Interim results for half year ended 30 June 2020

RNS Number : 1897V
Metro Bank PLC
05 August 2020
 

 

Metro Bank PLC

Interim results

Trading Update H1 2020

5 August 2020

 

 

Metro Bank PLC (LSE: MTRO LN)

 

Interim results for half year ended 30 June 2020

 

Highlights

· Supporting customers, communities and colleagues through COVID-19

· Extended over £1 billion of government-backed business loans to date

· Deposit growth of 8% from 31 December 2019 and 14% YoY  

· Improving deposit mix with 73% from retail (exc. partnerships) and SME customers

· Operationally on track with the transformation plan

· F inancial performance impacted by COVID-19

· RateSetter acquisition accelerates rebalancing of lending mix

 

Summary

·

Supported customers, communities and colleagues during COVID-19, demonstrating that community banking has never been more relevant.

·

Transformation plan is on track, but financial performance impacted by COVID-19.

·

Underlying loss before tax of £ 183.4 million (H1 2019: £13.6 million profit), including c.£109 million of impact from COVID-19, equivalent to 60% of the loss, comprising £97 million COVID-19 ECL expense and lower transaction fee income.

·

Statutory loss before tax of £ 240.6 million (H1 2019: £3.4 million profit) reflecting the underlying loss and a number of one off items including the exit from a central London office and remediation costs.

·

8% growth in deposits from 31 December 2019 and 14% from H1 2019 to £ 15.6 billion (2019: £14.5 billion), with strong growth in non-interest bearing accounts and improving mix, with 73% (H1 2019: 63%) from retail (excluding partnerships) and SME customers.

·

'Run the Bank' cost growth contained at 2% whilst absorbing the cost of six store openings, the People-People advertising campaign and COVID-19 related costs.

·

Strong capital position with Common Equity Tier 1 (CET1) ratio of 14.5% (31 December 2019: 15.6%). Total Capital plus MREL of 21.3% (31 December 2019: 22.1%) exceeds regulatory minimum of 20.5%.

·

Continued to attract new customers , reaching 2.1 million customer accounts (2019: 2.0 million).

·

RateSetter acquisition accelerates rebalancing of lending mix towards unsecured lending , with a strong technology platform and a highly experienced team.

·

Strong liquidity position , LCR at 226% and c.£6.7bn of monetisable liquidity with c.£2.8 billion in cash.

·

Strengthened the Board and Executive Committee including appointment of Robert Sharpe as Chairman effective 1 November.

·

Given the uncertainty caused by the pandemic in the medium term, it is too early to establish if there is any impact on the 2024 financial targets.

·

The strategic plan is still appropriate and supports the Bank's ambition to be the UK's best community bank.

 

Key Financials:

 

£ in millions

30

June

2020

30

June

2019

Change from

H1 2019

31

December

2019

Change from

H2 2019

 

 

 

 

 

 

Assets

£22,134

£21,357

4%

£21,400

3%

Loans

£14,857

£14,989

(1%)

£14,681

1%

Deposits

£15,577

£13,703

14%

£14,477

8%

Loan to deposit ratio

95%

109%

(14pps)

101%

(6pps)

 

 

 

 

 

 

CET1 capital ratio

14.5%

15.8%

(130bps)

15.6%

(110bps)

Total capital ratio (TCR)

17.3%

18.4%

(110bps)

18.3%

(100bps)

TCR plus MREL

21.3%

-

-

22.1%

(80bps)

Liquidity coverage ratio

226%

163%

63pps

197%

29pps

 

 

£ in millions

H1

 2020

H1

 2019

Change from

H1 2019

H2

 2019

Change from

H2 2019

 

 

 

 

 

 

Total underlying revenue1

£153.3

£216.7

(29%)

£183.4

(17%)

Underlying (loss)/profit before tax 2

(£183.4)

£13.6

 

(£25.1)

 

Statutory (loss)/profit before tax

(£240.6)

£3.4

 

(£134.2)

 

Net interest margin

1.15%

1.62%

(47bps)

1.40%

(25bps)

 

 

 

 

 

 

Underlying EPS- basic

(108.8p)

8.1p

 

(14.9p)

 

Underlying EPS- diluted

(108.8p)

8.1p

 

(14.9p)

 

 

1.  Underlying revenue excludes amounts relating the Capability & Innovation fund

2.  Underlying (loss)/profit before tax excludes the FSCS levy, Listing Share Awards, impairment and write-off of property, plant & equipment (PPE) and intangible assets, net BCR costs, transformation costs and remediation costs. Statutory (loss)/profit after tax is included in the Profit and Loss Account.

 

Daniel Frumkin, Chief Executive Officer at Metro Bank, said:

"These have been testing times but I'm very proud of the way Metro Bank has demonstrated the benefits of its community banking model, with our colleagues stepping up to support our customers and the local communities we serve. We entered 2020 at the start of our transformation journey, and while the pandemic has weighed heavily on our financial performance, we've made early progress delivering against the strategic priorities set out in February. We've opened six new stores, continued to grow our number of customer accounts, built a new lending platform to deliver Bounce Back Loans, and announced the acquisition of RateSetter which will help us meet more customer needs through unsecured lending, whilst also demonstrating cost discipline.

"Our ambition to become the UK's best community bank has never been more important and I'm confident we can build on this progress in the second half of the year."   

A presentation for investors and analysts will be held at 08:30 (UK Time) on 5 August 2020.

The presentation will be webcast on:

https://onlinexperiences.com/Launch/QReg/ShowUUID=0F0C2D46-15F6-4924-B29B-92FCD064A2E0

 

For those wishing to dial-in:

From the UK dial: +44 3333000804

From the US dial: +1 6319131422

Participant Pin: 22063918#

URL for other international dial in numbers: 

https://events-ftp.arkadin.com/ev/docs/NE_W2_TF_Events_International_Access_List.pdf

 

Financial performance for the half year ended 30 June 2020

 

Deposits

£ in millions

30

June

2020

30

June

2019

Change from

HY 19

31

December

2019

Change from

FY 19

 

 

 

 

 

 

Demand: current accounts

£5,274

£4,305

23%

£4,278

23%

Demand: savings accounts

£5,982

£5,509

9%

£5,593

7%

Fixed term: savings accounts

£4,321

£3,889

11%

£4,606

(6%)

Deposits from customers

£15,577

£13,703

14%

£14,477

8%

 

 

 

 

 

 

Deposits from customers includes:

 

 

 

 

Retail customers (excl. retail partnerships)

£7,355

£5,555

32%

£6,891

7%

SMEs

£4,093

£3,130

31%

£3,261

26%

 

£11,448

£8,685

32%

£10,152

13%

Retail partnerships

£1,705

£1,954

(13%)

£1,839

(7%)

Commercial customers (excluding SMEs3)

£2,424

£3,064

(21%)

£2,486

(2%)

 

£4,129

£5,018

(18%)

£4,325

(5%)

 

 

 

 

 

 

3.  SME defined as enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding €50 million, and/or an annual balance sheet total not exceeding €43 million, and have aggregate deposits less than €1 million. 

 

·

Customer account growth of 84 ,000 in H1 2020 (H1 2019: 385,000) to 2.1 million, despite lockdown restrictions for much of the period.

·

Total deposits grew by over £1 billion in the first six months to £15,577 million as at 30 June 2020 (31 December 2019: £14,477 million) . Year-on-year deposits have grown 14% from £13,703 million at 30 June 2019, following a strong increase in retail and SME deposits, that together comprise 73% (H1 2019: 63%) of total deposits. SME balances were boosted by the deposit of loans provided via the Bounce Back Loan Scheme (BBLS). Customer behaviour has also changed in H1 with a preference for instant access (demand) savings and current accounts rather than fixed term accounts, the former seeing an increase from 68% at 30 June 2019 to 72% at 30 June 2020.

·

Cost of deposits was 82bps for the first six months of the year, a decrease of 3bps compared to 85bps in H2 2019, partially reflecting the 65bps base rate reductions in March and the roll-off of higher cost fixed term deposit accounts. These factors combined to deliver an exit rate of 60bps at 30 June 2020.

 

Loans

·

Total net loans as at 30 June 2020 were £14,857 million, up 1% from £14,681 million at 31 December 2019 reflecting lower new business volumes due to COVID-19 and an increase in ECLs, offset by capital-efficient government-supported new SME/business lending.

·

Commercial loans increased £562 million to £4,614 million at 30 June 2020 from £4,052 million at 31 December 2019, including £730 million of BBLS and £50 million of Coronavirus Business Interruption Loan Scheme (CBILS) lending at 30 June. At 31 July over 25,000 BBLS, CBILS and CLBILS (Coronavirus Large Business Interruption Loan Scheme) loans had been written totalling over £1 billion.

·

Retail mortgages remained the largest component of the lending book at 68% of gross lending (31 December 2019: 71%), down £240 million to £10,190 million at 30 June 2020 from £10,430 million at 31 December 2019 reflecting attrition and lower activity in the market. Mortgage applications started to recover in June with the lifting of lockdown restrictions, a trend that has continued into July.

·

Loan to deposit ratio at 95% ended the period below the position at full year 2019 (31 December 2019: 101%), reflecting the increase in deposits over the first six months of the year.

 

 

£ in millions

30

June

2020

30

June

2019

Change from

HY 19

31

December

2019

Change from

FY 19

 

 

 

 

 

 

Gross Loans and advances to customers

£15,002

£15,020

-

£14,715

2%

Less: allowance for impairment

(£145)

(£31)

>100%

(£34)

>100%

Net Loans and advances to customers

£14,857

£14,989

(1%)

£14,681

1%

 

 

 

 

 

 

Gross loans and advances to customers includes:

 

Commercial lending

£4,614

£4,343

6%

£4,052

14%

Retail mortgages

£10,190

£10,412

(2%)

£10,430

(2%)

Consumer lending

£198

£265

(25%)

£233

(15%)

 

Expected Credit Loss (ECL)

·

ECL expense of £ 112.0 million in H1 2020, equivalent to an annualised Cost of Risk of 1.55%, a 145bps increase on H2 2019. £15 million of this is driven by an increase in underlying ECL reflecting a maturation of the portfolio, while the remaining £97 million relates to changes in macro-economic assumptions resulting from COVID-19. ECLs were assessed using scenarios provided by Moody's Analytics.

 

Macro-economic assumptions

 

Baseline scenario

2020

2021

2022

2023

Unemployment rate - %

8.4%

8.4%

7.9%

6.9%

House price index - YoY%

(14.6%)

(4.9%)

5.8%

10.0%

UK GDP - YoY%

(7.7%)

3.9%

5.2%

3.5%

Mortgage 5 year interest rates - %

1.7%

1.9%

2.2%

2.8%

 

Source: Moody's Analytics

·

17% of residential mortgage customers by value had active payment deferrals at 30 June , equivalent to £1.8 billion, which has since reduced by more than 45%.

·

Detailed assessment of individual exposures performed for commercial loans exceeding £3 million and commercial real estate loans exceeding £5 million.

·

Non-Performing Loans at 0.96% (31 December 2019: 0.53%) reflect the increase in ECL from the maturation of the portfolio. The average debt to value (DTV) of the residential mortgage book as at 30 June 2020 was 59% (31 December 2019: 59%), while DTV in the commercial book was 60% (31 December 2019: 60%). Consumer unsecured is currently a small part of the lending portfolio at less than 2% of total book.

 

Profit and Loss Account

·

Net interest margin (NIM) of 1.15% compared to 1.40% for the six months to 31 December 2019 , with the decline primarily reflecting the Bank's reduced loan to deposit ratio and the 'lag effect' of the 65bps base rate cuts in March as lending re-priced more rapidly than deposits.

·

Net interest income down 18% to £116.2 million (H2 2019: £141.9 million) following the movements in NIM described above. 

·

Net fee and other income decreased 18% to £36.1m (H2 2019: 44.0 million) primarily due to the impact of lower customer transaction volumes during lockdown.

·

Underlying cost:income ratio increased to 147% in H1 2020 from 110% in the six months to 31 December 2019 , largely reflecting net interest income headwinds and planned higher investment opex. 'Run the Bank' cost growth was contained at 2% whilst absorbing the cost of six store openings, an advertising campaign and COVID-19 related costs. Increased 'Change the Bank' expenditure reflects front loaded investment spend with a lower average capitalisation rate.

·

Underlying loss before tax was £183.4 million, an increase from the £25.1 million loss in H2 2019 , reflecting the ECL expense and income challenges arising primarily from COVID-19.

·

Statutory loss before tax of £240.6 million in H1 2020 (H2 2019: £134.2 million loss) including:

Impairment and write-off of property plant & equipment and intangible assets (£26.6 million): primarily relates to the accelerated exit from the Central London Office at Old Bailey to the benefit of future costs.

Remediation costs (£17.8 million): reflect the ongoing remediation programme in relation to a previously disclosed review of the Bank's sanctions procedures and to the January 2019 risk weighted assets (RWA) adjustment, and associated regulatory investigations.

Transformation costs (£12.4 million): costs associated with the delivery of the cost transformation programme and includes some costs related to the Old Bailey exit.

·

Statutory loss after tax of £239.5 million in H1 2020 (H2 2019: £183.9 million) after a £1.1 million corporation tax credit.

 

Capital, Funding and Liquidity

·

Strong liquidity and funding position maintained , reflecting H1 2020 deposit growth. As a result, the Bank's Liquidity Coverage Ratio was 226% as of 30 June 2020, compared to the Bank's requirement of 100%.

The Bank will utilise the Bank of England's TFSME (Term Funding Scheme with additional incentives for SMEs) which provides access to significant additional funding. The scheme provides further flexibility to the Bank's funding plans, including the repayment of TFS .

·

CET1 capital of £1,243 million as at 30 June 2020 (31 December 2019: £1,427) was 14.5% of RWA (31 December 2019: 15.6%).

The Bank's capital ratios include the application of the Capital Requirements Regulation (CRR) 'Quick Fix' package, of this the revised IFRS9 transitional agreement contributes c.1.0% to CET1 and a further c.0.6% is derived from changes to the SME supporting factor. The EBA's proposal relating to the treatment of software assets may have a beneficial impact in H2, although remains subject to the finalisation of the EBA Regulatory Technical Standards and PRA assessment.

·

Total capital as a percentage of RWA was 17.3% reflecting the statutory loss reported in the period. Total capital plus MREL resources were £1,834 million with a total capital plus MREL ratio of 21.3% of RWA at 30 June 2020.

In March, the Bank of England reduced the countercyclical capital buffer (CCyB) to 0% from 1%. The adjustment to CCyB reduces the Bank's minimum CET1 requirement to 9.6%4 and interim total capital plus MREL requirement (including regulatory buffers) to 20.5%4.

The Bank of England MREL framework review is expected by end 2020. Depending on the outcome, the Board may consider raising £200-300 million further MREL in H1 2021. Ahead of this, MREL resources may fall below the sum of the firm's MREL requirement and buffers (the loss absorbing capacity) for a period of time.

·

Total RWA as at 30 June 2020 was £8,605 million (31 December 2019: £9,147 million). The reduction in H1 reflects capital-light lending through government-backed BBLS and CBILS as well as lending discipline in other areas. The result is a loan risk weight density of 45% as at 30 June 2020 (31 December 2019: 48%).

·

Regulatory leverage ratio of 5.8%.

4.  Based on current capital requirements, excluding any confidential PRA buffer, if applicable

 

Progress on strategic priorities

 

·

The Bank has continued to focus on delivering on its five strategic priorities, with its ambition to become the UK's best community bank more relevant than ever.

 

Costs

Cost initiatives on track, with 'Run the Bank' cost growth contained to 2% despite COVID-19 related expenditure.

Acceleration of property strategy through the early exit from a central London office location at Old Bailey; the implementation of preferred supplier lists; and IT outsourcing initiatives will continue to limit cost growth going forward.

 

 

Infrastructure

-  Planned infrastructure initiatives on track despite delivery of additional services in response to COVID-19, including the rapid development the Bank's first cloud based e-form for digital applications and the accelerated roll out of the BBLS lending platform.

-  Investment in customer support capability brought forward for implementation during H2 2020.

 

Revenue

-  Initiatives to meet more customer needs on track, with the launch of new service offerings including mobile receipt capture capability and SME direct debit origination.

RateSetter acquisition accelerates mix shift toward higher-yielding unsecured lending.

-  Opened six new stores in H1 2020 .

 

Balance sheet optimisation

-  Shift to higher yielding assets for risk adjusted returns accelerated by RateSetter acquisition and specialist mortgages offering.

-  Continuing to assess structural market opportunities.

-  Benefiting from capital light SME growth through government-backed lending schemes and capital relief measures.

-  Access to TFSME provides flexibility in funding.

 

Communications:

- Increased customer and colleague communication as well as launch of People-People advertising campaign.

 

Impact of COVID-19

 

·

The pandemic has had a range of impacts on the Bank, some of which may have implications for future financial performance.

 

Operational

- 100% of stores remained open during the lockdown to ensure customer needs continued to be served, albeit with temporarily reduced hours. Colleague absence rate peaked at 8.2% in March but recovered to a more normal level of 1.5% in June.

- 'R un the Bank' opex growth was contained within expectations even with the purchase of personal protective equipment, working from home equipment and the rewarding of frontline teams with a £2 million 'thank you' fund.

-  Action taken to accelerate the move out of central London office space.

-  Launched BBLS, CBILS and CLBILS lending to support customers and grow capital light assets.

 

Fee income

-  Lower levels of economic activity during lockdown impacted fee income as ATM, card and FX transaction volumes declined significantly.

-  Marginal recovery in transaction volumes has been observed.

 

Credit Provisioning

- ECL expense recognised in H1 2020 under IFRS9, with 86% resulting from COVID-19. Scenarios apply and are sensitive to independent macro-economic forecasts.

-  Not anticipating H1 2020 charge to annualise in H2 2020, dependent on macro-economic assumptions.

 

Margin compression

-  Base rate cut by 65bps in March to 0.1%, impacting yields on treasury assets. 

-  Short term impact on profitability in H1 2020 due to the 'lag effect' of lending re-pricing faster than deposits. The lower rate environment is also anticipated to have an impact on financial performance into the medium term.

-    Accelerating mix shift to improve yield including the acquisition of RateSetter and expansion within specialist mortgages will mitigate some of this impact.

 

Customer Experience

·

Expanded coverage , opening new stores in Wolverhampton, Cardiff and Hammersmith in Q1, with further openings in Liverpool, Cardiff (Newport Road) and Sheffield in Q2. Metro Bank now has 77 stores.

·

Enhanced digital offering through continued roll-out of innovative digital solutions to improve banking for our SME customers including: Business Current Account Online (BAO) in beta test; account sweeping; BBLS lending platform in partnership with ezbob; Direct Debit origination in partnership with Bottomline Technologies; and in-app receipt management technology in partnership with Sensibill.

 

RateSetter Acquisition

·

On 3 August 2020 announced an agreement to acquire Retail Money Market LTD ("RateSetter") for initial consideration of £2.5 million, with additional consideration of up to £0.5 million payable 12 months after completion subject to the satisfaction of certain criteria and further consideration of up to £9 million payable on the third anniversary of the completion of the transaction, subject to the satisfaction of certain key performance criteria. Completion is expected in H2 2020.

·

Delivers ability to accelerate exposure to unsecured lending, with a strong technology platform and deep experience in the consumer unsecured lending market.

 

Board and Executive Committee Changes

A number of changes have been announced since the full year results in February 2020:

·

Robert Sharpe will join the Board as Chairman on 1 November 2020, subject to regulatory approval. Robert succeeds Sir Michael Snyder, who has transformed the Board under his tenure.

·

Gene Lockhart stepped down as Non-Executive Director with effect from 28 April 2020 and Stuart Bernau stepped down as Non-Executive Director with effect from 18 May 2020, both following 10 years of service.

·

After six years on the Board, Roger Farah stepped down as Non-Executive Director with effect from 13 March 2020.

·

Anne Grim, Ian Henderson, and Nicholas Winsor were appointed as independent Non-Executive Directors with effect from 20 April 2020. Following these changes, the Board (excluding the Chairman) is comprised of eight Non-Executive Directors, all of whom are independent, and two Executive Directors.

·

Three appointments complete a number of recent changes to the Executive Committee: Martin Boyle joined as Chief Transformation Officer in June; Carol Frost joined as Chief People Officer in August; and Richard Lees will join as Chief Risk Officer in early in 2021, subject to regulatory approval.

 

Outlook

Guidance for H2 2020 is broadly on-track with the outlook provided in February, excluding the impact of COVID-19 on performance:

 

 

February Guidance

H1 2020 Performance

H2 2020 Commentary

Deposits

Mid-single digit growth in 2020

£15.6b

+8% HoH

H1 benefited from BBLS deposits and lower spending during lockdown, expect H2 to be broadly flat.

Loan to Deposit Ratio

2024 Target

<100%

 

95%

 

Government-backed lending (CBILS and BBLS) gives confidence to support higher LTD.

Net Interest Margin

2020 NIM in-line with Q4 2019 (1.30%)

 

1.15%

 

Expected to benefit from lower cost of deposits due to increased Non-Interest Bearing Liabilities and fixed term deposit roll off.

Fees

Fee and other income to increase as proportion of revenue mix

£36.1m

 

Marginal recovery in transaction volumes so far.

Operating costs

Run the Bank

Mid-high single digit growth in 2020 excl. investment opex

 

Change the Bank

New investment opex £250-300m

front-end loaded through the plan

 

 

+2% HoH

 

 

 

 

+89% HoH

 

 

On track to contain growth to mid-single digit in 2020.

Reflects increased customer support functions.

 

YoY change reflects front loading investment spend with lower average capitalisation rate.

Flexible approach to expenditure in H2 2020 and 2021.

Cost of Risk

15-30bps

1.55%

Not anticipating H1 2020 charge to annualise in H2 2020.

Capital

MREL issuance up to £300m before 1 Jan 2022

 

Total Capital + MREL

21.3%

 

Bank of England MREL framework review expected by end 2020. Depending on the outcome, we may consider raising £200-300m further MREL in H1 2021. Ahead of this, MREL resources may fall below the sum of the firm's MREL requirement and buffers (the loss absorbing capacity) for a period of time.

 

Looking ahead , given the uncertainty caused by the pandemic in the medium term, it is too early to establish if there is any impact on the 2024 financial targets

The strategic plan supports the ambition to be the UK's best community bank.

 

 

         

Metro Bank PLC

Summary Balance Sheet and Profit & Loss Account

(Unaudited)

Balance Sheet

Year-on-year change

 

30-Jun

2020

31-Dec

2019

30-Jun

2019

 

 

 

£'million

£'million

£'million

Assets

 

 

 

 

 

Loans and advances to customers

(1%)

 

14,857

14,681

14,989

Treasury assets5

 

 

6,101

5,554

4,668

Assets classified as held for sale

 

 

-

-

521

Other assets6

 

 

1,176

1,165

1,179

Total assets

4%

 

22,134

21,400

21,357

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits from customers

14%

 

15,577

14,477

13,703

BoE funding scheme drawings

 

 

3,801

3,801

3,801

Debt securities

 

 

599

591

249

Other liabilities

 

 

810

948

1,837

Total liabilities

 

 

20,787

19,817

19,590

Total shareholder's equity

 

 

1,347

1,583

1,767

Total equity and liabilities

 

 

22,134

21,400

21,357

 

5.  Comprises investment securities and cash & balances with the Bank of England

6.  Comprises property, plant & equipment, intangible assets and other assets

 

 

Year-on-year change

Half year to

Profit & Loss Account

30-Jun

2020

31-Dec

2019

30-Jun

2019

 

 

£'million

£'million

£'million

 

 

 

 

 

Net interest income

(30%)

116.2

141.9

166.2

Net fee and other income

 

36.1

44.0

46.4

Net gains/(losses) on sale of assets

 

1.0

(2.5)

4.1

Total underlying revenue

(29%)

153.3

183.4

216.7

 

 

 

 

 

"Run the bank" costs

 

(184.1)

(179.7)

(178.7)

"Change the bank" costs7

 

(40.6)

(21.5)

(20.0)

Operating costs

13%

(224.7)

(201.2)

(198.7)

COVID-19 ECL expense8

 

(96.8)

-

-

Underlying ECL expense

 

(15.2)

(7.3)

(4.4)

Expected credit loss expense

 

(112.0)

(7.3)

(4.4)

 

 

 

 

 

Underlying (loss)/profit before tax

(>100%)

(183.4)

(25.1)

13.6

 

 

 

 

 

FSCS levy

 

(0.2)

0.4

(0.7)

Listing Share Awards

 

(0.2)

(0.2)

(0.3)

Impairment and write-off of property plant & equipment and intangible assets

 

(26.6)

(76.7)

(1.0)

Net BCR costs9

 

-

(1.3)

(1.2)

Transformation costs

 

(12.4)

(6.8)

(4.7)

Remediation costs

 

(17.8)

(24.5)

(2.3)

 

 

 

 

 

Statutory (loss)/profit before tax

(>100%)

(240.6)

(134.2)

3.4

 

 

 

 

 

Statutory taxation

 

1.1

(49.7)

(2.1)

 

 

 

 

 

Statutory (loss)/profit after tax

(>100%)

(239.5)

(183.9)

1.3

 

 

 

Half year to

Key metrics

30-Jun

2020

31-Dec

2019

30-Jun

2019

Underlying earnings per share - basic

 

(108.8p)

(14.9p)

8.1p

Underlying earnings per share - diluted

 

(108.8p)

(14.9p)

8.1p

Number of shares - undiluted

 

172.4m

172.4m

122.4m

Number of shares - diluted

 

172.4m

172.4m

122.4m

Net interest margin (NIM)

 

1.15%

1.40%

1.62%

NIM + fees

 

1.51%

1.86%

2.07%

Cost of deposits

 

0.82%

0.85%

0.70%

Cost of risk - COVID-198

 

1.32%

-

-

Cost of risk - Underlying

 

0.23%

0.10%

0.06%

Cost of risk

 

1.55%

0.10%

0.06%

Underlying cost:income ratio

 

147%

110%

92%

 

 

 

 

 

           

7.  Change the Bank costs consists of investment spend, including amortisation

Underlying ECL represents the natural deterioration of the book as it matures and specific impairments where there was an indication of credit deterioration prior to the COVID-19 pandemic.

8.  COVID-19 ECL represents an estimate of the increase in credit risk specifically due to the impacts of the COVID-19 pandemic on customers.

9.  Net BCR costs includes amounts previously disclosed under costs relating to the RBS alternative remedies package application, Capability & Innovation costs and Capability & Innovation funding

 

For more information, please contact:

Metro Bank PLC Investor Relations

Jo Roberts

+44 (0) 20 3402 8900

jo.roberts@metrobank.plc.uk

 

Metro Bank PLC Media Relations

Tina Coates / Abigail Whittaker

+44 (0) 7811 246016 / +44 (0) 7989 876136

pressoffice@metrobank.plc.uk

 

Teneo

Charles Armitstead / Haya Herbert Burns

+44 (0)7703 330269 / +44 (0) 7342 031051

Metrobank@teneo.com

 

ENDS

 

About Metro Bank

Metro Bank is celebrated for its exceptional customer experience. Its mobile app and online service achieved the top spot in the Competition and Market Authority's Service Quality Survey among personal and business current account holders in February 2020; the bank also ranked in the top two for overall service and store service for personal and business customers. It was awarded 'Best All Round Personal Finance Provider' at the Moneynet Personal Finance Awards 2019.

Offering retail, business, commercial and private banking services, it prides itself on giving customers the choice to bank however, whenever and wherever they choose. Whether that's through its network of stores open seven days a week, early until late, 362 days a year; on the phone through its UK-based 24/7 contact centres; or online through its internet banking or award-winning mobile app: the bank offers customers real choice.

The bank is headquartered in Holborn, London.

Metro Bank PLC. Registered in England and Wales. Company number: 6419578. Registered office: One Southampton Row, London, WC1B 5HA. 'Metrobank' is the registered trade mark of Metro Bank PLC.

It is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. Most relevant 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 PLC 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 PLC

INTERIM REPORT

SIX MONTHS ENDED 30 JUNE 2020

 

Forward-looking statements

This document contains forward-looking statements. Forward-looking statements are not historical facts but are based on certain assumptions of management regarding our present and future business strategies and the environment in which we will operate, which the Group believes to be reasonable but are inherently uncertain, and describe the Group's future operations, plans, strategies, objectives, goals and targets and expectations and future developments in the markets. 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 presentation are based on the Group's current expectations and, by their nature, forward-looking statements are subject to a number of risks and uncertainties (including but not limited to the COVID-19 pandemic), many of which are beyond the Group's control, that could cause the Group's 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, express or implied, is made regarding future performance. The Group undertakes no obligation to release the results of any revisions to any forward-looking statements in this presentation that may occur due to any change in its expectations or to reflect events or circumstances after the date of this presentation and the parties named above disclaim any such obligation.

 

Company Information

Board of Directors

About Metro Bank

Metro Bank is celebrated for its exceptional customer experience. Its mobile app and online service achieved the top spot in the Competition and Market Authority's Service Quality Survey among personal and business current account holders in February 2020; the Bank also ranked in the top two for overall service and store service for personal and business customers. It was awarded 'Best All Round Personal Finance Provider' at the Moneynet Personal Finance Awards 2019.

Offering retail, business, commercial and private banking services, it prides itself on giving customers the choice to bank however, whenever and wherever they choose. Whether that's through its network of stores; 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.

The bank employs around 3,500 colleagues and is headquartered in Holborn, London.

 

 

 

 

 

 

 

 

 

Metro Bank PLC. Registered in England and Wales. Company number: 6419578. Registered office: One Southampton Row, London, WC1B 5HA. 'Metrobank' is the registered trade mark of Metro Bank PLC.

It is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. Most relevant 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 PLC 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.

 

Chairman

Sir Michael Snyder (Interim)

Robert Sharpe (From 1 November 2020)

 

Current Non-Executive Directors

Catherine Brown

Sally Clark (Appointed 1 January 2020)

Anne Grim (Appointed 20 April 2020)

Ian Henderson (Appointed 20 April 2020)

Monique Melis

Paul Thandi

Michael Torpey

Nicholas Winsor (Appointed 20 April 2020)

 

Former Non-Executive Directors

Stuart Bernau (Stepped down 18 May 2020)

Gene Lockhart (Stepped down 28 April 2020)

 

Executive Directors

Daniel Frumkin - Chief Executive Officer

David Arden - Chief Financial Officer

 

Company Secretary

David Arden

 

Registered Office

One Southampton Row

London

WC1B 5HA

 

Independent Auditors

PricewaterhouseCoopers LLP

Chartered Accountants and Statutory Auditors

7 More London Riverside

London

SE1 2RT

 

Registered Number

6419578

 

www.metrobankonline.co.uk

 

sumMarised interim results

 

Half year to

30 June 2020

Half year to

31 December 2019

Change

Half year to

30 June 2019

Change

Profit and loss

 

 

 

 

 

Underlying (loss)/profit before tax1

(£183.4m)

(£25.1m)

 

£13.6m

 

Statutory (loss)/profit before tax

(£240.6m)

(£134.2m)

 

£3.4m

 

Total income (statutory)

£168.9m

£195.1m

 

£220.5m

 

Total operating expenses (Statutory)

£297.5m

£322.0m

 

£212.7m

 

Net interest margin

1.15%

1.40%

(25bps) 

1.62%

(47bps) 

Net interest margin + fees

1.51%

1.86%

(35bps)

2.07%

(56bps)

Average cost of deposits

0.82%

0.85%

(3bps)

0.70%

12bps

 

 

 

 

 

 

 

30 June 2020

31 December 2019

Change

30 June 2019

Change

Balance sheet

 

 

 

 

 

Customer deposits

£15,577m

£14,477m

 

£13,703m

 

Customer loans

£14,857m

£14,681m

 

£14,989m

 

Loan to deposit ratio

95%

101%

(6pps)

109%

(14pps)

Total assets

£22,134m

£21,400m

 

£21,357m

 

 

 

 

 

 

 

Asset quality

 

 

 

 

 

ECL to period-end loans

0.96%

0.23%

73bps

0.20%

77bps

Cost of risk (annualised)

1.55%

0.10%

145bps

0.06%

149bps

 

 

 

 

 

 

Capital ratios

 

 

 

 

 

Common Equity Tier 1 (CET1) ratio

14.5%

15.6%

 

15.8%

 

Regulatory leverage ratio

5.8%

6.6%

 

7.0%

 

Total regulatory capital plus MREL ratio

21.3%

22.1%

 

n/a

 

 

 

 

 

 

 

Customer metrics

 

 

 

 

 

Customer accounts

2.1m

2.0m

 

1.8m

 

Stores

77

71

 

65

 

 

 

 

 

 

 

 

1.  Underlying (loss)/profit before tax is an alternative performance measure and excludes Listing Share Awards, impairment and write-off of property, plant & equipment (PPE) and intangible assets, net Banking Competition Remedies Limited (BCR) costs, transformation costs and remediation costs when comparing to our statutory (loss)/profit.

 

Business review

The first half of 2020 has undoubtedly been one of the most challenging periods in a generation, with social and economic impacts resulting from the COVID-19 pandemic.

I want to start by extending my thanks to all my Metro Bank colleagues. They have shown resilience and have adapted incredibly well, delivering outstanding service. Whilst operating temporarily reduced hours, all of our stores have remained open and our AMAZE Direct call centres have continued to support customers throughout. It is in testing times like these that we truly demonstrate the value of our culture, with colleagues around the business stepping up to support the communities we serve. I am immensely proud of what they have managed to achieve in such difficult conditions.

Having entered 2020 at the start of our transformation journey we remain on track. Despite the impacts of the pandemic, we have been able to demonstrate the resilience of the Bank and have made good progress against our five strategic priorities, with a number of achievements in the period, including:

· Opening of six new stores, in-line with plan;

· Delivering our first ever advertising campaign, celebrating 'people-people banking';

· Demonstrating greater cost discipline; and

· Progressing on initiatives to meet more customer needs including the launch of online business account opening (in Beta testing) and direct-debit origination for business customers.

COVID-19 has weighed heavily on our financial performance with an increase in our expected credit loss (ECL) expense for the first half of the year, up £107.6 million to £112.0 million (half year to 30 June 2019: £4.4 million), which has driven a loss before tax for the first half of the year of £240.6 million (half year to 30 June 2019: profit of £3.4 million).

Arguably given the current environment, our ambition to become the UK's best community bank has never been more important and to that effect, I wanted to highlight in more detail how we have supported our customers, communities and colleagues in the past six months.

Supporting our customers  

As mentioned at the outset, all of our stores have remained open throughout the pandemic. The business has proved its operational resilience, with digital services and back office functions continuing to perform well. We put in place new processes for more vulnerable customers to access cash and dedicated times to call. With more customers using digital channels, we built a new digital journey for customers to make it easier to reset their online banking credentials, and set up a dedicated section on our website to keep customers updated with the very latest coronavirus support and information.

Colleagues have worked with customers whose personal or business finances have been impacted to ensure they benefit from the most appropriate support. We automatically waived overdraft interest for personal customers on a temporary basis, and offered payment deferrals across our mortgage, credit card and loan products. We extended existing mortgage offers for customers buying a new home for up to three months to give them extra time to complete transactions. We also adopted digital valuations to enable us to continue lending at a time when others withdrew from the market.

Alongside this, in March, we introduced wide-ranging measures to support our business customers before additional Government support measures were introduced. This included capital repayment deferrals, interest roll-ups and covenant waivers to give customers vital peace of mind and additional financial flexibility. We also temporarily waived both arrangement fees and limit amendment fees for customers using a business overdraft.

During the period, Metro Bank also gained accreditation under the British Business Bank's Coronavirus Business Interruption Loan Scheme (CBILS), Bounce Back Loan Scheme (BBLS) and Coronavirus Large Business Interruption Loan Scheme (CLBILS). We have provided loans to thousands of businesses in need of support, with lending under these schemes at 30 June 2020 totalling £780 million. To support the expected level of demand for Bounce Back Loans, we accelerated the building of our brand new online lending platform, delivered in just six weeks, to enable us to fulfil these applications.

Having granted relief to thousands of customers through these means, we're now working with customers to understand their needs going forward. Where there is evidence that extending further support is the right thing to do, we will do so. We appreciate every situation will be different, so our colleagues are working together with our customers on an individual basis to find a solution that is right for them. The lending schemes described above are underwritten either in part or fully by the Government (BBLS: 100%; CBILS: 80%; and CLBILS: 80%) and we are using them as widely as possible to support our customers, whilst performing the necessary fraud, anti-money laundering and know your customer checks, in line with the scheme guidance.

We remain unwavering in our ambition to become the UK's best community bank and our commitment to being a flexible, responsible lender to our customers - in particular now, as we deal with the long-term financial effects of the coronavirus crisis sits right at the heart of that.

Supporting our communities

We also play an active role in the communities we serve. We already empower colleagues to go out into their local communities and further the causes they choose, encouraging them to give time and become part of something bigger.

In this respect, we have deepened our community engagement during the pandemic, with colleagues from around the business supporting a vast array of local projects ranging from helping food banks to volunteering to assist the NHS.

Each of our colleagues are given a 'Day to Amaze', a day each year to volunteer locally when they'd normally be working. We've extended this to five days in 2020 so our colleagues can do much more for their communities who need us more than ever right now.

Separately, in May 2020, we hit our fundraising target for Teenage Cancer Trust. Over the course of our one-year partnership colleagues and customers across the Bank raised more than £150,000. Fundraising efforts have ranged from bake sales and quizzes, to the Three Peaks Challenge and abseiling down The Orbit in London's Olympic Park. The vital funds raised will enable Teenage Cancer Trust to support three specialist nurses for a year.

In June, we opened two stores in new communities, Sheffield and Cardiff Newport Road. The Cardiff Newport Road store offers a drive-thru service - our fifth drive-thru store in the UK - allowing customers to carry out cashier services from the comfort of their cars and completely contact-free, providing a lifeline to many during the pandemic who are reliant on cash for their banking needs.

Supporting our colleagues

Our primary focus throughout this period has been the safety and welfare of all our colleagues. The past few months have confirmed a simple truth for me: we are an essential service for our customers, delivered by brilliant colleagues. Our colleagues play a vital role for our customers day-in, day-out.

As the virus started to spread, our teams adapted to the latest Government guidelines. We implemented enhanced hygiene procedures and social distancing across all our stores and sites. We also made changes early on so as many colleagues as possible could work from home.

As a bank with a strong store presence, we know customers like to speak to us in person so we did everything we could to keep our stores open and available to customers who needed us, as well as providing support through AMAZE Direct. To do this, we were relying on some of our colleagues, designated as key workers, to come into work because they could not perform their critical role for our customers from home. I know I speak for our customers and our colleagues when I say how grateful and proud we are of each and every one of them for taking this on. To show our appreciation, we set aside a £2 million thank you fund for front line colleagues to share between them.

We extended our sickness policy to ensure all of our colleagues were fully paid while taking the time needed to recover if they fell ill or needed to self-isolate.  We also increased paid emergency dependent leave to support parents and carers, and continue to support flexible working arrangements.

We introduced a scheme for our vulnerable colleagues which allowed them to take at least the recommended 12 weeks to shield themselves away from work on full pay. We supported these colleagues directly rather than using the Government Coronavirus Job Retention Scheme. We also offered voluntary leave, funded by Metro Bank with 80% pay, for some customer-facing colleagues who were struggling to come to work, for example due to childcare issues or where they were living with vulnerable people that have been advised to shield.

To ensure our colleagues have plenty of support to keep themselves in good shape, both physically and mentally - wherever they are working - we launched a new health and wellbeing hub. The response from colleagues has been brilliant, and we intend to maintain this hub as a long-term resource. We have also signed up all our colleagues to a free, annual subscription to Headspace - an app dedicated to mindfulness, meditation, sleep and movement.

As lockdown restrictions lift we are supporting the return to the work-place for colleagues who cannot work from home. We will continue to see significant numbers of colleagues continue to work from home for the foreseeable future, as following feedback many prefer this to being fully office based.  We continue to engage with colleagues in relation to our location and office approach to make sure this is appropriate. We also remain focused on ensuring that under these new ways of working our culture remains intact and our colleagues feel supported. As part of this both myself and other members of the senior leadership team have increased further our visibility and presence in order to make ourselves fully accessible to colleagues.  A more home-based team means we have even more reason to scale back our central London office space, something we had highlighted as part of our refocused strategy at the 2019 full year, and which will result in a reduction in associated costs in the future.

Celebrating our 10th birthday

29 July 2020 saw us celebrate our 10 year anniversary since we launched our first store in Holborn, as the first high street bank to open in more than 100 years. We've since grown from 79 colleagues and one store in July 2010 to 3,500 colleagues, 77 stores and more than two million customers today. Like others celebrating big events during the pandemic, we've reached this milestone in circumstances that we would not have envisaged. However, despite the challenges of social distancing, we wanted to mark the special occasion in style and thank our customers, communities and colleagues for their support over the past decade. To celebrate, we were delighted to have Heather Small, the Voice of M People, perform an exclusive concert recorded at our Holborn store, featuring her greatest hits and our very own Metro Bank colleagues.

Capability and innovation fund

After renegotiating our commitment, under the Capability and Innovation (C&I) fund as announced in February 2020, we remain on track with delivery. During the first six months of the year we opened two further stores in the North, in Liverpool and Sheffield. Alongside this we launched a number of digital initiatives. These included Direct Debit Originations and Business Account Online (in Beta testing). The expansion of our footprint and broadening of our range of services will meet the banking needs of thousands of SMEs, in what remains an underserved section of the market. 

RateSetter acquisition

On 3 August 2020 we announced an agreement to acquire Retail Money Market LTD ('RateSetter') for an initial consideration of £2.5 million, followed by up to £0.5 million deferred consideration after 12 months, with additional consideration of up to £9.0 million payable on the third anniversary of the completion of the transaction, subject to the satisfaction of certain key performance criteria. Completion is expected in the second half of the year.

The acquisition, in-line with our strategy, will help us accelerate our capability in unsecured lending, through an established business with a strong technology platform and people who have deep experience in the consumer unsecured lending market. The acquisition allows us to meet more customers' needs and gain scale both quicker and cheaper than building our own system.

Progress on strategic priorities

While we respond to the current situation, we also continue to remain focused on delivering against our strategic priorities as set out in February 2020. That strategy hasn't changed - everything we are doing is to deliver on our ambition to be the UK's best community bank, and that's more important than ever right now. I am pleased to say that we remain on track and are progressing against the five strategic pillars we had set out:

· Costs - we're continuing to demonstrate greater cost control, making sure we're being as efficient as we can, building transparency into our processes and discipline in terms of where we spend our money. Our cost initiatives are on track, with our 'run the bank' costs increasing just 2% compared to the second half of 2019. Key deliverables during the first half included implementation of a preferred supplier list resulting in cost reduction of 15% in respect of targeted suppliers, and outsourcing of our digital testing environment.

· Revenue - we want to grow revenue by meeting more customer needs. Our revenue initiatives are on track, despite net interest income and fees being negatively impacted by COVID-19. Last month we launched our business account online opening (in Beta testing) proposition to help meet the needs of this underserved sector. We've also continued to develop capabilities for specialist mortgages and recently reintroduced 85-90% LTV mortgage products. In the first half of the year we opened six new stores from Liverpool in the North to Hammersmith in the South and also our first stores in Wales.

· Infrastructure - we're continuing to invest in our channels and core infrastructure with a number of changes delivered to improve the customer and colleague experience. Our planned infrastructure initiatives remain on track despite delivery of additional services in response to COVID-19, for example the accelerated development of the first cloud based e-form for digital applications.

· Balance sheet optimisation - we're continuing to assess market opportunities to optimise our balance sheet. Our strategic objective to change the lending mix shift will be accelerated by the RateSetter platform and SME lending supported by BBLS, CBILS and CLBILS. In addition, access to the Term Funding Scheme with additional incentives for SMEs ( TFSME) scheme provides us with increased funding flexibility.

· Internal and external communications - we launched our first ever advertising campaign in the first quarter 2020, featuring our own colleagues. We've seen our brand consideration and familiarity increase following the campaign - giving us a strong platform to build upon during the second half of 2020.

Related parties

Since the Bank started 10 years ago we have relied on InterArch to provide architectural, design and creative services. As previously announced we started a process to identify alternative suppliers for these services, after receiving shareholder feedback. Following the expiration of contracts with InterArch in February we entered a short agreement to support this transition. This has now completed and we are now working with new providers for these services.

I would like to take this opportunity to thank both Shirley Hill and her team at InterArch for all they have done for the Bank over the last decade, particularly their work in developing the Metro Bank brand and helping shape our distinct identity.

Board changes

Over the last six month period we also completed our search for a new Chairman, announcing in July the appointment of Robert Sharpe who will commence in role from 1 November 2020 taking over from Sir Michael Snyder, who has transformed the Board under his tenure.

Robert will join us from Bank of Ireland, where he is currently Chairman of their UK operations and has previously held board positions at companies including Vaultex Limited, Aldermore Bank plc, Barclays Pension Trustees Limited, George Wimpey plc and Al Rayan Bank plc.

In addition during his executive career he was CEO at West Bromwich Building Society, Portman Building Society and for Bank of Ireland's consumer business in the UK and brings a wealth of experience in retail banking which will help us in our ambition to become the UK's best community bank.

We have also welcomed a number of new Non-Executives Directors - Sally Clark, Ian Henderson, Anne Grim and Nicholas Winsor - all of whom bring invaluable experience to the Board, as we - together with the Executive Committee and all our colleagues - remain focused on delivering our strategy.

Finally, and following completion of 10 years of service, Gene Lockhart and Stuart Bernau have stepped down from our Board and I would like to extend my thanks to them for their service and commitment over many years. 

Executive committee changes

During the first half of the year, there have also been a number of changes to our Executive Committee (ExCo).

Ian Walters has taken on the new role of Managing Director, Distribution, bringing together Retail, Business and Commercial banking, Martin Boyle has been appointed Chief Transformation Officer, bringing invaluable transformation and change expertise that will be instrumental to ensuring the successful execution of our strategic plan, and Carol Frost joined the Bank in August as Chief People Officer.

In addition, David Thomasson (appointed Chief Commercial Officer), Jessica Myers (Director, Brand and Marketing), and Tina Coates (Director, Corporate Affairs) have joined the ExCo, bringing fresh representation to the leadership team from within the Bank. I also wanted to thank Andrew Shiels who has been undertaking the role of Interim Chief Risk Officer. Richard Lees, who is currently Chief Risk Officer at the Co-operative Bank, will be taking over the role on a permanent basis from early 2021.

These changes ensure that there is both continuity as well as new thinking within the Bank's leadership. I am confident that they will help the Bank work towards achieving its long-term ambition of being the UK's best community bank.

Outlook

The first half of 2020 has been an incredibly tough six months within a difficult operating environment. I am therefore pleased with how resilient the Bank has been, particularly in supporting our customers and communities.

We continue to work on delivering our turnaround strategy and addressing the legacies of the past. It is now more important than ever that we ensure the success of our transformation, as we reshape the Bank to be more efficient and adaptable in order to face the future.

COVID-19 remains an unprecedented challenge and the pace of recovery in expected credit losses in particular will largely be driven by the wider macroeconomic recovery. An even lower interest rate environment has emboldened our focus on reducing our cost of deposits through a continued focus on customer service. Additionally, we are accelerating our move to higher yielding assets, through our acquisition of the RateSetter platform and expansion into specialist mortgages.

Given the uncertainty caused by the pandemic, it is too early to establish if there is any impact on our 2024 targets. However, whilst the outlook remains uncertain, our strategy provides us with a route to profitability in the medium term, and I, along with our management team, remain focused on executing it.

 

Daniel Frumkin

Chief Executive Officer  

5 August 2020

 

Finance review

Despite the impacts of the unforeseen and unprecedented COVID-19 pandemic, we have delivered good progress against the plan we laid out in February 2020 and, excluding the impacts of COVID-19, we are broadly on track both financially and operationally. 

COVID-19 impacts

The outbreak of COVID-19 has had a marked impact on our financial performance. Expected credit losses increased by over £100 million to £112.0 million (half year to 30 June 2019: £4.4 million) representing a cost of risk of 1.55% (half year to 30 June 2019: 0.06%) and are reflective of the forecasted macroeconomic scenarios provided by Moody's Analytics.

Whilst fee, commission and other income remained broadly flat year-on-year (up 4% from £50.2 million to £52.0 million), income has been markedly impacted by lower transaction volumes during the period as a result of the lockdown.

Alongside these factors we have also experienced higher costs as a result of our response. These range from adapting our stores in order to continue to operate safely (including cleaning and personal protective equipment) through to scaling up colleague's ability to work from home.

Although the impact of COVID-19 has been significantly adverse to our financial performance, our financial and capital ratios remain above regulatory minima. In addition, the various changes made by the Government and regulators as part of their response to the pandemic, including a reduction in the counter-cyclical buffer as well as the introduction of certain Capital Requirements Regulation "Quick Fixes" have increased our CET1. Furthermore, the Government launched several lending schemes to support businesses, which have low or no impact on regulatory capital and carry reduced credit risk:

· Bounce Back Loans - This scheme is designed to help small and medium-sized businesses to borrow between £2,000 and £50,000 (capped at 25% of their turnover) at a fixed rate of 2.5% a year. The Government guarantees 100% of the loan and also pays the interest for the first 12 months. These loans attract a zero per cent risk weighting and therefore have no impact on regulatory capital.  

· Coronavirus Business Interruption Loans - This scheme is designed to help small and medium-sized businesses to borrow up to £5 million. The Government guarantees 80% of the loan and also pays the interest for the first 12 months. No risk weighting is applied to the Government-guaranteed part of the loan, and the unguaranteed part attracts the standard risk weighting. As such, these loans attract a significantly lower risk weighting and therefore have a lower impact on our regulatory capital ratios. 

· Coronavirus Large Business Interruption Loans - This scheme is designed to help medium and large sized businesses to access loans and other kinds of finance up to £200 million. Like the CBILS scheme, the Government guarantees 80% of the loan   and no risk weighting is applied to the Government-guaranteed part of the loan. As a result, they attract a significantly lower risk weighting and have a lower impact on regulatory capital compared to our standard commercial loans.

We were successful in achieving accreditation for all three schemes. In total we have lent over £780 million of eligible loans as at 30 June 2020. Given the importance of these loans to our customers and the effect they have in supporting the wider economy, along with their capital and credit risk efficiencies, these loans will continue to be a key focus for us in the months ahead whilst the schemes continue to operate.

Table 1: Breakdown of Government-backed lending (as at 30 June 2020)

 

Number of loans

(unaudited)

Gross carrying amount

(unaudited)

£'million

Average loan size

(unaudited)

£'000

Bounce back loans

19,390

730

38

Coronavirus business interruption loans

187

50

267

Coronavirus large business interruption loans

-

-

-

Total

19,577

780

 

 

Income statement review

Table 2: Summary income statement

 

Half year to

30 June 2020

(unaudited)

£'million

Half year to

30 June 2019

(unaudited)

£'million

Growth

Net interest income

115.9

166.2

(30%)

Net fee, commission and other income

52.0

50.2

 

Net gains on sale of assets

1.0

4.1

 

Total income

168.9

220.5

(23%)

General operating expenses

(234.1)

(174.7)

34%

Depreciation and amortisation

(36.8)

(37.0)

 

Impairment and write-off of PPE and intangible assets

(26.6)

(1.0)

 

Expected credit loss expense

(112.0)

(4.4)

>100%

(Loss)/profit before tax

(240.6)

3.4

(>100%)

Taxation

1.1

(2.1)

 

(Loss)/profit after tax

(239.5)

1.3

(>100%)

 

Net interest income

Net interest income was down 30% year-on-year to £115.9 million (six months to 30 June 2019: £166.2 million) primarily a result of continued net interest margin (NIM) compression, as well as the sale of a £521m mortgage portfolio in July 2019, the lower average lending volumes and the various actions taken to protect the balance sheet in 2019.

NIM for the first six months of the year was 1.15% down from 1.62% for the same period last year. This was as a consequence of a number of factors including a continued competitive lending environment, the absorption of our MREL debt issuance (which was issued in the second half of 2019 at 9.5%) and the deposit pricing actions taken during 2019. NIM was weakened further by the base rate cuts to 0.10% in March, which led to a short-term timing difference whereby lending products repriced immediately and deposits repriced following appropriate notice periods to customers.

We anticipate that NIM will recover in the second half of the year as the revised base rate fully transitions on both sides of the balance sheet and legacy fixed rate deposits begin to roll off. Additionally, and in line with our strategy, we will begin to accelerate our lending in the new higher yielding sectors of speciality mortgages and unsecured lending, for which the acquisition of RateSetter is a catalyst. 

Fee, commission and other income

COVID-19 has impacted fee and commission income as a result of significant falls in transaction volumes, particularly in relation to foreign exchange and ATM income following a decline in foreign travel and a move away from cash. We are starting to see volumes recover and therefore see a return to growth going forward.

Fee income is also distorted year on year by the changes to the rules regarding fees charged to customers who go into unarranged overdrafts. These fees were removed in December 2019 as a result of the rules introduced by the Financial Conduct Authority. We have replaced these fees with increased overdraft interest rates and therefore going forward a decline in this fee income will be offset by an increase in interest income. This offset is not however observed in the first half of the year as a result of our suspension of overdraft interest charges to help customers through the COVID-19 pandemic.

Operating expenses

Operating expenses during the first six months of the year rose to £234.1 million up from £174.7 million in the same period in 2019, largely reflecting the ongoing remediation programmes as well as transformation spend. Even including the additional spend required by COVID-19 this increase is in line with expectations and reflects the continued focus on 'Run the Bank' cost discipline. 

Expected credit loss expense

Our expected credit loss expense increased to £112.0 million for the first six months of 2020 up from £4.4 million for the comparable period in 2019. This has primarily been driven by the effects of deteriorating macro-economic factors used in the modelling or where specific impairments are attributable to COVID-19 related factors. Alongside COVID-19 related factors the remaining increase is generally as a result of the portfolio maturing as well as a small number of individual loans.

Commercial lending has been the single largest constituent of our portfolio which has contributed to the increase in the expected credit losses, particularly amongst sectors where we anticipate COVID-19 will have a disproportionate impact, such as retail and hospitality. For these sectors we have provisioned for higher levels of expected credit losses to reflect the risk of a higher default rate.

Balance sheet review

Table 3: Summary balance sheet

 

30 June 2020

(unaudited)

£'million

31 December 2019

(audited)

£'million

Growth

Assets

 

 

 

Cash and balances with the Bank of England

3,080

2,989

 

Loans and advances to customers

14,857

14,681

1%

Investment securities

3,021

2,565

 

Property, plant and equipment

821

856

 

Intangible assets

202

168

 

Other assets

153

141

 

Total assets

22,134

21,400

3%

Liabilities

 

 

 

Deposits from customers

15,577

14,477

8%

Deposits from central banks

3,801

3,801

 

Debt securities

599

591

 

Repurchase agreements

211

250

 

Lease liabilities

340

341

 

Deferred grant

31

50

 

Other liabilities

228

307

 

Total liabilities

20,787

19,817

 

Total equity

1,347

1,583

 

 

Deposits

Deposits grew by 8% from 31 December 2019 to £15,577 million at 30 June 2020 (31 December 2019: £14,477 million). The increase was primarily driven by our core retail and SME franchises which were up 7% and 26% respectively from the start of the year.

Current accounts grew by 23% during the first half of the year and make up 34% of total customer deposits as at 30 June 2020 (31 December 2019: 30%). We are seeing a shift in customer preference towards having instant access to funds, leading to growth of current accounts and instant access savings accounts. Growth in fixed rate savings also slowed as result of us unwinding the pricing decision we took last year.

We envisage a slowdown in deposit growth in the second half as customers start to utilise cash balances as and when Government support measures are reduced and the broader macro environment improves. We have particularly noticed that a significant proportion of the BBLS loans we have issued have been unused and remain in customers' accounts. This is likely to be as a result of businesses drawing these loans in advance of potential need; given they pay no interest on these for the first year it is a cost effective and accessible method of additional liquidity. 

Lending

Net lending ended the period at £14,857 million, up from £14,681 million at 31 December 2019. The £176 million increase has been driven by the £780 million lent out under the Government support schemes, offset by increased credit provisions as well as the back book continuing to pay down as it matures.

Retail mortgages remained the largest component of the lending book at 68% of gross lending (31 December 2019: 71%), down £240 million to £10,190 million at 30 June 2020 from £10,430 million at 31 December 2019 reflecting attrition and lower activity in the market. We plan to increase our penetration into the specialist mortgage market as part of our strategy.

Commercial loans, which now comprise 31% of our lending, increased £562 million to £4,614 million at 30 June 2020 from £4,052 million at 31 December 2019. This includes the £730 million of BBLS and £50 million CBILS which are continuing to grow.

Consumer unsecured lending still remains a relatively immaterial part of our lending portfolio, accounting for only 1% of our gross lending at 30 June 2020. As part of our strategy we aim to significantly increase this area of lending, the acquisition of RateSetter gives us the platform and capability in order to be able to scale this area of lending at pace.

Term funding scheme

In March the Bank of England launched TFSME to support lending to small and medium sized business. We welcome the introduction of TFSME as it will allow access to additional funding and provides further flexibility to our broader funding plans, including the repayment of the Term Funding Scheme (TFS) drawings.

Property, plant & equipment and intangibles

Non-current assets have increased during the period, reflecting the investment we continue to make as a Group. The largest increase is in relation to intangible assets which have increased by £34 million to £202 million as a result of our digital initiatives, including those part funded by the capability and innovation fund grant.  These include direct debit origination and online business account opening (in Beta testing).

The rate of increase in both intangibles and PPE has slowed as we continue to moderate our growth plans and focus on ensuring maximum capital efficiency. This is particularly evident in our PPE where we expect growth to be more measured in the short term as a result of the scaling back of our store opening plans.

During the first half of the year we opened six new stores, including our first in Wales. This includes a further two northern stores in Sheffield and Liverpool, where the running costs are being partly funded by the capability and innovation fund grant for their first 18 months in operation.

We will not be opening any further stores over the course of 2020 and only one store, which is already under construction, in 2021.

Capital

Our CET1 and total capital plus MREL ratios at 30 June 2020 were 14.5% and 21.3% respectively, above the regulatory minimum of 9.6% and 20.5% (minimums based on current capital requirements, excluding any confidential PRA buffer, if applicable). CET1 also remains materially above our target of c.12%.

During the first six months of the year a number of favourable changes have occurred, consisting of a reduction in the counter-cyclical buffer and the Capital Requirements Regulation "Quick Fixes". Consultation is ongoing with regards to further capital changes, particularly in relation to the capital treatment of software and the MREL framework review. We continue to monitor these developments and retain an active dialogue with our regulators on these matters.

Liquidity

Our liquidity position continues to be strong and we were well placed entering the pandemic. We ended 30 June 2020 with a Liquidity Coverage Ratio (LCR) of 226%. We will continue to prudently manage our investments and to invest in high quality securities while maintaining a strong cash position.

The reduction in our loan to deposit ratio back to below 100% and access to TFSME also provide sustainable funding going forward and also means we have little dependence on non-central bank wholesale funding.

RateSetter acquisition

On 3 August we announced an agreement to acquire Retail Money Market LTD ("RateSetter") for an initial consideration of £2.5 million, followed by up to £0.5 million deferred consideration after 12 months, with additional consideration of up to £9.0 million payable on the third anniversary of the completion of the transaction, subject to the satisfaction of certain key performance criteria. Completion is expected in the second half of the year. RateSetter will have minimal impact on our capital at the point of acquisition. Going forward the ability to grow our unsecured portfolio at scale will be NIM accretive and help cushion the impacts of the low interest rate environment and the effects of a competitive mortgage market.

Going concern

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 in business for the foreseeable future. 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 surrounding the ongoing COVID-19 pandemic.

Outlook

Looking ahead to the second half of 2020 and beyond, we anticipate continued economic uncertainty, which will continue to weigh on both our financial performance as the longer-term economic consequences begin to materialise, particularly as immediate Government support measures are withdrawn.

Despite these clear challenges we are well positioned to continue the execution of our strategy and a return to profitability over the medium term. We continue to see a path to delivering the targets we set out in February 2020 and to delivering acceptable returns for our shareholders

 

 

David Arden

Chief Financial Officer  

5 August 2020

 

risk review

Our risk management approach lies at the heart of everything we do and consists of:

• A robust compliance and control environment

• Fair and consistent customer treatment and outcomes

• Maintaining a strong risk culture, with the right expertise

 

We have adopted a set of risk management principles that must be followed across the Bank with robust controls in place to ensure risk is managed effectively. Our risk strategy and Risk Management Framework is maintained by the Chief Risk Officer and approved by the Board and are kept under continuous review.

Principal risks

As at 30 June 2020 there had been no significant change to the business model, risk management framework or risk appetites we outlined in our 2019 Annual Report and Accounts.

A detailed description of our principal risks and uncertainties to which we are exposed, along with the Group's approach to mitigating these risk, is set out in the risk report which can be found on pages 18 to 39 of our 2019 Annual Report and Accounts.  These risks consist of:

1.  credit risk - the risk of financial loss due to a borrower's failure to meet the terms of any debt contract or where a borrower otherwise fails to perform as agreed, due to financial difficulties.

2.  operational risk -  the risk of direct or indirect loss from failed or inadequate processes, people or systems, or exposure to external events.

3.  liquidity and funding risk - the risk that future financial obligations are not met or future asset growth cannot occur because of an inability to obtain funds at a reasonable price within a reasonable time.

4.  market risk - the risk that earnings or the economic value of equity will underperform due to changes in interest rates, foreign exchange rates, or other financial market asset prices. Our ability to manage market risks contributes to our overall capital management.

5.  financial crime - the risk of financial loss or reputational damage due to regulatory fines or penalties, restriction or suspension of business, or cost of mandatory corrective action as a result of failing to comply with prevailing legal and regulatory requirements relating to financial crime (which we define as including internal or external fraud, anti-money laundering/counter terrorist financing, bribery and corruption and sanctions compliance).

6.  regulatory risk - the risk of financial loss or reputational damage due to regulatory fines or penalties, restriction or suspension of business, or cost of mandatory corrective action as a result of failing to adhere to applicable laws, regulations and supervisory guidance.

7.  conduct risk - the risk of treating customers unfairly, and delivering inappropriate outcomes that lead to customer detriment.

8.  model risk - the potential for negative outcomes from random or systematic errors in model development, input, calculation or use of outputs. Models are always approximations and never perfect and there are therefore risks associated with using them. These risks range from their theoretical basis, the data and methods used in their construction, the economic conditions under which they are developed, and their use.

Further information on credit risk and liquidity risk are outlined below.

Impacts of COVID-19 on principal risks

Expected credit losses

The most significant factor that has impacted our principal risks for the first six months has been the COVID-19 pandemic. Primarily this has impacted our credit risk profile with our expected credit loss provisions increasing from £34 million at 31 December 2019 to £145 million at 30 June 2020.

Table 4: Expected credit loss movements

 

31 December 2019

(audited)

£'million

Underlying

expected credit loss increase1

(unaudited)

£'million

COVID-19 expected credit loss increase2

(unaudited)

£'million

30 June 2020

(unaudited)

£'million

Retail mortgages

8

3

29

40

Consumer lending

13

2

7

22

Commercial lending

13

9

61

83

Total

34

14

97

145

 

(1)  Underlying ECL represents the natural deterioration of the book as it matures and specific impairments where there was an indication of credit deterioration prior to the COVID-19 pandemic.

(2)  COVID-19 ECL represents the estimated increase in credit risk specifically due to the impacts of the COVID-19 pandemic on customers.

Support for customers

We are committed to supporting customers during this difficult time, In line with regulatory requirements, we offered payment deferrals to mortgage and personal customers to who required that support measure. This was initially for a three month period from March to June, however this has been extended for a further three month period until September.

In addition, we have proactively offered support measures to commercial customers. In total we have granted customer support arrangements on 22% of our commercial lending portfolio (based on gross exposure).

As at 30 June 2020 we had granted over 10,000 customer support measures (primarily consisting of payment deferrals). Additionally, we have provided covenant waivers for our elements of our commercial loan portfolio to provide additional support. We are continuing to monitor and support customers currently utilising customer support measures to ensure we minimise our credit risk.

The weighted average debt-to-value of the retail mortgages and commercial lending subject to support measures up to 30 June 2020 was 64% and 57% respectively.

Table 5: Customer measures support provided during 2020 (up to 30 June 2020)1

 

Number of loans subject to support measures

(unaudited)

Gross carrying amount

(unaudited)

£'million

Proportion of portfolio

(unaudited)

%

Retail mortgages

6,419

1,776

17

Consumer lending

1,415

9

5

Commercial lending

2,621

1,010

22

Total

10,455

2,795

19

 

(1)  Excludes covenant waivers

 

In addition to providing payment deferrals and similar support measures we have undertaken a number of other initiatives to support customers in this difficult period. These include participation in all three of the Government's lending support programmes. As at 30 June 2020 we had lent £780 million under these schemes including £730 million of BBLS and £50 million of CBILS. As at 31 July 2020 we have written over 25,000 BBLS, CBILS and CLBILS loans, totalling over £1 billion. Alongside this we have provided further support to businesses and household through waiving certain account fees as well as suspending interest on overdrafts.

Credit risk

Residential mortgage lending

The majority of our lending comprises residential mortgages, typically issued by ourselves with a loan to value of less than 90% and with strong collateral providing mitigation to withstand economic stress and therefore minimise our credit losses. Loans with a debt to value (DTV) of greater than 90% have typically been acquired as part of a portfolio purchase.

 

The average debt to value (DTV) of our residential mortgage book as at 30 June 2020 was 59% (31 December 2019: 59%).

 

Table 6: Residential mortgage lending by DTV banding1

 

30 June 2020 (unaudited)

31 December 2019 (audited)

 

Retail owner occupied

£'million

Retail

buy-to-let

£'million

Total retail mortgages

£'million

Retail owner occupied

£'million

Retail

buy-to-let

£'million

Total retail mortgages

£'million

Less than 50%

2,609

433

3,042

2,647

464

3,111

51-60%

1,362

383

1,745

1,383

393

1,776

61-70%

1,381

482

1,863

1,422

505

1,927

71-80%

1,804

560

2,364

1,813

554

2,367

81-90%

1,131

14

1,145

1,201

13

1,214

91-100%

20

-

20

23

-

23

More than 100%

3

8

11

4

8

12

Total retail mortgage lending

8,310

1,880

10,190

8,493

1,937

10,430

 

(1)  Property valuations have not been updated since March 2020

Table 7: Residential mortgage lending by repayment type

 

30 June 2020 (unaudited)

31 December 2019 (audited)

 

Retail owner occupied

£'million

Retail

buy-to-let

£'million

Total retail mortgages

£'million

Retail owner occupied

£'million

Retail

buy-to-let

£'million

Total retail mortgages

£'million

Interest only

2,579

1,784

4,363

2,573

1,834

4,407

Capital and interest

5,731

96

5,827

5,920

103

6,023

Total retail mortgage lending

8,310

1,880

10,190

8,493

1,937

10,430

 

Table 8: Residential mortgage lending by geographic exposure

 

30 June 2020 (unaudited)

31 December 2019 (audited)

 

Retail owner occupied

£'million

Retail

buy-to-let

£'million

Total retail mortgages

£'million

Retail owner occupied

£'million

Retail

buy-to-let

£'million

Total retail mortgages

£'million

Greater London

3,349

1,161

  4,510

3,424

1,197

4,621

South East

  2,048

 325

2,373

2,094

337

2,431

South West

728

  95

823

738

97

835

East of England

  552

  74

626

570

76

646

North West

  471

  65

536

482

66

548

West Midlands

  333

  60

393

340

62

402

Yorkshire and the Humber

  270

  37

307

275

37

312

East Midlands

  237

  26

263

243

26

269

Wales

  166

  20

186

169

21

190

North East

  90

  10

100

93

11

104

Scotland

  66

  7

73

65

7

72

Total retail mortgage lending

8,310

1,880

10,190

8,493

1,937

10,430

 

Commercial lending

Table 9: Summary of commercial lending

 

30 June

2020

(unaudited)

£'million

31 December

 2019

(audited)

£'million

Professional buy-to-let

1,167

1,219

Other commercial term loans

2,222

2,327

Non-Government backed commercial term loans

3,389

3,546

Bounce back loans

730

-

Coronavirus business interruption loans

50

-

Government backed commercial term loans

780

-

Total commercial term loans

4,169

3,546

Overdrafts and revolving credit facilities

185

202

Credit cards

3

3

Asset and invoice finance

257

301

Total commercial lending

4,614

4,052

 

Our commercial lending remains largely comprised of term loans. Roughly half of this consists of professional buy-to-let lending and the new Government backed lending schemes, with the remaining balance consisting of other term loans to a diverse range of businesses in differing sectors.

Other term loans have a much greater DTV range, with 15% of the book (31 December 2019: 17%) having a DTV of greater than 100%. For these types of loans we have typically obtained additional forms of collateral which are not included in the DTV figure (such as debentures or unsupported guarantees) which provide an additional level of mitigation not accounted for in the calculation of expected credit loss . As at 30 June 2020 the average DTV of our commercial term loan book was 60% (31 December 2019: 60%).

COVID-19 has had a disproportionate impact on a number of sectors, particularly hospitality and retail and correspondingly we have provisioned for higher levels of expected credit losses in these sectors to reflect the risk of higher default rate.

Table 10: Commercial term lending (exc. Government-backed lending) by DTV banding1

 

30 June 2020 (unaudited)

31 December 2019 (audited)

 

Professional

buy-to-let

£'million

Other term loans

£'million

Total commercial term loans

£'million

Professional

buy-to-let

£'million

Other term loans

£'million

Total commercial term loans

£'million

Less than 50%

  364

  882

  1,246

363

911

1,274

51-60%

  270

  541

  811

283

535

818

61-70%

  371

  324

  695

404

343

747

71-80%

  136

  69

  205

135

86

221

81-90%

  11

  51

  62

10

31

41

91-100%

  6

  13

  19

12

37

49

More than 100%

  9

  342

  351

12

384

396

Total commercial term lending

  1,167

  2,222

  3,389

1,219

2,327

3,546

 

(1)  Property valuations have not been updated since March 2020

 

Table 11: Commercial term lending (exc. Government-backed lending) by repayment type

 

30 June 2020 (unaudited)

31 December 2019 (audited)

 

Professional

buy-to-let

£'million

Other term loans

£'million

Total commercial term loans

£'million

Professional

buy-to-let

£'million

Other term loans

£'million

Total commercial term loans

£'million

Interest only

  1,109

  281

  1,390

1,155

328

1,483

Capital and interest

  58

  1,941

  1,999

64

1,999

2,063

Total commercial term lending

  1,167

  2,222

  3,389

1,219

2,327

3,546

 

Table 12: Commercial term lending (exc. Government-backed lending) by geographic exposure

 

30 June 2020 (unaudited)

31 December 2019 (audited)

 

Professional

buy-to-let

£'million

Other term loans

£'million

Total commercial term loans

£'million

Professional

buy-to-let

£'million

Other term loans

£'million

Total commercial term loans

£'million

Greater London

  812

  1,355

  2,167

850

1,414

2,264

South East

  216

  399

  615

224

424

648

South West

  51

  169

  220

52

156

208

East of England

  32

  124

  156

35

104

139

North West

  20

  63

  83

21

115

136

West Midlands

  11

  49

  60

11

49

60

Yorkshire and the Humber

  11

  24

  35

11

26

37

East Midlands

  5

  12

  17

5

12

17

Wales

  4

  11

  15

4

10

14

North East

  3

  10

  13

4

9

13

Northern Ireland

  1

  5

  6

1

5

6

Scotland

  1

  1

  2

1

3

4

Total commercial term lending

  1,167

  2,222

  3,389

1,219

2,327

3,546

 

Table 13: Commercial term lending (exc. Government-backed lending) by industry exposure

 

30 June 2020 (unaudited)

31 December 2019 (audited)

 

Professional

buy-to-let

£'million

Other term loans

£'million

Total commercial term loans

£'million

Professional

buy-to-let

£'million

Other term loans

£'million

Total commercial term loans

£'million

Real estate (rent, buy and sell)

1,167

1,070

2,237

1,219

1,155

2,374

Legal, Accountancy & Consultancy

-

202

202

-

236

236

Health & Social Work

-

243

243

-

263

263

Hospitality

-

323

323

-

308

308

Retail

-

95

95

-

100

100

Real estate (management of)

-

11

11

-

11

11

Construction

-

33

33

-

35

35

Recreation, cultural and sport

-

51

51

-

51

51

Investment and unit trusts

-

7

7

-

8

8

Education

-

29

29

-

30

30

Real estate (development)

-

82

82

-

62

62

Other

-

76

76

-

68

68

Total commercial term lending

1,167

2,222

3,389

1,219

2,327

3,546

 

Consumer lending

Consumer unsecured lending still remains a relatively immaterial part of our lending portfolio, although as part of our strategy we aim to significantly increase this area of lending, underlined by our acquisition of RateSetter.

Non-performing loans

Table 14: Non-performing loans

 

30 June 2020 (unaudited)

31 December 2019 (audited)

 

NPLs

£'million

NPL ratio

%

NPLs

£'million

NPL ratio

%

Retail mortgages

39

0.39%

25

0.24%

Consumer lending

11

5.74%

10

4.30%

Commercial (exc. Government backed lending)

91

2.54%

42

1.12%

BBLS & CBILS

-

-

-

-

Commercial lending (including asset and invoice finance)

91

2.06%

42

1.12%

Total

142

0.96%

77

0.53%

 

The increase in retail mortgage non-performing loans (NPL) is a result of a small number of large balance mortgages with relatively lower DTV.

The Commercial NPL ratio has deteriorated due to seasoning of the portfolio and COVID-19 related issues driven by individual single name customers entering the highest risk category of our watch list coupled with customers receiving forbearance. We have not grown the commercial book, with the exception of the Government-backed lending schemes over the first half of 2020.

The Consumer NPL ratio has deteriorated due to maturity of the book.

Cost of risk

Table 15: Cost of risk

 

Half year to

30 June 2020 (unaudited)

%

Full year

31 December 2019 (audited)

%

Retail mortgages

0.66%

-

Consumer lending

7.35%

1.92%

Commercial (exc. Government backed lending)

3.61%

0.11%

BBLS & CBILS

-

-

Commercial lending (including asset and invoice finance)

3.49%

0.11%

Total

1.55%

0.08%

 

Liquidity and funding risk

Liquidity

O ur liquidity position continues to be strong and we were therefore well placed entering the pandemic. We ended 30 June 2020 with an LCR of 226%. We prudently manage our investments and continue to invest in high quality securities as well as maintaining a strong cash position. We ended the period with a loan to deposit ratio of 95%, which is back in line with our long term appetite of being below 100%.  

Capital

We manage capital in accordance with prudential rules issued by the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) , in line with the European Union (EU) Capital Requirements Directive and we are committed to maintaining a strong capital base, under both existing and future regulatory requirements.

 

From 1 January 2020, MREL took effect on an interim basis, and will come fully into effect in 2022. Holding MREL debt is a requirement placed on larger firms to ensure that in the event of their failing and requiring resolution by the Bank of England, their customers continue to have access to their funds, and the operation of their accounts will not be affected. We raised £350 million in qualifying MREL debt in the second half of 2019 and remain above the regulatory minimum.

 

 

Table 16: Capital resources

 

30 June 2020

(unaudited)

£'million

31 December 2019

(audited)

£'million

Ordinary share capital

-

-

Share premium

1,964

1,964

Retained earnings

(632)

(392)

Intangible assets

(202)

(168)

Deferred tax liability (CET1 element)

4

4

Other reserves

15

11

IFRS 9 transitional adjustments

94

8

Total Tier 1 capital (CET1 capital)

1,243

1,427

Debt securities

249

249

Total Tier 2 capital

249

249

Total

1,492

1,676

 

Emerging risks

Alongside COVID-19, which is covered above, within our annual report we outlined a number of emerging risks. An update to these is provided below, where appropriate. We have not identified any new emerging risks in the first half of 2020.

Emerging risk

Change from full year

Operational resilience

A strong COVID-19 response has seen a large proportion of our colleagues working from home since March and this will continue for the months ahead.  The availability of technology, suppliers and processes has been managed through the height of the pandemic, with limited impacts to critical processes.

Short term manual processes have increased to support the rapid delivery of COVID-19 driven change and more sustainable mitigations are being developed to support increased home working in the future. Evolving cyber and fraud threats are being monitored, and a number of change programmes are underway to improve our technology and data control environment and increase our operational resilience.

Culture and people

There is an emerging risk relating to retaining or attracting colleagues in key roles to support the execution of our revised strategy.

Additionally, 2020 has seen a significant increase in the number of colleagues working from home, many for the foreseeable future. Whilst colleagues have adapted to this new operating environment, we are aware of the additional pressures it can bring in many instances, partially in relation to colleague's physical and mental health. We continue to support colleagues as much as we can and have launched a new health and wellbeing hub as well as signing up all our colleagues to a free, annual subscription to Headspace (an app dedicated to mindfulness, meditation, sleep and movement).

Prolonged working from home also presents emerging challenges in preserving our unique culture. We are working hard to ensure our culture is retained in this different operating environment and have made concerted efforts, including our 10th Birthday celebrations. We have continued to hire and on-board new colleagues through the year, including during lockdown and are continuing to evolve this process to make it as easy and welcoming as possible.

Management continues to monitor this area of emerging risk as a top priority; making the Bank a great place to work is key to retaining and attracting the colleagues needed to deliver our strategy.

Climate change

Despite the current situation, climate change risk remains high and is still considered important to us as well as many of our stakeholders.

As part of stimulating a return to economic growth, policy makers are increasingly looking towards encouraging a faster transition to a low-carbon future. As such we continue to develop our approach toward climate change risk. 

 

STATEMENT OF DIRECTOR's RESPONSIBILITIES

The directors confirm to the best of their knowledge these condensed interim financial statements have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and that the interim management report includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely:

• An indication of important events that have occurred during the first six months ended 30 June 2020 and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

• Material related-party transactions in the first six months ended 30 June 2020 and any material changes in the related-party transactions described in the last annual report.

 

Signed on its behalf by:

 

Daniel Frumkin

David Arden

Chief Executive Officer

Chief Financial Officer

5 August 2020

5 August 2020

 

Independent review report to Metro Bank PLC

Report on the interim financial statements

Our conclusion

We have reviewed Metro Bank PLC's condensed consolidated interim financial statements (the "interim financial statements") in the interim report of Metro Bank PLC for the six month period ended 30 June 2020. 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 International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

What we have reviewed

The interim financial statements comprise:

· The consolidated balance sheet as at 30 June 2020;

· The consolidated statement of comprehensive income for the period then ended;

· The consolidated cash flow statement for the period then ended;

· The consolidated statement of changes in equity for the period then ended; and

· The notes to the interim financial statements.

The interim financial statements included in the interim report have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

As disclosed in note 1 to the interim financial statements, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

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.

Our responsibility is to express a conclusion on the interim financial statements in the interim report based on our review. 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.

What a review of interim financial statements involves

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. 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.

 

PricewaterhouseCoopers LLP

Chartered Accountants

London

5 August 2020

 

Consolidated statement of comprehensive income (unaudited)

For the half year to 30 June 2020

 

Note

Half year to

30 June

2020

£'million

Half year to

31 December 2019

£'million

Half year to

30 June

2019

£'million

Interest income

2

217.7

244.2

252.0

Interest expense

2

(101.8)

(102.3)

(85.8)

Net interest income

 

115.9

141.9

166.2

Net fee and commission income

 

23.5

28.5

32.5

Net gains/(losses) on sale of assets

 

1.0

(2.5)

4.1

Other income

 

28.5

27.2

17.7

Total income

 

168.9

195.1

220.5

 

 

 

 

 

General operating expenses

3

(234.1)

(205.9)

(174.7)

Depreciation and amortisation

7,8

(36.8)

(39.4)

(37.0)

Impairment and write offs of PPE and intangible assets

7,8

(26.6)

(76.7)

(1.0)

Total operating expenses

 

(297.5)

(322.0)

(212.7)

Expected credit loss expense

 

(112.0)

(7.3)

(4.4)

(Loss)/profit before tax

 

(240.6)

(134.2)

3.4

Tax credit/(expense)

5

1.1

(49.7)

(2.1)

(Loss)/profit for the period

 

(239.5)

(183.9)

1.3

 

 

 

 

 

Other comprehensive income/(expense) for the period

 

 

 

 

Items which will be reclassified subsequently to profit or loss where specific conditions are met:

 

 

 

 

Movements in respect of investment securities held at fair value through other comprehensive income (net of tax):

 

 

 

 

- changes in fair value

 

3.2

2.0

0.7

- changes in fair value transferred to the income statement on disposal

 

(0.2)

(2.8)

0.4

Total other comprehensive income/(expense)

 

3.0

(0.8)

1.1

 

 

 

 

 

Total comprehensive income for the period

 

(236.5)

(184.7)

2.4

 

 

 

 

 

Earnings per share

 

 

 

 

Basic earnings per share (pence)

12

(138.9)

(106.7)

1.0

Diluted earnings per share (pence)

12

(138.9)

(106.7)

1.0

 

Consolidated balance sheet (unaudited)

As at 30 June 2020

 

Note

30 June

2020

£'million

31 December

 2019

£'million

30 June

2019

£'million

Assets

 

 

 

 

Cash and balances with the Bank of England

 

3,080

2,989

2,298

Loans and advances to customers

6

14,857

14,681

14,989

Investment securities held at FVOCI

 

444

411

419

Investment securities held at amortised cost

 

2,577

2,154

1,951

Property, plant and equipment

7

821

856

798

Intangible assets

8

202

168

217

Prepayments and accrued income

 

70

66

65

Deferred tax asset

5

-

-

39

Assets classified as held for sale

 

-

-

521

Other assets

 

83

75

60

Total assets

 

22,134

21,400

21,357

Liabilities

 

 

 

 

Deposits from customers

 

15,577

14,477

13,703

Deposits from central banks

 

3,801

3,801

3,801

Debt securities

 

599

591

249

Repurchase agreements

 

211

250

1,176

Derivative financial liabilities

 

12

8

9

Lease liabilities

9

340

341

342

Deferred grants

10

31

50

115

Provisions

 

12

17

2

Deferred tax liabilities

5

15

15

-

Other liabilities

 

189

267

193

Total liabilities

 

20,787

19,817

19,590

Equity

 

 

 

 

Called up share capital

11

-

-

-

Share premium account

11

1,964

1,964

1,964

Retained earnings

 

(632)

(392)

(208)

Other reserves

 

15

11

11

Total equity

 

1,347

1,583

1,767

 

 

 

 

 

Total equity and liabilities

 

22,134

21,400

21,357

 

The notes on pages 29 to 46 form part of the condensed consolidated interim financial statements.

 

These condensed consolidated interim financial statements were approved and authorised for issue by the Board of Directors on 5 August 2020 and were signed on its behalf by:

 

Sir Michael Synder

Daniel Frumkin

David Arden

Interim Chairman

Chief Executive Officer

Chief Financial Officer

 

Consolidated cash flow STATEMENT ( unaudited)

For the half year to 30 June 2020

 

Note

Half year to

30 June

2020

£'million

Half year to

31 December 2019

£'million

Half year to

30 June

2019

£'million

Reconciliation of (loss)/profit before tax to net cash flows from operating activities:

 

 

 

 

(Loss)/profit before tax

 

(241)

(134)

3

Adjustments for:

 

 

 

 

Impairment and write offs of PPE and intangible assets

7,8

27

77

1

Interest on lease liabilities

9

9

9

9

Depreciation and amortisation

7,8

37

39

37

Share option award charges

4

1

2

2

Grant income recognised in the income statement

10

(16)

(11)

(5)

Amounts provided for

 

5

12

-

(Gain)/loss on sale of assets

 

(1)

2

(4)

Accrued interest on and amortisation of investment securities

 

(2)

(11)

3

Changes in operating assets and liabilities

 

 

 

 

Changes in loans and advances to customers

 

(176)

309

(754)

Changes in deposits from customers

 

1,100

774

(1,958)

Changes in operating assets

 

(11)

824

(850)

Changes in operating liabilities

 

(61)

(1,213)

1,182

Net cash inflows/(outflows) from operating activities

 

671

679

(2,334)

Cash flows from investing activities

 

 

 

 

Net (purchase)/sale of investment securities

 

(454)

(190)

1,765

Purchase of PPE

 

(10)

(87)

(33)

Purchase and development of intangible assets

8

(53)

(40)

(39)

Net cash (outflows)/inflows from investing activities

 

(517)

(317)

1,693

Cash flows from financing activities

 

 

 

 

Shares issued (net of costs)

11

-

-

359

Debt securities issued (net of costs)

 

-

342

-

Grants received

10

-

-

120

Grants repaid

10

(50)

-

-

Repayment of capital element of leases

9

(13)

(13)

(12)

Net cash (outflows)/inflows from financing activities

 

(63)

329

467

 

 

 

 

 

Net increase/(decrease) in cash and cash equivalents

 

91

691

(174)

Cash and cash equivalents at start of period

 

2,989

2,298

2,472

Cash and cash equivalents at end of period

 

3,080

2,989

2,298

 

 

 

 

 

(Loss)/profit before tax includes:

 

 

 

 

Interest received

 

217

240

253

Interest paid

 

(107)

(95)

(79)

 

Consolidated statement of changes in EQUITY ( unaudited)

For the half year to 30 June 2020

 

 

Called-up

Share capital

£'million

Share

premium £'million

Retained

earnings

£'million

FVOCI

reserve

£'million

Share

option reserve

£'million

Total

equity

£'million

Balance at 1 January 2020

-

1,964

(392)

(3)

14

1,583

Loss for the period

-

-

(240)

-

-

(240)

Other comprehensive income (net of tax) relating to investment securities designated at fair value through other comprehensive income

-

-

-

3

-

3

Total comprehensive income

-

-

(240)

3

-

(237)

Net share option movements

-

-

-

-

1

1

Balance at 30 June 2020

-

1,964

(632)

-

15

1,347

 

 

 

 

 

 

 

Balance at 1 July 2019

-

1,964

(208)

(2)

13

1,767

Loss for the period

-

-

(184)

-

-

(184)

Other comprehensive expense (net of tax) relating to investment securities designated at fair value through other comprehensive income

-

-

-

(1)

-

(1)

Total comprehensive income

-

-

(184)

(1)

-

(185)

Net share option movements

-

-

-

-

1

1

Balance at 31 December 2019

-

1,964

(392)

(3)

14

1,583

 

 

 

 

 

 

 

Balance at 1 January 2019

-

1,605

(209)

(3)

10

1,403

Profit for the period

-

-

1

-

-

1

Other comprehensive income (net of tax) relating to investment securities designated at fair value through other comprehensive income

-

-

-

1

-

1

Total comprehensive income

-

-

1

1

-

2

Shares issued

-

375

-

-

-

375

Cost of shares issued

-

(16)

-

-

-

(16)

Net share option movements

-

-

-

-

3

3

Balance at 30 June 2019

-

1,964

(208)

(2)

13

1,767

 

 

 

 

 

 

 

Note

11

11

 

 

 

 

 

Notes to the condensed consolidated interim financial statements (unaudited)

1.  Basis of preparation and accounting policies

1.1  General information

Metro Bank PLC ("our" or "we") provides retail and commercial banking services in the UK, 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 preparation

The condensed consolidated interim financial statements of Metro Bank and its subsidiaries ("the Group") for the half year ended 30 June 2020 were authorised for issue in accordance with a resolution of the Directors on 5 August 2020.

These condensed consolidated interim financial statements for the half year ended 30 June 2020 have been prepared in accordance with the Disclosure and Transparency Rules of the FCA and IAS 34 Interim Financial Reporting as adopted by the EU. They do not include all the information required by International Financial Reporting Standards (IFRS) in full annual financial statements and should be read in conjunction with our Annual Report and Accounts for the year ended 31 December 2019 which are available on our website.

The comparative financial information for the year ended 31 December 2019 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for that year has been delivered to the Registrar of Companies. 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.

Going concern

The Directors consider that it is appropriate to continue to adopt the going concern basis of accounting in preparing the condensed consolidated interim financial statements. In reaching this assessment, the Directors have considered projections for the Group's capital and funding position as well as other principal risks. As part of this process the Directors have considered an updated long-term plan including associated upside and downside scenarios. All scenarios considered incorporate assumptions surrounding the potential impacts of the COVID-19 pandemic on the economy over both the near and longer terms. Directors also considered the key assumptions and uncertainties that feed into these plans alongside management actions and mitigants that are available. Under all scenarios considered the Directors believe the Group to remain a going concern on the basis that it maintains sufficient resources (including liquidity and capital) to be able to continue to operate for the foreseeable future. The Directors did not deem there to be any material uncertainties with regards to the assessment on going concern.

1.3  Accounting policies

The accounting policies are consistent with those applied in our 2019 Annual Report and Accounts.

Future accounting developments

There are no known future accounting developments that are likely to have a material impact on the Group.

1.4  Critical accounting judgements

In our 2019 Annual Report and Accounts we identified three critical accounting judgements:

· Measurement of the expected credit loss allowance (significant increase in credit risk)

· Recognition of provisions

· Write-off of intangible assets

We continue to consider measurement of the expected credit loss allowance (significant increase in credit risk) and recognition of provisions to be significant accounting judgements at 30 June 2020. The only change to the nature of the judgements described in the 2019 Annual Report and Accounts relates to the judgment applied when determining if there has been a significant increase in credit risk. During the half year to 30 June 2020 we introduced the ability for our customers to request payment deferrals as a result of the COVID-19 pandemic. The use of a payment deferral is not in itself considered to be trigger of a significant increase in credit risk and as such the granting of a COVID-19 related payment holiday does not in itself result in a transfer between stages for the purposes of IFRS 9. Payment deferral is however a potential indicator of a significant increase in credit risk and the increased risk has been reflected via a judgemental uplift to the probabilities of default for loans subject to payment deferral. Otherwise the process we apply to determine whether a significant increase in credit risk has occurred is consistent with that outlined in our 2019 Annual Report and Accounts .

Following the impairment exercise performed in 2019 and having given due consideration to the current economic environment have not identified any new impairment indicators in the 6 months to 30 June 2020.  We therefore do not consider the write-off or impairment of intangible assets to be a significant accounting judgement at 30 June 2020.

No new critical accounting judgements have been identified as at 30 June 2020.

1.5  Critical accounting estimates

In our 2019 Annual Report and Accounts we identified one critical accounting estimate relating to the formulation and incorporation of multiple forward-looking economic scenarios into the measurement of the expected credit loss allowance.  We continue to consider this to be a critical accounting estimate. 

As described in the 2019 Annual Report and Accounts, 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 forecast economic conditions, sufficient to calculate unbiased ECL. At 30 June 2020 we used three scenarios ("Baseline", "Upside" and "Downside") all of which reflect the impact of the current uncertainty in the UK economy due to the COVID-19 pandemic.

The following factors, considered to be the key drivers of ECL, have been used for the scenarios applied:

· UK five year mortgage interest rates

· UK unemployment rates

· UK house price index (HPI) changes, year on year

· UK gross domestic product (GDP) changes, year on year

The weightings applied to each scenario at 30 June 2020 are:

· Baseline - 40%

· Upside and Downside - 30% each

The weighted ECL is higher than the Baseline scenario, reflecting the impact of the Downside scenario, offset by the impact of the Upside scenario.

 

The weightings applied to each scenario are considered to represent significant accounting estimates. We have performed an assessment of the impact on the ECL if each of the Baseline, Upside and Downside scenarios were applied to the ECL calculation using a 100% weighting (that is, ignoring all other scenarios in each case):

 

Scenario

ECL

£'million

Variance to reported weighted ECL at 30 June 2020

Weighted

145

-

Baseline

136

(6%)

Upside

118

(19%)

Downside

184

27%

 

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 take into account movements in impairment stage allocations that would result under the different scenarios.

The period-end assumptions used for the ECL estimate as at 30 June 2020 are as follows:

 

Macroeconomic variable

Scenario

2020

2021

2022

2023

UK five year mortgage interest rates (%)

Baseline

1.73%

1.91%

2.24%

2.78%

Upside

1.99%

2.44%

2.85%

3.32%

Downside

1.77%

1.92%

1.90%

2.06%

Unemployment (%)

Baseline

8.41%

8.40%

7.86%

6.93%

Upside

7.65%

6.79%

6.43%

5.73%

Downside

9.94%

10.77%

10.39%

9.22%

House price index (YoY%)

Baseline

(14.64%)

(4.88%)

5.75%

9.95%

Upside

(12.13%)

1.26%

7.21%

8.27%

Downside

(19.48%)

(14.44%)

1.99%

10.35%

UK GDP (YoY%)

Baseline

(7.66%)

3.85%

5.17%

3.47%

Upside

(4.71%)

3.85%

4.96%

3.42%

Downside

(10.64%)

4.38%

5.27%

3.41%

 

1.6  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

2.  Net interest income

Interest income

 

Half year to

30 June

2020

£'million

Half year to

31 December 2019

£'million

Half year to

30 June

2019

£'million

Cash and balances held with the Bank of England

4.9

9.4

7.6

Loans and advances to customers

191.7

216.2

218.8

Investment securities held at amortised cost

19.5

17.3

23.3

Investment securities held at FVOCI

1.6

1.3

2.3

Total interest income

217.7

244.2

252.0

 

Interest expense

 

Half year to

30 June

2020

£'million

Half year to

31 December 2019

£'million

Half year to

30 June

2019

£'million

Deposits from customers

60.3

61.2

51.2

Deposits from central banks

6.8

14.4

14.1

Repurchase agreements

1.2

2.7

4.7

Debt securities

24.2

15.1

7.0

Lease liabilities

9.3

8.9

8.8

Total interest expense

101.8

102.3

85.8

 

3.  General operating expenses

 

Half year to

30 June

2020

£'million

Half year to

31 December 2019

£'million

Half year to

30 June

2019

£'million

People costs

88.7

84.6

86.3

Information technology costs

21.7

17.1

16.7

Occupancy expenses

17.2

14.7

13.9

Money transmission and other banking related costs

13.5

11.0

16.1

Transformation costs

12.4

6.8

4.7

Remediation costs

17.8

24.5

2.3

Capability & Innovation fund (C&I) costs

15.1

12.7

3.8

Legal, regulatory and professional fees

24.0

9.0

6.9

Contractor costs

2.8

2.8

3.0

Printing, postage and stationery costs

3.1

2.9

2.7

Travel costs

1.3

2.0

1.9

Marketing and advertising costs

3.6

1.8

1.7

Costs relating to preparing for the RBS alternative remedies package

-

-

1.2

Other

12.9

16.0

13.5

Total general operating expenses

234.1

205.9

174.7

 

4.  People costs

 

Half year to

30 June

2020

£'million

Half year to

31 December 2019

£'million

Half year to

30 June

2019

£'million

Wages and salaries

74.6

70.4

71.8

Social security costs

7.9

7.4

7.3

Pension costs

5.0

4.9

4.9

Equity-settled share based payments

1.2

1.9

2.3

Total people costs

88.7

84.6

86.3

 

5.  Taxation

Tax (expense)/credit for the period

The components of tax (expense)/credit for the six months ended 30 June 2020, 31 December 2019 and 30 June 2019 are:

 

Half year to

30 June

2020

£'million

Half year to

31 December 2019

£'million

Half year to

30 June

2019

£'million

Current tax

 

 

 

Current  tax

0.6

3.6

(0.1)

Adjustment in respect of prior years

-

(0.2)

(0.1)

Total current tax credit/(expense)

0.6

3.4

(0.2)

Deferred tax

 

 

 

Origination and reversal of temporary differences

(1.3)

(50.7)

(1.3)

Effect of changes in tax rates

1.8

(1.9)

(0.9)

Adjustment in respect of prior periods

-

(0.5)

0.3

Total deferred tax credit/(expense)

0.5

(53.1)

(1.9)

Total tax credit/(expense)

1.1

(49.7)

(2.1)

 

Reconciliation of the total tax credit/(expense)

The tax credit/(expense) shown in the income statement differs from the tax credit/(expense) that would apply if all accounting profits had been taxed at the UK corporation tax rate.

A reconciliation between the tax credit/(expense) and the accounting profit multiplied by the UK corporation tax rate for the half year ended 30 June 2020, 31 December 2019 and 30 June 2019 are as follows:

 

Half

year to

30 June

2020

£'million

Effective tax rate

%

Half

year to

31 December 2019

£'million

Effective tax rate

%

Half year to

30 June

2019

£'million

Effective tax rate

%

(Loss)/Profit before tax

(240.6)

 

(134.2)

 

3.4

 

Tax credit/(expense) at statutory income tax rate of 19%

45.7

19.0%

25.5

19.0%

(0.6)

19%

 

 

 

 

 

 

Tax effects of:

 

 

 

 

 

 

Non-deductible expenses - depreciation on non-qualifying fixed assets

(1.4)

(0.6%)

(2.7)

2.0%

(0.3)

9.2%

Non-deductible expenses - PPE impairment

(2.2)

(0.9%)

(1.1)

0.8%

-

-

Non-deductible expenses - remediation

(3.0)

(1.3%)

(4.4)

3.3%

-

-

Non-deductible expenses - other

(0.5)

(0.2%)

(0.6)

0.4%

(0.1)

1.1%

Impact of intangible asset impairment on R&D deferred tax liability

-

-

1.8

(1.3%)

-

-

Share based payments

(0.2)

(0.1%)

(1.5)

1.1%

(0.4)

11.1%

Adjustment in respect of prior years

-

-

(0.7)

0.5%

0.2

(5.5%)

Losses for the period for which no deferred tax asset has been recognised

 (39.1)

(16.3%)

(11.4)

8.5%

-

-

Derecognition of tax losses arising in prior years

-

-

(52.7)

39.3%

-

-

Effect of changes in tax rates

1.8

0.8%

(1.9)

1.4%

(0.9)

27.6%

Tax (expense) / credit reported in the consolidated income statement

1.1

0.4%

(49.7)

37.0%

(2.1)

62.5%

 

Effective tax rate

The effective tax rate for half year to 30 June 2020 is 0.4% (half year to 31 December 2019: 37.0%; half year to 30 June 2019: 62.5%). The main reasons for this, in addition to the reported accounting loss before tax for the period are set out below:

Derecognition of tax losses carried forward

 

We derecognised the deferred tax asset for tax losses carried forward as at 31 December 2019, due to the reduction in our expected forecast short term profit. This is due to our long term investment in cost, revenue and infrastructure transformation. The tax relief on current year losses to date for which no deferred tax asset has been recognised is £39.1 million at 30 June 2020 (31 December 2019: £11.4, 30 June 2019: £nil).

 

Effect of changes in tax rates

 

This relates to the remeasurement of deferred tax rates following a change to the main UK corporation tax rate, announced in the Budget on 11 March 2020 and substantively enacted on 17 March 2020. The rate applicable from 1 April 2020 remained at 19%, rather than the previously enacted reduction to 17%.

 

 

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.

 

The following table shows deferred tax recorded in the statement of financial position and changes recorded in the tax expense:

 

 

Unused tax losses

£'million

Investment securities & impairments

£'million

Share based payments

£'million

Property, plant & equipment

£'million

Intangible assets

£'million

Total

£'million

30 June 2020

 

 

 

 

 

 

Deferred tax assets

-

5

-

-

-

5

Deferred tax liabilities

-

(2)

-

(14)

(4)

(20)

Deferred tax liabilities (net)

-

3

-

(14)

(4)

(15)

 

 

 

 

 

 

 

At 1 January 2020

-

4

-

(15)

(4)

(15)

Income statement

-

(1)

-

1

-

-

At 30 June 2020

-

3

-

(14)

(4)

(15)

 

 

 

 

 

 

 

31 December 2019

 

 

 

 

 

 

Deferred tax assets

-

6

-

-

-

6

Deferred tax liabilities

-

(2)

-

(15)

(4)

(21)

Deferred tax liabilities (net)

-

4

-

(15)

(4)

(15)

 

 

 

 

 

 

 

At 1 July 2019

53

5

-

(12)

(7)

39

Income statement

(53)

(1)

-

(3)

3

(54)

At 31 December 2019

-

4

-

(15)

(4)

(15)

 

 

 

 

 

 

 

30 June 2019

 

 

 

 

 

 

Deferred tax assets

53

7

-

-

-

60

Deferred tax liabilities

-

(2)

-

(12)

(7)

(21)

Deferred tax assets (net)

53

5

-

(12)

(7)

39

 

 

 

 

 

 

 

At 1 January 2019

53

5

1

(11)

(7)

41

Income statement

-

-

(1)

(1)

-

(2)

At 30 June 2019

53

5

-

(12)

(7)

39

 

6.  Loans and advances to customers

 

 

30 June 2020

 

Gross carrying amount £'million

ECL allowance £'million

Net carrying amount £'million

Retail mortgages

10,190

(40)

10,150

Consumer lending

198

(22)

176

Commercial lending

4,614

(83)

4,531

Total loans and advances to customers

15,002

(145)

14,857

 

 

31 December 2019

 

Gross carrying amount £'million

ECL allowance £'million

Net carrying amount £'million

Retail mortgages

10,430

(8)

10,422

Consumer lending

233

(13)

220

Commercial lending

4,052

(13)

4,039

Total loans and advances to customers

14,715

(34)

14,681

 

 

30 June 2019

 

Gross carrying amount £'million

ECL allowance £'million

Net carrying amount £'million

Retail mortgages

10,412

(7)

10,405

Consumer lending

265

(11)

254

Commercial lending

4,343

(13)

4,330

Total loans and advances to customers

15,020

(31)

14,989

 

Loans and advances to customers by category

 

30 June

2020

£'million

31 December

 2019

£'million

30 June

2019

£'million

Retail owner occupied

8,310

8,493

8,447

Retail buy-to-let

1,880

1,937

1,965

Total retail mortgages

10,190

10,430

10,412

Overdrafts

73

77

73

Credit cards

10

11

11

Term loans

115

145

181

Total consumer lending

198

233

265

Total retail lending

10,388

10,663

10,677

Professional buy-to-let

1,167

1,219

1,313

Bounce back loans

730

-

-

Coronavirus business interruption loans

50

-

-

Other commercial term loans

2,222

2,327

2,498

Commercial term loans

4,169

3,546

3,811

Overdrafts and revolving credit facilities

185

202

225

Credit cards

3

3

3

Asset and invoice finance

257

301

304

Total commercial lending

4,614

4,052

4,343

Total gross loans to customers

15,002

14,715

15,020

 

Credit risk exposures

The following tables show the loans for each of our portfolios by days past due along with their corresponding staging. Where payment deferrals have been given as a result of COVID-19 the days past due figure exclude the deferral period. Overall COVID-19 has impacted a number of our customers, and this is reflected in the deterioration in the proportion of loans which are past due.  We have provisioned for higher levels of expected credit losses to reflect this risk. 

Retail mortgages

 

30 June 2020

 

Stage 1

12 month ECL £'million

Stage 2

Lifetime ECL £'million

Stage 3

Lifetime ECL £'million

POCI

Lifetime ECL £'million

Up to date

9,382

680

33

-

1 to 29 days past due

-

14

7

-

30 to 89 days past due

-

29

11

-

90+ days past due

-

-

34

-

Gross carrying amount

9,382

723

85

-

 

 

31 December 2019

 

Stage 1

12 month ECL £'million

Stage 2

Lifetime ECL £'million

Stage 3

Lifetime ECL £'million

POCI

Lifetime ECL £'million

Up to date

9,873

449

16

-

1 to 29 days past due

1

21

4

-

30 to 89 days past due

-

32

10

-

90+ days past due

-

-

24

-

Gross carrying amount

9,874

502

54

-

 

 

30 June 2019

 

Stage 1

12 month ECL £'million

Stage 2

Lifetime ECL £'million

Stage 3

Lifetime ECL £'million

POCI

Lifetime ECL £'million

Up to date

 10,154

 163

 16

 1

1 to 29 days past due

 6

 8

 5

 - 

30 to 89 days past due

 - 

 40

 9

 -

90+ days past due

 - 

 - 

 10

 - 

Gross carrying amount

 10,160

 211

 40

 1

 

Consumer lending

 

30 June 2020

 

Stage 1

12 month ECL £'million

Stage 2

Lifetime ECL £'million

Stage 3

Lifetime ECL £'million

POCI

Lifetime ECL £'million

Up to date

177

-

-

-

1 to 29 days past due

2

1

-

-

30 to 89 days past due

-

7

-

-

90+ days past due

-

-

11

-

Gross carrying amount

179

8

11

-

 

 

31 December 2019

 

Stage 1

12 month ECL £'million

Stage 2

Lifetime ECL £'million

Stage 3

Lifetime ECL £'million

POCI

Lifetime ECL £'million

Up to date

213

-

-

-

1 to 29 days past due

10

-

-

-

30 to 89 days past due

-

-

-

-

90+ days past due

-

-

10

-

Gross carrying amount

223

-

10

-

 

30 June 2019

 

Stage 1

12 month ECL £'million

Stage 2

Lifetime ECL £'million

Stage 3

Lifetime ECL £'million

POCI

Lifetime ECL £'million

Up to date

243

-

-

-

1 to 29 days past due

11

-

-

-

30 to 89 days past due

-

2

-

-

90+ days past due

-

-

9

-

Gross carrying amount

254

2

9

-

 

Commercial lending

 

30 June 2020

 

Stage 1

12 month ECL £'million

Stage 2

Lifetime ECL £'million

Stage 3

Lifetime ECL £'million

POCI

Lifetime ECL £'million

Up to date

4,353

2

43

-

1 to 29 days past due

2

39

1

-

30 to 89 days past due

-

97

16

-

90+ days past due

-

-

61

-

Gross carrying amount

4,355

138

121

-

 

 

31 December 2019

 

Stage 1

12 month ECL £'million

Stage 2

Lifetime ECL £'million

Stage 3

Lifetime ECL £'million

POCI

Lifetime ECL £'million

Up to date

3,900

-

7

-

1 to 29 days past due

29

18

4

-

30 to 89 days past due

-

54

9

-

90+ days past due

-

-

31

-

Gross carrying amount

3,929

72

51

-

 

 

30 June 2019

 

Stage 1

12 month ECL £'million

Stage 2

Lifetime ECL £'million

Stage 3

Lifetime ECL £'million

POCI

Lifetime ECL £'million

Up to date

 4,293

 - 

 -

 -

1 to 29 days past due

 7

 8

 -

 - 

30 to 89 days past due

 - 

 26

 -

 - 

90+ days past due

 - 

 - 

 9

 -

Gross carrying amount

 4,300

 34

 9

 -

 

Loss allowance

The following tables explain the changes in both the gross carrying amount and loss allowances of our loans and advances during the period.

Retail mortgages

 

Gross carrying amount

Loss allowance

Net carrying amount

£'million

Stage 1

Stage 2

Stage 3

POCI

Total

Stage 1

Stage 2

Stage 3

POCI

Total

Stage 1

Stage 2

Stage 3

POCI

Total

Balance at 1 January 2020

9,874

502

54

-

10,430

-

(3)

(5)

-

(8)

9,874

499

49

-

10,422

Transfers to/from stage 11

127

(126)

(1)

-

-

(1)

1

-

-

-

126

(125)

(1)

-

Transfers to/from stage 21

(383)

383

-

-

-

-

-

-

-

-

(383)

383

-

-

Transfers to/from stage 31

(24)

(14)

38

-

-

-

-

-

-

-

(24)

(14)

38

-

Net remeasurement due to transfers2

-

-

-

-

-

-

(5)

(3)

-

(8)

-

(5)

(3)

-

(8)

New lending3

260

4

-

-

264

(2)

-

-

-

(2)

258

4

-

-

262

Repayments, additional drawdowns and interest accrued

(127)

(5)

-

-

(132)

-

-

-

-

-

(127)

(5)

-

-

(132)

Derecognitions4

(345)

(21)

(6)

-

(372)

-

-

-

-

-

(345)

(21)

(6)

-

(372)

 Changes to assumptions6

-

-

-

-

-

(18)

(4)

-

-

(22)

(18)

(4)

-

-

(22)

Balance at 30 June 2020

9,382

723

85

-

10,190

(21)

(11)

(8)

-

(40)

9,361

712

77

-

10,150

 

 

Gross carrying amount

Loss allowance

Net carrying amount

£'million

Stage 1

Stage 2

Stage 3

POCI

Total

Stage 1

Stage 2

Stage 3

POCI

Total

Stage 1

Stage 2

Stage 3

POCI

Total

Balance at 1 July 2019

10,160

211

40

1

10,412

-

(3)

(4)

-

(7)

10,160

208

36

1

10,405

Transfers to/from stage 11

38

(35)

(3)

-

-

-

-

-

-

-

38

(35)

(3)

-

Transfers to/from stage 21

(269)

270

(1)

-

-

-

-

-

-

-

(269)

270

(1)

-

Transfers to/from stage 31

(22)

(7)

29

-

-

-

-

-

-

-

(22)

(7)

29

-

Net remeasurement due to transfers2

-

-

-

-

-

-

-

(1)

-

(1)

-

-

(1)

-

(1)

New lending3

502

75

-

-

577

-

-

-

-

-

502

75

-

-

577

Repayments, additional drawdowns and interest accrued

(116)

(7)

(2)

-

(125)

-

-

-

-

-

(116)

(7)

(2)

-

(125)

Derecognitions4

(419)

(5)

(9)

(1)

(434)

-

(1)

1

-

-

(419)

(6)

(8)

(1)

(434)

 Changes to assumptions6

-

-

-

-

-

-

1

(1)

-

-

-

1

(1)

-

Balance at 31 December 2019

9,874

502

54

-

10,430

-

(3)

(5)

-

(8)

9,874

499

49

-

10,422

 

 

Gross carrying amount

Loss allowance

Net carrying amount

£'million

Stage 1

Stage 2

Stage 3

POCI

Total

Stage 1

Stage 2

Stage 3

POCI

Total

Stage 1

Stage 2

Stage 3

POCI

Total

Balance at 1 January 2019

9,245

336

39

5

9,625

-

(5)

(4)

(2)

(11)

9,245

331

35

3

9,614

Transfers to/from stage 11

 131

 (127)

 (4)

 - 

-

 (1)

 1

 -

 - 

 -

 130

 (126)

 (4)

 - 

-

Transfers to/from stage 21

 (100)

 100

 -

 - 

-

 - 

 - 

 - 

 - 

-

 (100)

 100

-

 - 

-

Transfers to/from stage 31

 - 

 (9)

 9 

 - 

 -

 - 

 - 

 - 

 - 

 - 

 - 

 (9)

 9 

 - 

-

Net remeasurement due to transfers2

 - 

 - 

 - 

 - 

 - 

 1

 (1)

 (1)

 - 

 (1)

 1

 (1)

 (1)

 - 

 (1)

New lending3

 1,620

 2

 -

 - 

 1,622

 - 

 - 

 - 

 - 

 -

 1,620

 2

-

 - 

 1,622

Repayments, additional drawdowns and interest accrued

 (128)

 (2)

 (1)

 -

 (131)

 - 

 - 

 - 

 - 

 - 

 (128)

 (2)

 (1)

-

 (131)

Derecognitions4

 (247)

 (9)

-

 (4)

 (260)

 -

 -

-

 2

 2

 (247)

 (9)

 -

 (2)

 (258)

Transfer to disposal group classified as held for sale5

 (361)

 (80)

 (3)

 -

 (444)

-

 3

 1

 -

 4

 (361)

 (77)

 (2)

 -

 (440)

Changes to assumptions6

 - 

 - 

 - 

 - 

 - 

 -

 (1)

 -

 -

 (1)

 -

 (1)

-

-

 (1)

Balance at 30 June 2019

10,160

 211

 40

 1

10,412

-

 (3)

 (4)

 -

 (7)

10,160

 208

 36

1

10,405

 

Consumer lending

 

Gross carrying amount

Loss allowance

Net carrying amount

£'million

Stage 1

Stage 2

Stage 3

POCI

Total

Stage 1

Stage 2

Stage 3

POCI

Total

Stage 1

Stage 2

Stage 3

POCI

Total

Balance at 1 January 2020

223

-

10

-

233

(3)

(1)

(9)

-

(13)

220

(1)

1

-

220

Transfers to/from stage 11

1

(1)

-

-

-

-

-

-

-

-

1

(1)

-

-

Transfers to/from stage 21

(8)

8

-

-

-

1

(1)

-

-

-

(7)

7

-

-

Transfers to/from stage 31

(1)

-

1

-

-

-

-

-

-

-

(1)

-

1

-

Net remeasurement due to transfers2

-

-

-

-

-

-

(1)

(1)

-

(2)

-

(1)

(1)

-

(2)

New lending3

8

1

-

-

9

-

-

-

-

-

8

1

-

-

9

Repayments, additional drawdowns and interest accrued

(25)

-

-

-

(25)

-

-

-

-

-

(25)

-

-

-

(25)

Derecognitions4

(19)

-

-

-

(19)

-

-

-

-

-

(19)

-

-

-

(19)

 Changes to assumptions6

-

-

-

-

-

(6)

(1)

-

-

(7)

(6)

(1)

-

-

(7)

Balance at 30 June 2020

179

8

11

-

198

(8)

(4)

(10)

-

(22)

171

4

1

-

176

 

 

Gross carrying amount

Loss allowance

Net carrying amount

£'million

Stage 1

Stage 2

Stage 3

POCI

Total

Stage 1

Stage 2

Stage 3

POCI

Total

Stage 1

Stage 2

Stage 3

POCI

Total

Balance at 1 July 2019

254

2

9

265

 (3)

 (1)

 (7)

-

 (11)

251

1

2

-

254

Transfers to/from stage 11

-

-

-

-

-

-

-

Transfers to/from stage 21

1

 (1)

-

-

-

-

-

-

1

 (1)

-

Transfers to/from stage 31

 (1)

 (1)

2

-

-

-

-

-

-

 (1)

 (1)

2

-

Net remeasurement due to transfers2

-

-

-

 (2)

-

 (2)

 (2)

-

 (2)

New lending3

12

-

12

-

-

-

-

-

12

-

12

Repayments, additional drawdowns and interest accrued

 (16)

 (1)

-

 (17)

-

-

-

-

-

 (16)

 (1)

-

 (17)

Derecognitions4

 (27)

-

 (27)

-

-

-

-

-

 (27)

-

 (27)

 Changes to assumptions6

-

-

-

-

-

-

-

Balance at 31 December 2019

223

10

-

233

 (3)

 (1)

 (9)

-

 (13)

220

 (1)

1

-

220

 

 

Gross carrying amount

Loss allowance

Net carrying amount

£'million

Stage 1

Stage 2

Stage 3

POCI

Total

Stage 1

Stage 2

Stage 3

POCI

Total

Stage 1

Stage 2

Stage 3

POCI

Total

Balance at 1 January 2019

275

8

5

-

288

(3)

(3)

(3)

-

(9)

272

5

2

-

279

Transfers to/from stage 11

 5

 (5)

-

 - 

 -

 - 

 - 

 - 

 - 

-

 5

 (5)

 -

 - 

 -

Transfers to/from stage 21

 (2)

 2

-

 - 

-

 - 

 - 

 - 

 - 

 -

 (2)

 2

 -

 - 

 -

Transfers to/from stage 31

 (2)

 (2)

 4

 - 

 - 

 -

 2

 (2)

 - 

 - 

 (2)

 -

 2

 - 

 - 

Net remeasurement due to transfers2

 - 

 - 

 - 

 - 

 - 

-

 -

 (2)

 - 

 (2)

 -

 -

 (2)

 - 

 (2)

New lending3

 27

 -

-

 - 

 27

 -

-

-

 - 

-

 27

 -

-

 - 

 27

Repayments, additional drawdowns and interest accrued

 (21)

 -

 -

 - 

 (21)

 - 

 - 

 - 

 - 

 - 

 (21)

 -

-

 - 

 (21)

Derecognitions4

(28)

(1)

-

-

(29)

-

-

-

-

-

(28)

(1)

-

-

(29)

 Changes to assumptions6

 - 

 - 

 - 

 - 

 - 

 - 

 - 

 - 

 - 

 -

-

 -

 -

 - 

-

Balance at 30 June 2019

 254

 2

 9

 - 

 265

 (3)

 (1)

 (7)

 - 

 (11)

 251

 1

 2

 - 

 254

 

Commercial lending

 

Gross carrying amount

Loss allowance

Net carrying amount

£'million

Stage 1

Stage 2

Stage 3

POCI

Total

Stage 1

Stage 2

Stage 3

POCI

Total

Stage 1

Stage 2

Stage 3

POCI

Total

Balance at 1 January 2020

3,929

72

51

-

4,052

(6)

(1)

(6)

-

(13)

3,923

71

45

-

4,039

Transfers to/from stage 11

20

(16)

(4)

-

-

-

-

-

-

-

20

(16)

(4)

-

Transfers to/from stage 21

(107)

107

-

-

-

-

-

-

-

-

(107)

107

-

-

Transfers to/from stage 31

(66)

(19)

85

-

-

-

-

(1)

-

(1)

(66)

(19)

84

-

(1)

Net remeasurement due to transfers2

-

-

-

-

-

-

(6)

(20)

-

(26)

-

(6)

(20)

-

(26)

New lending3

919

2

2

-

923

(2)

-

-

-

(2)

917

2

2

-

921

Repayments, additional drawdowns and interest accrued

(112)

-

(3)

-

(115)

-

-

-

-

-

(112)

-

(3)

-

(115)

Derecognitions4

(228)

(8)

(10)

-

(246)

-

-

1

-

1

(228)

(8)

(9)

-

(245)

 Changes to assumptions6

-

-

-

-

-

(40)

(2)

-

-

(42)

(40)

(2)

-

-

(42)

Balance at 30 June 2020

4,355

138

121

-

4,614

(48)

(9)

(26)

-

(83)

4,307

129

95

-

4,531

 

 

Gross carrying amount

Loss allowance

Net carrying amount

£'million

Stage 1

Stage 2

Stage 3

POCI

Total

Stage 1

Stage 2

Stage 3

POCI

Total

Stage 1

Stage 2

Stage 3

POCI

Total

Balance at 1 July 2019

4,300

34

9

4,343

 (7)

 (6)

 (13)

4,293

34

3

4,330

Transfers to/from stage 11

 (12)

12

1

 (1)

 (11)

11

Transfers to/from stage 21

 (43)

43

 (43)

43

Transfers to/from stage 31

 (13)

 (7)

20

1

(1)

 (13)

 (6)

19

Net remeasurement due to transfers2

 (1)

 (1)

 (1)

 (3)

 (1)

 (1)

 (1)

 (3)

New lending3

125

1

15

141

 (2)

 (2)

125

1

13

139

Repayments, additional drawdowns and interest accrued

 (98)

 (3)

11

 (90)

 (98)

 (3)

11

 (90)

Derecognitions4

 (330)

 (8)

 (4)

 (342)

3

3

 (330)

 (8)

 (1)

 (339)

 Changes to assumptions6

1

1

2

1

1

2

Balance at 31 December 2019

3,929

72

51

4,052

 (6)

 (1)

 (6)

 (13)

3,923

71

45

4,039

 

 

Gross carrying amount

Loss allowance

Net carrying amount

£'million

Stage 1

Stage 2

Stage 3

POCI

Total

Stage 1

Stage 2

Stage 3

POCI

Total

Stage 1

Stage 2

Stage 3

POCI

Total

Balance at 1 January 2019

4,265

77

14

-

4,356

(6)

(3)

(5)

-

(14)

4,259

74

9

-

4,342

Transfers to/from stage 11

 55

 (55)

 -

 - 

 -

 (2)

 2

 -

 - 

 -

 53

 (53)

 -

 - 

 -

Transfers to/from stage 21

 (21)

 21

 - 

 - 

 - 

 -

 -

 - 

 - 

 - 

 (21)

 21

 - 

 - 

 - 

Transfers to/from stage 31

 (4)

 (2)

 6

 - 

 -

 -

 -

 - 

 - 

 -

 (4)

 (2)

 6

 - 

-

Net remeasurement due to transfers2

 - 

 - 

 - 

 - 

 - 

 2

 -

 (1)

 - 

 1

 2

 -

 (1)

 - 

 1

New lending3

 388

 1

 -

 - 

 389

 (1)

 -

 -

 - 

 (1)

 387

 1

 -

 - 

 388

Repayments, additional drawdowns and interest accrued

 (105)

 -

 (5)

 -

 (110)

 - 

 - 

 - 

 - 

 - 

 (105)

 -

 (5)

 -

 (110)

Derecognitions4

 (201)

 (6)

 (4)

-

 (211)

 -

 -

-

 -

 -

 (201)

 (6)

 (4)

 - 

 (211)

Transfer to disposal group classified as held for sale5

 (77)

 (2)

 (2)

 - 

 (81)

 -

 -

 -

 - 

 -

 (77)

 (2)

 (2)

 - 

 (81)

Changes to assumptions6

 - 

 - 

 - 

 - 

 - 

 -

 1

 -

 -

 1

 -

 1

 -

 -

 1

Balance at 30 June 2019

 4,300

 34

 9

 -

 4,343

 (7)

 -

 (6)

 -

 (13)

 4,293

 34

 3

 -

 4,330

 

1.  Represents the stage transfers prior to any ECL remeasurement

2.  Represents the remeasurement between the twelve month and lifetime ECL due to stage transfer, including any changes to the model assumptions and forward looking information

3.  Represents the increase in balances resulting from loans and advances that have been newly originated, purchased or renewed

4.  Represents the decrease in balances resulting from loans and advances that have been fully repaid, disposed of or written off

5.  Represents the decrease in balances resulting from the reclassification of loans and advances that as at the reporting date are treated as held for sale

6.  Represents the change in loss allowances resulting from changes to assumptions notably forward looking macro-economic information and changes in the customer's risk profile

 

 

 

7.  Property, plant and equipment

 

Investment property

£'million

Leasehold improvements

£'million

Freehold land &  buildings

£'million

Fixtures fittings & equipment

£'million

IT hardware

£'million

Right of use assets

£'million

Total

£'million

Cost

 

 

 

 

 

 

 

1 January 2020

18

314

262

26

10

332

962

Additions

-

3

4

1

2

3

13

Write-offs

-

(2)

-

(1)

(1)

-

(4)

30 June 2020

18

315

266

26

11

335

971

Accumulated depreciation

 

 

 

 

 

 

 

1 January 2020

10

49

14

12

5

16

106

Charge for the period

-

6

2

2

2

9

21

Write-offs

-

-

-

(1)

(1)

-

(2)

Impairments

-

9

-

1

-

15

25

30 June 2020

10

64

16

14

6

40

150

Net book value at

30 June 2020

8

251

250

12

5

295

821

 

 

 

 

 

 

 

 

Cost

 

 

 

 

 

 

 

1 July 2019

10

298

206

35

40

330

919

Additions

-

28

55

3

1

9

96

Disposals

-

-

-

-

-

(7)

(7)

Write-offs

-

(3)

-

(12)

(31)

-

(46)

Transfers

8

(9)

1

-

-

-

-

31 December 2019

18

314

262

26

10

332

962

Accumulated depreciation

 

 

 

 

 

 

 

1 July 2019

3

44

11

20

35

8

121

Charge for the period

-

6

2

4

1

8

21

Write-offs

-

-

-

(12)

(31)

-

(43)

Transfers

-

(1)

1

-

-

-

-

Impairments

7

-

-

-

-

-

7

31 December 2019

10

49

14

12

5

16

106

Net book value at

31 December 2019

8

265

248

14

5

316

856

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost

 

 

 

 

 

 

 

1 January 2019

10

275

199

33

39

313

869

Additions

-

23

7

2

1

17

50

30 June 2019

10

298

206

35

40

330

919

Accumulated depreciation

 

 

 

 

 

 

 

1 January 2019

3

39

9

18

33

-

102

Charge for the period

-

5

2

2

2

8

19

30 June 2019

3

44

11

20

35

8

121

Net book value at

30 June 2019

7

254

195

15

5

322

798

 

8.  Intangible assets

 

Goodwill

£'million

Customer contracts

£'million

Software

£'million

 Total

£'million

Cost

 

 

 

 

1 January 2020

4

-

224

228

Additions

-

-

53

53

Write-offs

-

-

(6)

(6)

Deferred grant (see note 10)

-

-

(3)

(3)

30 June 2020

4

-

268

272

Accumulated amortisation

 

 

 

 

1 January 2020

-

-

60

60

Charge for the period

-

-

16

16

Write-offs

-

-

(6)

(6)

30 June 2020

-

-

70

70

Net book value at 30 June 2020

4

-

198

202

 

 

 

 

 

Cost

 

 

 

 

1 July 2019

4

1

286

291

Additions

-

-

40

40

Write-offs

-

(1)

(99)

(100)

Deferred grant (see note 10)

-

-

(3)

(3)

31 December 2019

4

-

224

228

Accumulated amortisation

 

 

 

 

1 July 2019

-

1

73

74

Charge for the period

-

-

19

19

Write-offs

-

(1)

(32)

(33)

31 December 2019

-

-

60

60

Net book value at 31 December 2019

4

-

164

168

 

 

 

 

 

Cost

 

 

 

 

1 January 2019

4

1

249

254

Additions

-

-

39

39

Write-offs

-

-

(1)

(1)

Deferred grant (see note 10)

-

-

(1)

(1)

30 June 2019

4

1

286

291

Accumulated amortisation

 

 

 

 

1 January 2019

-

1

56

57

Charge for the period

-

-

17

17

30 June 2019

-

1

  73

74

Net book value at 30 June 2019

4

-

213

217

 

9.  Lease liabilities

 

Half year to

30 June

2020

£'million

Half year to

31 December 2019

£'million

Half year to

30 June

2019

£'million

At beginning of the period

341

342

328

Additions and modifications

3

6

17

Disposals

-

(3)

-

Lease payments made

(13)

(13)

(12)

Interest on lease liabilities

9

9

9

At the end of the period

340

341

342

 

10.  Deferred grants

 

Half year to

30 June

2020

£'million

Half year to

31 December 2019

£'million

Half year to

30 June

2019

£'million

At beginning of the period

50

115

-

Grants received

-

-

120

Released to the income statement

(16)

(12)

(4)

Offset against capital expenditure (see note 8)

(3)

(3)

(1)

Amounts awaiting repayment

-

(50)

-

At the end of the period

  31

50

115

 

Our only deferred grants relate to amounts received in relation to the C&I Fund which formed part of the RBS alternative remedies programme. The programme was aimed to increase competition in the UK business banking marketplace.

Originally we were awarded a grant of £120 million, however following changes to our strategy in 2019, a revised business case was submitted to BCR (the awarding body). On 25 February 2020 the revised business case was accepted by BCR, as part of which the public commitments attached to the grant were amended. The commitments relate to the delivery of certain digital initiatives as well as opening at least 15 stores in the north of England. Full details of the commitment can be found on BCR's website. As part of this, it was agreed that £50 million of the grant would be returned to BCR.

The acceptance of our proposal by BCR post year end was considered an adjusting event for the purposes of our 2019 financial statements and, as such, the £50 million to be repaid was classified as a liability as at 31 December 2019, with the money being returned in the first half of 2020.

 

11.  Share capital

 As at 30 June 2020 we had 172.4 million ordinary shares of 0.0001 pence (31 December 2019: 172.4 million, 30 June 2019 172.4 million) in issue.

Called up ordinary share capital (issued and fully paid)

 

Half year to

30 June

2020

£'million

Half year to

31 December 2019

£'million

Half year to

30 June

2019

£'million

At beginning of the period

-

-

-

Shares issued

-

-

-

At end of the period

-

-

-

 

Share premium

 

Half year to

30 June

2020

£'million

Half year to

31 December 2019

£'million

Half year to

30 June

2019

£'million

At beginning of the period

1,964

1,964

1,605

Shares issued

-

-

375

Cost of shares issued

-

-

(16)

At end of the period

1,964

1,964

1,964

 

12.  Earnings per share

Basic earnings per share (EPS) is calculated by dividing the (loss)/profit attributable to ordinary equity holders of Metro Bank by the weighted average number of ordinary shares in issue during the year.

 

 

Half year to

30 June

2020

Half year to

31 December 2019

Half year to

30 June

2019

(Loss)/profit attributable to ordinary equity holders (£'million)

(239.5)

(183.9)

1.3

Weighted average number of ordinary shares in issue (thousands) 

172,420

172,420

122,420

Basic earnings per share (pence)  

(138.9)

(106.7)

1.0

 

Diluted EPS has been calculated by dividing the (loss)/profit attributable to ordinary equity holders of Metro Bank 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 made a loss during the half years to 30 June 2020 and 31 December 2019, 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.

 

 

Half year to

30 June

2020

Half year to

31 December 2019

Half year to

30 June

2019

(Loss)/profit attributable to ordinary equity holders (£'million)

(239.5)

(183.9)

1.3

Weighted average number of ordinary shares in issue (thousands) 

172,420

172,420

122,425

Diluted earnings per share (pence)

(138.9)

(106.7)

1.0

 

13.  Fair value of financial instruments

 

Carrying
value

£'million

Quoted market price
Level 1

£'million

Using observable inputs
Level 2

£'million

With significant unobservable inputs
Level 3

£'million

Total

fair value

£'million

30 June 2020

 

 

 

 

 

Assets

 

 

 

 

 

Loan and advances to customers

14,857

-

-

14,975

14,975

Investment securities held at FVOCI

444

444

-

-

444

Investment securities held at amortised cost

2,577

850

1,753

-

2,603

Liabilities

 

 

 

 

 

Deposits from customers

15,577

-

-

15,559

15,559

Deposits from central banks

3,801

-

-

3,801

3,801

Debt securities

599

460

-

-

460

Repurchase agreements

211

-

-

211

211

 

 

 

 

 

 

31 December 2019

 

 

 

 

 

Assets

 

 

 

 

 

Loan and advances to customers

14,681

-

-

14,652

14,652

Investment securities held at FVOCI

411

411

-

-

411

Investment securities held at amortised cost

2,154

508

1,647

-

2,155

Liabilities

 

 

 

 

 

Deposits from customers

14,477

-

-

14,448

14,448

Deposits from central banks

3,801

-

-

3,801

3,801

Debt securities

591

602

-

-

602

Repurchase agreements

250

-

-

250

250

 

 

 

 

 

 

30 June 2019

 

 

 

 

 

Assets

 

 

 

 

 

Loan and advances to customers

14,989

-

-

14,920

14,920

Investment securities held at FVOCI

419

419

-

-

419

Investment securities held at amortised cost

1,951

414

1,532

-

1,946

Liabilities

 

 

 

 

 

Deposits from customers

13,703

-

-

13,656

13,656

Deposits from central banks

3,801

-

-

3,801

3,801

Debt securities

249

210

-

-

210

Repurchase agreements

1,176

-

-

1,176

1,176

 

Information on how fair values are calculated for the financial assets and liabilities noted above are 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 (fair value level 1 assets), or using observable inputs (in the case of fair value level 2 assets).

 

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.

Deposits from central banks/repurchase agreements

Fair values are estimated using discounted cash flows, applying current rates. Fair values approximate carrying amounts as their balances are generally short dated.

 

14.  Legal proceedings and regulatory matters

As part of the normal course of business we are subject to legal and regulatory matters, the majority of which are not considered to have a material impact on the business.

The contingent liabilities detailed below are those which could potentially have a material impact, although their inclusion does not constitute any admission of wrongdoing or legal liability. The outcome and timing of these matters is inherently uncertain. Based on the facts currently known, it is not possible at the moment to predict the outcome of any of these matters or reliably estimate any financial impact. As such, at the reporting date no provision has been made for any of these cases within the financial statements.

PRA and FCA investigations into RWA Adjustment and AIRB Accreditation

We are currently subject to enforcement investigations by both the Prudential Regulation Authority (PRA) and FCA.

The PRA's investigation relates to potential breaches of the PRA's Fundamental Rules 2 and 6. The PRA is investigating whether there were failures to conduct regulatory reporting with due skill, care and diligence, to remedy an issue identified by the PRA in a timely fashion and/or to provide effective oversight and control to comply with its regulatory reporting obligations. These issues relate to our assessment and reporting of our risk-weighted assets. We are co-operating with the PRA's investigation. As yet, the PRA has given no indication of the likely timeframe for completing their investigation or of the action that might be taken as a result. As a result, it is not possible to identify the likely outcome of the investigation or quantify any potential liability for penalties or possible costs associated with the investigation with any certainty.

The current scope of the FCA's investigation concerns potential breaches of articles 15 and 17 of the Market Abuse Regulation (EU 596/2014), Principle 11 of the FCA's Principles for Business, and Listing Principle 1, Premium Listing Principle 6 and Rule 1.3.3 of the Listing Rules, in the period between 1 June 2017 and 26 February 2019. The investigations relate to the announcements made on 23 January 2019 and 26 February 2019 in relation to risk-weighted assets and AIRB accreditation respectively and the impact these announcements had on our share price. We are co-operating with the FCA's investigation. As yet, the FCA has given no indication of the likely timeframe for completing their investigation or of any action that might be taken as a result. As a result, it is not possible to identify the likely outcome of the investigation or quantify any potential liability for penalties or possible costs associated with the investigation with any certainty.

Sanctions-related matters

In November 2017, on the advice of external legal counsel, we notified the Office of Foreign Assets Control (OFAC) that we had discovered that a UK-based entity with which we had a banking relationship was subject to US sanctions relating to Cuba. We ended our relationship with the relevant entity. In addition, in 2019, we discovered that a payment made to a customer's account, which it had received from a UK-based financial institution, had been routed to the UK-based financial institution from Iran. A further notification was made to OFAC. We have initiated a review of the foregoing matters, together with a review of our broader sanctions compliance policies and transaction monitoring policies and procedures with the support of external advisers which is still ongoing. We continue to fully co-operate with our regulators in relation to their enquiries in this regard. At this stage it is not practicable to identify the likely outcome or estimate the potential financial impact of these matters with any certainty.

US class action

We are also defending civil claims brought against us in the State of California based on breaches of US Federal Securities laws arising from allegedly false and misleading statements in relation to our loan book between March 2018 and May 2019. We intend to vigorously defend these proceedings. They are at an early stage, and so it is not practicable to identify the likely outcome or estimate the potential financial impact.

 

15.  Related party transactions

During the period, architecture, design and branding services were provided to us by InterArch, Inc., ("InterArch") a firm which is owned by Shirley Hill, the wife of Vernon W. Hill II. Vernon W. Hill II was Chairman until 23 October 2019 and a Board member until 17 December 2019 when he stepped down. He retains an honorary role as Chairman Emeritus.

By virtue of his previous position in the Bank, as well as status of founder, InterArch continues to be considered a related party. The creative and brand services contract and architectural design service contract ended on 27 February 2020. In order to ensure the smooth transition to new providers, we entered into a short agreement with InterArch to support the transition until the end of June 2020. This process has now fully completed.

The cost of these services in the half year to 30 June 2020 was £0.6 million (half year to 31 December 2019: £1.7 million; half year to 30 June 2019: £3.6 million). The balance owed to InterArch at 30 June 2020 was £nil million (31 December 2019: £0.1 million; 30 June 2019: £0.2 million).

 

16.  Post balance sheet events

Retail Money Market LTD

On 3 August 2020 we announced an agreement to acquire Retail Money Market LTD, which trades under the name RateSetter, for an initial consideration of £2.5 million, followed by up to £0.5 million deferred consideration after 12 months, with additional consideration of up to £9.0 million payable on the third anniversary of the completion of the transaction, subject to the satisfaction of certain key performance criteria. Completion is expected in the second half of the year.

 

END OF the condensed consolidated interim financial statements

 

Reconciliation of statutory to underlying results (unaudited)  

 

Underlying loss represents an adjusted measure, excluding the effect of certain items that are considered to distort year-on-year comparisons, in order to provide readers with a better and more relevant understanding of the underlying trends in the business. Details of the item that are considered to be non-underlying and their reasons for exclusion can be found on page 178 of our 2019 Annual Report and Accounts:

A reconciliation from our statutory to underlying results is set out below:

Half year to 30 June 2020

Statutory basis

£'million

FSCS levy

£'million

Listing Share Awards

£'million

Impairment and write offs of PPE and intangible assets

£'million

Net BCR costs

£'million

Transformation costs

£'million

 Remediation costs £'million

Underlying basis

£'million

Interest income

217.7

217.7

Interest  expense

(101.8)

0.3

(101.5)

Net interest income

115.9

0.3

116.2

Net fee and commission income

23.5

23.5

Net gains on sale of assets

1.0

1.0

Other income

28.5

(15.9)

12.6

Total income

168.9

(15.6)

153.3

 

 

 

 

 

 

 

 

 

General operating expenses

(234.1)

0.2

0.2

15.4

12.4

17.8

(188.1)

Depreciation and amortisation

(36.8)

0.2

(36.6)

Impairment and write offs of property, plant & equipment and intangible assets

(26.6)

26.6

-

Total operating expenses

(297.5)

0.2

0.2

26.6

15.6

12.4

17.8

(224.7)

Expected credit loss expense

(112.0)

 

 

 

 

 

(112.0)

Loss before tax

(240.6)

0.2

26.6

-

12.4

17.8

(183.4)

Taxation

1.1

-

-

(2.2)

(3.1)

(4.2)

Loss after tax

(239.5)

0.2

0.2

26.6

-

10.2

14.7

(187.6)

 

 


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