: Expected credit loss allowances
ECL have increased during the year by £10 million to £197 million (31 December 2022: £187 million) predominantly driven by maturation of the consumer portfolio, offset by repayments in commercial and improvements in macroeconomic scenarios. As part of our ECL we continue to hold overlays to reflect the continued macroeconomic uncertainty given the high inflation and cost of living pressures as well as anticipated interest rate increases not fully captured in the latest macroeconomic scenarios and IFRS 9 models.
Non-performing loans
Table 5: Non-performing loans
NPLs increased to £365 million (31 December 2022: £352 million) with the overall NPL ratio increasing to 2.86% (31 December 2022: 2.65%). The NPL ratio for mortgages has increased to 1.83% (31 December 2022: 1.45%), driven largely by our legacy acquired mortgage portfolios. These portfolios were not written under our organic credit criteria, and we have seen poorer arrears performance, exacerbated in the recent period as these have on average poorer risk scores and are more likely to be on a variable rate. The NPL ratio for consumer customers has increased to 4.82% (31 December 2022: 3.38%) driven by the maturation of the RateSetter loans portfolio. The NPL ratio for Commercial has reduced to 4.19% (31 December 2022: 4.59%) driven by successful BBLS claims and repayments as well as the write-off of a small number of large commercial exposures. Cost of riskTable 6: Cost of risk and coverage ratios
The change in overall cost of risk is primarily driven by increased ECL for consumer lending (resulting from maturation of this portfolio) which now equates to 11% of our total lending (31 December 2022: 11%) and carries a higher cost of risk than retail mortgages and commercial. As at the 30 June 2023 our coverage ratio on our consumer lending portfolio stood at 6.60%, up from 5.07% as the year-end. The cost of risk for retail mortgages has remained flat. The cost of risk for commercial has reduced due to improvements in macroeconomic scenarios and repayments of a small number of large commercial exposures.
Stage 2 balancesStage 2 balances are identified using quantitative and qualitative tests that determine the significant increase in credit risk (SICR) criteria. In addition, customers that trigger the 30 days back stop classification are also reported in Stage 2, in line with IFRS 9 standards. Table 7: Stage 2 balances1
Stage 2 balances have decreased in the first half of 2023, with the quantitative SICR criteria continuing to be the primary driver and improvements in macroeconomic outlook resulting in customers no longer triggering SICR and transferring back to Stage 1. Marginal decreases in Stage 2 balances have also been observed in the qualitative and 30 days past due backstop criteria. As at 30 June 2023, 87% (31 December 2022: 88%) of Stage 2 balances triggered quantitative SICR criteria, 10% (31 December 2022: 9%) triggered qualitative SICR and the remaining 3% (31 December 2022: 3%) triggered the 30 days past due backstop criteria. Credit risk exposure by internal PD rating
Table 8: Credit risk exposure, by IFRS 9 12-month PD rating and stage allocation1
The migration observed across bandings, in particular band 1, is primarily driven by the improvement in macroeconomic scenarios feeding through the IFRS 9 models resulting in customers moving to lower PD bands. Retail mortgage lendingMortgage balances have been broadly stable in the first six months of 2023 at £7,591 million (31 December 2022: £7,649 million) with modest organic book growth offsetting the run-off of our back book portfolios. Despite the challenging economic environment, the credit performance of the portfolio during the first half of 2023 has remained broadly stable. Debt-to-value (DTV) has increased by 2% to 58% as at 30 June 2023 (31 December 2022: 56%) as a result of falling house prices. Early arrears cases (one to less than three months in arrears) have remained stable at 0.63% at 30 June 2023 (31 December 2022: 0.63%). Accounts that are three or more months in arrears have increased from 0.73% at 31 December 2022 to 0.91% at 30 June 2023, mainly driven by increases in arrears in the legacy acquired portfolios that are in run-off and have greater sensitivity to interest rate rises. Loan-to-value has been restricted to <=90% resulting in a small reduction in average loan-to-value for new lending (30 June 2023: 67%; 31 December 2022: 68%). Table 9: Residential mortgage lending by repayment type
Table 10: Retail mortgage lending by DTV banding
Table 11: Residential mortgage lending by geographic exposure
All of our loan exposures which are secured on property are secured on UK-based assets. Our current retail mortgages portfolio is concentrated within London and the South-East, which is representative of our original customer base and store footprint. Consumer lendingConsumer balances have reduced to £1,410 million as at 30 June 2023 (31 December 2022: £1,480 million). The portfolio is now comprised 95% of lending through the RateSetter brand, including £5 million in secured motor originations, with the remaining of the portfolio being £45 million of overdrafts and £23 million of credit cards. The performance of this portfolio is aligned with expectations with continual enhancements being performed in relation to the affordability and creditworthiness assessment in light of the economic environment. Increases in arrears and non-performing loans have been observed but are in line with the growth of the book as well as historical cohorts and our internal forecasts. The total ECL coverage position for consumer has increased to 6.6% as a result of the continued maturation of the portfolio and a post model overlay to reflect the uncertainty due to high inflation (31 December 2022: 5.1%). Commercial lendingOur commercial lending remains largely comprised of term loans secured against property and government supported lending. In addition, commercial lending includes facilities secured by other forms of collateral (such as debentures and guarantees) as well as asset and invoice financing. Our commercial balances have decreased from £4,160 million to £3,768 million in the first six months of 2023. This reflects the business strategy to reduce our professional buy to let and real estate lending, and run-offs in government supported lending. Our commercial real estate book covers property investment lending against both residential and commercial property, with repayment reliant on rental income from the underlying property. As at 30 June 2023 35% of the book is covered by residential property, 20% by retail property and 18% by offices. The average DTV for our commercial real estate loans is 45%, unchanged from 31 December 2022 (31 December 2022: 45%). Commercial customers are managed through an early warning categorisation where there are early signs of financial difficulty, thereby allowing timely engagement and appropriate corrective action to be taken. Early Warning categories support our IFRS 9 stage classification. Total lending in Early Warning categories has remained broadly flat since December 2022, However, some deterioration within early warning categories has been observed. Close customer management is key to identify issues and supporting our customers.
Table 12: Commercial term lending (exc. BBLS) by DTV banding
As of 30 June 2023, 75% of our commercial term lending (excluding BBLS) had a DTV of 80% or less (31 December 2022: 76%), reflecting the prudent risk appetite historically applied. Lending with DTV >100% includes loans which benefit from additional forms of collateral, such as debentures. The value of this additional collateral is not included in the DTV but does provide an additional level of credit risk mitigation. DTV >100% also includes government backed lending where the facility does not also benefit from property collateral. The decrease in DTV>100% in 2023 reflects a reduction in government backed lending.
Table 13: Commercial term lending (exc. BBLS) by industry exposure
We manage credit risk concentration to individual borrowing entities and sectors. Our credit risk appetite includes limits for individual sectors where we have higher levels of exposure. The sector profile for commercial term lending is broadly consistent with the position as at 31 December 2022. There has been an overall reduction in commercial real estate of 13%.
Table 14: Commercial term lending (exc. BBLS) by repayment type
Table 15: Commercial term lending (exc. BBLS) by geographic exposure
Capital risk Capital remains the largest constraint on the business as we continue to operate within our publicly disclosed MREL buffers and expect to continue to do so for a further period of time. Our return to profit in the first half of the year combined with a slight reduction in RWAs has seen us generate organic capital growth between 1 January and 30 June 2023. As a result we have seen increases across our regulatory ratios compared to 31 December 2022 except for total capital following the haircut to Tier 2 arising from implementation of our holding company in May. These increases are notwithstanding the step down of IFRS 9 transitional relief on 1 January 2023. Capital requirements We manage capital in accordance with prudential rules issued by the PRA and Financial Conduct Authority (FCA) and we are committed to maintaining a strong capital base, under both existing and future regulatory requirements. As at 30 June 2023 our CET1, Tier 1 and MREL requirements were 4.7%, 6.3% and 16.7%, respectively (excluding buffers). Further details of which can be found in the finance review section above. On 5 July 2023 the CCyB rate increased from 1% to 2%. The increase in the CCyB means we do not have sufficient CET1 resources to meet the Combined Buffer Requirement for Tier 1. This subjects the Bank to maximum distributable amount (MDA) restrictions in the PRA Rulebook, which limit the ability of the Bank to make certain payments, including dividends on ordinary shares and coupon payments on Additional Tier 1 instruments as well as other cash/bonus payments. As we do not currently have any AT1-eligible instruments and have no imminent plans to make dividend payments on our ordinary shares there are minimal implications resulting from this, other than it acting as a limit on the level of variable remuneration we can pay colleagues. As set out in the finance review section, in May 2023, we implemented our new holding company, Metro Bank Holdings PLC, which became the new listed entity in order to meet the Bank of England’s resolution requirements of having a single point of entry for the purposes of resolution. There are no changes to our capital requirements as a result of the holding company insertion other than that our main capital requirements will now be monitored at the new Group level. As Metro Bank Holdings PLC is a clean holding company, it will primarily hold the Group’s external debt and equity and as such there are limited impacts from its insertion, although the Tier 2 resources which continue to be held at the level of Metro Bank PLC are now subject to a haircut at the level of the Group. As part of the holding company insertion we undertook a process to create distributable reserves within both Metro Bank PLC and Metro Bank Holdings PLC in line with the Companies Act 2006. The creation of distributable reserves will allow us to issue and pay dividends on instruments including AT1 in the future (providing the MDA restrictions do not apply at the point of payment). Risk-weighted assets Risk weighted assets ended the period at £7,802 million down from £7,990 million as at 31 December 2022. The reduction has been driven by a decrease in lending volumes partly offset by an increase to our annual operational risk adjustment. The increase in base rates over the period has allowed us to redeploy capital into low risk-weighted investment securities and zero risk-weighted deposits at the Bank of England. These provide a strong return on regulatory capital, especially given limited capital availability, which constrains our ability to increase lending on less risk weight efficient assets. We continue to progress our AIRB application in respect of our retail mortgages. We are also continuing to work through the implications of the implementation of Basel 3.1 on which the PRA published its consultation at the end of November 2022.
Capital resources
Table 16: Capital resources
1. Retained earnings as at 30 June 2023 includes the profit of £12.7 million for the first half of the year. As at 30 June 2023 our total regulatory capital stood at £1,030 million down from £1,069 million as at 31 December 2022, as the profits for the first six months of the year were offset by a step down in the IFRS 9 transitional relief on the 1 January 2023. The continued accumulation of profit will allow us to accrete capital going forward. We also plan to access the capital markets, as and when conditions allow, to allow us to exit our regulatory buffers as well as provide additional growth capital. Financial crime risk Metro Bank maintains its low appetite for customer relationships or activity that poses a high financial crime risk and has no appetite for customer relationships or activity that violate our sanctions obligations. We continue to invest in our systems and controls as part of ongoing efforts to embed the Financial Crime Framework throughout the bank. This includes activity to manage our ongoing sanctions compliance associated with the conflict in Ukraine. The skills and capability of our colleagues to prevent and detect financial crime continues to be a key focus, with formal training delivered to all colleagues and robust consequence management measures in place. Regulatory risk Progress continues to be made on key regulatory initiatives, including embedding customer-centric enhancements in response to the new Consumer Duty requirements and other key developments including Basel 3.1 and the revised UK Corporate Governance Code. Our risk appetite remains unchanged and subject to active oversight through targeted risk metrics that are calibrated to reflect regulatory priorities. The bank’s regulatory risk framework and supporting policies have been revalidated and we continue to maintain coordinated and proactive engagement with our key regulators. Technology risk We continue to invest and improve our key technology capabilities that underpin the bank’s customer service proposition and maintain our operational resilience. The bank’s technology estate is continuously reviewed to ensure it remains fit for purpose and the first half of the year has included prioritisation of required updates, risk and performance reviews of our material third party technology providers and independent assessment of our technology resilience. We continue to patch and upgrade our systems and platforms and keep an open dialogue with our regulators on actual or potential disruption events. Emerging risks We consider emerging risks to be evolving threats which cannot yet be fully quantified, with the potential to significantly impact our strategy, financial performance, operational resilience and/or reputation. We keep our emerging risks under review, informed by a horizon scanning process, with escalation and reporting to the Risk Oversight Committee and Board as necessary. The emerging risks reported in our 2022 Annual Report and Accounts have been updated below, many of which are components of our principal risks, reflecting the rapidly evolving risk landscape and therefore level of future uncertainties. For example, ongoing Cyber Risk is managed closely as a subset of Operational Risk on a day-to-day basis. As anticipated, the macroeconomic and geopolitical environment has been challenging through the first half of 2023 and this is forecast to continue for the remainder of the year. Rising interest rates are placing pressure on household finances and inflation remains high. Considered as part of Technological Change, artificial intelligence has been included as an emerging risk to be monitored in light of the speed at which the threats and opportunities it offers are progressing.
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
The Directors confirm to the best of their knowledge these condensed interim financial statements have been prepared in accordance with UK adopted International Accounting Standard 34, ‘Interim Financial Reporting’ giving a true and fair view of the assets, liabilities, financial position and profit or loss as and as required by DTR 4.2.7R and DTR 4.2.8R, namely:
Signed on its behalf by:
Daniel Frumkin James Hopkinson Robert Sharpe Chief Executive Officer Chief Financial Officer Chair
Independent review report to Metro Bank Holdings PLC Report on the condensed consolidated interim financial statements Our conclusion We have reviewed Metro Bank Holdings PLC’s condensed consolidated interim financial statements (the “interim financial statements”) in the interim report of Metro Bank Holdings PLC for the 6 month period ended 30 June 2023 (the “period”).
Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with UK adopted International Accounting Standard 34, 'Interim Financial Reporting' and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom’s Financial Conduct Authority.
The interim financial statements comprise:
The interim financial statements included in the interim report of Metro Bank Holdings PLC have been prepared in accordance with UK adopted International Accounting Standard 34, 'Interim Financial Reporting' and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom’s Financial Conduct Authority.
Basis for conclusion We conducted our review in accordance with International Standard on Review Engagements (UK) 2410, ‘Review of Interim Financial Information Performed by the Independent Auditor of the Entity’ issued by the Financial Reporting Council for use in the United Kingdom (“ISRE (UK) 2410”). A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.
A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim financial statements.
Conclusions relating to going concern Based on our review procedures, which are less extensive than those performed in an audit as described in the Basis for conclusion section of this report, nothing has come to our attention to suggest that the directors have inappropriately adopted the going concern basis of accounting or that the directors have identified material uncertainties relating to going concern that are not appropriately disclosed. This conclusion is based on the review procedures performed in accordance with ISRE (UK) 2410. However, future events or conditions may cause the group to cease to continue as a going concern.
Responsibilities for the interim financial statements and the review Our responsibilities and those of the directors The interim report, including the interim financial statements, is the responsibility of, and has been approved by the directors. The directors are responsible for preparing the interim report in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom’s Financial Conduct Authority. In preparing the interim report, including the interim financial statements, the directors are responsible for assessing the group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or to cease operations, or have no realistic alternative but to do so.
Our responsibility is to express a conclusion on the interim financial statements in the interim report based on our review. Our conclusion, including our Conclusions relating to going concern, is based on procedures that are less extensive than audit procedures, as described in the Basis for conclusion paragraph of this report. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom’s Financial Conduct Authority and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
PricewaterhouseCoopers LLP Chartered Accountants London 31 July 2023
CONDENSED Consolidated statement of comprehensive income (unaudited) For the half year to 30 June 2023
The accompanying notes form an integral part of these condensed consolidated interim financial statements. CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) As at 30 June 2023
The accompanying notes form an integral part of these condensed consolidated interim financial statements. These condensed consolidated interim financial statements were approved and authorised for issue by the Board of Directors on 31 July 2023 and were signed on its behalf by:
Daniel Frumkin James Hopkinson Robert Sharpe Chief Executive Officer Chief Financial Officer Chair
CONDENSED CONSOLIDATED CASH FLOW STATEMENT (UNAUDITED) For the half year to 30 June 2023
Non-cash items The table below sets out the non-cash items included in profit/(loss) before tax which been adjusted for in the cash flow statements above.
The accompanying notes form an integral part of these condensed consolidated interim financial statements. CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED) For the half year to 30 June 2023
The accompanying notes form an integral part of these condensed consolidated interim financial statements.
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of preparation and accounting policies1.1 General informationMetro Bank Holdings PLC ("our" or "we") is the holding company of Metro Bank PLC, which provides retail and commercial banking services in the UK. Metro Bank Holdings PLC is a public limited liability company incorporated and domiciled in England and Wales and is listed on the London Stock Exchange (LON:MTRO). The address of its registered office is: One Southampton Row London WC1B 5HA. 1.2 Basis of preparationThe condensed consolidated interim financial statements of Metro Bank Holdings PLC and its subsidiaries for the half year ended 30 June 2023 were authorised for issue in accordance with a resolution of the Directors on 31 July 2023. These condensed consolidated interim financial statements for the six months ended 30 June 2023 have been prepared in accordance with UK adopted International Accounting Standards (IAS 34 ‘Interim Financial Reporting’) and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom’s Financial Conduct Authority. The comparative financial information as at and for the periods ending 31 December 2022 and 30 June 2022 do not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for the year ended 31 December 2022 has been delivered to the Registrar of Companies. These accounts are for Metro Bank PLC, the former listed entity and ultimate parent company of the Group up until 19 May 2023. The auditor’s report on those accounts was not qualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report and did not contain statements under section 498(2) or (3) of the Companies Act 2006. Insertion of Metro Bank Holdings PLCTo meet Bank of England’s resolution requirements, on 19 May 2023, Metro Bank Holdings PLC was inserted as the new ultimate holding company and listed entity of the Group. Prior to this date Metro Bank PLC was both a banking entity and the ultimate parent company of the Group, but has subsequently become a 100% subsidiary of Metro Bank Holdings PLC. In addition to the insertion of a new holding company the Group undertook a reduction in capital to provide the Group with distributable reserves. The insertion of Metro Bank Holdings PLC has been treated as a business combination under common control, with the Group controlled by the same parties both before and after the insertion. Combinations under common control are outside the scope of IFRS 3 ‘Business Combinations’ and accordingly, the insertion has not been recognised at fair value and no goodwill or fair value acquisition adjustments have been recognised. The Group has instead applied predecessor accounting approach as this most faithfully represents the substance of the facts and circumstances of the series of transactions that comprise the insertion of Metro Bank Holdings PLC. This is on the basis that those transactions are not designed to deliver economic benefits, but represent a re-arrangement of the organisation of business activities across legal entities in order to be compliant with the relevant regulations. In applying this approach, the Group has used the carrying amounts in Metro Bank PLC’s consolidated financial statements at the date of transfer to determine the value of the assets and liabilities transferred. These financial statements are therefore prepared as if Metro Bank Holdings PLC had been the parent company throughout the current and prior years, to treat the new structure as if it has always been in place. Hedge accounting continues to be applied to the transferred designated hedge relationships as if they have originally been designated by the Group. Further details on the insertion of Metro Bank Holdings PLC can be found in note 12. Going concern
The Directors have adopted the going concern basis in preparing these condensed consolidated interim financial statements. This assessment has been reached after assessing our principal risks, which remain unchanged from those disclosed in the risk report of the 2022 Annual Report and Accounts. As with the assessment undertaken at the year end the Directors placed additional consideration of the risk that we may have insufficient capital given that we continue to utilise regulatory buffers.
In reaching their conclusion the Directors considered the performance over the period against our Long-Term Plan as well as the continued delivery of our strategy, an update on which is provided within the Business Review section of this report. As part of their assessment the Directors have considered a wide range of information relating to present and future conditions, including projected future profitability, and capital resources and requirements as well as liquidity. The Directors have prepared a 'severe but plausible' downside scenario which involves a significant deterioration in the economy and deposit outflows over a period of 12 months from the date of this report. In this scenario we fell below regulatory minima during the period at a total regulatory capital plus MREL level, prior to any assumed actions that could be taken. The Directors considered the actions that could reasonably be deployed should such a scenario materialise. This involved making reasonable adjustments to our operating plans. While these mitigating actions did not in of themselves constitute any additional risk, they would involve us operating in our capital buffers for longer than envisaged. These actions centred around cost reductions, reducing lending origination as well as not seeking to raise any further regulatory capital.
The Directors believe the Group to remain a going concern and has sufficient resources to be able to continue to operate for a period of at least 12 months from when the interim financial statements are authorised for issue. They have also concluded that there are no material uncertainties that could cast significant doubt over this assessment. Although outside the going concern period of assessment, the Directors have also considered the refinancing of our £350 million senior non preferred note issuance which is MREL eligible and which has a call date in October 2024. In order to continue to meet its minimum capital requirements we will need to refinance this debt. The Directors consider this refinancing to be achievable at a satisfactory cost based on the Long-Term Plan and as such concluded this does not pose an additional risk to going concern. Operating segments We provide retail and commercial banking services. The Board considers the results of the Group as a whole when assessing the performance of the business and allocating resources. Accordingly, we have only a single operating segment. We operate solely in the UK and as such no geographical analysis is required. Accounting policies The accounting policies applied in these condensed consolidated interim financial statements are the same as those applied in the Group’s consolidated financial statements as at and for the year ended 31 December 2022. 1.3 Future accounting developmentsThere are no known future accounting developments that are likely to have a material impact on the Group. 1.4 Critical accounting judgementsIn our 2022 Annual Report and Accounts we identified the following critical accounting judgements:
No new critical accounting judgements have been identified during the period. Measurement of the expected credit loss allowance -significant increase in credit risk IFRS 9 ‘Financial Instruments’ requires accounts to be allocated into one of three stages. Stage 3 reflects accounts in default. Stage 2 are the accounts which have shown a significant increase in credit risk since origination (SICR), and Stage 1 is everything else. IFRS 9 requires a higher level of ECL to be recognised for underperforming loans. For loans in Stage 2 and Stage 3 a lifetime ECL is recognised compared to a 12-month ECL for performing loans (Stage 1).
Judgement is required to determine when a significant increase in credit risk has occurred. An assessment of whether credit risk has increased significantly since initial recognition is performed at each reporting period by considering the change in the probability of default (PD) over the remaining life of the financial instrument.
The assessment for a retail financial instrument compares the PD occurring at the reporting date to that at initial recognition, considering reasonable and supportable information, including information about past events, current conditions, and future economic conditions.
The assessment for a commercial financial instrument is based on quantitative and qualitative assessment, including current and forecast financial performance, future economic conditions, and our internal credit risk rating grade.
In light of the above-described classification, our stage allocation criteria must include:
There are three main criteria driving the SICR assessment identified as follows:
There are additional SICR rules utilised across portfolios. These rules, as well as more granular detail of both quantitative and qualitative criteria, are captured within the IFRS 9 model methodology and are approved as part of the annual model review process at Model Governance and Model Oversight Committees. The low credit risk exemption allowed under IFRS 9 has not been applied across the retail mortgage or consumer portfolios to identify SICR. Measurement of the expected credit loss allowance - use of post model adjustments and post model overlays We have applied Post Model Adjustments (PMAs) and Post Model Overlays (PMOs) in the assessment of ECL. PMAs supplement the models to account for where there are limitations in model methodology or data inputs and PMOs accounts for downsides risks which are not fully captured through the economic scenarios. The appropriateness of PMAs and PMOs is subject to rigorous review and challenge, including review by our Model Governance, Impairment Committee and Audit Committee.
PMAs and PMOs are defined as follows: Post model adjustments refer to increases/decreases in ECL to address known model limitations, either in model methodology or model inputs. These rely on analysis of model inputs and parameters to determine the change required to improve model accuracy. These may be applied at an aggregated level however, they will usually be applied at account level. Post model overlays reflect management judgement. These rely more heavily on expert judgement and will usually be applied at an aggregated level. For example, where recent changes in market and economic conditions have not yet been captured in the macroeconomic factor inputs to models (e.g., industry specific stress event).
Given the ongoing economic uncertainty we continue to maintain conservative levels of PMOs. The level of PMAs and PMOs has reduced during 2023 with the total percentage of ECL stock comprised of PMAs and PMOs reducing to 12% as at 30 June 2023 (31 December 2022: 17%).
PMAs totalling (£2.0 million) were in place as at 30 June 2023 (31 December 2022: £0.4 million). These negative PMAs are held in anticipation of IFRS 9 commercial models planned for implementation in the second half of 2023:
PMOs have been reassessed during the period to ensure an appropriate level of ECL to account for the high level of macroeconomic uncertainty, following the high inflation environment and cost of living pressures, and anticipated property price falls further exacerbated by the expected base rate increases. PMOs made up £26.1 million of the ECL stock as at 30 June 2023 (31 December 2022: £30.5 million) and comprised:
1.5 Critical accounting estimatesIn our 2022 Annual Report and Accounts we identified the following critical accounting estimate:
No new critical accounting estimates have been identified during the period. Measurement of the expected credit loss allowance - Multiple forward-looking macroeconomic scenarios The ECL recognised in the financial statements reflects the effect on expected credit losses of a range of possible outcomes, calculated on a probability-weighted basis, based on a number of economic scenarios, and including management overlays where required. These scenarios are representative of our view of forecasted economic conditions, sufficient to calculate unbiased ECL, and are designed to capture material ‘non-linearities’ (i.e., where the increase in credit losses if conditions deteriorate, exceeds the decrease in credit losses if conditions improve). In line with our approved IFRS 9 models, macroeconomic scenarios provided by Moody’s Analytics are used in the assessment of provisions. The use of an independent supplier for the provision of scenarios helps to ensure that the estimates are unbiased. The macroeconomic scenarios are assessed and reviewed monthly to ensure appropriateness and relevance to the ECL calculation. The selection of scenarios and the appropriate weighting to apply are considered and discussed internally and proposed recommendations for use in the IFRS 9 models are made to the monthly Impairment Committee (designated Executive Risk Committee for impairments) for formal approval. Our credit risk models are subject to internal model governance including independent validation. We undertake annual model reviews and have regular model performance monitoring in place. The impairment provisions recognised during the year reflect our best estimate of the level of provisions required for future credit losses as calibrated under our conservative weighted economic assumptions and following the application of expert credit risk judgement overlays. Scenarios and probability weights used as at 30 June 2023 are as follows are as follows:
The macroeconomic scenarios reflect the current macroeconomic environment as follows:
A wide range of potential economic variables have been considered in our ECL models, representing drivers of credit losses on our lending portfolios. Statistical methods are used to choose the subset of drivers which have the greatest significance and predictive fit to our data. This includes variables which impact GDP, unemployment, interest rates, inflation, stock prices, borrower income and the UK housing market.
1. We have applied a further stress to the five year mortgage rate, house price index and commercial real estate index on top of the independent forecasts received to account for economic uncertainty.
The base case macroeconomic outlook throughout 2023 reflects the inflationary and cost of living pressures resulting in higher interest rate and recessionary environment, which have been exacerbated by the latest base rate increase. Monthly reductions in property prices have begun to be observed, although the annual growth rate is still positive, and the labour market remains tight with low unemployment. Key assumptions underpinning the baseline June 2023 scenarios:
The following variables are the key drivers of ECL:
We have also assessed the IFRS 9 ECL sensitivity impact at a total portfolio level, by applying a 100% weighting to each of the four chosen scenarios.
We note that the sensitivities disclosed above represent example scenarios and may not represent actual scenarios which occur in the future. If one of these scenarios did arise then at that time the ECL would not equal the amount disclosed above, as the amounts disclosed do not take account of the alternative possible scenarios which would be considered at that time. We also note that the sensitivities disclosed above do not consider movements in impairment stage allocations that would result under the different scenarios.
Interest income
Interest expense
3. General operating expenses
4. People costs
5. TaxationTax expense for the period
Reconciliation of the total tax expense
Effective tax rate The effective tax rate for the period is 17.3% (half year to 31 December 2022: (4.8%); half year to 30 June 2022 (2.4%)) This has been calculated by applying the effective tax rate which is expected to apply to the Group for the six months ended 30 June 2023 using rates substantively enacted by 30 June 2023 as required by IAS 34 'Interim Financial Reporting'.
Effect of changes in tax rates This relates to the remeasurement of deferred tax balances following a change to the main UK corporation tax rate.
An increase in the UK corporation rate from 19% to 25% for taxable profits over £250,000 (effective 1 April 2023) was substantively enacted on 24 May 2021.
Losses for which no deferred tax asset has been recognised The tax effected value of current year losses for which no deferred tax asset has been recognised is £nil (31 December 2022: £11.7 million; 30 June 2022: £11.5 million). Deferred tax A deferred tax asset must be regarded as recoverable and therefore recognised only when, on the basis of all available evidence, it can be regarded as more likely than not there will be suitable tax profits from which the future of the underlying timing differences can be deducted.
Unrecognised deferred tax assets We have total unused tax losses of £896 million for which a deferred tax asset of £212 million has not been recognised. The impact of recognising the deferred tax asset in the future would be material. Although there is an expectation for profits in the near future, the tax benefits would be spread over a number of years. In addition, the 50% corporate loss restriction in place extends the timeline over which we can offset losses against future profits. This will be reassessed for the year ending 31 December 2023 in light of actual performance against management forecasts and prevailing market conditions. There is no time limit beyond which these losses expire. 6. Loans and advances to customers
Loans and advances to customers by category
Credit risk exposures Retail mortgages
Consumer lending
Commercial lending
Total lending
Loss allowance Retail mortgages
Consumer lending
Commercial lending
Total lending
7. Property, plant and equipment
8. Intangible assets
9. Deposits from Customers
10. Debt securities
During the first six months of the year we took the decision not to call our Fixed Rate Reset Callable Subordinated Notes (the ‘Notes’) issued by Metro Bank PLC, which had a call date on 26 June 2023. As a result, the interest rate on the Notes reset from 5.500% to 9.139%. In December 2022 the Bank of England’s Resolution Directorate agreed to provide a temporary, time-limited, adjustment for the Notes with respect to MREL eligibility until 26 June 2025. This came into effect upon the implementation of our holding company on 19 May 2023. The adjustment permitted the Notes to remain eligible to count towards our MREL requirement until 26 June 2025. On 28 July 2023 the Bank of England’s Resolution Directorate agreed to a further extension, permitting the Notes to remain eligible to count towards our MREL requirement until their maturity date on 26 June 2028. The eligibility of the Notes for Tier 2 capital will amortise over the final five years of their term to maturity. 11. Lease liabilities
12. Share capitalAs at 30 June 2023 we had 172.6 million ordinary shares of 0.0001 pence (31 December 2022: 172.4 million, 30 June 2022: 172.4 million) in issue. Called up ordinary share capital (issued and fully paid)
Share premium
Redeemable preference shares In addition to the share capital set out above Metro Bank Holdings PLC has £50,000 of redeemable preference shares which were issued to Robert Sharpe (Chair) and Daniel Frumkin (Chief Executive Officer) upon the initial incorporation of the legal entity on 29 September 2022. These shares are in the process of being redeemed. New holding company As set out in note 1, on 19 May 2023, Metro Bank Holdings PLC became the listed entity and new holding company of Metro Bank PLC. As part of the insertion of Metro Bank Holdings PLC, the existing listed share capital and share premium of Metro Bank PLC was cancelled and the share capital and share premium amounts transferred to retained earnings. Metro Bank PLC subsequently issued the same number of new unlisted 0.0001p ordinary shares to Metro Bank Holdings PLC. Each existing holder of Metro Bank PLC share was issued with an equivalent number of new shares in Metro Bank Holdings PLC, with the nominal value of 0.0001p, as part of a share for share exchange. The difference between the new nominal share capital in Metro Bank Holdings PLC and the net assets of Metro Bank PLC was recognised in a merger reserve. This merger reserve was capitalised through the allotment of 964,505,616 million special shares of 0.0001p each, which were then subsequently reduced to provide the Metro Bank Holdings PLC with distributable reserves. As at 30 June 2023 all of Metro Bank Holdings PLC’s retained earnings are distributable other than £50,000 which it is required to retain as a publicly listed company.
13. Earnings per shareBasic earnings per share (EPS) is calculated by dividing the profit/(loss) attributable to our ordinary equity holders by the weighted average number of ordinary shares in issue during the period. Diluted EPS has been calculated by dividing the profit/(loss) attributable to our ordinary equity holders by the weighted average number of ordinary shares in issue during the year plus the weighted average number of ordinary shares that would be issued on the conversion to shares of options granted to colleagues. As we were loss making during the six months periods to 31 December 2022 and 30 June 2022, the share options would be antidilutive, as they would reduce the loss per share. Therefore, all the outstanding options have been disregarded in the calculation of dilutive EPS for these periods.
14. Fair value of financial instruments
Cash and balances with the Bank of England, trade and other receivables, trade and other payables, assets classified as held for sale and other assets and liabilities which meet the definition of financial instruments are not included in the tables. Their carrying amount is a reasonable approximation of fair value.
An inverse relationship exists between interest rates and fair value and therefore as base rates have continued to rise this has seen the fair value of our fixed-rate financial instruments continue to remain below their carrying amount. As these financial instruments approach maturity their fair value will pull back to their carrying value.
The significant majority of our investment securities held at amortised cost are Bank of England eligible so are available for entering into repurchase agreements, should we need additional liquidity. The remainder of our investment securities are held at fair value and therefore market movements on these assets are already reflected in our reserves and capital ratios.
Information on how fair values are calculated is explained below.
Loans and advances to customers Fair value is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the balance sheet date, adjusted for future credit losses and prepayments, if considered material.
Investment securities The fair value of investment securities is based on either observed market prices for those securities that have an active trading market (Level 1 assets), or using observable inputs (in the case of Level 2 assets).
Financial assets held at fair value through profit and loss The financial assets at fair value through profit and loss relate to the loans and advances previously assumed by the RateSetter provision fund.
Deposits from customers Fair values are estimated using discounted cash flows, applying current rates offered for deposits of similar remaining maturities. The fair value of a deposit repayable on demand is approximated by its carrying value.
Debt securities Fair values are determined using the quoted market price at the balance sheet date. Whilst previously classified as a Level 1 instrument, as at 30 June 2023 this was reclassified as a Level 3 instrument due to low trading volumes on these instruments. Deposits from central banks/repurchase agreements Fair values approximate carrying amounts as their balances are generally short-dated. Derivative financial assets and liabilities 15. Legal proceedings and regulatory mattersAs part of the normal course of business we are subject to legal and regulatory matters. The matters outlined below represent contingent liabilities and as such at the reporting date no provision has been made for any of these cases within the financial statements. This is because, based on the facts currently known, it is not practicable to predict the outcome, if any, of these matters or reliably estimate any financial impact. Their inclusion does not constitute any admission of wrongdoing or legal liability. Financial Crime The FCA is currently undertaking enquiries regarding our financial crime systems and controls. We continue to engage and co-operate fully with the FCA in relation to these matters. Magic Money Machine litigation In 2022 Arkeyo LLC, a software company based in the United States, filed a civil suit with a stated value of over £24 million against us in the English High Court alleging, among other matters, that we infringed their copyright and misappropriated their trade secrets relating to money counting machines (i.e. our Magic Money Machines). We believe Arkeyo LLC’s claims are without merit and are vigorously defending the claim. 16. Post balance sheet eventsTier 2 MREL eligibility As set out in Note 10, on 28 July 2023 the Bank of England’s Resolution Directorate agreed to a further extension to the pre-existing adjustment with respect to our £250 million 9.139% Tier 2 Notes regarding their MREL eligibility. The adjustment permits the Tier 2 Notes to remain eligible to count towards our MREL requirement until their maturity date of 26 June 2028. Their eligibility as Tier 2 regulatory capital will continue to amortise from the call date (26 June 2023) over their remaining life. Early repayment of TFSME On 28 and 31 July we made early repayments totalling £550 million to the Bank of England in respect of amounts we had drawn down under TFSME. The repayment was financed using long-dated repurchase agreements. Following these repayments, the amount remaining due under the scheme total £3,250 million. These will mature in 2025 and 2027 in the amounts of £1,860 million and £1,390 million respectively. There have been no other material post balance sheet events.
END OF the condensed consolidated interim financial statements
ALTERNATIVE PERFORMANCE MEASURES (UNAUDITED) In the reporting of financial information, we use certain measures that are not required under IFRS, the Generally Accepted Accounting Principles under which we report. These measures are consistent with those used by management to assess underlying performance. These alternative performance measures have been defined below, where a measure relates to a half year any financial statement lines marked with an * have been annualised in the calculation. Cost of deposits Interest expense on customer deposits divided by the average deposits from customers for the period.
Cost of risk Expected credit loss expense divided by average gross loans.
Coverage ratio Expected credit losses as a percentage of gross loans.
Loan-to-deposit ratio Net loans and advances to customers expressed as a percentage of total deposits as at the period end.
Net-interest margin Net interest income as a percentage of average interest–earning assets.
Non-performing loan ratio Gross balance of loans in stage 3 (non–performing loans) as a percentage of gross loans as at period end.
Statutory cost:income ratio Statutory total operating expenses as a percentage of statutory total income.
Underlying cost:income ratio Underlying total operating expenses as a percentage of underlying total income.
Underlying profit/(loss) Underlying profit/(loss) represents an adjusted measure, excluding the effect of certain items that are considered to distort period-on-period comparisons, in order to provide readers with a better and more relevant understanding of the underlying trends in the business.
Metro Bank Holdings PLC Registered number 14387040 (England and Wales)
Registered office One Southampton Row London WC1B 5HA
metrobankonline.co.uk
Dissemination of a Regulatory Announcement, transmitted by EQS Group. The issuer is solely responsible for the content of this announcement. |
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| ISIN: | GB00BMX3W479 |
| Category Code: | IR |
| TIDM: | MTRO |
| LEI Code: | 984500CDDEAD6C2EDQ64 |
| OAM Categories: | 1.2. Half yearly financial reports and audit reports/limited reviews |
| Sequence No.: | 261360 |
| EQS News ID: | 1692473 |
| End of Announcement | EQS News Service |
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