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Metro Bank PLC (MTRO)

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Wednesday 28 July, 2021

Metro Bank PLC

Interim results for half year ended 30 June 2021

RNS Number : 7247G
Metro Bank PLC
28 July 2021
 

Metro Bank PLC

Interim results

Trading Update H1 2021

28 July 2021

 

Metro Bank PLC (LSE: MTRO LN)

 

Interim results for half year ended 30 June 2021

 

Summary

 

·

Strategic plan remains on track. The liability-led strategy, supplemented by an acceleration of asset mix shift, has reduced cost of deposits and increased lending yield.

·

Remain focused on executing the plan and returning to profitable growth, meeting the bank's strategic objectives and supporting our colleagues, customers and communities.

·

Total underlying revenue at £179.8 million (H1 2020: £153.3 million) demonstrates the recovery of a significant portion of the income foregone from the mortgage disposal in December 2020. Adjusting for the disposal, revenue improved 47% YoY and 14% HoH.

·

Cost of Deposits at 0.31% in H1 2021 (H1 2020: 0.82%) reflects continuing mix improvement, pricing action taken as well as the Base rate decrease in March 2020.

·

Underlying loss before tax of £110.0 million (H1 2020: loss of £183.4 million) largely reflects a reduction in ECL expense YoY. Adjusting for the disposal, underlying loss improved 49% YoY and 6% HoH.

·

Statutory loss before tax of £138.9 million (H1 2020: loss of £240.6 million) includes one-off items such as intangible impairment and remediation costs. Adjusting for the disposal, statutory loss before tax improved 46% YoY and 10% HoH.

 

Key Financials:

 

 

£ in millions

30

June

2021

31 December

2020

Change from

FY 2020

30

June

2020

Change from

H1 2020

 

 

 

 

 

 

Assets

£23,013

£ 22,579

2%

£22,134

4%

Loans

£12,325

£ 12,090

2%

£14,857

(17%)

Deposits

£16,620

£ 16,072

3%

£15,577

7%

Loan to deposit ratio

74%

75 %

(1pps)

95%

(21pps)

 

 

 

 

 

 

CET1 capital ratio

13.9 %

15.0 %

(110bps)

14.5%

(60bps)

Total capital ratio (TCR)

17.2%

18.1%

(90bps)

17.3%

(10bps)

MREL ratio

21.7 %

22.4 %

(70bps)

21.3%

40bps

Liquidity coverage ratio

309 %

187 %

122pps

226%

83pps

 

 

£ in millions

H1

2021

H2

2020

Change from

H2 2020

H1

2020

Change from

H1 2020

 

 

 

 

 

 

Total underlying revenue1

£179.8

£187.6

(4)%

£153.3

17%

Adjusted total underlying revenue2

£179.4

£158.0

14%

£121.8

47%

Underlying loss before tax3

(£110.0)

(£88.4)

 

(£183.4)

 

Statutory loss before tax

(£138.9)

(£71.0)

 

(£240.6)

 

Net interest margin

1.28%

1.28%

0 bps

1.15%

13 bps

 

 

 

 

 

 

Underlying EPS

(65.1 p)

(42.9p)

 

(108.8p)

 

1.  Underlying revenue excludes grant income recognised relating to the Capability & Innovation fund and the gain on the mortgage portfolio sale

2.  Adjusted total underlying revenue and loss before tax adjusts underlying numbers on a like for like basis by excluding loan income from the mortgage portfolio disposal announced December 2020

3.  Underlying loss before tax excludes the FSCS levy (for half year figures only), Listing Share Awards, impairment and write-off of property, plant & equipment (PPE) and intangible assets, net BCR costs, transformation costs, remediation costs, business acquisition and integration costs and mortgage portfolio sale. Statutory loss after tax is included in the Profit and Loss Account.

 

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

 

"In a challenging environment, Metro Bank has continued to deliver on its strategic priorities. As a community bank our colleagues have gone above and beyond for our customers and we've enhanced product offerings to meet more of our customers' needs. Financial performance reflects where we are in our turnaround plan, as well as the impact of national lockdowns. We are encouraged by the momentum we have achieved, including delivering on higher yielding mortgage products, lower cost of deposits and meaningful entry into the personal lending market. Looking ahead, we remain focused on executing the plan and returning to profitable growth, meeting the bank's strategic objectives and supporting our colleagues, customers and communities."

 

A presentation for investors and analysts will be held at 8.30AM   (UK time) on 28 July 2021.

The presentation will be webcast on:

https://onlinexperiences.com/Launch/QReg/ShowUUID=D164D86C-B29F-4220-B6F2-A6F1472D95F5

For those wishing to dial-in:

From the UK dial: 0800 358 9473

From the US dial: +1 855 85 70686

Participant Pin: 87111112#

URL for other international dial in numbers: 

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

 

Progress on strategic plan

 

Metro Bank continues to successfully deliver transformational change against all five pillars of the strategic plan set out in February 2020, despite significant headwinds presented by the pandemic.

 

·

Balance sheet optimisation: Decisive action taken in response to the changing environment. The mortgage disposal and RateSetter back book acquisition accelerated the shift to higher yielding assets along with enhancements to existing mortgage products.  Repositioning commercial lending towards full relationship trading businesses and exiting transactional real estate lending is ongoing.

 

·

Revenue: More products launched in store including RateSetter loans and insurance offerings. Government backed lending through the Bounce Back Loan Scheme (BBLS) top-up and the Recovery Loan Scheme (RLS) to support communities. Investment in digital capability improves the multi-channel presence, launching online products such as MFLOW to support SME customers.

 

·

Cost: Investment in automation, IT platforms and the customer service proposition provides greater efficiency and scalability. Agreed the acquisition of three further store freeholds at attractive yields, reducing costs and providing greater flexibility, expected to complete in H2. Successfully disposed of some of our central London office property (already exited, as previously announced).

 

·

Infrastructure : The enhancements to IT, regulatory reporting and financial crime all improve the resilience of the bank. The investment in digital channels improves the customer journey and enables more FANs to take advantage of the enhanced customer proposition. Delivery of the change agenda is exceeding plan.

 

·

Internal and external communications: Continue support for customers, colleagues and communities through the pandemic with a range of bank wide and local initiatives, as well as launching an SME marketing campaign showcasing our FANs.

 

 

Financial performance for the half year ended 30 June 2021

 

Deposits

£ in millions

30

June

2021

31

December

2020

Change from

FY 2020

30

June

2020

Change from

H1 2020

 

 

 

 

 

 

Demand: current accounts

£6,749

£ 6,218

9%

£5,274

28%

Demand: savings accounts

£7,402

£ 6,430

15%

£5,982

24%

Fixed term: savings accounts4

£2,469

£ 3,424

(28%)

£4,321

(43%)

Deposits from customers

£16,620

£ 16,072

3%

£15,577

7%

 

 

 

 

 

 

Deposits from customers includes:

 

 

 

 

Retail customers (excl. retail partnerships)

£6,964

£ 7,364

(5%)

£7,355

(5%)

SMEs

£4,605

£ 4,420

4%

£4,093

13%

 

£11,569

£ 11,784

(2%)

£11,448

1%

Retail partnerships

£1,697

£ 1,596

6%

£1,705

-

Commercial customers (excluding SMEs5)

£3,354

£ 2,692

25%

£2,424

38%

 

£5,051

£ 4,288

18%

£4,129

22%

 

 

 

 

 

 

4.  Comprised of personal/business: June 2021 82%/18%; December 2020 85%/15%; and June 2020 86%/14%

5.  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.

                   

 

·

Total deposits grew by over £0.5 billion in the first six months to £16,620 million as at 30 June 2021 (31 December 2020: £16,072 million) , despite fixed term deposit (FTD) accounts falling by £1.0 billion following continued action to reduce prices. Growth largely resulted from an increase in commercial deposits, reflecting customers' preference for increased liquidity as well as higher balances held by Conveyancing/Legal firms following elevated completion volumes towards the end of June.

 

Following higher than anticipated growth in the first half and transitory nature of some commercial and BBLS-related deposits, outturn in the second half will be somewhat dependent on customer behaviour. Focus will remain on maintaining a high-quality mix of relationship-driven customer deposits.

 

·

Cost of deposits was 31bps in the first half, a decrease of 18bps compared to 49bps in 2H20, reflecting the managed roll-off of higher cost FTD accounts with a corresponding mix improvement in favour of non-interest-bearing current accounts and demand savings accounts. Cost of deposits improved throughout the period and the beneficial effects of repricing are expected to continue into the second half of 2021, although at a slower pace than H1.

 

·

Customer account growth of 0.2 million (H2 2020: 0.1 million) in the last six months to 2.4 million, reflects incremental growth from the RateSetter back book acquisition, with an otherwise stable level of accounts owing to the managed reduction in fixed term deposits.

 

Loans

 

£ in millions

30-Jun

2021

31-Dec

2020

Change from

FY 2020

30-Jun

2020

Change from

HY 2020

 

 

 

 

 

 

Gross Loans and advances to customers

£12,491

£ 12,244

2%

£15,002

(17%)

Less: allowance for impairment

166)

154 )

8%

(£145)

14%

Net Loans and advances to customers

£12,325

£ 12,090

2 %

£14,857

(17%)

 

 

 

 

 

 

Gross loans and advances to customers consists of:

 

 

 

 

 

Commercial lending6

£3,416

£3,681

(7%)

£3,834

(11%)

Government-backed lending7

£1,556

£1,467

6%

£780

99%

Retail mortgages

£6,815

£ 6,892

(1%)

£10,190

(33%)

Consumer lending

£704

£ 204

245%

£198

256%

6.  Includes CLBILS (£39 million at 30 June 2021)

7.  BBLS and CBILS

 

 

·

Total net loans as at 30 June 2021 were £12,325 million, up 2% from £12,090 million at 31 December 2020 primarily reflecting the acquisition of the £337m RateSetter consumer back book in April, together with strong organic growth in consumer lending supported by the integration of the RateSetter platform, offset by the attrition of lower-yielding residential mortgages and commercial term loans.  Total net loans are expected to increase in the second half of the year, with continuing mix shift towards higher yielding assets.

 

·

Commercial loans (excluding BBLS and CBILS) decreased by 7% during H1 to £3,416 million at 30 June 2021 and are 11% below a year earlier following the attrition of lower-yielding commercial and commercial real estate term loans.

 

·

Government backed lending increased £89 million in the first half to £1,556 million at 30 June 2021 and up £776 million from a year earlier. Growth in 1H 2021 was primarily driven by BBLS top-up applications. The bank has recently become an accredited lender for the RLS.

 

·

Retail mortgages remained the largest component of the lending book at 55%, with mortgage applicants benefitting from enhancements to the existing mortgage offering and the launch of further specialist mortgage products during the first half of the year.

 

·

Consumer lending increased to 6% of the of the loan book from 2% at 31 December 2020 , resulting from the strong increase in organic lending as the RateSetter platform was rolled-out across all of Metro Bank's channels and the completion of the RateSetter back book acquisition. Consumer originations averaged more than £50 million per month during 1H 2021 compared to less than £2 million per month a year earlier.

 

·

Loan to deposit ratio was marginally lower at 74% (31 December 2020: 75%) reflecting the impact of the mortgage portfolio disposal in December and deposit inflows in the period.

 

·

Annualised cost of risk at 0.24% (2H 2020: 0.20%) included recognition of ECL expense associated with organic and inorganic growth in consumer lending. Non-performing loans increased marginally to 2.52% (31 December 2020: 2.10%) reflecting a limited number of single name commercial exposures. The loan portfolio remains highly collateralised with average debt to value (DTV) of the residential mortgage book at 56% (31 December 2020: 56%), while DTV in the commercial book was 59% (31 December 2020: 56%).

 

Profit and Loss Account

 

·

Net interest margin (NIM) at 1.28% was in line with the preceding six month period , with lower cost of deposits, improved lending mix and higher lending yield, offset by the impact of the mortgage portfolio disposal in December and higher than expected deposits.

 

Continued reduction in cost of deposits combined with a favourable asset mix shift is expected to improve NIM performance in H2 compared to H1.

 

·

Underlying net interest income was broadly flat at £133.6 million (H2 2020: £134.1 million), despite the mortgage portfolio disposal in H2 2020. Adjusting for the sale net interest income increased 27% HoH. 

·

Underlying net fee and other income decreased 7% sequentially to £46.7 million (H2 2020: £50.2 million), as customer activity remained subdued because of COVID-19 lockdowns and other social restrictions. The outlook for H2 2021 will be significantly dependent on the pace of recovery as the country continues its path out of lockdown.

·

Underlying cost:income ratio increased to 153 % in 2020 from 139% in the prior six months , largely reflecting a combination of fee income headwinds, the non-repeat of an underlying net gain on sale in H2 2020 and operating cost dynamics outlined below.

'Run the Bank' (RTB) cost growth was less than 2% sequentially on a like for like basis, adjusting for the RateSetter acquisition or 4% in total. 'Change the Bank' (CTB) expenditure increased to £40.0 million plus £20.3 million of amortisation, compared to £37.6 million plus £17.4 million of amortisation in the preceding six months, in line with previous guidance.

Cost focus will continue, with low to mid-single digit percentage growth in RTB in H2 2021 compared to H1.

·

Underlying loss before tax was £110.0 million, an increase from the £88.4 million loss in H2 2020 , reflecting the mortgage book disposal, reduced fee and other income, inorganic cost expansion following the RateSetter platform acquisition and higher CTB investment. Adjusting for the disposal, underlying loss improved 49% YoY and 6% HoH.

·

Statutory loss before tax of £138.9 million in H1 2021 (H2 2020: loss of £71.0 million) includes remediation costs primarily related to sanctions (£25.4 million) and the impairment of RateSetter peer-to-peer intangible assets (£7.5 million), partially offset by the residual gain on sale of the mortgage portfolio (£8.4 million). Adjusting for the mortgage disposal, statutory loss before tax improved 46% YoY and 10% HoH.

·

Statutory loss after tax of £ 141.1 million in H1 2021 (H2 2020: loss of £62.4 million) after a £ 2.2 million corporation tax charge.

Capital, Funding and Liquidity

 

·

Strong liquidity and funding position maintained , supported by the settlement of the mortgage portfolio disposal in February and continuing deposit growth. As a result, the Bank's Liquidity Coverage Ratio (LCR) was elevated at 309% as of 30 June 2021 (30 December 2020: 187%). Whilst NIM dilutive, this excess liquidly is earnings neutral and provides flexibility and optionality at a time of macroeconomic uncertainty.

 

In H1 2021 a further £2.1 billion of maturing Term Funding Scheme (TFS) drawings were rolled into Term Funding Scheme with additional incentives for SMEs (TFSME). The Bank has capacity to roll all of its TFS drawings into TFSME.

 

·

CET1 capital of £1,052 million as at 30 June 2021 (31 December 2020: £1,192) was 13.9% of RWA (31 December 2020: 15.0%) this compares to our minimum CET1 requirement of 9.3%8.

 

The Bank's capital includes £86 million of relief provided through the EBA's treatment of software assets, equivalent to 1.0% of CET1. As expected, the PRA announced in July that software will return to being fully deducted from 1 January 2022 and therefore this benefit is not considered when making capital decisions.

 

·

Total capital as a percentage of RWA was 17.2% reflecting the statutory loss reported in the period. MREL resources were £1,643 million with an MREL ratio of 21.7% of RWA at 30 June 2021, this compares to our minimum interim requirement of 20.5%8 and current end-state requirement of 20.7%8. MREL resources may fall below the sum of the firm's MREL requirement and buffers (the loss absorbing capacity) for a period of time.

 

We note the Bank of England's Consultation Paper on MREL.

 

·

Total RWA as at 30 June 2021 was £7,563 million (31 December 2020: £7,957 million). The reduction in H1 reflects the settlement of the mortgage portfolio in February, partially offset by organic and inorganic growth in consumer lending. The result is a loan risk weight density of 47% as at 30 June 2021 (31 December 2020: 47%).

 

·

Regulatory leverage ratio was 4.9%.

 

8.  Based on current capital requirements including P2A requirement of 1.11% (of which 0.8% must be met with Tier 1) , excluding any confidential PRA buffer, if applicable.

 

Metro Bank PLC

Summary Balance Sheet and Profit & Loss Account

(Unaudited)

Balance Sheet

YoY change

 

30-Jun

2021

31-Dec

2020

30-Jun

2020

 

 

 

£'million

£'million

£'million

Assets

 

 

 

 

 

Loans and advances to customers

(17%)

 

12,325

12,090

14,857

Treasury assets9

 

 

9,474

6,406

6,101

Assets classified as held for sale

 

 

-

295

-

Other assets10

 

 

1,214

3,788

1,176

Total assets

4%

 

23,013

22,579

22,134

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits from customers

7%

 

16,620

16,072

15,577

Deposits from central banks

 

 

3,800

3,808

3,801

Debt securities

 

 

596

600

599

Other liabilities

 

 

850

810

810

Total liabilities

 

 

21,866

21,290

20,787

Total shareholder's equity

 

 

1,147

1,289

1,347

Total equity and liabilities

 

 

23,013

22,579

22,134

 

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

10.  Comprises property, plant & equipment, intangible assets and other assets. Other assets at 31 December 2020 include £2.6 billion receivable from NatWest. This was received post year-end upon the completion of the transaction.

 

 

 

YoY change

Half year ended

Profit & Loss Account

30-Jun

2021

31-Dec

2020

30-Jun

2020

 

 

£'million

£'million

£'million

 

 

 

 

 

Underlying net interest income

15%

133.6

134.1

116.2

Underlying net fee and other income

 

46.7

50.2

36.1

Underlying net gains/(losses) on sale of assets

 

(0.5)

3.3

1.0

Total underlying revenue

17%

179.8

187.6

153.3

 

 

 

 

 

'Run the Bank' costs

 

(214.9)

(206.3)

(184.1)

'Change the Bank' costs11

 

(60.3)

(55.0)

(40.6)

Underlying operating costs

22%

(275.2)

(261.3)

(224.7)

Expected credit loss expense

 

(14.6)

(14.7)

(112.0)

 

 

 

 

 

Underlying loss before tax

(40%)

(110.0)

(88.4)

(183.4)

 

 

 

 

 

FSCS levy

 

-

-

(0.2)

Listing Share Awards

 

-

0.4

(0.2)

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

 

(7.5)

(14.0)

(26.6)

Net BCR costs

 

(0.3)

-

-

Transformation costs

 

(1.8)

(4.3)

(12.4)

Remediation costs

 

(25.4)

(23.0)

(17.8)

Business acquisition and integration costs

 

(2.3)

(5.4)

-

Gain on mortgage portfolio sale (net of costs)

 

8.4

63.7

-

 

 

 

 

 

Statutory loss before tax

(42%)

(138.9)

(71.0)

(240.6)

 

 

 

 

 

Statutory taxation

 

(2.2)

8.6

1.1

 

 

 

 

 

Statutory loss after tax

(41%)

(141.1)

( 62.4 )

(239.5)

             

 

 

 

 

 

Half year ended

Key metrics

30-Jun

2021

31-Dec

2020

30-Jun

2020

Underlying earnings per share - basic and diluted

 

(65.1p)

(42.9p)

(108.8p)

Number of shares

 

172.4m

172.4m

172.4m

Net interest margin (NIM)

 

1.28%

1.28%

1.15%

Cost of deposits

 

0.31%

0.49%

0.82%

Cost of risk

 

0.24%

0.20%

1.55%

Underlying cost:income ratio

 

153%

139%

147%

 

 

 

 

 

 

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

 

 

For more information, please contact:

Metro Bank PLC Investor Relations

Jo Roberts

+44 (0) 20 3402 8900

[email protected]

 

Metro Bank PLC Media Relations

Tina Coates / Mona Patel

+44 (0) 7811 246016 / +44 (0) 7815 506845

[email protected]  

 

Teneo

Charles Armitstead / Haya Herbert Burns

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

[email protected]

 

ENDS

 

About Metro Bank

 

Metro Bank services more than two million customer accounts and is celebrated for its exceptional customer experience. It is the highest rated high street bank for overall service quality and best for service in-store for personal customers, and best for service in-store for business customers in the Competition and Market Authority's Service Quality Survey in February 2021. It was recognised as 'Bank of the Year' at the 2020 MoneyAge Awards and 'Banking Brand of The Year' at the Moneynet Personal Finance Awards 2021, received Gold Award in the Armed Forces Covenant's Employer Recognition Scheme 2021 and won Best Open Banking Partnership - Commercial at the inaugural Open Banking Expo Awards 2021.

The community bank offers retail, business, commercial and private banking services, and prides itself on giving customers the choice to bank however, whenever and wherever they choose, and supporting the customers and communities it serves. Whether that's through its network of 77 stores open seven days a week, 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.

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

30 June 2021

 

 

 

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, 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

About Metro Bank

Metro Bank is celebrated for its exceptional customer experience. It is the highest rated high street bank for overall service quality and best for service in-store for personal customers, and best for service in-store for business customers in the Competition and Market Authority's Service Quality Survey in February 2021. It was recognised as 'Bank of the Year' at the 2020 MoneyAge Awards and 'Banking Brand of The Year' at the Moneynet Personal Finance Awards 2021.

 

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 over 4,000 colleagues and is headquartered in Holborn, London.

 

Board of Directors

Registered Office

 

One Southampton Row

London

WC1B 5HA

Chair

Robert Sharpe N

 

 

Non-Executive Directors

Independent Auditors

Catherine Brown N,O, R

PricewaterhouseCoopers LLP

Chartered Accountants and Statutory Auditors

7 More London Riverside

London

SE1 2RT

Sally Clark A, R

Anne Grim R

Ian Henderson A, O

Monique Melis A, N

Sir Michael Snyder N

 

Paul Thandi N,R

Registered Number

Michael Torpey A, O

6419578

Nicholas Winsor O

 

 

www.metrobankonline.co.uk

(A) Member of the audit committee

(N) Member of the nomination committee

(O) Member of the risk oversight committee

(R) Member of the remuneration committee

Chair of the committee

 

 

 

Executive Directors

 

Daniel Frumkin - Chief Executive Officer

 

David Arden - Chief Financial Officer

 

 

 

Company Secretary

 

Melissa Conway

 

 

 

 

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.

 

 

sumMarised interim results

 

Half year to

30 June 2021

Half year to

31 December 2020

Change

Half year to

30 June 2020

Change

Profit and loss

 

 

 

 

 

Underlying loss before tax1

(£110.0m)

(£88.4m)

24%

(£183.4m)

(40%)

Statutory loss before tax

(£138.9m)

(£71.0m)

96%

(£240.6m)

(42%)

Total income (statutory)2

£196.3m

£263.5m

(26%)

£168.9m

16%

Total operating expenses (Statutory)

£320.6m

£319.8m

0%

£297.5m

8%

Net interest margin

1.28%

1.28%

0 bps

1.15%

13 bps

Average cost of deposits

0.31%

0.49%

(18 bps)

0.82%

(51 bps)

 

 

 

 

 

 

 

30 June 2021

31 December 2020

Change

30 June 2020

Change

Balance sheet

 

 

 

 

 

Customer deposits

£16,620m

£16,072m

3%

£15,577m

7%

Customer loans

£12,325m

£12,090m

2%

£14,857m

(17%)

Loan to deposit ratio

74%

75%

(1 pps)

95%

(21 pps)

Total assets

£23,013m

£22,579m

2%

£22,134m

4%

 

 

 

 

 

 

Asset quality

 

 

 

 

 

Coverage ratio

1.33%

1.30%

3 bps

0.96%

37 bps

Cost of risk (annualised)

0.24%

0.20%

4 bps

1.55%

(131bps)

 

 

 

 

 

 

Capital ratios

 

 

 

 

 

Common Equity Tier 1 (CET1) ratio

13.9%

15.0%

 

14.5%

 

Regulatory leverage ratio

4.9%

5.6%

 

5.8%

 

Total regulatory capital plus MREL ratio

21.7%

22.4%

 

21.3%

 

 

 

 

 

 

 

Customer metrics

 

 

 

 

 

Customer accounts

2.4m

2.0m

 

2.1m

 

Stores

77

77

 

77

 

 

 

 

 

 

 

 

1.  Underlying loss 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, remediation costs, business acquisition and integration costs and net income resulting from the mortgage portfolio sale when comparing to our statutory loss.

2.  Statutory income in the six months to 31 December 2020 includes £69 million gain on sale of residential mortgage portfolio.

 

 

 

Business review

The first six months of 2021 have shown encouraging progress as we continue to deliver our strategy. While our operating environment remains challenging, economic indicators are beginning to show signs of improvement. The outlook is undoubtedly more positive compared to the full year, primarily due to the UK's successful vaccination programme and the gradual lifting of restrictions, but it remains unclear if and how the recovery will develop and as such we remain cautious in our approach.

The business performance is in line with that envisaged in our turnaround plan, even with the additional headwinds and capital drain caused by COVID-19 and we remain on track with the delivery of our strategy. The first half of the year has begun to show real momentum with underlying revenue up 14% over the preceding six months, when adjusted for the mortgage sale. The discipline of driving returns is starting to show early signs of success with a much lower cost of deposits, improving lending yield as a percentage of risk weighted assets and the lending and deposit mix shift all being indicators of progress. 

2021 has seen the Bank continue to deliver on what we promised, both in respect of fixing the basics and focusing on addressing the additional challenges arising from the COVID-19 pandemic. In many areas the rapid acceleration of changes brought on by COVID-19 has created opportunities which we continue to capitalise on, building on the early positive indicators we have seen emerge in the first half of the year.

Net interest margin (NIM) has remained flat since the second half of last year, despite the mortgage sale and the excess liquidity we are carrying from the proceeds of that sale, as well as higher than anticipated deposit inflows in the first half. Our lending yields are continuing to accrete and our cost of deposits are continuing to reduce. Our diversification of lending streams to focus more on consumer lending, government backed support schemes and an expanded range of mortgages is allowing us to generate a greater return on risk-weighted assets.

Operationally the business is performing well and we have returned our stores to seven-day a week opening. Whilst our head office colleagues remain almost entirely home-based, we are aiming for a gradual return to the office from September 2021, with a hybrid working approach that follows extensive consultation with our colleagues. We are confident this approach is in the best interest of our colleagues and will continue to engage with them as we evolve our flexible working approach.

Review of strategic priorities

We recognised an underlying loss before tax of £110.0 million during the period (six months to 30 June 2020: £183.4 million, six months to 31 December 2020: £88.4 million) which reflects the cost of addressing legacy challenges, where we are in our turnaround plan and the ongoing impact of lockdowns.

Revenue

Whilst revenue was slightly down in the first six months of the year, this is a reflection of lower customer activity in line with national lockdowns impacting fee income. The fall in income arising from the mortgage sale at the end of last year was largely offset by a disciplined approach to deposit pricing, reducing cost of deposits, and the contribution from growth in consumer lending. Adjusting for the mortgage disposal, revenue increased 14% half on half. On front book pricing we are seeing strong growth in yields as we focus on achieving the right balance between risk and return and we concentrate our attention on areas of the lending market where we can compete effectively.

We have continued to rebalance our lending mix, with consumer lending making up a greater percentage of overall lending. This is mainly due to the acquisition of the RateSetter platform last year, which has provided a strong brand and enhanced capability in this area.

Alongside consumer lending we have bolstered our mortgage range to target underserved areas of the market. This has translated into higher average mortgage lending yields, despite the broader mortgage market remaining highly competitive.

By focusing on the right type of lending, whilst at the same time working to lower the price we pay for deposits, we are driving positive interest income jaws. Cost of deposits have fallen to 0.31%, from 0.49% in the second half of 2020 and are continuing to fall, demonstrating our business model is working and that we do not have to compete on price in order to win deposits. Indeed, pricing is now in line with the larger high street banks.

Fee and other income has remained subdued owing to the continuation of lockdown measures and travel restrictions. We continue to invest in this area as it provides an opportunity for capital efficient income growth and we are optimistic that the work we have undertaken in this segment of our business will mean it returns to growth as restrictions are lifted. New products, including our recently launched insurance partnerships, are areas that will assist in this, with initiatives such as our pet insurance product building on our strong customer proposition.

Costs

We continue to focus on costs, with underlying Run the Bank cost growth contained below 2% from the second half of 2020 to £214.9 million (six months to 31 December 2020: £206.3m million) after adjusting for the integration of RateSetter, which is now largely complete. Going forward we will be looking to realise the longer-term cost savings and additional synergies through this integration. 

Infrastructure

We continue to develop our two new stores in Bradford and Leicester, these both remain large and attractive markets and present an opportunity to bolster our franchise. We have worked with new architects and have ensured our new stores are more sustainable, flexible and cost efficient than previous locations, whilst not compromising on the unique Metro Bank look and feel. 

We have also agreed the further freehold purchase of three stores, all of which will complete in the second half of the year. These were secured at an attractive yield with a strong capital payback. Our strategy of purchasing the freeholds where the price is right allows us to buy ourselves out of long leases, providing greater flexibility over the sites, as well as being able to reduce costs.

In June we opened a new AMAZE Direct call centre in Bristol, utilising excess space above our store. The call centre underlines our focus on delivering exceptional service whether that be in store, on the phone, or digitally. As well as creating new roles to service our expanding customer base, the call centre also rationalised some of the existing smaller sites in central London which were set up earlier in our history and were no longer practical in terms of size and location for the next stage of our growth.

We have continued to invest in digital capabilities, namely in back office systems, and particularly in relation to regulatory compliance, including financial crime. We have also opened our business account online to a greater range of businesses, providing a simple and efficient way to open an account with us.

In addition to our back-office investments, we have also continued to launch new customer facing features. These include the addition of in-app invoicing technology for our small business accounts, helping customers keep track of their finances.

Balance sheet optimisation  

We have continued to deliver on our promise of optimising our Balance Sheet to ensure greater capital efficiency.

2021 started with the completion of the sale of the residential mortgage portfolio and this was swiftly followed by the purchase of the RateSetter back book, which helped redeploy some of the capital and liquidity released though the sale. We are an accredited provider for the government-backed Recovery Loan Scheme, the latest government-backed business support programme. The scheme will be 80% government-backed, via the British Business Bank, and like the earlier schemes, provides both a strong return on capital as well as reduced risk lending.

Over the course of the first six months of the year we have also continued to shift our asset mix, with a clear focus on risk adjusted returns on regulatory capital. This has seen us grow our unsecured lending portfolio as well as specialist mortgage offering whilst at the same time letting older and higher risk weighted commercial loans attrite. This approach is now seeing us generate an increased level of lending income as a proportion of risk weighted assets.

Internal and External Communications

In June we launched our first small business advertising campaign centred around three talented entrepreneurs and showcased our award-winning small business banking offering. The campaign forms part of our updated brand strategy and focus on "people-people banking" - the philosophy that whatever happens in the future of banking, people need people and value human relationships.

Colleagues

We continue to invest in our colleagues and in April we were delighted to celebrate the first cohort of 14 colleagues to complete the Masters-level apprenticeship for senior banking professionals from Cranfield School of Management. The course is a fully funded Masters programme and the UK's first Masters-level apprenticeship for senior banking professionals funded by the Apprenticeship Levy. We have two further cohorts currently on the programme and look forward to enabling more colleagues to take advantage of this opportunity in the years ahead.

Capital management

Following the mortgage portfolio sale, we do not anticipate the need to issue debt capital in the second half of the year. W e continue to take a portfolio view of balance sheet optimisation and MREL issuance, and we will take actions to optimise where needed. As in 2020, MREL resources may fall below the sum of the firm's MREL requirement and buffers (the loss absorbing capacity) for a period of time.

Outlook

We continue to deliver the strategy outlined in February 2020, with a focus on cost, revenue, infrastructure, balance sheet optimisation and internal and external communications. This strategy aims to return the Bank to sustainable profitability and provide adequate returns to shareholders.

It has been pleasing in the first half of 2021 to see the early stages of this strategy come through in our financial performance with the shift in lending mix, reduced cost of deposit, improved lending yield over base rate and higher lending income as a percentage of risk weighted assets all visible proof points. 

I continue to be humbled by the phenomenal effort and energy my colleagues display every day to look after our customers, engage in our local communities and deliver on our purpose of creating fans. Our turnaround is driven by our exceptional colleagues and as we continue to execute our strategy, it will be their continued dedication that will allow us to become the UK's best community bank.

 

Daniel Frumkin

Chief Executive Officer  

27 July 2021

 

Finance review

Our results for the first six months of 2021 reflect where we are in our strategic turnaround, although also show momentum within the business and positive signs that the approach adopted is working.

We recognised a statutory loss before tax for the period of £138.9 million, up from the £71.0 million recognised in the second half of 2020, with the increase primarily due to the £69.0 million gain relating to the £3.1 billion mortgage sale.

On an underlying basis the loss for the period of £110.0 million was an increase of 24% (six months to 31 December 2020: £88.4 million). This has been driven by c.£30 million of lost income in the first half of the year as the resulting liquidity freed up from the sale only started to be significantly deployed halfway through the period. Adjusting for this impact both interest income and profitability have increased half-on-half.

2021 has seen us continue to focus on shifting our deposit mix, which has led to the costs of deposits falling from 0.49% to 0.31% from the second half of 2020. Alongside this we have delivered an increasing lending yield and our approach of optimising the balance sheet is now seeing us generate a greater level of interest income as a proportion of risk weighted assets.

We ended the period with CET 1 capital ratio of 13.9% and an MREL ratio of 21.7%. These compare to the regulatory minima (excluding any confidential buffer) of 9.3% and 20.5% respectively. We continue to take a measured approach to capital management and are focused on building a greater risk adjusted return on regulatory capital.

Our primary focus remains the transformation of the Bank and in doing so we are taking a prudent approach in our assessment of the pace of economic recovery. We recognised an expected credit loss expense of £14.6 million for the period which is broadly flat half-on-half (six months to 31 December 2020: £14.7 million).

Income statement review

Table 1: Summary income statement

 

Half year to

30 June 2021

(unaudited)

£'million

Half year to

31 December 2020

(unaudited)

£'million

Half year to

30 June 2020

(unaudited)

£'million

Year-on-year growth

Net interest income

133.3

133.8

115.9

15%

Net fee, commission and other income

54.8

57.6

52.0

 

Net gains on sale of assets

8.2

72.1

1.0

 

Total income

196.3

263.5

168.9

16%

General operating expenses

(272.8)

(268.2)

(234.1)

17%

Depreciation and amortisation

(40.3)

(37.6)

(36.8)

 

Impairment and write-off of PPE and intangible assets

(7.5)

(14.0)

(26.6)

 

Expected credit loss expense

(14.6)

(14.7)

(112.0)

 

Loss before tax

(138.9)

(71.0)

(240.6)

(42%)

Taxation

(2.2)

8.6

1.1

 

Loss after tax

(141.1)

(62.4)

(239.5)

(41%)

 

Net interest income

Net interest income increased 15% year-on-year to £133.3 million (six months to 30 June 2020: £115.9 million), despite the £3.1 billion mortgage book sale, reflecting increased front book yields, including our meaningful entry into the personal lending market, combined with actions we have taken to reduce cost of deposits. Interest income was slightly reduced from the second half of 2020 (six months to 31 December 2020: £133.8 million) primarily due to the sale of the mortgage portfolio that completed at the start of the year. Adjusting for the mortgage portfolio sale, net interest income increased 57% year on year and 27% half on half.

NIM remained flat from the second half of 2020 at 1.28% (six months to 31 December 2020: 1.28%) and up from 1.15% in the first six months of 2020. The preservation of NIM was achieved despite continued strong deposit inflows and the excess liquidity arising from the mortgage sale.

Fee, commission and other income

Fee commission and other income remain below pre-pandemic levels as the lockdowns at the start of 2021 continued to constrain activity. As restrictions started to be lifted at the end of the period, we have seen an uptick in activity, particularly in areas such as foreign exchange, where volumes had been significantly depressed throughout the pandemic.

Fees and commission remains an area where we believe that we can deliver strong capital efficient returns by building on our expanding account base and leading customer service.

Operating expenses

Operating expenses grew to £275.2 million on an underlying basis during the first six months from £224.7 million in the same period for 2020 and £261.3 million for the last six months of 2020. The year-on-year increase is impacted by several factors, including store growth late in the first half of 2020 and the acquisition of RateSetter which occurred in September 2020. When compared to the final six months of 2020, which is a more representative comparison, cost growth was contained to 5%; 3% once adjusted for the timing of the RateSetter acquisition. On that adjusted basis, Run the Bank cost growth was less than 2%, in line with the guidance we provided at the start of the year.

On a statutory basis total operating expenses remained broadly flat at £272.8 million compared to £268.2 million for the second half of 2020 as the absorption of the additional RateSetter running costs was offset by lower transformation and integration expenditure.

Remediation issues continue to be a significant expense with associated costs of £25.4 million recognised in the period (six months to 31 December 2020: £23.0 million, six months to 30 June 2020: £17.8 million). We are continuing to work closely with the regulators in these investigations.

Expected credit loss expense

Although the macroeconomic environment has improved in 2021, the net charge of £14.6 million ( six months to 30 June 2020: £112.0 million, six months to 31 December 2020: £14.7 million) recognised for the period reflects the continued uncertainty, particularly in respect of new COVID variants and the speed and sustainability of lifted restrictions; during the period we added a fourth macroeconomic scenario to help capture this cautious outlook. We have also continued to develop our provisioning models to capture a greater range of factors, and to apply a material level of post model overlays to capture factors that are not easily reflected in the scenarios. These reflect additional uncertainty arising from the withdrawal of pandemic support measures, including the jobs retention scheme, stamp duty holiday and payment deferrals. These also capture newer risks, including the impact on certain property valuations due to the incidence of cladding.

Our expected credit losses also represent the changes in our lending mix during the start of the year as unsecured consumer lending now constitutes a greater proportion of our balance sheet, following the mortgage portfolio sale in December 2020 and the increase in unsecured lending delivered via RateSetter; whilst moving into unsecured lending generates higher yields, by its nature it also leads to a higher cost of risk. We continue to manage our unsecured lending within a defined risk appetite, with a focus on prime and near prime segments, underpinned by strong credit scoring criteria to ensure we limit losses, which to date remain low.

Balance sheet review

Table 2: Summary balance sheet

 

30 June 2021

(unaudited)

£'million

31 December 2020

(audited)

£'million

Growth

Assets

 

 

 

Cash and balances with the Bank of England

5,111

2,993

 

Loans and advances to customers

12,325

12,090

2%

Investment securities held at fair value through other comprehensive income (FVOCI)

1,198

773

 

Investment securities held at amortised cost

3,165

2,640

 

Financial assets held at fair value through profit and loss

5

30

 

Property, plant and equipment

786

806

 

Intangible assets

253

254

 

Prepayments and accrued income

75

77

 

Assets classified as held for sale

-

295

 

Other assets

95

2,621

 

Total assets

23,013

22,579

2%

Liabilities

 

 

 

Deposits from customers

16,620

16,072

3%

Deposits from central banks

3,800

3,808

 

Debt securities

596

600

 

Financial liabilities held at fair value through profit and loss

-

30

 

Repurchase agreements

212

196

 

Derivative financial liabilities

8

8

 

Lease liabilities

310

327

 

Deferred grant

22

28

 

Provisions

5

11

 

Deferred tax liability

13

12

 

Other liabilities

280

198

 

Total liabilities

21,866

21,290

 

Total equity

1,147

1,289

 

 

Deposits

Deposits grew by 3% from 31 December 2020 to £16,620 million at 30 June 2021 (31 December 2020: £16,072 million). The increase was primarily driven by commercial and SME customers which were up 25% and 4% respectively from the start of the year.

Current account balances grew by 9% during the first half of the year and make up 41% of total customer deposits as at 30 June 2021 (31 December 2020: 39%). We continue to see customer preference moving towards having instant access to funds, leading to growth of current accounts and instant access savings accounts, whilst at the same time we have proactively let higher cost fixed term deposits roll off as we continue to manage cost of deposits down.

Deposit growth in the second half will be influenced by customer behaviour, as cash balances are utilised as the economy recovers from the impacts of the pandemic, combined within the unwinding of government support measures. Focus will remain on maintaining a high-quality mix of relationship-driven customer deposits.

Lending

Net lending ended the period at £12,325 million, up 2% from £12,090 million at 31 December 2020. The £235 million increase has been driven by a c£500 million growth in consumer lending, offset by a moderate reduction in the commercial loans and retail mortgage books. The growth in consumer lending is a result of both organic origination through the RateSetter platform, and the purchase of the £337 million back book from peer-to-peer investors. Our investment in consumer lending, including integrating the RateSetter lending capabilities in store, provides a strong base on which we can capitalise as the economy opens and we are ready to serve a consumer-led recovery.

Retail mortgages remained the largest component of the lending book at 55% of gross lending (31 December 2020: 56%), down £77 million to £6,815 million at 30 June 2021 from £6,892 million at 31 December 2020. The decrease reflects the attrition of older loans, offset by our continued penetration into underserved areas of the mortgage market, which has replaced some of these balances.

Commercial loans, which now comprise 40% of our lending, saw a £176 million reduction from £5,148 million at 31 December 2020. The decrease is down to older term loans repaying combined with a slowdown in new government-backed lending in the first half of the year. We have now started to participate in the new government-backed Recovery Loan Scheme and therefore expect to see the return of some growth in this area. The second half of the year will also see the repayments of BBLS loans as the customer, rather than the government, starts to pay interest on these loans.

Property, plant & equipment and intangibles

Non-current assets have decreased during the period, driven by a reduction in our PPE balance, reflecting the scaling back of our store opening programme. We continue to work on sites in Leicester and Bradford and we have no further stores in the pipeline once these are open.

We have also recently agreed the purchase of a further three freeholds which will complete in the second half of 2021; once completed a third of our store estate will be freehold. By trading right of use assets for freeholds at attractive prices we can both reduce costs and gain flexibility for minimal additional risk weighted assets.

Intangibles remained flat over the first six months of the year as continued investment, albeit at a slower rate, was offset by amortisation and impairment charges.

Capital

Our CET1, Tier 1 and MREL ratios at 30 June 2021 were 13.9 %, 13.9% and 21.7 % respectively, compared to the regulatory minimum of 7.6%, 9.3 % and 20.5 %, respectively, (excluding any confidential PRA buffer). MREL resources may fall below the sum of our MREL requirement and buffers (the loss absorbing capacity) for a period of time.

Risk weighted assets ended the period down 5% to £7,563 million (31 December 2020: £7,957 million) reflecting our change in asset mix and our focus on improving return on regulatory capital. The reduction was also supported by the settlement of the final tranche of the mortgage portfolio in February 2021.

Liquidity

Our liquidity position continues to be strong owing to the liquidity freed up from the mortgage portfolio sale. We ended 30 June 2021 with a Liquidity Coverage Ratio (LCR) of 309 %. We will continue to prudently manage our investments and to invest in high quality securities while maintaining a strong cash position.

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 to operate for a period of at least twelve months from when the interim financial statements are authorised for issue. In making this assessment, the Directors considered a wide range of information relating to present and future conditions, including future projections of profitability, liquidity and capital resources as well as factoring in the uncertainties relating to the economic outlook.

 

David Arden

Chief Financial Officer  

27 July 2021

 

risk review

As at 30 June 2021, there had been no significant change to the business model, risk management framework or risk appetites we outlined in our 2020 Annual Report and Accounts. We have reassessed the principal and emerging risks we face, including those that could result in events or circumstances that might threaten our business model, future performance, solvency or liquidity, and reputation. The principal risk categories remain similar to those outlined in the 2020 Annual Report and Accounts, with changes relating to the identification of legal risk as a principal risk.

A detailed description of our principal risks and uncertainties to which we are exposed, along with our approach to mitigating these risk, is set out in the risk report which can be found on pages 15 to 22 of our 2020 Annual Report and Accounts. These risks consist of:

Credit risk - The risk of financial loss should our borrowers or counterparties fail to fulfil their contractual obligations in full and on time.

Operational risk - The risk that events arising from inadequate or failed internal processes, people and systems, or from external events cause regulatory censure, reputational damage, financial loss, service disruption and/or detriment to our FANS.

Liquidity and Funding risk - The risk that we fail to meet our short-term obligations as they fall due or that we cannot fund assets that are difficult to monetise at short notice (i.e. illiquid assets) with funding that is behaviourally or contractually long term (i.e. stable funding).

Market risk - The risk of loss arising from movements in market prices. Market risk is the risk posed to earnings, economic value or capital that arises from changes in interest rates, market prices or foreign exchange rates.

Financial crime - The risk of financial loss or reputational damage due to regulatory fines, 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.

Regulatory Compliance risk - The risk of failing to understand and comply with relevant laws and regulatory requirements; not keeping regulators informed of relevant issues; not responding effectively to information requests or failing to meet regulatory deadlines; or obstructing the regulator.

Conduct risk - The risk of treating customers unfairly and delivering poor outcomes that lead to customer detriment, such as financial loss and/or distress and inconvenience. This can also result in wider adverse impacts, for example, loss of our FANS, reputational damage, regulatory and/or legal action.

Model risk - The risk of potential loss and regulatory non-compliance due to decisions that could be principally based on the output of models, due to errors in the development, implementation or use of such models.

Capital risk - The risk that we fail to meet minimum regulatory capital (and MREL) requirements. Management of capital is essential to the appropriate management of our balance sheet, ensuring our resilience under stress, and the maintenance of the confidence of our current and potential creditors (including bondholders, the bond market, and customers) and key stakeholders in the pursuit of our business strategy.

Legal risk - The risk of loss, including to reputation, that can result from lack of awareness or misunderstanding of, ambiguity in, or reckless indifference to, the way law applies to the directors, the business, its relationships, processes, products and services.

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

Credit risk

COVID-19 continues to disrupt the economy and has had a material impact on customers. We reacted quickly to this by offering payment deferral, and other temporary support options, across both retail and commercial lending and we continue to provide customer support through government lending schemes and forbearance measures. In addition, the Bank has retained prudency in the estimation of expected credit losses (ECL) across all portfolios, including the use of management overlays, and continues to assess the validity of these estimates to ensure an appropriate level of coverage is maintained.

 

The effectiveness of government support during the pandemic has somewhat muted the emergence of defaults and impairments, resulting in a half year impairment charge £14.6 million. Arrears have remained broadly stable in the first six months of 2021 after most customers rolled off payment deferrals. The majority of payment deferral customers have now returned to contractual payments (with some requiring additional support) and this has led to an improvement in mix across IFRS 9 stages with customers transitioning from stage 2 back to stage 1. Whilst we do expect migrations to stage 2 and 3 to increase, particularly as government support ceases, we are holding an appropriate level of ECL, including COVID-19 related management overlays, to account for the anticipated deterioration.

The macroeconomic outlook has improved as the roll out of the vaccine continues and lock down measures are relaxed. However, there remains an unprecedented level of uncertainty with furlough ending in September, and as payments become due on Government backed loans schemes. We continue to monitor and assess the impact of COVID-19 on customers and the performance of our credit portfolios through these challenging times.

We continue to shift the balance sheet in line with our strategic objectives. The integration of RateSetter into our unsecured consumer finance division has supported higher growth in this area. This has been managed within a Board approved risk appetite and appropriate controls are in place to manage credit risk including the modelling of future losses, appropriate credit policy and referral to specialist manual underwriters where necessary.

Expected credit losses

We have increased the ECL level slightly during the half year of 2021 to £166 million (31 December 2020: £154 million) resulting in an overall coverage level of 1.33% (31 December 2020: 1.30%). This increase was predominately driven by the origination of new consumer loans, the purchase of the RateSetter back book, and a small number of individually assessed impairments on larger commercial loans.

This has been partly offset by the reduction in management overlays to reflect customers with previous payment deferrals options resuming contractual payments, implementation of the new loss given default (LGD) model and portfolio reductions primarily driven by the run-off of the legacy consumer unsecured lending portfolio.

 

Table 3: Expected credit expense movements

 

Six months to

 30 June 2021

£'million

Six months to

 30 June 2020

£'million

Change

£'million

Retail mortgages

(11)

(8)

(3)

Commercial lending

8

20

(12)

Consumer lending

17

3

14

Total expected credit loss expense

15

15

-

 

COVID support for customers

We participated in all three of the Government's key lending support programmes and have also become an accredited lender for the Recovery Loan Scheme (RLS). As at 30 June 2021 there is a total of £1.6 billion of government loans outstanding with £1.4 billion of BBLS, £162 million of CBILS and £39 million CLBILS.

We have proactively offered support measures to both retail customers, mainly in the form of payment deferrals, and commercial customers, in the form of capital repayment holidays, interest roll up, covenant suspensions and increases in working capital facilities. As at 30 June 2021 we have less than 1% of the overall book still requiring this support.

Alongside this, we have provided further support to households through waiving certain account fees as well as suspending interest on overdrafts.

We have provided an on-line portal enabling our BBLS customers to select from Pay as You Grow (PAYG) options to extend the term of their loan, take a six-month payment holiday or take a six-month interest only payment period. As at 30 June 2021 approximately five and half thousand customers have applied for one for above options which represents 14.9% of all BBLS granted.

Residential mortgage lending

The majority of our lending comprises residential mortgages, typically issued by ourselves with a loan to value of less than 95% and with strong collateral providing mitigation to withstand economic stress and therefore minimise our credit losses.

 

The average debt to value (DTV) of our residential mortgage book as at 30 June 2021 was 56% (31 December 2020: 56%).

 

We have taken advantage of opportunities to lend to customers with strong credit ratings for greater than 80% DTV, although the property price growth on back book lending has meant that the DTV profile has remained largely unchanged.

 

Asset quality and the standard of lending remain strong. However, COVID-19 and lockdown will continue to place strain on customers' financial circumstances. An increase in arrears was observed at the end of last year primarily driven by those customers rolling off support schemes, such as payment deferrals, but who continued to face financial difficulties. Since then arrears levels have been broadly stable.

 

Table 4: Residential mortgage lending by DTV banding

 

30 June 2021 (unaudited)

31 December 2020 (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%

  1,852

  504

  2,356

1,855

502

2,357

51-60%

  795

  401

  1,196

842

390

1,232

61-70%

  971

  586

  1,557

836

533

1,369

71-80%

  951

  291

  1,242

1,084

407

1,491

81-90%

  377

  1

  378

359

4

363

91-100%

  80

  - 

  80

74

-

74

More than 100%

  2

  4

  6

1

5

6

Total retail mortgage lending

  5,028

  1,787

  6,815

5,051

1,841

6,892

 

Table 5: Residential mortgage lending by repayment type

 

30 June 2021 (unaudited)

31 December 2020 (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

  2,221

  1,703

  3,924

2,337

1,751

4,088

Capital and interest

  2,807

  84

  2,891

2,714

90

2,804

Total retail mortgage lending

  5,028

  1,787

  6,815

5,051

1,841

6,892

 

Table 6: Residential mortgage lending by geographic exposure

 

30 June 2021 (unaudited)

31 December 2020 (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

  2,157

  1,115

  3,272

2,213

1,147

3,360

South East

  1,172

  295

  1,467

1,157

309

1,466

South West

  430

  87

  517

433

91

524

East of England

  303

  71

  374

298

73

371

North West

  259

  61

  320

265

63

328

West Midlands

  185

  60

  245

179

58

237

Yorkshire and the Humber

  140

  36

  176

139

37

176

East Midlands

  137

  25

  162

131

25

156

Wales

  105

  20

  125

102

21

123

North East

  62

  10

  72

62

10

72

Scotland

  78

  7

  85

72

7

79

Total retail mortgage lending

  5,028

  1,787

  6,815

5,051

1,841

6,892

 

Commercial lending

Table 7: Summary of commercial lending

 

30 June

2021

(unaudited)

£'million

31 December

 2020

(audited)

£'million

Professional buy-to-let

1,037

1,117

Other term loans

1,963

2,138

Non-Government backed commercial term loans

3,000

3,255

Bounce back loans

1,394

1,353

Coronavirus business interruption loans

162

114

Government backed commercial term loans

1,556

1,467

Total commercial term loans

4,556

4,722

Overdrafts and revolving credit facilities

133

149

Credit cards

3

3

Asset and invoice finance

280

274

Total commercial lending

4,972

5,148

 

Total commercial lending has decreased over the first half of 2021 to £5.0 billion. New lending principally reflects government support schemes. Repayment of professional buy-to-let and commercial term loans has also led to a reduction in the commercial portfolio.

Our commercial lending remains largely comprised of secured term loans and Government backed lending, with the remaining balance consisting of term loans and facilities secured by other forms of collateral (such as debentures) and asset and invoice finance.

As at 30 June 2021 the average DTV of our total commercial term loan book was 59% (31 December 2020: 56%).

DTV greater than 100% includes loans which benefit from 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. Our DTV profile primarily reflects the value of property collateral supporting our term loans and does not include any value from government guarantees provided to support CBILS and CLBILS lending. DTV greater than 100% has increased over the first half of 2021 primarily due to COVID impacts on the asset values of a small number of larger commercial loans. 

 

Table 8: Commercial term lending (exc. BBLS) by DTV banding

 

30 June 2021 (unaudited)

31 December 2020 (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%

  321

  789

  1,110

353

876

1,229

51-60%

  257

  473

  730

261

546

807

61-70%

  312

  221

  533

351

255

606

71-80%

  129

  64

  193

133

100

233

81-90%

  8

  91

  99

9

51

60

91-100%

  6

  10

  16

6

13

19

More than 100%

  4

  477

  481

4

411

415

Total commercial term lending

  1,037

  2,125

  3,162

1,117

2,252

3,369

 

Table 9: Commercial term lending (exc. BBLS) by industry exposure

 

30 June 2021 (unaudited)

31 December 2020 (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)

1,037

889

1,926

1,117

1,032

2,149

Legal, Accountancy & Consultancy

-

207

  207

-

208

208

Health & Social Work

-

226

  226

-

248

248

Hospitality

-

370

  370

-

376

376

Retail

-

100

  100

-

107

107

Real estate (management of)

-

10

  10

-

60

60

Construction

-

72

  72

-

36

36

Recreation, cultural and sport

-

84

  84

-

53

53

Investment and unit trusts

-

13

  13

-

9

9

Education

-

25

  25

-

30

30

Real estate (development)

-

36

  36

-

60

60

Other

-

93

  93

-

83

83

Total commercial term lending

1,037

2,125

3,162

1,117

2,252

3,369

 

The sector profile for commercial term lending is broadly consistent with the position as at 31 December 2020. There has been a reduction in commercial real estate and professional buy-to-let of c.10%.

We have observed that some sectors have been more severely impacted by COVID-19 lockdowns. Hospitality and leisure sectors have experienced a more significant reduction in income than other sectors, and as a consequence we have seen higher levels of COVID-19 support required by these customers. We have provisioned for higher levels of expected credit losses in these sectors to reflect the risk of higher default rate.

Commercial customers are managed through early warning categorisation where there have been some early signs of financial difficulty. The overriding objective is to identify, at an early stage, those customers for whom we believe repayment difficulties may develop, thereby allowing timely engagement and appropriate corrective action to be taken. Early warning categorisation supports IFRS 9 stage allocation.

Total lending in early warning categories has stabilised over the first six months of 2021, after the increases driven by COVID-19 over 2020. The majority of customers in early warning categories have received temporary COVID-19 support including payment holidays or government backed loans. We are now observing that many off these customers no longer require COVID-19 support, but we remain cautious in our provision approach in respect of them. There is a risk of increasing default levels as government support measures come to an end including furlough, VAT deferral, and moratorium on landlord action, and repayments fall due on BBLS and CBILS loans.

Therefore, we consider that credit risk remains heightened. We continue to maintain a cautious approach to impairments until the vaccine deployment programme is completed, vaccines prove effective against new COVID-19 variants and the economic recovery takes hold. We have maintained impairment levels to accommodate expected increasing default levels over the remainder of 2021. 

Table 10: Commercial term lending (exc. BBLS) by repayment type

 

30 June 2021 (unaudited)

31 December 2020 (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

  979

  231

  1,210

1,058

281

1,339

Capital and interest

  58

  1,894

  1,952

59

1,971

2,030

Total commercial term lending

  1,037

  2,125

  3,162

1,117

2,252

3,369

 

Table 11: Commercial term lending (exc. BBLS) by geographic exposure

 

30 June 2021 (unaudited)

31 December 2020 (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

  723

  1,254

  1,977

780

1,358

2,138

South East

  189

  386

  575

205

399

604

South West

  29

  151

  180

31

156

187

East of England

  46

  67

  113

48

67

115

North West

  19

  144

  163

20

146

166

West Midlands

  9

  66

  75

10

66

76

Yorkshire and the Humber

  3

  13

  16

3

13

16

East Midlands

  10

  13

  23

11

18

29

Wales

  5

  9

  14

5

10

15

North East

  3

  21

  24

3

18

21

Northern Ireland

1

-

1

1

-

1

Scotland

-

1

1

-

1

1

Total commercial term lending

  1,037

  2,125

  3,162

1,117

2,252

3,369

 

Consumer lending

The acquisition of RateSetter has driven improved capability to lend in the unsecured consumer loans market, with RateSetter loans now accounting for 80% of unsecured consumer lending. Performance of new lending is in line with expectations.

Overall asset quality remains strong, although arrears performance since the onset of COVID-19 has been muted by the payment deferrals scheme and the government furlough support schemes.

Non-performing loans

Table 12: Non-performing loans

 

30 June 2021 (unaudited)

31 December 2020 (unaudited)

 

NPLs

£'million

NPL ratio

%

NPLs

£'million

NPL ratio

%

Retail mortgages

110

1.61%

118

1.70%

Consumer lending (incl. RateSetter)

18

2.57%

13

6.13%

Commercial lending (including asset and invoice finance)

187

3.76%

127

2.48%

Total

315

2.52%

258

2.10%

 

Total Non-Performing Loans (NPLs) increased to £315 million (31 December 2020: £258 million). This increase was primarily driven by commercial customers who have previously sought COVID-19 support measures, and now require further forbearance support. The increase in NPL has been dampened by the government support measures still in place and there is a risk this will increase further in the second half of 2021.

NPLs for consumer customers have decreased to 2.57% (31 December 2020 6.13%) driven by the increase in overall lending, facilitated by RateSetter in the first half of the year as well as the run off of legacy consumer loans.

Cost of risk

Cost of risk (CoR) is credit impairment expense expressed as a percentage of average gross lending. The overall CoR has decreased to 0.24% in the first half of the year (2020: 0.86%) due to the significant charges taken in 2020 in response to COVID-19, compared to the relatively smaller charge movements observed in H1 2021.

Table 13: Cost of risk

 

Half year to

30 June 2021

annualised

 (unaudited)

%

Full year

31 December

2020

(unaudited)

%

Retail mortgages

(0.32%)

0.19%

Consumer lending

7.16%

5.97%

Commercial lending (including asset, invoice finance, CBLS, BBLS)

0.32%

1.99%

Total

0.24%

0.86%

 

The decrease in the retail mortgage CoR to -0.32% (2020: 0.19%) is primarily driven by in the reduction in management overlays for customers benefiting from payment deferrals, as customers have returned to contractual monthly payments and implementation of a new LGD model.

The increase in Consumer lending CoR to 7.16% (2020: 5.97%) is driven by the purchase of the RateSetter back book. The day one ECL charge for the acquired loans has artificially inflated the CoR for the period, as the portfolio was acquired half way through the period. This means that the average consumer lending balances, which the charge for the period is divided by to calculate CoR, only reflects the back book balance for roughly half the period.

The decrease in Commercial lending CoR to 0.32% (2020: 1.99%) is driven by a smaller £10m impairment charge compared to the significant charge taken in 2020 in response to the onset of COVID-19.

Liquidity and funding risk

Liquidity

O ur liquidity position continues to be strong, with our LCR standing at 309% as at 30 June 2021 (31 December 2020: 187%). Our strong liquidity position was strengthened by the completion of the mortgage sale at the start of the year and greater than expected deposit inflows.

We ended the period with a loan to deposit ratio of 74% (31 December 2020: 75%) and we continue to be deposit funded with no reliance on the wholesale markets.

We continue to have access to, and have made use of, the Bank of England's TFS and TFSME, both of which provide us with additional cost-efficient source of liquidity although are not reliant on this as a primary source of funding.

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.

Our CET1 capital ratio decreased to 13.9% at 30 June 2020 from 15.0% as at 31 December 2020. This was primarily due to the losses incurred during the period.

The minimum CET1, Tier 1 and Total Capital Ratio requirements, excluding any confidential PRA buffers, were 7.6%, 9.3% and 11.6%% respectively at 30 June 2021.

We continue to apply the IFRS 9 regulatory transitional arrangements, which allows us to add back to our capital base a portion of the IFRS 9 impairment charges during the transitional period, and our capital ratios are presented on a transitional basis after the application of this arrangement.

The CET1 capital ratio at 30 June 2021 includes a c.1.0% benefit related to software assets which are exempt from the deduction requirement for intangibles assets from CET1. The PRA has consulted on a proposal to revert this treatment and on 9 July 2021 a policy statement was published confirming the requirement for CET1 deduction of intangible software assets will be fully implemented on 1 January 2022.

In 2021 we are subject to an interim MREL requirement of 18% of risk-weighted assets plus buffers, which equates to 20.5% of risk-weighted assets (excluding any confidential PRA buffers). We ended the period with an MREL ratio of 21.7% (31 December 2020: 22.4%). MREL remains the binding constraint on the Bank and our MREL resources may fall below the sum of our MREL requirement plus buffers for a period of time.

 

Table 14: Capital resources

 

30 June 2021

(unaudited)

£'million

31 December 2020

(audited)

£'million

Ordinary share capital

-

-

Share premium

1,964

1,964

Retained earnings

(835)

(694)

Other reserves

18

19

Intangible assets

(253)

(254)

Other regulatory adjustments

158

157

Total Tier 1 capital (CET1)

1,052

1,192

Debt securities (Tier 2)

249

249

Total Tier 2 capital

249

249

Total regulatory capital

1,301

1,441

 

Operational risk

Impact of COVID-19

In response to the pandemic, it was necessary to implement new ways of working and adapt operational processes in 2020, the associated risks of which continue to be actively assessed for mitigation or acceptance as appropriate and process improvements made and embedded as business as usual. Our overall operational risk profile has remained relatively stable but is subject to ongoing review as the situation unfolds and the longer-term impacts of COVID-19 are fully understood. We continue to plan for, and respond to, ongoing developments to ensure continuity of service, minimise the impact on the risk profile, keep our colleagues and customers safe, and comply with UK Government guidance. While the roll-out of COVID-19 vaccines is underway, it will be some time before this materially reduces the impact of the pandemic on our day-to-day operations.

Fraud risk

We continue to work hard in a constantly evolving environment to minimise the impact of fraud. The level of fraud-related losses has increased but this is in proportion to the increase seen across the industry, particularly in relation to scams on our customers, to which we remain vigilant. Our round-the-clock operation reacts quickly to the fraudsters' changing tactics, minimising the impact to customers, and we continue to invest in system defences, and we provide regular communication and training to our colleagues and customers to ensure that we maintain a strong position in the industry. We are also one of nine firms which have signed up to the Lending Standards Board's Contingent Reimbursement Model voluntary code and we are fully committed to its principles.

Cyber threat

The impact which a successful cyber attack could have on our customers remains a very significant focus of attention, as we both manage our current IT systems and plan to deliver new technology for the future, recognising the changing cyber landscape and the increased focus on digital capabilities. This is mitigated by ongoing investment in our cyber and information security infrastructure, enabling us to make constant improvements to our monitoring, control and response capabilities to protect customer data and minimise the risk of disruption.

Operational resilience

In order to continue to proactively prevent, respond to, recover and learn from operational disruptions, we are investing in measures to enhance our operational resilience in line with increased regulatory requirements, including improving the management of our use of third party suppliers.

Emerging risks

Within our 2020 annual report we outlined several emerging risks. An update to these is provided below where appropriate. We have not identified any new emerging risks in the first half of 2021.

Emerging risk

Change from full year

Macroeconomic environment

The full extent of the economic impacts from COVID-19 is yet to be seen. The duration and depth of the downturn continues to remain uncertain due to the emergence of new variants and risks to credit and margin performance are expected, with significant disruption to both supply and demand already occurring. Increasing levels of unemployment could impact customers' ability to repay their lending. The efficacy of monetary and fiscal policy, and the speed and ability with which the UK can return to 'normal' operating conditions, will determine the overall economic impact for the UK.

We continue to monitor economic and political developments in light of the ongoing uncertainty, considering potential consequences for our customers, products and operating model. We actively monitor our credit portfolios and undertake robust internal stress testing to identify sectors that may come under stress as a result of an economic slowdown in the UK.

Climate risk

There is significant uncertainty around the time horizon over which climate risks will materialise, as well as the exact way in which they will occur.

Our mortgage portfolio represents a significant proportion of our customer lending. Increases in extreme variability in weather patterns may lead to increased incidence and severity of physical risks which, in addition to the disruption felt by customers, can lead to a decrease in the valuations of property. In addition, tightening minimum energy efficiency standards for domestic buildings could impact the value of mortgaged properties or the ability of borrowers to service debt. We have low levels of lending to carbon-related assets; however, we may be exposed to future transition risks through the business portfolio.

Analysis of current river and sea flood risk to properties within the mortgage portfolio has been undertaken as an initial step in assessing the physical risk to our lending. Scenario analysis work will be undertaken to consider the longer-term impacts, as well as the high degree of uncertainty. Transition risk within the mortgage portfolio will also be considered, with an assessment of the energy efficiency of properties, and we intend to use this information to support our customers to 'green' their homes. An assessment of sectors (and sub sectors) that may have a higher likelihood of being impacted by transition risks from moving to a lower carbon environment has been performed to increase understanding of the possible risks facing our customers, and support prioritisation of areas where further analysis is required. Building scenario analysis capability is a key component of work being undertaken in 2021.

Digitisation

COVID-19 has accelerated the digitisation of the banking industry in the space of a few months and is likely to lead to rapid change over the coming years as the industry rapidly adapts to customers' evolving behaviours. This is spurring an acceleration of investment and delivery by both incumbent banks and neo-banks to provide enhanced digital propositions to customers in both the consumer and business markets.

The Bank's strategy had always been predicated on new and exciting digital propositions, with the implications of the pandemic supporting that ambition, but also accelerating the timeframe for delivery. Our rapid response to the pandemic has demonstrated our ability to implement change and digital solutions swiftly. We are, therefore, continuously evaluating the timetable and investment profile of our strategy. We are continuing with our investment and digital development in the near term to position us for the future.

 

 

 

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 UK adopted International Accounting Standard 34, 'Interim Financial Reporting' 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 2021 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 2021 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

27 July 2021

27 July 2021

 

Independent review report to Metro Bank PLC

Report on the condensed consolidated 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 6 month period ended 30 June 2021 (the "period").

Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with UK adopted International Accounting Standard 34, 'Interim Financial Reporting' and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

What we have reviewed

The interim financial statements comprise:

· The consolidated balance sheet as at 30 June 2021;

· 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 explanatory notes to the interim financial statements.

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

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

28 July 2021

 

Consolidated statement of comprehensive income (unaudited)

 

Note

Half year to

30 June

2021

£'million

Half year to

31 December 2020

£'million

Half year to

30 June

2020

£'million

Interest income

2

194.2

208.6

217.7

Interest expense

2

(60.9)

(74.8)

(101.8)

Net interest income

 

133.3

133.8

115.9

Net fee and commission income

 

32.7

36.4

23.5

Net gains on sale of assets

 

8.2

72.1

1.0

Other income

 

22.1

21.2

28.5

Total income

 

196.3

263.5

168.9

 

 

 

 

 

General operating expenses

3

(272.8)

(268.2)

(234.1)

Depreciation and amortisation

7,8

(40.3)

(37.6)

(36.8)

Impairment and write offs of PPE and intangible assets

7,8

(7.5)

(14.0)

(26.6)

Total operating expenses

 

(320.6)

(319.8)

(297.5)

Expected credit loss expense

 

(14.6)

(14.7)

(112.0)

Loss before tax

 

(138.9)

(71.0)

(240.6)

Tax (expense)/credit

5

(2.2)

8.6

1.1

Loss for the period

 

(141.1)

(62.4)

(239.5)

 

 

 

 

 

Other comprehensive (expense)/ income 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

 

(1.2)

2.4

3.2

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

 

(0.4)

0.1

(0.2)

Total other comprehensive (expense)/ income

 

(1.6)

2.5

3.0

 

 

 

 

 

Total comprehensive loss for the period

 

(142.7)

(59.9)

(236.5)

 

 

 

 

 

Earnings per share

 

 

 

 

Basic earnings per share (pence)

12

(81.8)

(36.2)

(138.9)

Diluted earnings per share (pence)

12

(81.8)

(36.2)

(138.9)

For the half year to 30 June 2021

 

Consolidated balance sheet (unaudited)

 

Note

30 June

2021

£'million

31 December

 2020

£'million

30 June

2020

£'million

Assets

 

 

 

 

Cash and balances with the Bank of England

 

5,111

 2,993

3,080

Loans and advances to customers

6

12,325

 12,090

14,857

Investment securities held at FVOCI

 

1,198

 773

444

Investment securities held at amortised cost

 

3,165

 2,640

2,577

Financial assets held at fair value through profit and loss

 

5

 30

-

Property, plant and equipment

7

786

 806

821

Intangible assets

8

253

 254

202

Prepayments and accrued income

 

75

 77

70

Assets classified as held for sale

 

-

 295

-

Other assets

 

95

 2,621

83

Total assets

 

23,013

 22,579

22,134

Liabilities

 

 

 

 

Deposits from customers

 

16,620

16,072

15,577

Deposits from central banks

 

3,800

3,808

3,801

Debt securities

 

596

600

599

Financial liabilities held at fair value through profit and loss

 

-

30

-

Repurchase agreements

 

212

196

211

Derivative financial liabilities

 

8

8

12

Lease liabilities

9

310

327

340

Deferred grants

10

22

28

31

Provisions

 

5

11

12

Deferred tax liabilities

5

13

12

15

Other liabilities

 

280

198

189

Total liabilities

 

21,866

21,290

20,787

Equity

 

 

 

 

Called up share capital

11

-

-

-

Share premium account

11

1,964

1,964

1,964

Retained earnings

 

(835)

(694)

(632)

Other reserves

 

18

19

15

Total equity

 

1,147

1,289

1,347

 

 

 

 

 

Total equity and liabilities

 

23,013

22,579

22,134

 As at 30 June 2021

 

The notes below 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 27 July 2021 and were signed on its behalf by:

 

Robert Sharpe

Daniel Frumkin

David Arden

Chairman

Chief Executive Officer

Chief Financial Officer

 

Consolidated cash flow STATEMENT ( unaudited)

For the half year to 30 June 2021

 

Note

Half year to

30 June

2021

£'million

Half year to

31 December 2020

£'million

Half year to

30 June

2020

£'million

Reconciliation of loss before tax to net cash flows from operating activities:

 

 

 

 

Loss before tax

 

(139)

(71)

(241)

Adjustments for:

 

 

 

 

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

7,8

8

14

27

Interest on lease liabilities

9

9

10

9

Depreciation and amortisation

7,8

40

37

37

Share option award charges

4

1

1

1

Grant income recognised in the income statement

 

(7)

(8)

(16)

Amounts provided for

 

-

3

5

Gain on sale of assets

 

(8)

(72)

(1)

Accrued interest on and amortisation of investment securities

 

1

5

(2)

Changes in operating assets and liabilities

 

 

 

 

Changes in loans and advances to customers

 

(235)

2,767

(176)

Changes in deposits from customers

 

548

495

1,100

Changes in operating assets

 

2,817

(2,809)

(11)

Changes in operating liabilities

 

77

(2)

(61)

Net cash inflows from operating activities

 

3,112

370

671

Cash flows from investing activities

 

 

 

 

Net (purchase)/sale of investment securities

 

(953)

(391)

(454)

Purchase of property, plant and equipment

 

-

(19)

(10)

Purchase and development of intangible assets

8

(26)

(28)

(53)

Acquisition of subsidiary, net of cash acquired

 

-

(1)

-

Net cash outflows from investing activities

 

(979)

(439)

(517)

Cash flows from financing activities

 

 

 

 

Grants repaid

10

-

-

(50)

Repayment of capital element of leases

9

(15)

(18)

(13)

Net cash outflows from financing activities

 

(15)

(18)

(63)

 

 

 

 

 

Net increase/(decrease) in cash and cash equivalents

 

2,118

(87)

91

Cash and cash equivalents at start of period

 

2,993

3,080

2,989

Cash and cash equivalents at end of period

 

5,111

2,993

3,080

 

 

 

 

 

Loss before tax includes:

 

 

 

 

Interest received

 

203

290

217

Interest paid

 

74

69

107

 

Consolidated statement of changes in EQUITY ( unaudited)

For the half year to 30 June 2021

 

 

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 2021

-

1,964

(694)

3

16

1,289

Loss for the period

-

-

(141)

-

-

(141)

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

-

-

-

(2)

-

(2)

Total comprehensive expense

-

-

(141)

(2)

-

(143)

Net share option movements

-

-

-

-

1

1

Balance at 30 June 2021

-

1,964

(835)

1

17

1,147

 

 

 

 

 

 

 

Balance at 1 July 2020

-

1,964

(632)

-

15

1,347

Loss for the period

-

-

(62)

-

-

(62)

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

-

-

-

3

-

3

Total comprehensive (expense)/income

-

-

(62)

3

-

(59)

Net share option movements

-

-

-

-

1

1

Balance at 31 December 2020

-

1,964

(694)

3

16

1,289

 

 

 

 

 

 

 

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 (expense)/income

-

-

(240)

3

-

(237)

Net share option movements

-

-

-

-

1

1

Balance at 30 June 2020

-

1,964

(632)

-

15

1,347

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes to the condensed consolidated interim financial statements (unaudited)

1.  Basis of preparation and accounting policies

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.

Basis of preparation

The condensed consolidated interim financial statements of Metro Bank and its subsidiaries for the six months ended 30 June 2021 were authorised for issue in accordance with a resolution of the Directors on 27 July 2021.

These condensed consolidated interim financial statements for the six months ended 30 June 2021 have been prepared on the basis of the policies set out in the 2020 annual financial statements and in accordance with UK adopted IAS 34 and the Disclosure Guidance and Transparency Rules sourcebook of the UK's Financial Conduct Authority, and should be read in conjunction with the annual consolidated financial statements for the year ended 31 December 2020 which were prepared in accordance with IFRS in conformity with the requirements of the Companies Act 2006 and IFRS adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.

In the year to 31 December 2021 our annual financial statements will be prepared in accordance with IFRS as adopted by the UK Endorsement Board. This change in basis of preparation is required by UK company law for the purposes of financial reporting as a result of the UK's exit from the EU on 31 January 2020 and the cessation of the transition period on 31 December 2020.This change does not constitute a change in accounting policy but rather a change in framework which is required to ground the use of IFRS in company law. There is no impact on recognition, measurement or disclosure between the two frameworks in the period reported.

The comparative financial information as at and for the periods ending 31 December 2020 and 30 June 2020 do not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for the year ended 31 December 2020 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 our capital and funding position. The Directors also considered the key assumptions and uncertainties that feed into these projections and the mitigants that are available should actual performance differ to these projections. 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 a period of at least twelve months from when the interim financial statements are authorised for issue. The Directors did not deem there to be any material uncertainties with regards to the assessment on going concern.

Accounting policies

Except as described below, the accounting policies applied in these condensed consolidated interim financial statements are the same as those applied in the Group's consolidated financial statements as at and for the year ended 31 December 2020.

IBOR transition

During the period we have adopted Interest Rate Benchmark Reform Phase 2 - Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 (the Phase 2 amendments).

The only impact on our financial statements is in relation to our hedging arrangements, which have transitioned from being based on LIBOR to SONIA. The Phase 2 amendments have allowed us to amend the designation of our hedging relationships and the associated hedge documentation to reflect these changes without discontinuing the hedging relationships. Our accounting policies in respect of hedging remain unchanged and continue to be applied.

The impact of the changes does not have a significant impact on these condensed consolidated interim financial statements.

Future accounting developments

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

Critical accounting judgements

In our 2020 Annual Report and Accounts we identified the following critical accounting judgements:

· Recognition of provisions

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

· Measurement of the expected credit loss allowance -use of post model overlays and adjustments

Further details on these critical accounting judgements is set out below. No new critical accounting judgements have been identified during the period.

Recognition of provisions

We are currently subject to several regulatory investigations. A key area of judgement applied in the preparation of these financial statements is deciding whether a provision should be made for the outcome of these matters. Specifically, judgement is applied in determining whether a present obligation exists and where one does, in estimating the probability, timing and amount of any outflows. In determining whether a provision needs to be made and whether it can be reliably estimated, we consult relevant professional experts and reassess our judgements on an ongoing basis as facts change. Because of the complex nature of the legal and regulatory matters we are subject to, it is typically the case that it is not possible to reliably estimate the outcome and in these cases we do not provide for their outcome, however we do provide further disclosures outlining the matters in further detail.

Additional information about legal and regulatory matters which constitute contingent liabilities is available in note 14.

Measurement of the expected credit loss allowance -significant increase in credit risk

IFRS 9 requires a higher level of expected credit loss to be recognised for underperforming loans as a lifetime ECL is recognised compared to a 12-month ECL for performing loans. This is considered based on a staging approach. Financial assets that have had no significant increase in credit risk since initial recognition, or that have low credit risk at the reporting date, are considered to be performing loans and are classified as 'Stage 1'. Losses are calculated based on our expectation of losses expected on defaults which may occur within the next 12 months. Assets which are considered to have experienced a significant increase in credit risk since initial recognition, but that do not have objective evidence of impairment, are classified as 'Stage 2'. Losses are calculated based on defaults which may occur at any point in the asset's lifetime.

Judgement is required to determine when a significant increase in credit risk has occurred. An assessment of whether credit risk has increased significantly since initial recognition, resulting in transfer to Stage 2.

As a response to the COVID-19 pandemic, 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 deferral does not in itself result in a transfer between stages for the purposes of IFRS 9. Payment deferral is however a potential indicator of an increase risk and has been reflected via a post model overlay.

Measurement of the expected credit loss allowance -use of post model overlays and adjustments

We use Post Model Adjustments (PMAs) and Post Model Overlays (PMOs) in the assessment of ECL. PMAs supplement the models to account for where there are limitations in model methodology or data inputs and PMOs accounts for downsides risks which are not fully captured through the economic scenarios.

The appropriateness of PMAs and PMOs is subject to rigorous review and challenge, including review by the Bank's Model Governance Committee, Impairment Committee and Audit Committees.

Post model adjustments (PMAs) refer to increases/decreases in ECL to address known model limitations, either in model methodology or model inputs. These rely on analysis of model inputs and parameters to determine the change required to improve model accuracy. These may be applied at an aggregated level, however they will usually be applied at account level.

As at 30 June 2021, only one PMA remains, as models have been implemented into production and previously held PMAs have been released. The remaining PMA reflects the temporary over-estimation of the amortisation profile of customers with payment deferral options (30 June 2021: -£1.4 million; 31 December 2020: £23.0 million).

Post model overlays (PMOs) reflect management judgement. These rely more heavily on expert judgement and will usually be applied at an aggregated level. For example, where recent changes in market and economic conditions have not yet been captured in the macroeconomic factor inputs to models (e.g. industry specific stress event).

Given the continued economic uncertainty, government support and lock down restrictions and further uncertainty on how the pandemic will unfold, we continue to maintain appropriate levels of PMOs. Given the reduction in PMAs, the total percentage of ECL stock comprised of PMAs/PMOs has reduced to 34% (31 December 2020: 50%).

PMOs make up £56.6 million of the ECL stock for the half year ended 30 June 2021 (31 December 2020: £54.0 million) and comprise:

• An overlay to reflect the introduction of a fourth more severe downside scenario - to reflect a wider range of macroeconomic scenarios (30 June 2021: £3.9 million; 31 December 2020: £nil). This has been incorporated as a PMO pending completion of formal model validation.

• An overlay to reflect the existing payment deferrals provided to customers - for mortgages and consumer lending a portfolio level overlay has been maintained to reflect the increased risk for customers currently benefiting from COVID-19 payment deferrals (30 June 2021: £2.6 million; 31 December 2020: £10.9 million). This overlay has been reduced during the first half of 2021 as customers have demonstrated consistent repayments following the end of the deferral period. We expect this to continue to reduce during H2 2021.

•           Uncertainties to economic forecast - to reflect the additional uncertainty not captured in the scenarios used. The latest Commercial portfolio macroeconomic scenarios include a favourable view of GDP which reflects the benefits of the easing of lock-down restrictions. Further, government support schemes have artificially delayed default emergence. The Commercial economic forecasts have been lagged, to capture the future default risk expected to emerge, as Government support schemes come to an end in the second half of the year. (30 June 2021: £9.6 million; 31 December 2020: £nil).

• An expert judgement overlay for the Commercial portfolio - to reflect additional downside risks as a result of COVID-19 and associated severe economic scenarios, including additional stress on commercial property values, sector based stress for customers benefiting from temporary COVID-19 support, and a contagion overlay to reflect cross default risk (30 June 2021: £14.9 million; 31 December 2020: £10.6 million).

• An expert judgement overlay for the Mortgage portfolio - to reflect additional downside risks as a result of COVID-19 and associated severe economic scenarios, and potential impact of cladding on property values (30 June 2021: £13.1 million; 31 December 2020: £14.6 million).

• An overlay for losses in respect of government backed lending schemes - this covers the potential cost to recover for BBLS (30 June 2021: £9.6 million; 31 December 2020: £7.5 million).

•           An overlay for the RateSetter portfolio - to reflect the difference in ECL estimated using the newly developed models and the current approach (30 June 2021: £1.9 million; 31 December 2020: £nil). This has been incorporated as a PMO pending completion of formal model validation.

Critical accounting estimates

In our 2020 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. 

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, and are designed to capture material 'non-linearities' (i.e. where the increase in credit losses if conditions deteriorate, exceeds the decrease in credit losses if conditions improve).

In line with Metro Bank's approved IFRS 9 models, macroeconomic scenarios provided by Moody's Analytics are used in the assessment of provisions. The use of an independent supplier for the provision of scenarios helps to ensure that the estimates are unbiased.

A fourth more severe downside macroeconomic scenario has been introduced as at 30 June 2020 across all portfolios to ensure the set of scenarios adequately reflect a wider range of downside risks which have been previously included within management overlays. Scenarios and probability weights are as follows:

Scenario weighting

Half year to

30 June

2021

Half year to

31 December 2020

Half year to

30 June

2020

Baseline

40%

40%

40%

Upside

20%

30%

30%

Downside 

30%

30%

30%

Severe Downside

10%

-

-

 

The macroeconomic scenarios reflect the current macroeconomic environment as follows:

Baseline scenario (40% weight)

Reflects the projection of the median, or "50%" scenario, meaning that in the assessment there is an equal probability that the economy might perform better or worse than the baseline forecast.

Upside scenario (20% weight)

This above-baseline scenario is designed so there is a 90% probability the economy will perform better than in this scenario, broadly speaking, and a 10% probability it will perform worse.

Downside scenario (30% weight)

In this recession scenario, in which a deep downturn develops, there is a 10% probability the economy will perform better, broadly speaking, and a 90% probability it will perform worse.

Severe Downside scenario (10% weight)

In this recession scenario, in which a deep downturn develops, there is a 4% probability the economy will perform better, broadly speaking, and a 96% probability it will perform worse.

 

Key assumptions underpinning the baseline June 2021 scenarios:

· The Delta variant of COVID-19 is the dominant strain in the UK and new cases are increasing.

· The existing vaccines are effective against the new variant, and the death rate remains low.

· A fourth lockdown is prevented, but the last restriction measures remain for a longer period.

· The unemployment rate spikes in the last quarter of 2021 as a result of the end of the Coronavirus Job   Retention Scheme, which was extended to the end of September, and the recovery remains fragile in the   second half of the year.

· Inflation remains contained for several quarters still, weighed down by the decline in demand. It reaches the 2% target by the start of 2022.

· The government continues to support the economy through massive fiscal stimulus during the first half of 2021, while the Bank of England keeps monetary policy extremely loose for several quarters.

· The EU and the U.K. sign a new financial services agreement, and the U.K. continues operating in European markets.

The following variables are the key drivers of ECL:

· UK interest rate (five-year mortgage rate)

· UK unemployment rate

· UK HPI change, year-on-year (adjusted in the downside scenarios for regional concentration)

· UK GDP change, year-on-year

Macroeconomic scenarios impact the ECL calculation through varying the Probability of Default (PD) and Loss Given Default (LGD). We use UK HPI to index mortgage collateral which has a direct impact on LGD. A wide range of potential metrics were initially considered, representing drivers which capture trends in the economy at large, and may indicate economic trends which will impact UK borrowers. This included variables which impact economic output, interest rates, inflation, stock prices, borrower income and the UK housing market. Statistical methods were then used to choose the subset of drivers which had the greatest significance and predictive fit to our data.

Macroeconomic variable

Scenario

2021

2022

2023

2024

UK five year mortgage interest rates (%)

Baseline

2.5%

2.8%

3.2%

3.7%

Upside

2.8%

3.1%

3.5%

4.2%

Downside

2.1%

2.3%

2.6%

2.9%

Severe Downside

2.1%

2.0%

2.5%

2.8%

Unemployment (%)

Baseline

6.7%

6.0%

5.3%

5.0%

Upside

6.3%

4.9%

4.3%

4.2%

Downside

7.4%

8.2%

7.6%

7.0%

Severe Downside

7.5%

9.1%

8.2%

7.8%

House price index (YoY%)1

Baseline

(1.4%)

3.2%

6.3%

5.2%

Upside

3.8%

10.2%

6.9%

3.9%

Downside

(6.3%)

(12.0%)

(2.0%)

6.6%

Severe Downside

(12.8%)

(18.1%)

(2.2%)

6.7%

UK GDP (YoY%)

Baseline

6.4%

4.6%

2.9%

1.3%

Upside

9.3%

4.5%

2.3%

1.3%

Downside

2.4%

4.0%

4.2%

2.1%

Severe Downside

1.3%

3.3%

3.9%

2.0%

 

The period-end assumptions used for the ECL estimate as at 31 December 2020 are as follows:

Macroeconomic variable

Scenario

2021

2022

2023

2024

UK five year mortgage interest rates (%)

Baseline

2.2%

2.8%

3.3%

3.6%

Upside

2.4%

2.9%

3.7%

4.2%

Downside

1.7%

2.3%

2.6%

2.7%

Unemployment (%)

Baseline

7.4%

6.8%

5.9%

5.5%

Upside

6.4%

5.6%

5.0%

4.8%

Downside

9.2%

9.3%

8.3%

7.6%

House price index (YoY%)

Baseline

(5.0%)

3.2%)

5.7%

5.8%

Upside

(1.1%)

7.6%

7.4%

5.5%

Downside

(9.8%)

(1.95%)

4.7%

6.8%

UK GDP (YoY%)

Baseline

6.8%

5.4%

2.7%

1.0%

Upside

10.7%

3.9%

2.4%

1.1%

Downside

1.8%

7.0%

3.0%

1.0%

 

1.  For the six months ended 30 June 2021 the HPI economic forecast has been stressed on the downside and more severe downside scenarios to reflect Metro Bank's geographical concentration risk.

Following the initial four-year projection period, the Upside, Downside and Severe Downside scenarios converge to the Baseline scenario. The rate of convergence varies based on the macroeconomic factor, but at a minimum convergence takes place three years from the initial four-year projection period.

Scenario

ECL

£'million

Variance to reported weighted ECL at 30 June 2021

Weighted

166

100%

Baseline

  153

(8%)

Upside

  146

(12%)

Downside

  182

10%

Severe Downside

208

26%

 

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.

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

2021

£'million

Half year to

31 December 2020

£'million

Half year to

30 June

2020

£'million

Cash and balances held with the Bank of England

2.3

1.2

4.9

Loans and advances to customers

182.2

201.6

191.7

Investment securities held at amortised cost

9.1

5.3

19.5

Investment securities held at FVOCI

0.6

0.5

1.6

Total interest income

194.2

208.6

217.7

 

Interest expense

 

Half year to

30 June

2021

£'million

Half year to

31 December 2020

£'million

Half year to

30 June

2020

£'million

Deposits from customers

25.5

38.8

60.3

Deposits from central banks

1.9

1.9

6.8

Repurchase agreements

1.1

1.1

1.2

Debt securities

23.6

23.6

24.2

Lease liabilities

8.8

9.4

9.3

Total interest expense

60.9

74.8

101.8

3.  General operating expenses

 

Half year to

30 June

2021

£'million

Half year to

31 December 2020

£'million

Half year to

30 June

2020

£'million

People costs

121.5

108.8

88.7

Information technology costs

27.3

26.6

21.7

Occupancy expenses

16.2

17.1

17.2

Money transmission and other banking related costs

33.6

32.4

13.5

Transformation costs

1.8

4.2

12.4

Remediation costs

25.4

22.9

17.8

Capability & Innovation fund (C&I) costs

5.8

6.4

15.1

Legal and Regulatory fees

3.4

3.1

2.3

Professional Fees

27.4

32.3

21.7

Contractor costs

2.1

2.7

2.8

Printing, postage and stationery costs

2.4

3.0

3.1

Travel costs

0.5

0.5

1.3

Marketing and advertising costs

1.5

2.8

3.6

Business acquisition and integration costs

2.3

5.4

-

Other

1.6

-

12.9

Total general operating expenses

272.8

268.2

234.1

 

4.  People costs

 

Half year to

30 June

2021

£'million

Half year to

31 December 2020

£'million

Half year to

30 June

2020

£'million

Wages and salaries

103.1

92.2

74.6

Social security costs

11.2

10.0

7.9

Pension costs

6.5

5.8

5.0

Equity-settled share based payments

0.7

0.8

1.2

Total people costs

121.5

108.8

88.7

 

5.  Taxation

Tax (expense)/credit for the period

The components of tax (expense)/credit for the six months ended 30 June 2021, 31 December 2020 and 30 June 2020 are:

 

Half year to

30 June

2021

£'million

Half year to

31 December 2020

£'million

Half year to

30 June

2020

£'million

Current tax

 

 

 

Current  tax

-

(0.7)

0.6

Adjustment in respect of prior years

(0.1)

(0.5)

-

Total current tax (expense)/credit

(0.1)

(1.2)

0.6

Deferred tax

 

 

 

Origination and reversal of temporary differences

2.3

4.9

(1.3)

Effect of changes in tax rates

(4.4)

0.3

1.8

Adjustment in respect of prior periods

-

4.6

-

Total deferred tax (expense)/credit

(2.1)

9.8

0.5

Total tax (expense)/credit

(2.2)

8.6

1.1

 

Reconciliation of the total tax (expense)/credit

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

A reconciliation between the tax expense and the accounting profit multiplied by the UK corporation tax rate for the half year ended 30 June 2021, 31 December 2020 and 30 June 2020 are as follows:

 

Half

year to

30 June

2021

£'million

Effective tax rate

%

Half

year to

31 December 2020

£'million

Effective tax rate

%

Half year to

30 June

2020

£'million

Effective tax rate

%

Loss before tax

(138.9)

 

(70.9)

 

(240.6)

 

Tax credit at statutory income tax rate of 19%

26.4

19.0%

13.5

19.0%

45.7

19.0%

 

 

 

 

 

 

 

Tax effects of:

 

 

 

 

 

 

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

(0.8)

(0.6%)

(1.0)

(1.4%)

(1.4)

(0.6%)

Non-deductible expenses - investment property impairment

-

-

(3.2)

(4.5%)

 

 

Non-deductible expenses - PPE impairment

-

-

-

-

(2.2)

(0.9%)

Non-deductible expenses - remediation

(4.6)

(3.3%)

(3.6)

(5.1%)

(3.0)

(1.3%)

Non-deductible expenses - other

(0.1)

(0.1%)

(0.2)

(0.3%)

(0.5)

(0.2%)

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

1.9

1.4%

0.2

0.3%

-

-

Share based payments

(0.2)

(0.1%)

-

-

(0.2)

(0.1%)

Adjustment in respect of prior years

(0.1)

-

4.1

5.8%

-

-

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

(20.3)

(14.6%)

(3.7)

(5.2%)

(39.1)

(16.3%)

Derecognition of tax losses arising in prior years

-

-

-

-

-

-

Effect of changes in tax rates

(4.4)

(3.2%)

0.3

0.4%

1.8

0.8%

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

(2.2)

(1.5%)

6.4

9.0%

1.1

0.4%

 

Effective tax rate

The effective tax rate for half year to 30 June 2021 is (1.5)% (half year to 31 December 2020: 0.4%; half year to 30 June 2020: 9.0%). This has been calculated by applying the effective tax rate which is expected to apply for the six months ended 30 June 2021 using rates substantively enacted by 30 June 2021 as required by IAS34 'Interim Financial Reporting'.

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. A reduction in the UK corporation tax rate from 19% to 17% (effective 1 April 2020) was substantively enacted on 6 September 2016. The March 2020 Budget announced that a rate of 19% would continue to apply with effect from 1 April 2020, and this change was substantively enacted on 17 March 2020.

An increase in the UK corporation rate from 19% to 25% (effective 1 April 2023) was substantively enacted on 24 May 2021. This will increase the company's future current tax charge accordingly. The deferred tax liability at 30 June 2021 has been calculated based on these rates, reflecting the expected timing of temporary differences.

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. Further information on the details of the judgements taken around deferred tax are discussed in note 1.

 

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 2021

 

 

 

 

 

 

Deferred tax assets

13

3

-

-

-

16

Deferred tax liabilities

-

-

-

(21)

(8)

(29)

Deferred tax liabilities (net)

13

3

-

(21)

(8)

(13)

 

 

 

 

 

 

 

At 1 January 2021

12

2

-

(16)

(10)

(12)

Income statement

1

-

-

(5)

2

(2)

Other comprehensive income

-

1

-

-

-

1

At 30 June 2021

13

3

-

(21)

(8)

(13)

 

 

 

 

 

 

 

31 December 2020

 

 

 

 

 

 

Deferred tax assets

12

3

-

-

-

15

Deferred tax liabilities

-

(1)

-

(16)

(10)

(27)

Deferred tax liabilities (net)

12

2

-

(16)

(10)

(12)

 

 

 

 

 

 

 

At 1 July 2020

-

3

-

(14)

(4)

(15)

Income statement

12

-

-

(2)

-

10

Other comprehensive income

-

(1)

-

-

-

(1)

Acquisition

-

-

-

-

(6)

(6)

At 31 December 2020

12

2

-

(16)

(10)

(12)

 

 

 

 

 

 

 

30 June 2020

 

 

 

 

 

 

Deferred tax assets

-

5

-

-

-

5

Deferred tax liabilities

-

(2)

-

(14)

(4)

(20)

Deferred tax liabilities (net)

-

(15)

 

 

 

 

 

 

 

At 1 January 2020

-

4

-

(15)

(4)

(15)

Income statement

-

(1)

-

1

-

-

At 30 June 2020

-

3

-

(14)

(4)

(15)

 

6.  Loans and advances to customers

 

30 June 2021

 

Gross carrying amount £'million

ECL allowance £'million

Net carrying amount £'million

Retail mortgages

6,815

(15)

6,800

Consumer lending

704

(42)

662

Commercial lending

4,972

(109)

4,863

Total loans and advances to customers

12,491

(166)

12,325

 

 

31 December 2020

 

Gross carrying amount £'million

ECL allowance £'million

Net carrying amount £'million

Retail mortgages

6,892

(26)

6,866

Consumer lending

204

(25)

179

Commercial lending

5,148

(103)

5,045

Total loans and advances to customers

12,244

(154)

12,090

 

 

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

 

Loans and advances to customers by category

 

30 June

2021

£'million

31 December

 2020

£'million

30 June

2020

£'million

Residential owner occupied

5,028

5,051

8,310

Retail buy-to-let

1,787

1,841

1,880

Total retail mortgages

6,815

6,892

10,190

Overdrafts

71

73

73

Credit cards

11

10

10

Term loans

622

121

115

Total consumer lending

704

204

198

Total retail lending

7,519

7,096

10,388

Professional buy-to-let

1,037

1,117

1,167

Bounce back loans

1,394

1,353

730

Coronavirus business interruption loans

162

114

50

Other term loans

1,963

2,138

2,222

Commercial term loans

4,556

4,722

4,169

Overdrafts and revolving credit facilities

133

149

185

Credit cards

3

3

3

Asset and invoice finance

280

274

257

Total commercial lending

4,972

5,148

4,614

Total gross loans to customers

12,491

12,244

15,002

 

Included within the consumer term loan figure is the portfolio back book of loans purchased from the RateSetter peer-to-peer investors in April for £337 million.

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 2021

 

Stage 1

12 month ECL £'million

Stage 2

Lifetime ECL £'million

Stage 3

Lifetime ECL £'million

POCI1

Lifetime ECL £'million

Up to date

5,917

751

32

-

1 to 29 days past due

1

17

10

-

30 to 89 days past due

-

18

17

-

90+ days past due

-

-

52

-

Gross carrying amount

5,918

786

111

-

 

1.  Purchase or originated credit impaired

 

31 December 2020

 

Stage 1

12 month ECL £'million

Stage 2

Lifetime ECL £'million

Stage 3

Lifetime ECL £'million

POCI

Lifetime ECL £'million

Up to date

5,911

802

47

-

1 to 29 days past due

-

18

8

-

30 to 89 days past due

-

43

13

-

90+ days past due

-

-

50

-

Gross carrying amount

5,911

863

118

-

 

 

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

-

 

Consumer lending

 

30 June 2021

 

Stage 1

12 month ECL £'million

Stage 2

Lifetime ECL £'million

Stage 3

Lifetime ECL £'million

POCI

Lifetime ECL £'million

Up to date

641

34

1

-

1 to 29 days past due

1

1

-

-

30 to 89 days past due

-

8

1

-

90+ days past due

-

-

16

1

Gross carrying amount

642

43

18

1

 

 

31 December 2020

 

Stage 1

12 month ECL £'million

Stage 2

Lifetime ECL £'million

Stage 3

Lifetime ECL £'million

POCI

Lifetime ECL £'million

Up to date

149

38

-

-

1 to 29 days past due

-

3

-

-

30 to 89 days past due

-

2

-

-

90+ days past due

-

-

12

-

Gross carrying amount

149

43

12

-

 

 

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

-

 

Commercial lending

 

30 June 2021

 

Stage 1

12 month ECL £'million

Stage 2

Lifetime ECL £'million

Stage 3

Lifetime ECL £'million

POCI

Lifetime ECL £'million

Up to date

3,985

765

165

-

1 to 29 days past due

1

8

2

-

30 to 89 days past due

-

27

10

-

90+ days past due

-

-

9

-

Gross carrying amount

3,986

800

186

-

 

 

31 December 2020

 

Stage 1

12 month ECL £'million

Stage 2

Lifetime ECL £'million

Stage 3

Lifetime ECL £'million

POCI

Lifetime ECL £'million

Up to date

4,115

863

96

-

1 to 29 days past due

-

21

2

-

30 to 89 days past due

-

22

11

-

90+ days past due

-

-

18

-

Gross carrying amount

4,115

906

127

-

 

 

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

-

 

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 2021

5,911

863

118

-

6,892

(5)

(17)

(4)

-

(26)

5,906

846

114

-

6,866

Transfers to/from stage 11

369

(352)

(17)

-

-

(7)

6

1

-

-

362

(346)

(16)

-

-

Transfers to/from stage 21

(280)

288

(8)

-

-

1

(1)

-

-

-

(279)

287

(8)

-

-

Transfers to/from stage 31

(9)

(21)

30

-

-

-

1

(1)

-

-

(9)

(20)

29

-

-

Net remeasurement due to transfers2

-

-

-

-

-

6

-

-

-

6

6

-

-

-

6

New lending3

545

77

-

-

622

(1)

(1)

-

-

(2)

544

76

-

-

620

Repayments, additional drawdowns and interest accrued

(92)

(11)

(1)

-

(104)

-

-

-

-

-

(92)

(11)

(1)

-

(104)

Derecognitions4

(526)

(58)

(11)

-

(595)

1

1

-

-

2

(525)

(57)

(11)

-

(593)

 Changes to assumptions5

-

-

-

-

-

1

5

(1)

-

5

1

5

(1)

-

5

Balance at 30 June 2021

5,918

786

111

-

6,815

(4)

(6)

(5)

-

(15)

5,914

780

106

-

6,800

 

 

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 2020

9,382

723

85

-

10,190

(21)

(11)

(8)

-

(40)

9,361

712

77

-

10,150

Transfers to/from stage 1

(18)

20

(2)

-

-

-

-

-

-

-

(18)

20

(2)

-

-

Transfers to/from stage 2

(176)

177

(1)

-

-

-

-

-

-

-

(176)

177

(1)

-

-

Transfers to/from stage 3

(31)

(8)

39

-

-

-

1

(1)

-

-

(31)

(7)

38

-

-

Net remeasurement due to transfers

-

-

-

-

-

1

(3)

2

-

-

1

(3)

2

-

-

New lending

262

44

1

-

307

(1)

(3)

-

-

(4)

261

41

1

-

303

Repayments, additional drawdowns and interest accrued

5

(6)

-

-

(1)

-

-

-

-

-

5

(6)

-

-

(1)

Transfer to held for sale6

(289)

(7)

-

-

(296)

1

-

-

-

1

(288)

(7)

-

-

(295)

Derecognitions

(3,224)

(80)

(4)

-

(3,308)

3

1

1

-

5

(3,221)

(79)

(3)

-

(3,303)

 Changes to assumptions

-

-

-

-

-

12

(2)

2

-

12

12

(2)

2

-

12

Balance at 31 December 2020

5,911

863

118

-

6,892

(5)

(17)

(4)

-

(26)

5,906

846

114

-

6,866

 

 

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 1

127

(126)

(1)

-

-

(1)

1

-

-

-

126

(125)

(1)

-

Transfers to/from stage 2

(383)

383

-

-

-

-

-

-

-

-

(383)

383

-

-

Transfers to/from stage 3

(24)

(14)

38

-

-

-

-

-

-

-

(24)

(14)

38

-

Net remeasurement due to transfers

-

-

-

-

-

-

(5)

(3)

-

(8)

-

(5)

(3)

-

(8)

New lending

260

4

-

-

264

(2)

-

-

-

(2)

258

4

-

-

262

Repayments, additional drawdowns and interest accrued

(127)

(5)

-

-

(132)

-

-

-

-

-

(127)

(5)

-

-

(132)

Derecognitions

(345)

(21)

(6)

-

(372)

-

-

-

-

-

(345)

(21)

(6)

-

(372)

Changes to assumptions

-

-

-

-

-

(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

 

2.  Represents the stage transfers prior to any ECL remeasurement

3.  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

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

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

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.  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

 

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 2021

149

43

12

-

204

(6)

(9)

(10)

(25)

143

34

2

179

Transfers to/from stage 1

14

(14)

-

-

-

(2)

2

12

(12)

Transfers to/from stage 2

(4)

4

-

-

-

(4)

4

Transfers to/from stage 3

(1)

(2)

3

-

-

2

(2)

(1)

1

Net remeasurement due to transfers

-

-

-

-

-

1

(1)

1

(1)

New lending

512

24

5

1

542

(17)

(3)

(3)

(23)

495

21

2

1

519

Repayments, additional drawdowns and interest accrued

(11)

(6)

(1)

-

(18)

(11)

(6)

(1)

(18)

Derecognitions

(17)

(6)

(1)

-

(24)

1

1

2

(17)

(5)

(22)

 Changes to assumptions

-

-

-

-

-

4

2

(2)

4

4

2

(2)

4

Balance at 30 June 2021

642

43

18

1

704

(20)

(5)

(17)

(42)

622

38

1

1

662

 

 

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 2020

179

8

11

-

198

(8)

(4)

(10)

-

(22)

171

4

1

-

176

Transfers to/from stage 1

(1)

1

-

-

-

-

-

-

-

-

(1)

1

-

-

-

Transfers to/from stage 2

(54)

54

-

-

-

-

-

-

-

-

(54)

54

-

-

-

Transfers to/from stage 3

(2)

(1)

3

-

-

-

-

-

-

-

(2)

(1)

3

-

-

Net remeasurement due to transfers

-

-

-

-

-

-

(6)

(2)

-

(8)

-

(6)

(2)

-

(8)

New lending

47

1

-

-

48

(2)

-

-

-

(2)

45

1

-

-

46

Repayments, additional drawdowns and interest accrued

11

(20)

(1)

-

(10)

-

-

-

-

-

11

(20)

(1)

-

(10)

Derecognitions

(31)

-

(1)

-

(32)

-

-

1

-

1

(31)

-

-

-

(31)

 Changes to assumptions

-

-

-

-

-

4

1

1

-

6

4

1

1

-

6

Balance at 31 December 2020

149

43

12

-

204

(6)

(9)

(10)

-

(25)

143

34

2

-

179

 

 

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 1

1

(1)

-

-

-

-

-

-

-

-

1

(1)

-

-

Transfers to/from stage 2

(8)

8

-

-

-

1

(1)

-

-

-

(7)

7

-

-

Transfers to/from stage 3

(1)

-

1

-

-

-

-

-

-

-

(1)

-

1

-

Net remeasurement due to transfers

-

-

-

-

-

-

(1)

(1)

-

(2)

-

(1)

(1)

-

(2)

New lending

8

1

-

-

9

-

-

-

-