Metro Bank PLC

Full year results

Trading Update 2020

24 February 2021

 

Metro Bank PLC (LSE: MTRO LN)

 

Results for Year ended 31 December 2020

 

Highlights:

·    Continued support for customers, communities and colleagues through COVID-19

·    Accelerated transition to higher yielding assets

o     £3.1 billion mortgage disposal

o     RateSetter platform and back book acquisitions drive growth in unsecured lending

o     Shift towards specialist mortgages (>80% of applications)

·    Extended over 36,000 government-backed business loans totalling £1.5 billion

·    11% growth in deposits; meaningful mix shift to more current accounts

·    #1 high street bank for service for the sixth time in a row

·    10% growth in customer accounts

 

 

Summary

·	Continued support for customers, communities and colleagues during COVID-19, demonstrating that community banking has never been more relevant.
·	Transformation plan is on track, although financial performance impacted by COVID-19.
·	Strategic pillars unchanged. The liability-led strategy has been supplemented by an acceleration of asset mix shift in response to longer term impacts of COVID-19.
·	Underlying loss before tax of £271.8 million for the year (2019: loss of £11.7 million)
·	Estimated £124 million of impact from COVID-19, comprising c.£100million COVID-19 expected credit loss (ECL) expense and lower transaction fee income.
·	Underlying loss halved H2 vs H1, with improved net interest margin (NIM) and fee income combined with significantly lower ECL charge.
·	Statutory loss before tax of £311.4 million (2019: loss of £130.8 million) reflecting the underlying loss and a number of one-off items including the exit from a central London office and remediation costs.
·	11% year-on-year growth in deposits to £16.1 billion (2019: £14.5 billion) and 3% growth in H2, with mix improved as fixed term deposit accounts reduced to 21% (31 December 2019: 32%) and the share of retail (excluding partnerships) and SME customers increased to 73% (31 December 2019: 70%). Cost of deposits exited the year at 39bps.
·	£3.1 billion residential mortgage portfolio disposal removes current need to issue MREL qualifying debt and creates headroom for growth in higher-yielding assets.
·	Completion of RateSetter platform acquisition and announcement of back book purchase accelerating rebalancing of lending mix towards unsecured lending.
·	Pro forma Common Equity Tier 1 (CET1) ratio of 16.3%1 (31 December 2019: 15.6%), including c.0.8% of software assets. Pro forma total capital plus MREL of 24.4%1 (31 December 2019: 22.1%).
·	Strong liquidity position, pro forma liquidity coverage ratio (LCR) 331% 1.
·	Continued to attract new customers, reaching 2.2 million customer accounts (31 December 2019: 2.0 million).
·	Awarded Moneynet Banking Brand of Year 2021 and MoneyAge Bank of the Year 2020.
·	Strengthened the Board and Executive Committee including appointment of Robert Sharpe as Chair on 1 November 2020.

 

Key Financials:

 

£ in millions	31-Dec 2020	31-Dec 2019	Change from FY 2019	30-Jun 2020	Change from HY 2020
Assets	£22,579	£21,400	6%	£22,134	2%
Loans	£12,090	£14,681	(18%)	£14,857	(19%)
Deposits	£16,072	£14,477	11%	£15,577	3%
Loan to deposit ratio	75%	101%	(26pps)	95%	(20pps)
CET1 capital ratio	15.0%	15.6%	(60bps)	14.5%	50bps
Total capital ratio (TCR)	18.1%	18.3%	(20bps)	17.3%	80bps
TCR plus MREL	22.4%	22.1%	30bps	21.3%	110bps
Liquidity coverage ratio	187%	197%	(10pps)	226%	(39pps)

 

 

£ in millions	Year ended 31-Dec  2020	Year ended 31-Dec  2019	YoY Change	Half year ended 31-Dec 2020	Half year ended 30-Jun 2020	HoH Change
Total underlying revenue2	£340.9	£400.1	(15%)	£187.6	£153.3	22%
Underlying loss before tax 3	(£271.8)	(£11.7)		(£88.4)	(£183.4)
Statutory loss before tax	(£311.4)	(£130.8)		(£71.0)	(£240.6)
Net interest margin	1.22%	1.51%	(29bps)	1.28%	1.15%	13bps
Underlying EPS- basic	(151.7p)	(10.8p)		(42.9p)	(108.8p)
Underlying EPS- diluted	(151.7p)	(10.8p)		(42.9p)	(108.8p)

1.     Pro forma on completion of the residential mortgage portfolio sale, including the settlement of a receivable outstanding at year end

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

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:

 

"It has been a truly unprecedented year for our business, colleagues and customers. Never has the role of a community bank been more important for people across the UK and I am incredibly proud of the way Metro Bank has continued to support and deliver for our customers. Whether through our colleagues who have kept all stores open and been available on the phone throughout national and regional lockdowns, or through our back office colleagues who have helped business and personal customers access much-needed government backed loan schemes, Metro Bank has made a real difference to the communities we serve. 

 

"The pandemic has clearly impacted performance, leading to significant expected credit losses, but our transformation strategy is firmly on track and we have accelerated initiatives to shift our asset mix, bringing higher yield and improving net interest margin, as evidenced in the second half. The purchase of the RateSetter platform has allowed us to enter the unsecured lending market. In addition, we have made progress against each of our strategic pillars, including the sale of part of our residential mortgage portfolio to further optimise our balance sheet, the launch of higher yielding products including specialist mortgages, and we have grown customer accounts to 2.2 million. 

 

"2020 marked Metro Bank's 10th anniversary and whilst challenging, the strategic actions we have taken, supported by our incredible team of dedicated colleagues, means we remain on track to achieve our transformation plan as the UK's best community bank."

 

 

A presentation for investors and analysts will be held at 11:30AM (UK Time) on 24 February 2021.

The presentation will be webcast on:

https://onlinexperiences.com/Launch/QReg/ShowUUID=581E4973-0E91-467D-A85E-8C23D1FCA10D

 

For those wishing to dial-in:

 

From the UK dial: 0800 358 9473

From the US dial: +1 855 85 70686

Participant Pin: 78468426#

URL for other international dial in numbers:  https://event.sharefile.com/share/view/s7bae1d9235d495a8

Progress on strategic plan

 

 

Differentiated customer proposition and customer centric model has once again been recognised in the CMA Service Quality Survey, with Metro Bank the highest rated high street bank for overall service quality for personal and business customers. We were also awarded Moneynet Banking Brand of Year 2021 and MoneyAge Bank of the Year 2020. 

 

Strategic pillars unchanged. The liability-led strategy supplemented by the acceleration of asset mix shift, in response to the significant reduction in treasury yields resulting from COVID-19. The actions taken in 2020 reflect this change of emphasis.

 

Driving profitable revenue growth through meeting more customer needs by better executing and enhancing product offerings remains a key part of our strategy which in turn supports our acceleration towards higher yielding assets.

 

Committed to leveraging our existing network of 77 stores, with no expansion beyond stores in Bradford and Leicester in 2021. Future expansion is subject to review, with no new stores planned in 2022 or 2023.

 

2020 actions

 

Balance sheet optimisation	-  £3.1 billion residential mortgage portfolio disposal with an average yield of 2.1% -  Acquisition and integration of RateSetter platform accelerates growth in consumer unsecured lending -  Re-entered high LTV mortgage market as part of specialist mortgages strategy, specialist mortgage applications accounted for >80% of all mortgage applications in 4Q20
Revenue	-  Launched Bounce Back Loan Scheme (BBLS) and Coronavirus Business Interruption Loan Scheme (CBILS) government backed loans including BBLS top-ups -  New products launched enhancing both retail and business customer propositions, including Business Account Online (BAO) -  Unsecured consumer lending now originating through the RateSetter platform
Cost	-  Accelerated property strategy; exited central London property, purchased three freeholds of existing stores and shift to continued remote working -  Procurement transformation and IT outsourcing transformed -  E-forms and process automation across the Bank -   Leveraging the existing store estate is a key driver and future store plans are always under evaluation
Infrastructure	-  RateSetter platform integrated and originating unsecured consumer lending -  Regulatory requirements delivered including PSD2, high cost of credit and cross border regulation -  IT landscape enhanced with a security operations centre and platform upgrades

 

 

2021 priorities and outlook

 

Balance sheet optimisation	-  Accelerate unsecured lending and specialist mortgages to drive improved yields and reduce the lag effect on NIM -  Remain dynamic and opportunistic to seek capital efficiencies
Revenue	-  Further proposition enhancements for both retail and business customers including insurance, credit cards, small business loans and enhanced business overdrafts -  Focus on opportunity to reach more customers through digital channels -  Furthering range of specialist mortgage products
Cost	-  Customer service transformation -  Continued development of a strategic collections capability for the Bank including meeting BBLS requirements -  Management focus on cost discipline, review of cost performance and discretionary spend
Infrastructure	-  Product delivery through digital channels -  Delivery of regulatory requirements and enhancements to regulatory reporting -  IT and operational resilience programmes

 

2021 economic and market outlook remains uncertain but commitment to customers, colleagues and communities is unwavering.

 

 

 

 

Financial performance for the year and six months ended 31 December 2020

 

Deposits

£ in millions	31-Dec 2020	31-Dec 2019	Change from FY 2019	30-Jun 2020	Change from HY 2020
Demand: current accounts	£6,218	£4,278	45%	£5,274	18%
Demand: savings accounts	£6,430	£5,593	15%	£5,982	7%
Fixed term: savings accounts	£3,424	£4,606	(26%)	£4,321	(21%)
Deposits from customers	£16,072	£14,477	11%	£15,577	3%
Deposits from customers includes:
Retail customers (excl. retail partnerships)	£7,364	£6,891	7%	£7,355	-%
SMEs	£4,420	£3,261	36%	£4,093	8%
	£11,784	£10,152	16%	£11,448	3%
Retail partnerships	£1,596	£1,839	(13%)	£1,705	(6%)
Commercial customers (excluding SMEs4)	£2,692	£2,486	8%	£2,424	11%
	£4,288	£4,325	(1%)	£4,129	4%
4.     SME defined as enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding €50 million, and/or an annual balance sheet total not exceeding €43 million, and have aggregate deposits less than €1 million.

 

·	Customer account growth of 0.2 million (2019: 0.4 million) in the year to 2.2 million, despite lockdown restrictions for much of the period and supported by the launch of Business Current Account Online.
·	Total deposits grew by over £1.5 billion to £16,072 million as at 31 December 2020 (31 December 2019: £14,477 million), following an increase in SME and retail deposits, that together comprise 73% (2019: 70%) of the total. SME balances were boosted by the deposit of BBLSs loans provided. Action taken to reduce pricing of fixed term deposit (FTD) accounts to be more in line with high street competitors combined with a change in customer preference for current accounts and instant access (demand) savings improved the deposit mix during the year. Current accounts comprised 39% of total deposits at 31 December 2020, increased from 30% a year earlier, while FTD accounts reduced from 32% to 21% over the same period.   Following higher than anticipated growth in 2020, deposit expansion will have less of a focus in 2021 with balances reflecting the transitory nature of the BBLS-related deposits together with the roll-off of high cost FTD accounts. Focus will remain on maintaining a high-quality mix of deposits.
·	Cost of deposits was 65bps for the year, a decrease of 13bps compared to 78bps in 2019, reflecting the 65bps base rate reductions to 10bps and the roll-off of higher cost FTD accounts. The reduction in cost of deposits from 82bps in H1 to 49bps in H2 and the year-end exit rate of 39bps reflects the timing of the base rate cut in March and the progressive roll off of FTD accounts. The favourable impact on cost of deposits from FTD roll off and repricing is expected to continue into 2021.

 

 

Loans

                          

·	Total net loans as at 31 December 2020 were £12,090 million, down 18% from £14,681 million at 31 December 2019 primarily reflecting the £3.1 billion residential mortgage portfolio sale in December partially offset by capital-efficient government-supported new SME/business lending. Total net loans are expected to increase in the year ahead, with accelerating mix shift towards higher yielding assets benefitting from the actions taken in 2020.
·	Commercial loans increased £1,096 million to £5,148 million at 31 December 2020 from £4,052 million at 31 December 2019. Commercial lending included £1,353 million of BBLS and £114 million of Coronavirus Business Interruption Loan Scheme (CBILS) lending at 31 December 2020.
·	Retail mortgages remained the largest component of the lending book at 56% of gross lending down from 71% a year earlier, reflecting the £3.1 billion mortgage portfolio disposal in December. Higher yielding speciality mortgages comprised more than 80% of retail mortgage applications in the fourth quarter, a trend that is expected to continue.
·	Consumer lending remained at 2% of the loan book, with a marginal decline in H1 reversed in Q4 following the start of Metro Bank funded lending through the RateSetter platform.   Consumer lending is set to increase substantially in 2021, benefitting from the acquisition of the RateSetter back book (£384 million as at 29 January 2021) and the continued roll out of lending through the RateSetter platform across all of the Bank's channels.
·	Loan to deposit ratio ended the year at 75% (December 2019: 101%), reflecting the mortgage portfolio disposal and the increase in deposits.

 

 

 

 

 

 

 

 

 

 

 

 

 

£ in millions	31-Dec 2020	31-Dec 2019	Change from FY 2019	30-Jun 2020	Change from HY 2020
Gross Loans and advances to customers	£12,244	£14,715	(17%)	£15,002	(18%)
Less: allowance for impairment	(£154)	(£34)	>100%	(£145)	6%
Net Loans and advances to customers	£12,090	£14,681	(18%)	£14,857	(19%)
Gross loans and advances to customers consists of:
Commercial lending	£5,148	£4,052	27%	£4,614	12%
Retail mortgages	£6,892	£10,430	(34%)	£10,190	(32%)
Consumer lending	£204	£233	(12%)	£198	3%

 

 

Expected Credit Loss

 

·	ECL expense of £126.7 million of which £112.0 million was incurred in H1 primarily reflected a deterioration in macro-economic assumptions and single name charges resulting from COVID-19. In H2, the ECL expense reduced to £14.7 million attributable to portfolio changes and single name charges.   Macro-economic assumptions   Baseline scenario 2020 2021 2022 2023 2024 Unemployment rate - % 5.8% 9.2% 9.3% 8.3% 7.6% House price index - YoY% 2.1% (9.8%) (1.9%) 4.7% 6.8% UK GDP - YoY% (11.1%) 1.8% 7.0% 3.0% 1.0% Mortgage 5 year interest rates - % 2.0% 1.7% 2.3% 2.6% 2.7%   Source: Moody's Analytics December 2020
·	Less than 1% of residential mortgage customers by value had active payment deferrals as at 31 December 2020, significantly below the 17% of customers who had active deferrals as at 30 June 2020.
·	Average debt to value (DTV) of the residential mortgage book as at 31 December 2020 was 56% (2019: 59%), while DTV in the commercial book was 56% (2019: 60%).
·	Non-performing Loans increased to 2.10% (31 December 2019: 0.53%) primarily driven by customers who have received temporary COVID-19 support measures and now require further forbearance support.

 

 

Profit and Loss Account

 

·	Net interest margin (NIM) of 1.22% compared to 1.51% for the year ended 31 December 2019, reflected continued margin compression following the 65bps base rate cut, a reduction in the loan-to-deposit ratio and a significant volume of new lending comprising lower yielding, although capital-efficient, government-backed schemes. NIM in the first half of 1.15% absorbed the lag effect of deposits repricing more slowly than lending in response to the March base rate cuts, while H2 gained momentum from lower cost of deposits, increasing to 1.28%.   Continued reduction in cost of deposits combined with a favourable asset mix shift is expected to improve NIM performance in the year ahead compared to H2 NIM.
·	Underlying net interest income down 19% year-on-year to £250.3 million (2019: £308.1 million), with H2 at £134.1 million higher than H1 (£116.2 million) following the movements in NIM described above.
·	Underlying net fee and other income decreased 5% to £86.3 million (2019: £90.4 million) primarily reflecting the impact of lockdowns on customer activity. This effect was evident within the year with a weaker performance in the first half (£36.1 million) than the second half when fewer social restrictions were in place. The outlook for 2021 will be significantly affected by the path towards the exit from the current lockdown.
·	Underlying cost:income ratio increased to 143% in 2020 from 100% in the prior year, largely reflecting net interest income headwinds and planned higher investment opex. 'Run the Bank' (RTB) cost growth was 1% on a like for like basis, adjusting for items including RateSetter acquisition, COVID-19 related costs, six store openings, and colleague reward, or 9% in total. 'Change the Bank' (CTB) expenditure increased to £63m plus £33m of amortisation, with the new investment spend at a lower average capitalisation rate, in line with previous guidance.   RTB is expected to deliver low to mid-single digit percentage growth in 2021, in addition to the annualisation of RateSetter costs. Expect marginally higher CTB spend in 2021 with the pace of expenditure dependent on capacity of the Bank to absorb the rate of change, plus amortisation.
·	Underlying loss before tax was £271.8 million, an increase from the £11.7 million loss in 2019, reflecting ECL expense and income challenges including those arising from COVID-19. Within the year, the return towards profitability gathered momentum as the underlying loss in H2 was half the loss in the first six months.
·	Statutory loss before tax of £311.4 million in 2020 (2019: loss of £130.8 million) including: -     Impairment and write-off of property plant & equipment and intangible assets (£40.6 million): primarily relates to the accelerated exit from the Central London Office at Old Bailey and intangible asset impairment. -     Remediation costs (£40.8 million): reflect primarily the ongoing remediation programme in relation to a previously disclosed review of the Bank's sanctions procedures and to the January 2019 risk weighted assets (RWA) adjustment, and associated regulatory investigations. -     Transformation costs (£16.7 million): costs associated with the delivery of the cost transformation programme and includes some costs related to the Old Bailey exit. -     Business acquisition and integration costs (£5.4 million): costs associated with acquisition of the RateSetter platform, completed in September. -     Net gain on Mortgage portfolio sale (£63.7 million): relates to the 90% of the £3.1 billion disposal derecognised upon signing in December, net of costs. The transaction completed on 2 February 2021, consequently the remaining gain on sale will be recognised in H1 2021.
·	Statutory loss after tax of £301.7 million in 2020 (2019: £182.6 million) after a £9.7 million corporation tax credit.

 

 

Capital, Funding and Liquidity

 

·	Strong liquidity and funding position maintained, supported by 2020 deposit growth. As a result, the Bank's Liquidity Coverage Ratio (LCR) was 187% as of 31 December 2020, compared to the requirement of 100%. Following the settlement of a receivable on completion of the mortgage portfolio disposal in February 2020, pro forma LCR was estimated at 331%.   We continue to use funds from the BoE's Term Funding Scheme (TFS) which was closed to further drawdowns in February 2018. In 2020 we rolled over £550 million of maturing TFS drawings into TFSME (Term Funding Scheme with additional incentives for SMEs) which provides access to significant additional funding and further flexibility to the Bank's funding plans.
·	CET1 capital of £1,192 million as at 31 December 2020 (31 December 2019: £1,427) was 15.0% of RWA (31 December 2019: 15.6%), including £75 million related to software assets, equivalent to 0.8%, this compares to our minimum requirement of 9.3%5.   The Bank's capital ratios include the application of the Capital Requirements Regulation 'Quick Fix' package, of this the revised IFRS9 transitional agreement contributes c. 1.1% to CET1 and a further c. 0.6% is derived from changes to the SME supporting factor. In addition, further capital relief has been provided through the EBA's changes to the capital treatment of software, although the PRA has announced their intention in CP5/21 to modify the regulatory requirements and we expect that software will return to being fully deducted prior to 1 January 2022.  We are therefore not considering the benefit when making capital decisions today or in our longer-term strategic planning.
·	Total capital as a percentage of RWA was 18.1% reflecting the statutory loss reported in the period. Total capital plus MREL resources were £1,783 million with a total capital plus MREL ratio of 22.4% of RWA at 31 December 2020, this compares to our minimum interim requirement of 20.5%5.   The requirement to meet the end-state MREL threshold is now 1 January 2023, as is the requirement to implement a HoldCo structure.
·	Total RWA as at 31 December 2020 was £7,957 million (31 December 2019: £9,147 million). The reduction in 2020 reflects the mortgage portfolio disposal and capital-efficient lending through government-backed BBLS and CBILS together with lending discipline in other areas. The result is a loan risk weight density of 47% as at 31 December 2020 (31 December 2019: 48%).
·	On completion of the residential mortgage portfolio sale, including the settlement of a receivable outstanding at the year-end, the 31 December pro forma CET1 ratio is estimated at 16.3% and the pro forma total capital plus MREL ratio at 24.4%.
·	Regulatory leverage ratio of 5.6%.
5.     Based on current capital requirements, excluding any confidential PRA buffer, if applicable

 

 

Board and Executive Committee Changes

 

·	Since the last full year results in February 2020, Robert Sharpe joined the Board as Chair on 1 November 2020, while Anne Grim, Ian Henderson, and Nicholas Winsor were appointed as independent Non-Executive Directors. Following these changes, the Board is comprised of nine Non-Executive Directors in addition to the Chair, all of whom are independent, and two Executive Directors.
·	In the same period, a number new appointments completed changes to the Executive Committee: Martin Boyle as Chief Transformation Officer; Carol Frost as Chief People Officer; and Richard Lees as Chief Risk Officer.

 

 

 

 

 

 

 

 

Metro Bank PLC

Summary Balance Sheet and Profit & Loss Account

(Unaudited)

Balance Sheet	Year-on-year change		31-Dec 2020	30-Jun 2020		31-Dec 2019
			£'million	£'million		£'million
Assets
Loans and advances to customers	(18%)		12,090	14,857		14,681
Treasury assets6			6,406	6,101		5,554
Assets classified as held for sale			295	-		-
Other assets7			3,788	1,176		1,165
Total assets	6%		22,579	22,134		21,400
Liabilities
Deposits from customers	11%		16,072	15,577		14,477
Deposits from central banks			3,808	3,801		3,801
Debt securities			600	599		591
Other liabilities			810	810		948
Total liabilities			21,290	20,787		19,817
Total shareholder's equity			1,289	1,347		1,583
Total equity and liabilities			22,579	22,134		21,400

 

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

7         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.

 

 

 

 

 

		Year-on-year change
Profit & Loss Account			31-Dec 2020	31-Dec 2019
			£'million	£'million
Underlying net interest income	(19%)		250.3	308.1
Underlying net fee and other income			86.3	90.4
Underlying net gains on sale of assets			4.3	1.6
Total underlying revenue	(15%)		340.9	400.1
'Run the Bank' costs			(390.4)	(358.6)
'Change the Bank' costs8			(95.6)	(41.5)
Underlying operating costs	21%		(486.0)	(400.1)
Expected credit loss expense			(126.7)	(11.7)
Underlying loss before tax	(>100%)		(271.8)	(11.7)
Listing Share Awards			0.2	(0.6)
Impairment and write-off of property plant & equipment and intangible assets			(40.6)	(77.7)
Net BCR costs			-	(2.6)
Transformation costs			(16.7)	(11.5)
Remediation costs			(40.8)	(26.8)
Business acquisition and integration costs			(5.4)	-
Gain on mortgage portfolio sale (net of costs)			63.7	-
Statutory loss before tax	(>100%)		(311.4)	(130.8)
Statutory taxation			9.7	(51.8)
Statutory loss after tax	(>100%)		(301.7)	(182.6)

 

 

 

Key metrics			31-Dec 2020	31-Dec 2019
Underlying earnings per share - basic			(151.7p)	(10.8p)
Underlying earnings per share - diluted			(151.7p)	(10.8p)
Number of shares - undiluted			172.4m	147.4m
Number of shares - diluted			172.4m	147.4m
Net interest margin (NIM)			1.22%	1.51%
Cost of deposits			0.65%	0.78%
Cost of risk			0.86%	0.08%
Underlying cost:income ratio			143%	100%

 

 

 

8         Change the Bank costs consists of investment spend, including amortisation

 

 

 

	Year-on-year change	Half year ended
Profit & Loss Account		31-Dec 2020	30-Jun 2020	31-Dec 2019
		£'million	£'million	£'million
Underlying net interest income	(5%)	134.1	116.2	141.9
Underlying net fee and other income		50.2	36.1	44.0
Underlying net gains/(losses) on sale of assets		3.3	1.0	(2.5)
Total underlying revenue	2%	187.6	153.3	183.4
'Run the Bank' costs		(206.3)	(184.1)	(179.7)
'Change the Bank' costs8		(55.0)	(40.6)	(21.5)
Underlying operating costs	30%	(261.3)	(224.7)	(201.2)
Expected credit loss expense		(14.7)	(112.0)	(7.3)
Underlying loss before tax	>100%	(88.4)	(183.4)	(25.1)
FSCS levy		-	(0.2)	0.4
Listing Share Awards		0.4	(0.2)	(0.2)
Impairment and write-off of property plant & equipment and intangible assets		(14.0)	(26.6)	(76.7)
Net BCR costs		-	-	(1.3)
Transformation costs		(4.3)	(12.4)	(6.8)
Remediation costs		(23.0)	(17.8)	(24.5)
Business acquisition and integration costs		(5.4)	-	-
Gain on mortgage portfolio sale (net of costs)		63.7	-	-
Statutory loss before tax	(47%)	(71.0)	(240.6)	(134.2)
Statutory taxation		8.6	1.1	(49.7)
Statutory loss after tax	(66%)	(62.4)	(239.5)	(183.9)

 

 

 

			Half year ended
Key metrics			31-Dec 2020	30-Jun 2020	31-Dec 2019
Underlying earnings per share - basic			(42.9p)	(108.8p)	(14.9p)
Underlying earnings per share - diluted			(42.9p)	(108.8p)	(14.9p)
Number of shares - undiluted			172.4m	172.4m	172.4m
Number of shares - diluted			172.4m	172.4m	172.4m
Net interest margin (NIM)			1.28%	1.15%	1.40%
Cost of deposits			0.49%	0.82%	0.85%
Cost of risk			0.20%	1.55%	0.10%
Underlying cost:income ratio			139%	147%	110%

 

 

For more information, please contact:

Metro Bank PLC Investor Relations

Jo Roberts

+44 (0) 20 3402 8900

jo.roberts@metrobank.plc.uk

 

Metro Bank PLC Media Relations

Tina Coates / Abigail Whittaker

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

pressoffice@metrobank.plc.uk 

 

Teneo

Charles Armitstead / Haya Herbert Burns

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

Metrobank@teneo.com

 

ENDS

 

 

 

About Metro Bank

 

Metro Bank serves 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 for personal and business customers and the number one bank for service in stores 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.

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, early until late, 362 days a year; on the phone through its UK-based 24/7 contact centres; or online through its internet banking or award-winning mobile app: the bank offers customers real choice.

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

 

Preliminary Announcement

 

(Unaudited)

 

For the year ended 31 December 2020

 

Chief executive officer's statement

 

In February 2020, shortly after being appointed as CEO and having completed a comprehensive review of the business, we launched our strategic priorities with a clear plan to return the Bank to sustainable profitability built around a community banking model.

 

It's hard to believe that only a few weeks later the country was in lockdown, and the world entered the most difficult social and economic crisis of a generation. It has been a truly unprecedented year for our business, colleagues and customers.  But never has the role of a community bank been more important for people across the UK and I'm incredibly proud of the way colleagues have stepped up to support each other, our customers and the communities we serve. 

 

Our community banking model has proven itself over the past 12 months, with the Competition and Market Authority's Service Quality Survey once again confirming that Metro Bank is number one for store service and number one on the high street for overall service.  We pride ourselves on giving customers the choice to bank however, whenever and wherever they choose by delivering full-service banking across stores, digital and telephony - and customers continue to choose us, with customer accounts growing to more than 2.2 million by the end of 2020.

 

Despite the pandemic weighing on our financial performance during the course of the year, we've made good progress delivering against the strategic priorities we set out in February 2020 and while there is still much to do, we remain on track to achieve our transformation plan as the UK's best community bank.

 

COVID-19

The response of Metro Bank colleagues to the pandemic has left me humbled, and the resilience they have shown has been inspiring.  The unique culture that we have built and our unwavering focus on serving customers has shone through. Whether it be our front line colleagues who have kept stores and been available on the phone open throughout national and regional lockdowns, through our back office colleagues who have helped business and personal customers access much-needed government backed loan schemes, those who have worked remotely to keep our essential services running while continuing to launch new products, or those that have volunteered and fundraised for local causes in need of support.

 

Our colleagues have made a real difference to the communities we serve. I want to say a huge thank you to them for all their efforts during 2020 to look after our customers, our communities and most importantly each other.

 

OUR STRATEGY

In February 2020 we identified five strategic drivers to help return us to delivering adequate shareholder return in line with our ambition to become the UK's best community bank.

 

In spite of the challenges that the pandemic brings, those drivers remain unchanged and the business has remained resilient. Our underlying performance and the foundations on which our turnaround plan is built are strong.

 

Fundamentally we have seen, and continue to see, a significant opportunity to deepen relationships with existing customers by improving our product offering, enhancing our channels and by continuing to remain completely focused on delivering excellent customer service.

 

STRATEGIC RESPONSE TO THE PANDEMIC

While the key strategic drivers and the transformation plan we set out last year remain appropriate, the pandemic's impact on the macro-economic environment meant we've clearly had to adapt and accelerate the delivery of some strategic initiatives.

 

Starting in April, alongside the significant operational response and initiatives put in place to support customers, colleagues and communities, we worked to understand the impact of the pandemic on our plan. It is clear that the pandemic has caused both shorter term effects and more systemic medium term effects that influence our plans. Shorter term effects arise from lower customer activity, for example with notable impact on interchange fees, ATM and foreign exchanges volumes. However these are transitory, evidenced by a strong bounce back in activity during the period of lockdown easing over the summer. 

 

Clearly the resulting fall in economic activity has in turn created pressure on our customers leading to a rise in credit provisioning. While we have seen limited actual losses to date, the underlying impact of the pandemic cannot yet be fully understood as a result of the appropriate government support schemes that remain in place. We therefore anticipate the impact on our customers will become clearer over the next 12-18 months. We remain committed to supporting consumers and businesses as we navigate the months ahead.

 

In line with the government support measures announced during the course of 2020, we worked hard to support our customers through these government backed lending schemes, notably BBLS, CBILS and CLBILS. These loans provide lending with little capital and credit risk impact due to them being partly or fully underwritten by the Government. To date, we have helped more than 36,000 customers and lent out £1.5 billion.

 

The more systemic medium term effects of the pandemic revolve around lower interest rates and quantitative easing measures taken by the Bank of England that have meaningfully depressed yields on investible assets. In February 2020, we were clear that our transformation agenda would be driven by a liability-led strategy given Metro Bank's proven ability to grow deposits. The deposits would then be invested in low risk weight investments which, while weighing on net interest margin, would have meaningfully improved our return on tangible equity.

 

While shifting our asset mix and the associated yield enhancement alongside this was a core part of our plan, these activities were not due to be a focus until the latter years of our plan. However, in an enduring lower for longer interest-rate environment, and given there is less inherent value in excess liquidity, we have accelerated some initiatives to deliver a different asset mix quicker - with higher yielding assets and improving net interest margin. As a result, the Executive team took several actions during the course of the year including:

 

·      Purchasing the RateSetter platform bringing technology and talented colleagues with deep expertise in the unsecured lending market to accelerate our entry into this area.

·      Continuing the use of the RateSetter brand on aggregator sites, opening up a new distribution channel that was not in our plans a year ago with the Metro Bank brand not present on aggregators.

·      An immediate shift away from prime residential mortgages into more specialist offerings generating higher yield.

·      Repricing fixed term deposits, moving from best on high street rates and bringing us into line with incumbent providers.

 

While it is still early days, and acknowledging that it will take time to change the shape of the balance sheet to ultimately improve net interest margin, the early results are encouraging.

 

For example, RateSetter lending is now available through the Metro Bank website and app, and ready to launch in Metro Bank stores when lockdown restrictions ease.  Since launch, we have extended more than £120 million unsecured consumer loans to customers; this is more than twelve times the value of consumer lending that Metro Bank has delivered organically in any year since launch. 

 

Furthermore, following the decision to more quickly focus on specialist products, more than 80% of applications in the last six months of 2020 were for specialist mortgages. Cost of deposits and our deposit mix at the year-end show the results of our focus on repricing fixed term deposits during the course of the year, and it should be expected that we will remain disciplined on deposit mix, deposit pricing and deposit growth - given the lower inherent value of excess liquidity going forward.

 

As a result of the impact of the pandemic on financial performance, capital has been reduced more quickly than anticipated and access to capital markets has been more volatile. Given this, and the desire to shift our asset mix more quickly to enhance yield, we were swift to identify and deliver on opportunities presented by the current climate with the sale of a portfolio of residential mortgages in December 2020. We are pleased with the outcome of this transaction, with both the gain on sale and the resulting release of risk-weighted assets removing the need to raise additional capital as well as allowing us to increase our lending in higher yielding areas. In February 2021 we announced our intention to deploy some of this capital to acquire the RateSetter back book from peer-to-peer investors, to accelerate the optimisation of our balance sheet.

 

STRATEGIC PROGRESS

Alongside the actions taken to support customers through COVID-19 and to react to the changing external environment, as outlined above, we have continued to make solid progress on delivering against our strategic pillars. We're continuing to deliver what we said we would do, and the business has demonstrated its resilience with the pandemic having limited effect on our ability to drive and deliver change.

 

1) Cost initiatives

Despite the high fixed cost base nature of retail banking, we have controlled business as usual ('Run the Bank') costs. Cost growth was 1% on a like for like basis, adjusting for the RateSetter acquisition, COVID-19 related costs, six store openings, and colleague reward, or 9% in total.  Costs to transform the business ('Change the Bank') have increased 130%. We always anticipated these change costs would be frontloaded and remain focused on keeping these appropriately contained.

 

We are taking a more proactive management approach to our property estate. In our interim results we announced we had taken the decision to vacate our office at Old Bailey, London. The success of our working from home arrangements as well as feedback from colleagues is leading us to explore other opportunities for office space rationalisation, including better utilising excess space in our store network rather than occupying standalone office space. An example of this is our new operations centre in our Bristol store, using previously underused space.  

 

We have also taken the opportunity to capitalise on our strong liquidity position to take advantage of the current commercial property market. This has seen us buy the freeholds of certain stores at an attractive yield and either at, or close to, the carrying amount of their right of use asset - meaning only a marginal upfront capital impact in exchange for longer-term run rate savings and flexibility.

 

2) Revenue initiatives

Despite various national and regional lockdowns throughout the year, we have continued to grow our customer accounts - increasing to 2.2 million as at the year-end (31 December 2019: 2.0 million). During 2020 we opened six stores, including two, in Sheffield and Cardiff, following the initial COVID-19 outbreak. We will open two further stores in 2021.

 

In August 2020, we launched the Bank's first switching offer, helping us give something back to our existing customers by rewarding them for referring friends to open an account whilst welcoming new customers too. In September we launched Business Account Online (BAO) that enables new customers to open a business account on their mobile or online, 24 hours a day, and taking just 15 minutes from application to approval. We had to pause applications temporarily due to the overwhelming demand received, but we started to resume openings in 2021. We have also continued to see a meaningful share of the business switching market join us from RBS through the Incentivised Switching Scheme.

 

Furthermore, this year we will begin to make insurance products available to better serve Metro Bank customers and drive incremental revenue - initially through a partnership with Churchill Expert providing SME insurance, and with further partnerships to follow during the course of 2021.

 

3) Infrastructure

Alongside building the digital application system for BBLS in less than six weeks, we have continued to launch digital initiatives throughout the year including launching Business Account Online (BAO); account sweeping; Direct Debit origination in partnership with Bottomline Technologies; in-app receipt management technology in partnership with Sensibill; and an accounting software partnership with Clear Books.

 

We have also demonstrated the operational resilience of the bank - moving a significant proportion of colleagues to home-based working almost overnight, alongside delivering a significant programme of mandatory, regulatory and discretionary change.

 

4) Balance sheet optimisation

Our main focus this year has been on increasing our return on regulatory capital. We continue to explore corporate transactions where there are attractive opportunities that would be strategically advantageous to us, although our predominant focus remains on growing organically. We have accelerated the delivery of this pillar of our strategy in particular as outlined in our strategic response to the pandemic above.

 

5) Internal and external communications

The start of the year saw us launch our first marketing campaign - people-people banking - which showcased our incredible colleagues and was designed to help customers and potential customers understand Metro Bank's differentiators.

 

Following the success of our first advertising campaign, we are planning to launch a new advertising campaign focusing on business banking for SMEs. This is an area we see as key for future growth enabling us to deepen relationships, earn greater levels of fee income and is an area that remains underserved by larger competitors.

 

As well as a greater level of communications with customers we have continued to remain fully engaged with colleagues, regulators and shareholders. As a large proportion of colleagues have been working fully from home, maintaining effective communication has been critical in preserving our culture. This will continue to be important moving forward as we move towards a more flexible model with regard to location.

 

RESULTS

COVID-19 has weighed heavily on our financial performance during 2020, with us making a loss before tax of £311.4 million (2019: loss of £130.8 million). Adjusted for non-underlying items the loss for the year was £271.8 million (2019: loss of £11.7 million).   

 

The loss has primarily been driven by an increase in our expected credit loss expense which rose from £11.7 million in 2019 to £126.7 million in 2020, reflecting the worsened economic outlook. The results also reflect the low interest rate environment and competitive marketplace as well as the costs of delivering our turnaround plan.

 

However, excluding the impact of COVID-19, financial performance is on track and in line with our expectations one-year into our turnaround plan. And half-on-half P&L performance demonstrates the momentum of the transformation plan - with underlying loss before tax halving in H2 compared with H1.

 

BUILDING THE TEAM

In April 2020, I also began making a series of changes to our Executive Committee (ExCo) in order to ensure we were best set up with the right skills and experience to support customers and colleagues in executing our strategy. This included bringing onboard a number of external hires - Richard Lees joined as Chief Risk Officer, Martin Boyle as Chief Transformation Officer, and Carol Frost as Chief People Officer. 

 

With our refreshed ExCo now established, I am confident they will help me and the Bank to navigate the ongoing choppy waters and deliver our ambition to be the UK's best community bank.

 

THE FUTURE

This year marked the 10-year anniversary of our first store in Holborn, as the first high street bank to open in more than 100 years. We've since grown from 79 colleagues and one location to more than 3,500 colleagues, 77 stores and more than 2.2 million customer accounts today.

 

In February 2021, we were rated the top high street bank for overall service for personal and business customers in the latest Competition and Market Authority's Service Quality Service and number one for store service for the 6th time running. This is a huge endorsement to all our colleagues and the professionalism they have shown through very trying times.

 

Whilst the past decade had not been without its challenges, and there is plenty of heavy lifting still to do, we have built a business to be proud of. The level of dedication amongst my colleagues, the strong start we have made in executing our strategic plan, and our relentless focus on delivering great customer service across all channels gives me every confidence we can deliver on our growth ambitions and meet more customer needs.

 

One year into my role I am continually reminded what an amazing group of colleagues I work alongside. Their dedication to our FANS, communities and each other allows us to drive Metro Bank forward. It has been an extremely challenging year, but I could not ask more from our colleagues.

 

Finally, it would be remiss not to remember the real cost of the pandemic and extend my deepest sympathies to anyone who has lost a loved one.

 

Daniel Frumkin

Chief Executive Officer

24 February 2021

 

 

 

 

 

Finance review (unaudited)

 

	2020 £'million	2019 £'million	Change
Net interest income	250.3	308.1	(19%)
Underlying fee and other income	86.3	90.4	(5%)
Underlying net gains on sale of assets	4.3	1.6	>100%
Total underlying revenue	340.9	400.1	(15%)
Operating costs	(486.0)	(400.1)	21%
Expected credit loss expense	(126.7)	(11.7)	>100%
Underlying loss before tax	(271.8)	(11.7)	>100%
Non-underlying items	(39.6)	(119.1)	(67%)
Statutory loss before tax	(311.4)	(130.8)	>100%

 

 

Our financial performance in 2020 reflects the challenging year we have faced, as the anticipated costs of our turnaround have been compounded by a difficult operating environment.

 

Notwithstanding these challenges, we have made good progress against our turnaround plan, whilst at the same time maintaining a strong balance sheet.  Our underlying performance is on track against our expectations, once adjusted for the impacts of COVID-19.

 

Entering 2020, the main constraint on the business remained regulatory capital. In response to this, and in line with our strategy, we took the decision in December 2020 to divest £3.1 billion of residential mortgages (90% were derecognised at year-end). The sale increased total capital plus MREL resources by 4%, removing the need to raise additional capital in the near term, as well as allowing us to continue to shift our product portfolio towards higher yielding segments.

 

Further supporting this strategy, in September 2020 we acquired RateSetter which provided immediate capabilities to accelerate our reach into the unsecured lending.  In February 2021 we further announced our intention to utilise some of the capital freed up from the mortgage sale to buy the back book of peer-to-peer loans from the RateSetter investors. Additionally, during 2020 we significantly increased the proportion of mortgage lending in speciality segments.

 

Our statutory loss before tax for the year was £311.4 million, up from the loss of £130.8 million we made in 2019. A key driver of the increased loss was a higher expected credit loss expense which was £126.7 million compared to £11.7 million in 2019. Non-underlying items, particularly transformation and remediation costs, remained a significant component during 2020 reflecting the costs of the turnaround plan.

 

However, these costs were partly offset by a £63.7 million gain recognised on the mortgage sale (net of costs) in 2020. A further gain of £8.0 million for this sale (net of costs) was recognised in 2021.

 

	2020 £'million
Underlying loss before tax	(271.8)
Gain on mortgage portfolio sale (net of costs)	63.7
Listing Share Awards	0.2
Impairment and write-off of PPE and intangible assets	(40.6)
Remediation costs	(40.8)
Transformation costs	(16.7)
Business acquisition and integration costs	(5.4)
Statutory loss before tax	(311.4)

 

 

Income

 

NIM Reconciliation	Reconciliation
2019 Full Year Net Interest Margin	1.51%
Treasury assets (disposal)	(0.07%)
Lending mix	0.02%
Lending yield	(0.19%)
Cost of deposits	0.10%
Loan-to-deposit ratio and other	(0.15%)
2020 Full Year Net Interest Margin	1.22%

 

Total statutory income increased 4% year-on-year to £432.6 million from £415.6 million. This was driven by the £69.0 million gain recognised in relation to the mortgage sale. Adjusting for this and for grant income relating to the C&I programme, underlying income reduced by 15% year-on-year from £400.1 million to £340.9 million. This principally reflects margin compression due to the timing lag on asset and liability pricing following the 65bps base reduction in March, as well as the reduction in the loan to deposit ratio. These effects were most keenly felt in the first half of the year with net interest margin (NIM) reducing to 1.15% in H1.

 

NIM recovered somewhat in H2 to 1.28%, due to repricing actions taken on the deposit book, improved deposit mix benefiting from an 11% reduction in fixed term deposits and a 9% increase in non-interest bearing current accounts, plus improved asset mix. While the full year cost of deposits was 0.65%, the exit rate was 0.39%. In 2021, we anticipate further improvements in NIM as we continue to reprice deposits and move to higher yielding assets.

 

Fee income was materially impacted by lower volumes due to the various COVID-19 lockdowns and regional restrictions implemented throughout the year. Despite this, underlying fee and other income only fell 5%, reflecting continued account growth, as well as fee optimisation and other initiatives. Of note is the material recovery we saw in H2, with a 39% increase in underlying fees and other income from H1 as lockdown restrictions were eased over the summer and autumn. At the timing of writing it is difficult to predict when the current lockdown will end, however we do expect to see a normalisation of fee levels over the course of 2021, supported by current account growth and our SME propositions, as well as the introduction of new products during 2021.

 

COSTS

Total statutory costs grew by 15% during the year to £617.3 million (2019: £534.7 million). This reflects continued growth in non-underlying expenditure, most notably ongoing remediation costs, as well as previously communicated front-loaded 'Change the Bank' investment spend. 'Run the Bank' costs, which exclude investments and reflect our core operating expenses, grew 9% year-on-year. However, this growth includes the increased store footprint, the acquired costs from RateSetter, as well as COVID-19 related costs. Excluding these items, 'Run the Bank' cost increases were contained to 1% on a like for like basis, demonstrating improved cost discipline within the business.

 

The majority of 'Change the Bank' expenditure has been focused on required infrastructure and regulatory programmes during 2020. While this will continue into 2021, we do anticipate focusing more spend on revenue and cost avoidance initiatives.

 

During the year we took the decision to vacate one of our central London offices. The costs of this exit are reflected within transformation and impairment and write-off of PPE and intangible assets lines.

 

 

 

 

	2020 £'million	2019 £'million	Change
Depreciation and amortisation	74.4	76.4	(3%)
Total operating expense	617.3	534.7	15%
Total underlying operating expenses	486.0	400.1	21%
'Run the bank' costs	390.4	358.6	9%
'Change the bank' costs	95.6	41.5	>100%
Statutory cost:income ratio	143%	129%
Underlying cost:income ratio	143%	100%

 

 

Alongside this we have taken advantage of the opportunities afforded to us by our strong liquidity position and a weakened commercial property market to buy the freeholds of three of our stores. The stores purchased were on 25-year leases with no break clauses and were bought at amounts close or equal to their right of use asset - meaning only a marginal upfront capital impact in exchange for longer-term savings and flexibility. Freeholds now make up 30% of our store estate.

 

2021 will also see us start to realise synergies from the integration of RateSetter as well as focus on other areas where costs can be reduced across the business.

 

Depreciation and amortisation remained flat at £74.4 million during 2020 (2019: £76.4 million) reflecting reduced amortisation as a result of the write-offs made in 2019, offset by the increased store presence and new digital initiatives.

 

EXPECTED CREDIT LOSS EXPENSE

Expected credit losses were severely impacted by the deteriorating macro-economic conditions resulting from the COVID-19 pandemic, increasing £115.0 million to £126.7 million (2019: £11.7 million) representing a cost of risk of 0.86% (2019: 0.08%).

 

Balance sheet expected credit loss provisions were £154 million at the year-end (31 December 2019: £34 million) which represents coverage ratio of 1.30% of our total gross lending.

 

The increase in expected credit losses has been driven by deteriorating macro-economic scenarios which have primarily increased the probability of default. Observed losses still remain relatively low, however will likely increase through 2021 as COVID-19 related government support measures roll off.

 

We have applied a number of post-model adjustments and overlays to reflect the continued uncertainties in the economic environment, particularly in relation to sectors heavily impacted by the COVID-19 pandemic.

 

Throughout the course of the pandemic we have been committed to supporting customers and, in line with regulatory requirements, we offered payment deferrals to mortgage and personal customers who required support. This was initially for a three-month period from March to June, however this has been subject to extensions. In addition, we offered support measures to commercial customers and in total offered support arrangements on 29% of our commercial lending portfolio (based on gross exposure).

 

In line with regulatory guidance, the use of a support measure by a customer does not in itself signify an increase in credit risk for that loan.

 

At 31 December 2020 less than 1% of the mortgage portfolio were subject to support measures with weighted average debt-to-values of 64% on these loans.

 

 

Deposits

Deposits from customers ended the year at £16.1 billion up 11% from £14.5 billion at the end of 2019. The increase has primarily been driven by an 10% increase in new accounts as well as higher savings levels during the pandemic, a trend that has been seen across the market. Deposits have also increased as a result of the BBLS loans being redeposited, where businesses have secured funding but are yet to fully utilise the loan. These effects are particularly prevalent in our core deposit base of retail customers and SMEs.

 

Customer deposits	2020 £'billion	2019 £'billion	Change
Retail customers (excluding retail partnerships)	7.4	6.9	7%
Retail partnerships	1.6	1.8	(13%)
Commercial customers (excluding SMEs)	2.7	2.5	8%
SMEs	4.4	3.3	36%
Total customer deposits	16.1	14.5	11%

 

 

We continue to use funds from the BoE's Term Funding Scheme (TFS) which was closed to further drawdowns in February 2018. In 2020 we rolled over £550 million of TFS drawing that matured into TFSME - a similar style scheme aimed at supporting lending to SMEs.

 

Assets

Total assets increased to £22.6 billion from £21.4 billion at the end of 2019.

 

Loans and advances to customers fell to £12.1 billion from £14.7 billion, this decrease primarily reflects the £3.1 billion mortgage sale to NatWest. Following the sale, retail mortgages now make up 56% of our gross lending (31 December 2019: 71%).

 

Following the acquisition of RateSetter in September, unsecured personal loans ended the year at £121 million. Whilst this still only represents a small part of our lending, this will increase as we scale up the volumes over the course of 2021.

 

During the year we also grew our commercial lending by 27% to £5.1 billion (31 December 2019: £4.1 billion). The increase has been driven by government-backed lending schemes in the form of BBLS, CBLS and CLBLS which totalled £1.5 billion at year end.

 

	2020 £'billion	2019 £'billion	Change
Loans and advances to customers	12.1	14.7	(18%)
Total assets	22.6	21.4	6%
Loan to deposit ratio	75%	101%
Cost of risk	0.86%	0.08%

 

 

Our loan to deposit ratio returned to below 100% ending the year at 75% (31 December 2019: 101%). The sale of the mortgage portfolio in December lowered the ratio. Excluding the mortgage sale, the loan to deposit ratio would have been 94%.

 

Taxation

During 2020 we made a total tax contribution of £132.9 million (2019: £123.1 million), which comprised £86.5 million (2019: £78.2 million) of taxes we paid and a further £46.4 million (2019: £44.9 million) of taxes we collected.

 

Taxes paid	2020	2019
Corporation tax	0.0%	1.6%
Business rates	13.5%	12.9%
Land transaction tax	1.3%	3.3%
Employer NICs	20.4%	20.6%
Irrecoverable VAT and Customs duty	64.5%	61.3%
Other	0.3%	0.3%
Total taxes paid	£86.5m	£78.2m

 

 

Taxes collected on behalf of HMRC	2020	2019
Employer NICs	25.1%	23.6%
PAYE	65.5%	62.1%
Net VAT	9.1%	14.3%
Other	0.4%	-
Total taxes collected	£46.4m	£44.9m

 

In 2020 our tax credit recognised in the income statement was £9.7 million (2019:  expense £51.8 million).

 

Acquisition of RateSetter

In September 2020 we acquired Retail Money Market Ltd ('RateSetter'). The acquisition was in line with our strategy to shift our lending mix and the acquisition provided a quicker and more cost-efficient route to market than building out the capability in-house. As part of the acquisition we recognised £32 million of intangible assets in respect of RateSetter's unsecured lending platform. 

 

RateSetter was bought for consideration of £12 million, of which £0.5 million was deferred for 12 months from purchase and £9 million is payable up to three years from purchase subject to certain lending volumes being met. Goodwill of £6 million was recognised in relation to the purchase.

 

Prior to acquisition by Metro Bank, the RateSetter peer-to-peer business was put into run off, which closed the platform to new investors and started the process of running down the back book of loans.

 

Since the acquisition we have injected further capital into the business allowing it to repay £21 million of external debt, on which it was paying an average of 7% interest. Whilst RateSetter will continue to be loss making in the short term, in the near term we anticipate achieving cost synergies as it becomes more closely integrated into the Group and as we increase lending volumes.

 

On 2 February 2021 we announced our intention to purchase the back book of loans from the RateSetter peer-to-peer investors, in line with our strategy of increasing this area of lending.

 

 

 

 

Capital

 

	2020 £'million	2019 £'million	Change
CET1 capital	1,192	1,427	(16%)
Risk-weighted assets (RWAs)	7,957	9,147	(13%)
CET1 ratio	15.0%	15.6%	(60bps)
Total regulatory capital ratio	18.1%	18.3%	(20bps)
Total regulatory capital plus MREL ratio	22.4%	22.1%	30bps
Regulatory leverage ratio	5.6%	6.6%

 

 

As a result of the pandemic the regulator took a number of measures in relation to regulatory capital. These included a reduction in the countercyclical buffer to 0% from 1% (previously expected to increase to 2% in December 2020) and the Capital Requirements Regulation (CRR) 'Quick Fix' package including a revised IFRS 9 transitional agreement and changes to the SME supporting factor.

 

In addition, further capital relief has been provided through the EBA's changes to the capital treatment of software, although the PRA has announced through CP5/21 their intention to modify the regulatory requirements and we expect that software will return to being fully deducted prior to 1 January 2022. We are therefore not considering this benefit when making capital decisions today or in our longer term strategic planning.

 

We ended the year with a CET1 ratio of 15.0% (2019: 15.6%) and a total capital ratio plus MREL 22.4% (2019: 22.1%). On a pro forma basis adjusting for the mortgage portfolio sale which was in the process over the year end these ratios would be 16.3% and 24.4% respectively.

 

	Reconciliation
Total capital plus MREL ratio at 31 December 2019	22.1%
Annual operational risk adjustment	(0.4)%
Movement in lending (excl. portfolio sale)	1.8%
Mortgage portfolio sale	2.0%
Intangible assets (excluding RateSetter)	(1.1)%
EBA software add back	0.8%
SME supporting factor	0.9%
Expected credit losses	(1.6)%
IFRS9 add-back	1.0%
Loss for the year (ex ECL and gain on mortgage portfolio sale)	(3.1)%
Total capital plus MREL ratio at 31 December 2020	22.4%
Completion of mortgage portfolio sale	2.0%
Total capital plus MREL ratio at 31 December 2020 (pro forma)	24.4%

 

 

Looking ahead

Despite the clear challenges resulting from the COVID-19 pandemic, 2020 brought many encouraging signs which demonstrate our turnaround is beginning to take effect.

 

Whilst the external challenges we face will inevitably continue into 2021, we are now in a stronger position to tackle these. The sale of the residential mortgage portfolio has removed the immediate need to raise additional capital, as well as allowing us to reinvest the proceeds in higher yielding assets to maximise capital efficiency.

 

The capabilities and systems obtained via our acquisition of RateSetter will allow us to accelerate a shift in our product mix to focus on yield over volume.

 

We will continue to focus on cost control and ensure that we can return to sustainable profitability. That remains our key focus.

 

David Arden

Chief Financial Officer

24 February 2021

 

 

risk report 

 

Effective risk management underpins everything we do and is critical to realising our strategic priorities. We have an established risk management framework to manage and report the various risks that we face over the course of our daily business. The framework:

 

·      is the totality of systems, structures, policies, processes and people that identify, measure, evaluate, control, mitigate, monitor, and report all internal and external sources of material risk;

·      ensures all principal and emerging risks are identified, assessed, mitigated, monitored and reported;

·      ensures risk appetite is clearly articulated and influences the strategic plan;

·      promotes a clearly defined risk culture that emphasises risk management across all areas of the Bank; and

·      undertakes ongoing analysis of the environment in which we operate and proactively address potential risk issues as they arise.

 

We have a structured risk governance framework to support the Board of Directors' aim of achieving long-term and sustainable growth. The risk governance structure strengthens risk evaluation and management, while also positioning us to manage the changing regulatory environment in an efficient and effective manner.

 

Principal risks

As at 31 December 2020 we had the following principal risk:

 

Principal risk	Risk movement in 2020	Impact of COVID-19
Credit risk The risk of financial loss should our borrowers or counterparties fail to fulfil their contractual obligations in full and on time.	Increased Although the impacts on our retail and business credit portfolios are yet to fully manifest, it is clear that the level of risk has increased, with levels of defaults expected to increase over time, particularly once government support schemes come to an end.	We have participated in regulatory and government support schemes, with a priority focus on supporting existing customers through COVID-19. Capital repayment holidays, interest free overdrafts (for retail customers) and extensions of credit, as well as other flexible supporting measures, continue to be provided and monitored.   Policies, risk appetite, credit decisioning and supporting frameworks have been reviewed and updated to reflect the changing environment and risk profiles.
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.	Increased  The risk has increased, driven by increased remote working, the implementation of new processes and pressure on customer support areas arising from changing customer needs, which could lead to increased errors or delays and subsequent losses.	COVID-19 brought heightened people risk as some of our colleagues worked to keep our Stores open, whilst others worked from home. It also necessitated changes to working practices, which are managed closely via an enhanced governance structure. We are now investigating permanent improvements that can be made.
Liquidity and funding risk The risk that we fail to meet our short term obligations as they fall due.   The risk 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).	Decreased Liquidity and funding risk has decreased during the year, increasing stability.	The impact of COVID-19 has resulted in an overall improvement to our overall liquidity profile through improved deposit balances and participation in the Bounce Back Loan Scheme, with clients placing funds drawn-down on deposit, prior to their utilisation.
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.	No change Market risk has remained stable through the year.	Not directly impacted by COVID-19, we are able to manage and hedge interest rate risk through different rate environments.
Financial crime risk 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.	Decreased The risk has decreased during the year due to enhancements made to our AML and Sanctions controls through the Financial Crime Improvement Programme   Overall fraud attacks continue to significantly increase in line with what is being seen across the industry, year on year; albeit, in 2020, fraud losses have reduced from 2019.	New government support schemes have provided opportunities for fraudsters and we have implemented controls to counter their attempts.
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.	No change We remain exposed to regulatory and compliance risk as a result of significant ongoing and new regulatory change. We will seek to comply with all regulations as they evolve, and as customer expectations continue to develop.	We have deployed multiple new policies and processes to implement government, regulatory and central bank COVID-19 support measures. Additional regulatory and compliance risks are associated with adherence to both COVID-19-specific regulatory guidance and with existing regulation. Consequently, additional risk assessments, governance processes and assurance activities have been deployed across the Bank.
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.	Increased The risk has increased driven by the impact of the external environment, namely COVID-19 and the UK economy, where customers are increasingly more vulnerable to dramatic income changes, job losses and behavioural changes driven by social/political agendas.	COVID-19 has generally had a detrimental impact on customers' financial stability and affordability due to income loss caused by furlough and/or complete job loss. This has resulted in increased reliance on savings, inability to meet repayment demands and the need for the regulator and lenders to introduce enhanced forbearance measures, such as payment deferrals. We have now sought to include some of these measures as part of our ongoing collections strategy .
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.	Increased The risk has increased as a result of the rapid application of COVID-19 model adjustments.	The uncertain economic environment has affected all model components including input data, default markers, outputs, model accuracy and performance.
Capital risk The risk that we fail to meet minimum regulatory capital (and MREL) requirements. Management of capital is essential to the prudent management of our balance sheet, ensuring our resilience under stress, and the maintenance of the confidence of our current and potential creditors (including bond holders, the bond market, and customers) and key stakeholders in the pursuit of our business strategy	No change  Our capital ratios were broadly flat year-on-year. We took action to strengthen our MREL resources through the sale of a portfolio of owner occupied residential mortgages, which is in line with our strategy to enhance risk-adjusted returns on capital through the ongoing focus on balance sheet optimisation. We also purchased the peer-to-peer lender RateSetter, to provide unsecured personal loans direct to customers.	There have been several regulatory capital developments in the UK and Europe in response to COVID-19, which have reduced certain capital requirements for banks across the industry. Additionally, in order to provide operational capacity for banks to respond to the immediate financial stability priorities resulting from the impact of COVID-19, both the PRA and Basel communicated revised timelines across key regulatory initiatives.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated statement of comprehensive income (unaudited)

For the year ended 31 December 2020

 

	Notes	Year ended 31 December 2020 £'million	Year ended 31 December 2019 £'million
Interest income	2	426.3	496.2
Interest expense	2	(176.6)	(188.1)
Net interest income		249.7	308.1
Fee and commission income		61.1	67.4
Fee and commission expense		(1.2)	(6.4)
Net fee and commission income		59.9	61.0
Net gains on sale of financial assets		73.3	1.6
Other income		49.7	44.9
Total income		432.6	415.6
General operating expenses		(502.3)	(380.6)
Depreciation and amortisation	7,8	(74.4)	(76.4)
Impairment and write-offs of property, plant, equipment and intangible assets	7,8	(40.6)	(77.7)
Total operating expenses		(617.3)	(534.7)
Expected credit loss expense		(126.7)	(11.7)
Loss before tax		(311.4)	(130.8)
Taxation	3	9.7	(51.8)
Loss for the year		(301.7)	(182.6)
Other comprehensive income for the year
Items which will be reclassified subsequently to profit or loss:
Movement in respect of investment securities held at fair value through other comprehensive income (net of tax):
- changes in fair value		5.6	2.7
- fair value changes transferred to the income statement on disposal		(0.1)	(2.4)
Total other comprehensive income		5.5	0.3
Total comprehensive loss for the year		(296.2)	(182.3)
Loss per share
Basic (pence)	14	(175.0)	(123.9)
Diluted (pence)	14	(175.0)	(123.9)

 

 

 

Consolidated balance sheet (unaudited)

As at 31 December 2020

 

	Notes	31 December 2020 £'million	31 December 2019 £'million
Assets
Cash and balances with the Bank of England		2,993	2,989
Loans and advances to customers	5	12,090	14,681
Investment securities held at fair value through other comprehensive income	6	773	411
Investment securities held at amortised cost	6	2,640	2,154
Financial assets held at fair value through profit and loss	15	30	-
Property, plant and equipment	7	806	856
Intangible assets	8	254	168
Prepayments and accrued income		77	66
Assets classified as held for sale	9	295	-
Other assets		2,621	75
Total assets		22,579	21,400
Liabilities
Deposits from customers		16,072	14,477
Deposits from central banks		3,808	3,801
Debt securities		600	591
Financial liabilities held at fair value through profit and loss	15	30	-
Repurchase agreements		196	250
Derivative financial liabilities		8	8
Lease liabilities	10	327	341
Deferred grants	11	28	50
Provisions		11	17
Deferred tax liability	3	12	15
Other liabilities		198	267
Total liabilities		21,290	19,817
Equity
Called-up share capital	12	-	-
Share premium	12	1,964	1,964
Retained losses		(694)	(392)
Other reserves		19	11
Total equity		1,289	1,583
Total equity and liabilities		22,579	21,400

 

 

 

Consolidated statement of changes in equity (unaudited)

For the year ended 31 December 2020

 

	Called-up share capital £'million	Share premium £'million	Retained losses £'million	FVOCI reserve £'million	Share option reserve £'million	Total equity £'million
Balance as at 1 January 2020	-	1,964	(392)	(3)	14	1,583
Loss for the year	-	-	(302)	-	-	(302)
Other comprehensive income (net of tax) relating to investment securities designated at FVOCI	-	-	-	6	-	6
Total comprehensive loss	-	-	(302)	6	-	(296)
Net share option movements	-	-	-	-	2	2
Balance as at 31 December 2020	-	1,964	(694)	3	16	1,289
Balance as at 1 January 2019	-	1,605	(209)	(3)	10	1,403
Loss for the year	-	-	(183)	-	-	(183)
Other comprehensive income (net of tax) relating to investment securities designated at FVOCI	-	-	-	-	-	-
Total comprehensive loss	-	-	(183)	-	-	(183)
Shares issued	-	375	-	-	-	375
Cost of shares issued	-	(16)	-	-	-	(16)
Net share option movements	-	-	-	-	4	4
Balance as at 31 December 2019	-	1,964	(392)	(3)	14	1,583
Notes	12	12

 

 

 

Consolidated cash flow statement (unaudited)

For the year ended 31 December 2020

	Notes	Year ended 31 December 2020 £'million	Year ended 31 December 2019 £'million
Reconciliation of loss before tax to net cash flows from operating activities:
Loss before tax		(311)	(131)
Adjustments for:
Impairment and write-offs of property, plant, equipment and intangible assets	7, 8	41	78
Interest on lease liabilities	10	19	18
Depreciation and amortisation	7, 8	74	76
Share option charge		2	4
Grant income recognised in the income statement		(24)	(16)
Amounts provided for (net of releases)		8	12
Gain on sale of assets		(73)	(2)
Accrued interest on and amortisation of investment securities		3	(8)
Changes in operating assets and liabilities		-
Changes in loans and advances to customers		2,591	(445)
Changes in deposits from customers		1,595	(1,184)
Changes in other operating assets		(2,820)	(26)
Changes in other operating liabilities		(64)	(31)
Net cash inflows/(outflows) from operating activities		1,041	(1,655)
Cash flows from investing activities
Sales and redemptions of investment securities		615	2,193
Purchase of investment securities		(1,460)	(618)
Purchase of property, plant and equipment	7	(29)	(120)
Purchase and development of intangible assets	8	(81)	(79)
Acquisition of subsidiary (net of cash acquired)		(1)	-
Net cash (outflows)/inflows from investing activities		(956)	1,376
Cash flows from financing activities
Shares issued	12	-	375
Cost of shares issued	12	-	(16)
Debt issued		-	350
Cost of debt issued		-	(8)
Grant received	11	-	120
Grant repaid		(50)	-
Repayment of capital element of leases	10	(31)	(25)
Net cash (outflows)/inflows from financing activities		(81)	796
Net increase in cash and cash equivalents		4	517
Cash and cash equivalents at start of year		2,989	2,472
Cash and cash equivalents at end of year		2,993	2,989
Loss before tax includes:
Interest received		407	493
Interest paid		176	174