REG - Metro Bank PLC - Interim results for half year ended 30 June 2022
28/07/2022 07:16
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RNS Number : 0026U Metro Bank PLC 28 July 2022
Metro Bank PLC
Interim results
Trading update H1 2022
28 July 2022
Metro Bank PLC (LSE: MTRO LN)
Interim results for half year ended 30 June 2022
Highlights
· Strategic plan remains on track and monthly breakeven expected during Q1
2023(1). The liability-led strategy and accelerated asset mix shift has
successfully widened margins, further supported by the rising rate
environment.
· Total underlying revenue grew 31% YoY to £236.2 million (H1 2021: £179.8
million), demonstrating margin expansion and continued momentum in revenue
growth as lending is optimised for return on regulatory capital.
· Total underlying operating expenses fell 3% YoY to £266.3 million (H1 2021:
£275.2 million) reflecting cost actions taken to reduce run-rate in the near
term and limit future cost growth.
· Cost of deposits reduced 17bps YoY to 0.14% (H1 2021: 0.31%) with the impact
of rate rises offset by the continued focus on mix improvement, 47% of
deposits are current accounts (H1 2021: 41%).
· Underlying loss before tax of £48.0 million (H1 2021: loss of £110.0
million) reflects the significant growth in revenue and actions taken to
reduce cost, offset marginally by increased expected credit loss provisions.
· Statutory loss before tax of £60.2 million (H1 2021: loss of £138.9 million)
includes one off items relating to capital neutral intangible asset write
downs and remediation costs. Remediation costs of £3.0m (H1 2021: £25.4m)
have reduced significantly as programs successfully conclude.
· Announced appointment of James Hopkinson as CFO.
1. Assuming no material deterioration in the macro-economic
environment.
Daniel Frumkin, Chief Executive Officer at Metro Bank, said:
"We have delivered a strong first-half performance and I am encouraged by the
continued momentum we are seeing across the bank. Initiatives we have put in
place have helped us to improve NIM and lending yield, and drive record
revenue growth. We have also maintained our cost discipline and improved our
cost to income ratio, with the focus on generating greater earnings from our
capital base. As a result, we have built a sustainable business and we now
expect to reach monthly breakeven during Q1 2023.
"All of this has been made possible by focusing on our turnaround strategy
over the past two years. We also retain, at our core, fantastic colleagues
delivering highly-rated customer service and we remain committed to being the
UK's best community bank. Collectively, we remain resolutely focused on
continuing to execute our strategy and supporting our customers in the face of
an increasingly complex macroeconomic environment."
Key Financials:
30 31 December Change from 30 Change from
£ in millions June 2021 FY 2021 June H1 2021
2022 2021
Assets £22,555 £22,587 - £23,013 (2%)
Loans £12,364 £12,290 1% £12,325 -
Deposits £16,514 £16,448 - £16,620 (1%)
Loan to deposit ratio 75% 75% - 74% 1 pps
CET1 capital ratio 10.6% 12.6% (2.0 pps) 13.9% (3.3 pps)
Total capital ratio (TCR) 13.8% 15.9% (2.1 pps) 17.2% (3.4 pps)
MREL ratio 18.3% 20.5% (2.2 pps) 21.7% (3.4 pps)
Liquidity coverage ratio 257% 281% (24 pps) 309% (52 pps)
H1 H2 Change from H1 Change from
£ in millions 2022 2021 H2 2021 2021 H1 2021
Total underlying revenue(2) £236.2 £218.1 8% £179.8 31%
Underlying loss before tax(3) (£48.0) (£61.3) (22%) (£110.0) (56%)
Statutory loss before tax (£60.2) (£106.2) (43%) (£138.9) (57%)
Net interest margin 1.73% 1.51% 22 bps 1.28% 45 bps
Underlying EPS (28.5p) (36.0p) (21%) (65.1p) (56%)
2. Underlying revenue excludes grant income recognised relating to the
Capability & Innovation fund.
3. Underlying loss before tax is an alternative performance measure
and excludes 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.
Financial performance for the half year ended 30 June 2022
Deposits
£ in millions 30 31 December Change from 30 Change from
June 2021 FY 2021 June H1 2021
2022 2021
Demand: current accounts £7,770 £7,318 6% £6,749 15%
Demand: savings accounts £7,817 £7,684 2% £7,402 6%
Fixed term: savings accounts £927 £1,446 (36%) £2,469 (62%)
Deposits from customers £16,514 £16,448 - £16,620 (1%)
Deposits from customers includes:
Retail customers (excluding retail partnerships) £6,267 £6,713 (7%) £6,964 (10%)
SMEs(4) £4,892 £4,764 3% £4,605 6%
£11,159 £11,477 (3%) £11,569 (4%)
Retail partnerships £1,871 £1,814 3% £1,697 10%
Commercial customers (excluding SMEs(4)) £3,484 £3,157 10% £3,354 4%
£5,355 £4,971 8% £5,051 6%
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.
· Total deposits held broadly flat in the first six months at £16,514 million
as at 30 June 2022 (31 December 2021: £16,448 million), focus remained on mix
improvement as current accounts increased by £452 million and fixed term
deposit (FTD) accounts fell by £519 million.
· Cost of deposits was 14bps in the first half, a decrease of 3bps compared to
17bps in H2 2021 despite the rising rate environment, the reduction continues
to reflect the managed roll-off of higher cost FTD accounts and focus on mix
improvement in favour of non-interest-bearing current accounts and demand
savings accounts.
· Customer account growth of 0.1 million (H2 2021: 0.1 million) in the last six
months to 2.6 million, reflects stable growth in account openings and
incremental growth from the RateSetter acquisition offset by the roll-off of
FTDs.
Loans
£ in millions 30 31 December Change from 30 Change from
June 2021 FY 2021 June H1 2021
2022 2021
Gross loans and advances to customers £12,535 £12,459 1% £12,491 -
Less: allowance for impairment (£171) (£169) 1% (£166) 3%
Net loans and advances to customers £12,364 £12,290 1% £12,325 0%
Gross loans and advances to customers consists of:
Commercial lending(5) £2,993 £3,220 (7%) £3,416 (12%)
Government-backed lending(6) £1,488 £1,626 (8%) £1,556 (4%)
Retail mortgages £6,785 £6,723 1% £6,815 -
Consumer lending £1,269 £890 43% £704 80%
5. Includes CLBILS.
6. BBLS, CBILS and RLS.
· Total net loans as at 30 June 2022 were £12,364 million, broadly flat from
£12,290 million at 31 December 2021 reflecting continued growth in consumer
lending and specialist mortgages, offset by the attrition of lower-yielding
residential mortgages and commercial term loans including commercial real
estate. Total net loans are expected to increase in the second half of the
year, with continuing mix shift towards higher yielding assets.
· Commercial loans including commercial real estate (excluding BBLS, CBILS and
RLS) decreased by 7% during H1 to £2,993 million at 30 June 2022 and are 12%
below a year earlier following the attrition of lower-yielding commercial and
commercial real estate term loans that provide a lower return on regulatory
capital.
· Retail mortgages remained the largest component of the lending book at 54%,
with lower-yielding residential mortgages rolling off and focus shifting to
specialist mortgages as part of the balance sheet optimisation strategy.
Mortgage application volumes in Q2 2022 were 87% higher than Q1 and 133%
higher than Q4 2021.
· Consumer lending increased to 10% of the loan book from 7% at 31 December
2021, resulting from continued growth across all channels. Consumer
originations averaged £105 million per month during H1 2022 and this
trajectory is expected to continue. An approval rate of less than a third
(29%) during the period shows the focus on selective credit quality.
· Loan to deposit ratio remained stable at 75% (31 December 2021: 75%)
reflecting the mix improvements in deposits and actions taken to optimise the
balance sheet for accretive new lending despite current capital constraints.
· Government-backed lending decreased 8% in the first half to £1,488 million at
30 June 2022 and is down 4% from a year earlier.
· Annualised cost of risk at 0.29% (2H 2021: 0.12%) included recognition of ECL
expense associated with organic growth in consumer lending. Non-performing
loans reduced to 2.76% (31 December 2021: 3.71%) reflecting an improvement in
Commercial single name exposures. The loan portfolio remains highly
collateralised with average debt to value (DTV) of the residential mortgage
book at 56% (31 December 2021: 55%), while DTV in the commercial book was 55%
(31 December 2021: 57%).
Profit and Loss Account
· Net interest margin (NIM) at 1.73% has increased 22 bps in the first half,
reflecting the impact of lower cost of deposits, improved lending mix and
higher lending yields.
· Underlying net interest income increased 12% in H1 2022 to £180.9 million (H2
2021: £162.1 million), and increased 35% YoY, highlighting the strong
momentum in revenue following improvements in lending mix and the impact of
rate rises.
· Underlying net fee and other income increased 1% sequentially to £55.3
million (H2 2021: £54.8 million) driven by growth in Safe Deposit Boxes,
Services Charges and Interchange partially offset by a reduction in FX, gains
and other. Fees are expected to continue recovering.
· Underlying cost:income ratio reduced to 113% in the first half of 2022, from
125% in the prior six months, reflecting the actions taken to reduce costs as
well as the momentum gained in underlying revenue.
· Underlying loss before tax was £48.0 million, a reduction of 22% from the
£61.3 million loss in H2 2021 and a reduction of 56% from the £110.0 million
loss in H1 2021, highlighting the trajectory towards sustainable
profitability.
· Statutory loss before tax of £60.2 million in H1 2022 (H2 2021: loss of
£106.2 million) includes the capital neutral impairment of intangible assets
(£8.2 million) and remediation costs (£3.0 million). Remediation costs have
sharply reduced as we continue to close out legacy issues. For example, we
concluded the matter with US Office of Foreign Assets Control (OFAC) in
relation to Cuba and Iran without fine or penalty.
· Statutory loss after tax of £61.7 million in H1 2022 (H2 2021: loss of
£107.1 million) after a £1.5 million corporation tax charge.
Capital, Funding and Liquidity
· Strong liquidity and funding position maintained, the Bank's Liquidity
Coverage Ratio (LCR) remains elevated at 257% as of 30 June 2022 (31 December
2021: 281%). Whilst NIM dilutive, this excess liquidly is earnings neutral and
provides flexibility and optionality.
· Common Equity Tier 1 (CET1) ratio of 10.6% as at 30 June 2022 (31 December
2021: 12.6%) compares to a minimum CET1 requirement of 4.8%(7) and minimum
Tier 1 requirement of 6.4%(7).
· Total capital ratio of 13.8% as at 30 June 2022 (31 December 2021: 15.9%)
compares to a minimum requirement of 8.5%(7).
· MREL ratio of 18.3% as at 30 June 2022 (31 December 2021: 20.5%) compares to a
minimum requirement of 17.0%(7).
· The PRA reduced the Bank's Pillar 2A capital requirement from 1.11% to 0.50%
effective as of 27 June 2022. The Resolution Directorate of the Bank of
England also agreed that the Bank's binding MREL applicable from 27 June 2022
shall be equal to the lower of:
i) 18% of the Bank's RWAs; or
ii) Two times the sum of the Bank's Pillar 1 and Pillar 2A
Therefore the Bank's minimum MREL requirement(7) has been reduced to 17.0%.
· Total RWA as at 30 June 2022 was £7,702 million (31 December 2021: £7,454
million). The increase reflects the mix improvement towards higher yielding
assets. The result is a loan risk weight density of 49% as at 30 June 2022 (31
December 2021: 48%).
· Regulatory leverage ratio(8) was 4.3%.
7. Minimum capital requirement excluding buffers.
8. The PRA Policy Statement 21/21 took affect from 1 January 2022
which required the exclusion of certain central bank claims from the total
exposure measure. Had the central bank exposures been included the Leverage
Ratio would have been 3.8%.
Outlook and Guidance
· The path to profitability is supported by the continued mix improvements and
balance sheet growth alongside ongoing cost control and benefits from rate
rises.
Profitability: Monthly breakeven is expected during Q1 2023, assuming no
material deterioration in the macroeconomic environment.
· Momentum continues towards profitability as margins widen:
FY21 FY21 Exit Rate H1 2022
Cost of deposits 0.24% 0.15% 0.14%
Lending yield 3.07% 3.19% 3.40%
Net interest margin 1.40% 1.56% 1.73%
· Guidance provided in February 2021 for 2022 full year, as set out below, is
re-affirmed although we remain cognisant of the potential for unexpected
adverse macroeconomic developments, which may impact our ability to deliver on
guidance. Loan growth expectations are now higher for the year as the Bank
continues to optimise balance sheet growth within capital constraints.
Balance sheet: Higher growth than 2021 (2021: 2%) with continued focus on mix
improvement.
Margin: A 1.56% FY21 exit NIM holds us in good stead for 2022 with continued
focus on lending mix and improved yields as a result of the base rate rises,
potentially tempered by higher cost of deposits.
Fees: Transaction-driven revenue streams influenced by the pace of recovery.
Costs: Low single digit % reduction in total underlying operating expenses.
Non-underlying items are expected to be less than 20% of 2021 (2021: £73.8
million) as remediation costs fall away.
Capital: As previously stated we are comfortable operating in buffers and
remain above regulatory minima (currently 17.0% for MREL). The Bank's AIRB
application is progressing. Alternative capital actions remain available.
A presentation for investors and analysts will be held at 8.30AM (UK time) on
28 July 2022. The presentation will be webcast on:
https://webcast.openbriefing.com/metrobank22/
(https://eur01.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwebcast.openbriefing.com%2Fmetrobank22%2F&data=05%7C01%7CLuke.Passby%40metrobank.plc.uk%7C98d109230e81471f098008da6986f0b4%7C5951f0387ac944db87267818d4143d8d%7C0%7C0%7C637938325554189664%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&sdata=JnaH7Ajz0AEHpovryR606nFGz9BCP9FirTcelz6jKR8%3D&reserved=0)
For those wishing to dial-in:
From the UK dial: 0800 640 6441
From the US dial: +1 855 9796 654
Access code: 828004
Metro Bank PLC
Summary Balance Sheet and Profit & Loss Account
(Unaudited)
Balance Sheet YoY change 30-Jun 31-Dec 30-Jun
2022 2021 2021
£'million £'million £'million
Assets
Loans and advances to customers - £12,364 £12,290 £12,325
Treasury assets(9) £9,036 £9,142 £9,474
Other assets(10) £1,155 £1,155 £1,214
Total assets (2%) £22,555 £22,587 £23,013
Liabilities
Deposits from customers (1%) £16,514 £16,448 £16,620
Deposits from central banks £3,800 £3,800 £3,800
Debt securities £577 £588 £596
Other liabilities £695 £716 £850
Total liabilities - £21,586 £21,552 £21,866
Total shareholder's equity £969 £1,035 £1,147
Total equity and liabilities £22,555 £22,587 £23,013
9. Comprises investment securities and cash & balances with the
Bank of England.
10. Comprises property, plant & equipment, intangible assets and
other assets.
YoY change Half year ended
Profit & Loss Account 30-Jun 31-Dec 30-Jun
2022 2021 2021
£'million £'million £'million
Underlying net interest income 35% £180.9 £162.1 £133.6
Underlying net fee and other income 18% £55.3 £54.8 £46.7
Underlying net gains/(losses) on sale of assets - £1.2 (£0.5)
Total underlying revenue 31% £236.2 £218.1 £179.8
Underlying operating costs (3%) (£266.3) (£271.6) (£275.2)
Expected credit loss expense (£17.9) (£7.8) (£14.6)
Underlying loss before tax (56%) (£48.0) (£61.3) (£110.0)
Impairment and write-off of property plant & equipment and intangible (£8.2) (£17.4) (£7.5)
assets
Net BCR costs - £0.3 (£0.3)
Transformation costs (£1.0) (£7.1) (£1.8)
Remediation costs (£3.0) (£20.5) (£25.4)
Business acquisition and integration costs - (£0.1) (£2.3)
Mortgage portfolio sale - (£0.1) £8.4
Statutory loss before tax (57%) (£60.2) (£106.2) (£138.9)
Statutory taxation (£1.5) (£0.9) (£2.2)
Statutory loss after tax (56%) (£61.7) (£107.1) (£141.1)
Half year ended
Key metrics 30-Jun 31-Dec 30-Jun
2022 2021 2021
Underlying earnings per share - basic and diluted (28.5p) (36.0p) (65.1p)
Number of shares 172.4m 172.4m 172.4m
Net interest margin (NIM) 1.73% 1.51% 1.28%
Cost of deposits 0.14% 0.17% 0.31%
Cost of risk 0.29% 0.12% 0.24%
Underlying cost:income ratio 113% 125% 153%
For more information, please contact:
Metro Bank PLC Investor Relations
Jo Roberts
+44 (0) 20 3402 8900
IR@metrobank.plc.uk (mailto:IR@metrobank.plc.uk)
Metro Bank PLC Media Relations
Tina Coates / Mona Patel
+44 (0) 7811 246016 / +44 (0) 7815 506845
pressoffice@metrobank.plc.uk (mailto:pressoffice@metrobank.plc.uk)
Teneo
Charles Armitstead / Haya Herbert Burns
+44 (0) 7703 330269 / +44 (0) 7342 031051
Metrobank@teneo.com (mailto:Metrobank@teneo.com)
ENDS
About Metro Bank
Metro Bank services 2.6 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 bank for service in-store for personal and
business customers, in the Competition and Market Authority's Service Quality
Survey in February 2022. This year it has been awarded "Best Mortgage Provider
of the Year" in 2022 MoneyAge Mortgage Awards, "Best Business Credit Card" in
2022 Moneynet Personal Finance Awards and "Best Current Account for Overseas
Use" by Forbes 2022. It was "Banking Brand of The Year" at the Moneynet
Personal Finance Awards 2021 and received the Gold Award in the Armed Forces
Covenant's Employer Recognition Scheme 2021.
The community bank offers retail, business, commercial and private banking
services, and prides itself on giving customers the choice to bank however,
whenever and wherever they choose, and supporting the customers and
communities it serves. Whether that's through its network of 76 stores open
seven days a week, 362 days a year; on the phone through its UK-based contact
centres; or online through its internet banking or award-winning mobile app,
the bank offers customers real choice.
Metro Bank 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
(http://www.fscs.org.uk) . All Metro Bank products are subject to status and
approval.
Metro Bank PLC is an independent UK bank - it is not affiliated with any other
bank or organisation (including the METRO newspaper or its publishers)
anywhere in the world. Please refer to Metro Bank using the full name.
METRO BANK PLC
INTERIM REPORT
Six months ended 30 June 2022
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 services 2.6 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 bank for service in-store for personal and
business customers, in the Competition and Market Authority's Service Quality
Survey in February 2022. This year it has been awarded "Best Mortgage Provider
of the Year" in 2022 MoneyAge Mortgage Awards, "Best Business Credit Card" in
2022 Moneynet Personal Finance Awards and "Best Current Account for Overseas
Use" by Forbes 2022. It was "Banking Brand of The Year" at the Moneynet
Personal Finance Awards 2021 and received the Gold Award in the Armed Forces
Covenant's Employer Recognition Scheme 2021.
The community bank offers retail, business, commercial and private banking
services, and prides itself on giving customers the choice to bank however,
whenever and wherever they choose, and supporting the customers and
communities it serves. Whether that's through its network of 76 stores open
seven days a week, 362 days a year; on the phone through its UK-based contact
centres; or online through its internet banking or award-winning mobile app,
the bank offers customers real choice.
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
Monique Melis (A N)
Paul Thandi (N R)
Ian Henderson (A O*)
Anne Grim (R)
Nick Winsor (O)
Michael Torpey (A*) (O) Registered Number
6419578
(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
www.metrobankonline.co.uk
(https://teneointel-my.sharepoint.com/personal/kate_heighes_teneo_com/Documents/www.metrobankonline.co.uk)
Executive Directors
Daniel Frumkin - Chief Executive 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
(https://teneointel-my.sharepoint.com/personal/kate_heighes_teneo_com/Documents/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 Half year to Change Half year to Change
30 June 2022 31 December 2021 30 June 2021
Profit and loss
Underlying loss before tax(1) (£48.0m) (£61.3m) (22%) (£110.0m) (56%)
Statutory loss before tax (£60.2m) (£106.2m) (43%) (£138.9m) (57%)
Total income (statutory) £236.5m £222.2m 6% £196.3m 20%
Total operating expenses (statutory) £278.8m £320.6m (13%) £320.6m (13%)
Net interest margin 1.73% 1.51% 22 bps 1.28% 45 bps
Average cost of deposits 0.14% 0.17 % (3 bps) 0.31% (17 bps)
30 June 2022 31 December 2021 Change 30 June 2021 Change
Balance sheet
Customer deposits £16,514m £16,448m 0% £16,620m (1%)
Customer loans £12,364m £12,290m 1% £12,325m 0%
Loan to deposit ratio 75% 75% 0 pps 74% 1 pps
Total assets £22,555m £22,587m 0% £23,013m (2%)
Asset quality
Coverage ratio 1.36% 1.36% 0 bps 1.33% 3 bps
Cost of risk (annualised) 0.29% 0.12% 17 bps 0.24% 5 bps
Capital ratios
Common Equity Tier 1 (CET1) ratio 10.6% 12.6% 13.9%
Regulatory leverage ratio(2) 4.3% 4.4% 4.9%
MREL ratio 18.3% 20.5% 21.7%
Customer metrics
Customer accounts 2.6m 2.5m 2.4m
Stores 76 78 77
1. Underlying loss before tax is an alternative performance measure
and excludes 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. The PRA Policy Statement 21/21 took affect from 1 January 2022
which required the exclusion of certain central bank claims from the total
exposure measure. Had the central bank exposures been included the Leverage
Ratio would have been 3.8%.
BUSINESS review
The first six months of 2022 mark a turning point in our transformation
journey. The delivery of our strategic priorities over the past two years
combined with a slow return towards a more normalised interest rate
environment are seeing us meaningfully advance toward achieving sustainable
profitability.
This progress clearly demonstrates the value of our proposition and underlines
our commitment to becoming the UK's best community bank. Our continued reign
as the highest rated high street bank for service combined with our low cost
and stable deposit base shows that even in a rising rate environment our model
continues to resonate; with customers willing to trade price for service. This
approach continues to set us apart from our peers and will see us deliver long
term value for all stakeholders.
Progress against strategic priorities
During the six month period to 30 June 2022 we recognised an underlying loss
before tax of £48.0 million (half year to 30 June 2021: loss of £110.0
million, half year to 31 December 2021: loss of £61.3 million) which reflects
the continued momentum in revenue as well as our disciplined approach to
costs. We have also made strong progress in reducing statutory loss before tax
for the period, which fell to £60.2 million (half year to 30 June 2021: loss
of £138.9 million, half year to 31 December 2021: loss of £106.2 million) as
we addressed legacy challenges and continue to finalise our transformation
programme.
Revenue
Underlying revenue for the first six months continued its upwards trend to
£236.2 million from £218.1 million in the second half of 2021 (half year to
30 June 2021: £179.8 million) as a result of the rebalancing of our lending
portfolio as well as higher interest rates over the first six months of the
year.
The Metro Bank business model has always been built for a normalised interest
rate environment and the continued rise in the Bank of England base rates to
1.25% now sees it at a level we have not seen in our 12 year history. On
lending, we are seeing these increases flow through to our front book pricing
as well as variable rates, and this trend will continue as older fixed rate
balances continue to attrite. At the same time as increasing lending yields we
have held cost of deposits broadly flat, as current accounts make up 47% of
our deposit base and higher yielding fixed rate balances continue to fall.
These factors have driven a 45bps increase in net interest margin to 1.73%
(half year to 30 June 2021: 1.28%, half year to 31 December 2021: 1.51%).
The rebalancing of our lending portfolio continued over the first half of 2022
and strong originations of RateSetter personal loans saw our gross consumer
term lending exceed £1 billion for the first time. Credit standards are set
high given our focus on prime customers leading to non-performing loans
comprising only 2.75% of the portfolio. Consumer lending now makes up 10% of
our portfolio and is a larger component of book than professional buy-to-let
mortgages. Whilst residential mortgage lending remained broadly flat over the
first six months of the year it remains the largest constituent of our lending
at 54% (31 December 2021: 54%) and the first six months of the year has seen
us replace older balances with higher-yielding specialist products.
Alongside this we continued to issue government backed lending schemes,
growing Recovery Loan Scheme balances by £200 million since the start of the
year. These continue to provide a strong return on risk-adjusted returns in
line with our wider strategy as well as supporting our customers during this
uncertain period.
Our revenue for the period has also benefited from an increase in investment
yields, particularly noticeable in gilt pricing. This is allowing us to
generate an increased return from the excess liquidity we carry. This
additional liquidity also affords us the opportunity to quickly accelerate
mortgage lending in the future, post successful AIRB accreditation, without
having to aggressively grow deposits.
Fee income remained flat as customer activity was impacted by lockdowns and
other social restrictions earlier in the year, with moderate customer accounts
growth of 0.1 million during the first six months of the year. We continue to
invest in initiatives to expand fee income and aim to see growth in the second
half of 2022, although we are mindful of the economic outlook and the effects
this has on consumer confidence which is a driver.
Costs
Underlying operating expenses fell 3% year-on-year to £266.3 million (half
year to 30 June 2021: £275.2 million; half year to 31 December 2021: £271.6
million) despite inflationary pressures, reflecting the actions we have taken
over the past couple of years to reduce both short term run-rate and
longer-term growth. Our underlying cost income remains on a clear downward
trajectory, reducing to 113% for the period, down from 125% in the half year
to 31 December 2021 and 153% for the half year to 30 June 2021. On a statutory
basis we are also seeing a reduction in costs following the conclusion of a
large number of transformation initiatives and closure of legacy remediation
issues. For example, we concluded the matter with US Office of Foreign
Assets Control (OFAC) in relation to Cuba and Iran without fine or penalty.
We recognised an expected credit loss expense of £17.9 million for the
period, which largely reflects the change in the shape of our lending towards
unsecured. Although this shift naturally incurs a higher cost of risk than
some other areas of lending, we remain focused on the prime segments of the
market and our observed levels of losses remain low. We do however continue to
adopt a cautious economic outlook given that 2022 has seen heightened levels
of global insecurity including the Russian invasion of Ukraine. As a solely
focused UK bank we have no direct exposure to Ukraine or Russia, however like
the majority of the customers and communities we serve, we are exposed to
second order impacts, noticeably the increase in inflation that has in part
resulted from the conflict. We have applied management overlays to our
expected credit loss calculation to reflect these risks, offsetting the
release of COVID-19 related adjustments.
The current inflationary environment is the highest we have witnessed in a
generation however a tight cost discipline has helped us weather this
headwind. A clear example of this is the action we have undertaken over the
past couple of years to take advantage of the depressed commercial property
market to buy the freeholds to a number of our stores. This saw us buy out the
majority of our inflation linked leases with us now having only two sites
remaining where rent is subject to inflation linked increases. The total
number of freehold stores is now 28 representing 37% of our portfolio.
The largest increased in costs we have encountered is in relation to wage
price inflation with the market for talent remaining fiercely competitive in
particular in head-office and customer facing roles, and we provided
colleagues on average with an above inflation increase in our pay review,
effective 1 April 2022. This increase was offset by a reduction in change
spend which as guided fell back during the period.
Infrastructure
The first half of 2022 has continued to see us develop our physical and
digital infrastructure, although the pace has slowed as we return to
normalised levels from the elevated investment we undertook in the first two
years of our turnaround plan. The focus of change continues to be centred on
enhancing our propositions and expanding our capacity to allow us to absorb
the anticipated rate of balance sheet growth we envisage over the coming
years.
The start of the year saw us open our newest store in Leicester, which is
trading in line with expectations. We have also seen the continued recovery of
the rest of our stores post-pandemic as footfall returns to the high street.
It has been particularly pleasing to see the strong performance of our store
in Bradford which we opened during 2021; this was designed with a
significantly lower build cost than our previous stores, although retains
distinct Metro Bank characteristics. The fact it is performing both in line
with the rest of the estate demonstrates that significant savings can be
achieved without compromising what our customers love about us. This should
therefore allow us to deliver a significantly higher return on investment for
future stores as we look to grow into new markets.
Alongside our physical footprint, we continue to invest in expanding our
product offering with investment in building our motor finance proposition,
which will be launched later in the year under the RateSetter brand. This
builds upon the strong demand for prime unsecured lending and continues to
leverage the skills and capabilities of the RateSetter acquisition.
As well as customer facing investments we are continuing to invest in back
office infrastructure, with noticeable investments in financial crime.
Protecting our customers and our communities from financial crime will
continue to be an area of investment as we seek to remain ahead of this
evolving landscape.
The first six months of the year saw continued progress on our AIRB
application for residential mortgages. This remains a key strategic priority
for us as it provides the potential to gain greater capital efficiencies and
allow us to be more competitive in the mortgage market. We continue to engage
with the PRA in respect of the application with the ambition of achieving
accreditation in the near term, although the timing of any approval remains
uncertain.
Balance Sheet optimisation
The balance sheet optimisation actions we have taken to date, noticeable our
shift in lending mix, are now starting to bear fruit, with the effects clearly
showing in our revenue growth.
Following the successful entry into the consumer unsecured market through
RateSetter, we believe the motor finance product can also generate strong risk
adjusted returns. However, given the uncertain economic outlook we retain a
cautious approach to our roll-out and, as with our unsecured lending, will
ensure that we target the prime end of the market.
Our RateSetter proposition has been highly effective in allowing to quickly
and efficiently transition into higher yielding assets. The quick turnover of
balances due to the short duration of lending also allows us to take advantage
of rising interest rates as old balances attrite and are replaced with higher
yielding front book loans. This approach will also allow us to quickly pivot
back toward a focus on mortgage lending should rates to return to more
normalised levels and appropriate risk-adjusted returns be made following
successful AIRB accreditation.
Internal and External Communications
2022 has seen a positive start to the year in respect of our continued
communications agenda. We undertook a brand campaign targeted at small
businesses which showcased our incredible colleagues. The campaign was highly
targeted, focused on Cardiff, Kingston, Clapham, Oxford and Manchester
allowing us to maximise our impact in these important markets whilst
containing costs. We have been able to track and measure the success of the
campaign and have been pleased with the impact we have seen this deliver.
Colleagues and leadership
The key to our success remains our colleagues. The start of 2022 has seen the
market for talent remain fiercely competitive and as such we remain focused on
retaining and attracting colleagues through ensuring Metro Bank is a place
that people want to join and can thrive whilst here.
In June we had the opportunity to celebrate colleagues from around the
business at our AMAZE award ceremony; the first time we have been able to host
the event since 2018 due to the pandemic. This provided a fantastic platform
for us to be able to remind ourselves of the great work we undertake in
serving our communities and how we go above and beyond to ensure we create and
maintain FANS.
We also announced early this month that we have appointed James Hopkinson as
our new Chief Financial Officer. James will be joining us in early September
and we look forward to welcoming him at this exciting juncture. James joins us
from ClearBank where he was Chief Financial Officer for the past few years and
before that he spent almost 20 years at Standard Chartered in a variety of
senior roles.
During the second half of the year, executive committee members Richard Lees,
Cheryl McCuaig and Jessica Myers will be leaving the Bank. I would like to
take the opportunity to extend my thanks to them for all their efforts and
their contribution to my leadership team. They have provided immense support
in helping get us to this stage of our turnaround journey and I wish them all
the best in their future endeavours.
The first six months also saw Sally Clarke step down from the Board to pursue
other opportunities and I thank her for her contribution over the past two
years. Nick Winsor will become the designated NED for workforce engagement, a
crucial role in helping maintain our colleague centric approach. Over the
coming months our Chair, Robert Sharpe, will evaluate whether any further
changes are required to committee compositions as a result of Sally's
departure to maintain a strong and robust governance structure.
Capital
Capital remains the largest constraint on the business and we continue to
utilise regulatory buffers. As we advance towards profitability this will
allow us to return to growing our risk weighted assets, utilise some of our
excess liquidity and maintain our positive momentum on income growth.
In June 2022 the PRA reduced our Pillar 2A requirements from 1.11% to 0.50%
and the Resolution Directorate of the Bank of England agreed for our binding
MREL requirement to be set as the lower of 18% and two times the sum of Pillar
1 and Pillar 2A. These changes had the effect of reducing our minimal MREL
requirements (excluding buffers) to 17.0%, and reflect the credit quality of
our lending portfolio as well as the strength of our balance sheet.
We are currently working on the implementation of a holding company which we
are required to have in place by 26 June 2023, which is in line with the call
date of our Tier 2 bond. Under the terms of the Bank of England's December
2021 MREL Policy Statement, the operating company issued Tier 2 bond will lose
MREL eligibility upon the holding company implementation. Management will work
with regulators, debt holders and advisers with a view to addressing this MREL
eligibility aspect before the implementation of the holding company. Our
Senior Non-Preferred bond includes an option for the issuer to be substituted
to the holding company once it is established and so will remain fully MREL
eligible.
Outlook
Thanks to the hard work of our colleagues through unprecedented times, we have
reached an inflection point and can clearly demonstrate our trajectory back
towards profitability. Although we continue to have significant work to do,
with the momentum in the business I expect to achieve monthly breakeven during
the first quarter of 2023.
We remain resolutely focused on the delivery of our strategic priorities and I
would like to thank all of our stakeholders - our customers, colleagues,
shareholders and regulators - for their continued support.
Daniel Frumkin
Chief Executive Officer
27 July 2022
Finance review
The continued momentum we have seen in the business is reflected in our
results for the first six months of the year with underlying loss before tax
decreasing from £110.0 million to £48.0 million from the same period in 2021
(half year to 31 December 2021: £61.3 million). On a statutory basis losses
before tax reduced to £60.2 million for the same period (half year to 30 June
2021: £138.9 million, half year to 31 December 2021: £106.2 million) as a
result of the continued reduction in non-underlying items as we close out
legacy remediation projects and finalise our transformation agenda.
The results were underpinned by strong income growth combined with a reduction
in costs helping to drive positive operating jaws. Net interest income grew to
£180.8 million (half year to 30 June 2021: £133.3 million, half year to 31
December 2021: £162.0 million) driven by actions taken on lending mix, rising
base rates and a continued low-cost deposit base. Net interest Margin of 1.73%
(half year to 30 June 2021: 1.28%, half year to 31 December 2021: 1.51%) also
continued to increase as a result of these factors although it remains diluted
by the excess liquidity we continue to hold.
We ended the period with CET1 capital ratio of 10.6% and an MREL ratio of
18.3%. These compare to the regulatory minima including buffers (excluding any
confidential buffer) of 7.3% for CET1, 8.9% for Tier 1 and 19.5% for MREL.
Income statement review
Table 1: Summary income statement
Half year to Half year to Half year to Year-on-year
30 June 2022 31 December 2021 30 June 2021 growth
(unaudited) (unaudited) (unaudited)
£'million £'million £'million
Net interest income 180.8 162.0 133.3 36%
Net fee, commission and other income 55.7 59.0 54.8
Net gains on sale of assets - 1.2 8.2
Total income 236.5 222.2 196.3 20%
General operating expenses (233.2) (263.3) (272.8) (15%)
Depreciation and amortisation (37.4) (39.9) (40.3)
Impairment and write-off of PPE and intangible assets (8.2) (17.4) (7.5)
Expected credit loss expense (17.9) (7.8) (14.6)
Loss before tax (60.2) (106.2) (138.9) (57%)
Taxation (1.5) (0.9) (2.2)
Loss after tax (61.7) (107.1) (141.1) (56%)
Net interest income
Net interest income for the period was £180.8 million up from £162.0 million
in the second half of 2021 and £133.3 million for the same period last year.
This has been driven by increasing yield on our front book lending and
repricing of variable rate products as base rates continued to rise alongside
the continued rebalancing of our lending portfolio as we continue to execute
on our strategic priorities.
2022 has seen four base rate rises, from 0.25% to 1.25%, following the
increase from the historic low of 0.1% in December 2021. Further base rates
are expected in the second half of the year and although the market remains
fiercely competitive we should continue to see a strong pass through of these
increases into our front book loan pricing.
At the same time our focus on retail and business current accounts should help
to insulate the impact of these rate rises on our costs of deposits. Cost of
deposits for the first six months of 2022 was 0.14%, three basis points down
from the cost in the second half of 2021 (half year to 30 June 2021: 0.31%,
half year to 31 December 2021: 0.17%).
Net interest income has also benefited from increases in the returns from the
treasury portfolio where the impact of rate rises often filters through more
quickly than in our lending portfolio, noticeably through the balances we hold
at the Bank of England.
Finally, we have continued to see the incremental impacts of the actions we
have taken in respect of our store lease portfolio to reduce the interest
expense we recognise on IFRS 16 lease liabilities. The interest expense on
lease liabilities has fallen from £8.8 million in the six months to 30 June
2021 to £8.3 million for the same period this year. This is largely as a
result of the continued actions we took last year to purchase the freeholds of
some of our stores. Alongside this, the disposal of our lease on a site at the
Old Bailey, previous remeasurement of lease liabilities in respect of the
stores announced for closure, the slowed pace of new store growth and
continued maturation of the existing lease portfolio should all continue to
push this expense down going forward.
Fee, commission and other income
Subdued customer activity in the first half of the year led underlying net fee
and other income to remain broadly flat at £55.3 million (half year to 30
June 2021: £46.7 million, half year to 31 December 2021: £54.8 million).
Growth in service charges, driven by continued current account growth, offset
depressed foreign exchange volumes, with income from safe deposit boxes,
interchange fees and ATMs remaining stable.
Operating expenses
Underlying operating expenses slightly decreased to £266.3 million from
£271.6 million in the second half of 2021 and down from £275.2 million in
the first six months of 2021. The reduction reflects the benefits realised
from our transformation programme aided by a reduction in change expenditure,
offset slightly by an increase from wage inflation.
Statutory costs also were down, falling 12% to £233.2 million from £263.3
million in the final six months of 2021 (half year to June 2021: £272.8
million), as a result of a marked reduction in transformation costs,
reflecting where we are in our journey. Similarly, remediation costs have
sharply reduced as we continue to close out legacy issues. Offsetting this was
a £8.2 million write-off on intangible assets, although this item was capital
neutral.
Expected credit loss expense
We recognised an expected credit loss expense of £17.9 million for the period
(half year to 30 June 2021: £14.6 million, half year to 31 December 2021:
£7.8 million), reflecting the change in make-up of the lending portfolio as
well as our cautious macroeconomic outlook. Despite the worsening economic
outlook, the credit performance of our portfolio during the first half of 2022
has remained stable with both non-performing loans and arrears both reducing
in the first half of the year.
Whilst the portfolio continues to be resilient, we continue to adopt a
cautious outlook given the macro-economic uncertainties and as such retain a
material level of management overlay within our expected credit loss
assessment.
Balance sheet review
Table 2: Summary balance sheet
30 June 2022 31 December 2021 Growth
(unaudited) (audited)
£'million £'million
Assets
Cash and balances with the Bank of England 2,862 3,568 (20%)
Loans and advances to customers 12,364 12,290 1%
Investment securities held at fair value through other comprehensive income 781 798 (2%)
Investment securities held at amortised cost 5,393 4,776 13%
Financial assets held at fair value through profit and loss 2 3 (33%)
Property, plant and equipment 749 765 (2%)
Intangible assets 227 243 (7%)
Prepayments and accrued income 80 68 18%
Other assets 97 76 28%
Total assets 22,555 22,587 -
Liabilities
Deposits from customers 16,514 16,448 -
Deposits from central banks 3,800 3,800 -
Debt securities 577 588 (2%)
Repurchase agreements 166 169 (2%)
Derivative financial liabilities 8 10 (20%)
Lease liabilities 264 269 (2%)
Deferred grant 19 19 -
Provisions 14 15 (7%)
Deferred tax liability 12 12 -
Other liabilities 212 222 (5%)
Total liabilities 21,586 21,552 -
Total equity 969 1,035 (7%)
Deposits
Deposits of £16,514 million at 30 June 2022 were broadly flat compared to
£16,448 million at 31 December 2021. Given the amount of excess liquidity we
carry we have continued to focus on deposit quality and pricing rather than
volume. This manifested itself in the high proportion of current accounts,
which made up 47% of total customer deposits as at 30 June 2022 (31 December
2021: 44%).
Lending
Net lending remained flat during the first six months ending the period at
£12,364 million (31 December 2021: £12,290 million). However, we continued
to shift our lending mix as legacy balances ran off and capital was redeployed
into more capital efficient lending. Consumer lending, primarily in the form
of term lending delivered under the RateSetter brand, now makes up 10% of
total lending balances up from 6% a year ago and 7% at year end. Term lending
now makes up a larger proportion of lending than professional buy-to-let
mortgages, reflecting our transition away from this area of the market to
focus on lending which is more relationship driven.
We also continued to grow Recovery Loan Scheme lending during the first six
months of the year to over £357 million, up from £157 million at last year
end. This lending benefits from an 80% guarantee and as such aligns with our
aim of improving returns on regulatory capital at the same time as being able
to support small and medium sized trading businesses during a difficult time.
Balances on the closed government backed lending schemes continued to attrite,
reflecting the maturity of this portfolio; the majority of these loans are now
entering the second year of their five year term.
Property, plant & equipment and intangibles
Non-current assets and intangible asset balances continued to decrease during
the period. Property, plant and equipment ended the first half of the year at
£749 million, down from £765 million at year end, as additions continue to
fall. The opening of our store in Leicester was the only planned store opening
of the year and as such we should continue to see asset balances decrease in
the second half.
Intangible assets also continued to decrease reflecting the slowing pace of
investment, which was lower than amortisation charges recognised, reflecting
where we are in our transformation journey. Although the rate of intangible
additions has slowed, we continue to invest in enhancing our proposition and
expanding our capacity to allow us to efficiently scale the balance sheet in
the years ahead. This has seen us focus on such areas as our AIRB application
and continued investment in financial crime as well as new propositions
including auto-financing.
Capital
Our CET1, Tier 1 and MREL ratios at 30 June 2022 were 10.6%, 10.6% and 18.3%
respectively, compared to the regulatory minimum of 4.8%, 6.4% and 17.0%,
respectively, (excluding buffers). The MREL requirement of 17.0% reflects the
reduction of our Pillar 2A requirements from 1.11% to 0.50% and the move to
our binding MREL requirement being the lower of 18% and two times the sum of
Pillar 1 and Pillar 2A, which were announced in June 2022. Including buffers
(excluding any confidential buffer, where applicable) our CET1, Tier 1 and
MREL requirements are 7.3%, 8.9% and 19.5% respectively.
Our capital ratios were impacted in 2022 from changes in relation to the
capital treatment of software assets. On 1 January 2022 the capital treatment
of software assets reverted to the previous treatment of being deducted from
capital, following changes implemented by the PRA.
We continue to operate within our publicly disclosed MREL buffers and will
continue to do so for a period of time. The continued delivery of our
strategic priorities will expect us to see a return above these requirements
in the medium term.
Risk weighted assets ended the period at £7,702 million (31 December 2021:
£7,454 million) reflecting the continued change in asset mix. We continue to
optimise our risk weighted assets to ensure we are maximising our return on
regulatory capital and remain committed to achieving AIRB accreditation which
would free up risk-weighted assets and allow us to grow lending further.
Liquidity and wholesale funding
Our liquidity position continues to be strong, owing to our conservative
lending approach. We ended 30 June 2022 with a Liquidity Coverage Ratio (LCR)
of 257%, which continues to be significantly in excess of regulatory
requirements. This is also reflected in the maintenance of a robust loan to
deposit ratio which remained stable at 75% as at 30 June 2022 (31 December
2021: 75%). As we grow our regulatory capital, these elevated levels of
liquidity will allow us to continue to grow lending without having to
aggressively expand our deposit base.
We maintained our level under the Bank of England's Term Funding Scheme
(TFSME) at £3.8 billion, also contributing to our liquidity. As this cost of
funding is linked to the base rate, this has led to a noticeable increase in
the cost of this funding during the period, rising from £2.1 million in the
second half of 2021 to £13.1 million in the first half of this year (half
year to 30 June 2021: £1.9 million). The cost of servicing the TFSME now
exceeds the total interest expense paid on customer deposits. Although the use
of this funding source is NIM dilutive, however, it is still overall income
accretive as it is deployed into high quality securities which have also seen
an increase in yield, in addition to the liquidity benefit it provides.
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.
RISK review
As at 30 June 2022, there had been no significant change to the business
model, risk management framework or risk appetites we outlined in our 2021
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 the same to
those outlined in the 2021 Annual Report and Accounts.
A detailed description of our principal risks and uncertainties to which we
are exposed, along with our approach to mitigating these risks, is set out in
the Risk Report which can be found on pages 52 to 92 of our 2021 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 risk - The risk of regulatory sanction, financial loss and
reputational damage as a result of failing to comply with relevant regulatory
requirements.
• Conduct risk - The risk that our behaviours or actions result in unfair
outcomes or detriment to customers and/ or undermines market integrity.
• Model risk - The risk of potential loss, poor strategic decision making and
regulatory non-compliance due to decisions that could be principally based on
the output of models, due to errors in the assumptions, development,
implementation or use of such models.
• Capital risk - The risk that we fail to meet minimum regulatory capital (and
MREL) requirements.
• Strategic risk - The risk of having an insufficiently defined, flawed or
poorly implemented strategy, a strategy that does not adapt to political,
environmental, business and other developments and/or a strategy that does not
meet the requirements and expectations of our stakeholders.
• Legal risk - The risk of loss, including to reputation, which 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, liquidity, operational and conduct risks are
outlined below.
Credit risk
Despite the challenging economic environment, the credit performance of our
portfolio during the first half of 2022 has remained stable. Non-performing
loans and early arrears have both reduced in the first half of the year and we
have observed a reduction in commercial exposures under our Early Warning and
Close Monitoring processes. We have observed modest growth in the balance
sheet overall with originations in retail mortgages offsetting the reduction
in our legacy acquired portfolios, and strong organic growth in consumer
lending through the RateSetter platform. Whilst the portfolio continues to
show resilience, we have retained a prudent level of management overlay within
our expected credit loss assessment, reflecting the high level of
macroeconomic uncertainty, following the Russian invasion of Ukraine, and the
high inflation environment and cost of living pressures.
Total loans and advances to customers have increased by £76 million to £12.5
billion during the first half of 2022. This is reflective of our strategic
focus with 43% growth in consumer balances which now contributes to 10.0% of
total loans and advances to customers (31 December 2021: 7.0%). Retail
mortgages and commercial balances remained relatively unchanged. However,
whilst net commercial balances are relatively stable, there has been a change
in composition which reflects our strategic growth of asset finance and
invoice finance and new RLS lending, offset by repayments in BBLS and
commercial real estate.
Expected credit losses
The below table provides a breakdown of IFRS 9 Expected credit losses (ECL)
stock in the period by portfolio.
Table 3: Expected credit loss allowances
30 June 2022 31 December 2021 Change
£'million £'million £'million
Retail mortgages 18 19 (1)
Consumer lending 56 42 14
Commercial lending 97 108 (11)
Total expected credit loss allowances 171 169 2
Expected credit losses (ECL) have increased during the year by £2 million to
£171 million (2021: £169 million, 2020: £154 million) predominantly driven
by originations in consumer lending, offset by repayments in commercial,
particularly on some large single named cases. Management overlays are broadly
flat compared to year end due the addition of overlays to reflect continued
macroeconomic uncertainty following the Russian invasion of Ukraine and the
high inflation and cost of living pressures offsetting releases of those
relating to COVID-19 uncertainty.
Non-performing loans
The below table provides information on non-performing loans by portfolio.
Table 4: Non-performing loans
30 June 2022 (unaudited) 31 December 2021 (unaudited)
NPLs NPL ratio NPLs NPL ratio
£'million % £'million %
Retail mortgages 101 1.50% 114 1.70%
Consumer lending 32 2.53% 21 2.36%
Commercial lending 212 4.73% 327 6.75%
Total 345 2.75% 462 3.71%
NPLs have reduced to £345 million (2021: £462 million). This decrease is
primarily driven by repayments and write-offs in commercial, particularly on a
small number of large commercial single name cases, and BBLS where the bank
has successfully claimed against the government guarantee. NPLs for mortgages
have also moderately reduced primarily driven by customers returning to
contractual repayments. The NPL ratio for consumer lending has increased
slightly to 2.5% (2021: 2.4%) driven by maturation of the portfolio, in line
with expectations, following strong growth through the RateSetter platform.
Cost of risk
The below table provides information on the Cost of Risk (CoR). CoR is the
credit impairment charge expressed as a percentage of average gross lending.
Table 5: Cost of risk
Half year to Full year
30 June 2022 31 December
annualised 2021
(unaudited) (unaudited)
% %
Cost of risk 0.29% 0.18%
The change in overall cost of risk (CoR) is primarily driven by increased
lending in consumer lending which now equates to 10% of the bank's portfolio
and carries a higher CoR than retail mortgages and commercial. The decrease in
CoR for consumer lending is the result of new originations through the
RateSetter platform and the reduction in the legacy consumer portfolio.
In retail mortgages, the increase in CoR is driven by the deterioration in the
majority of the macroeconomic factors feeding into the IFRS 9 models offset by
improvements in the HPI forecast reflecting the continued increase in observed
house prices. The increase in CoR for commercial is also driven by
deterioration in macroeconomic scenarios.
Retail mortgage lending
Mortgage balances have increased slightly in the first six months of 2022 to
£6,785 million (31 December 2021: £6,723 million) with originations
offsetting the reduction in our legacy acquired portfolios.
Despite the challenging economic environment, the credit performance of the
portfolio during the first half of 2022 has remained stable. DTV has increased
slightly by 1% to 56% as at 30 June 2022 (31 December 2021: 55%) and the total
ECL stock position has reduced by £1 million to £18 million (31 December
2021: £19 million). Arrears are stable with a moderate improvement observed
in non-performing loans (30 June 2022: 1.5%; 31 December 2021: 1.7%).
Origination volumes have been strong in the first half of the year at £675
million in (half year to 31 December 2021: £510 million) and we have
continued to adjust our credit policy and lending criteria in late 2021 and
early 2022. Additional controls have been implemented to support these changes
to ensure the credit risk profile remains within appetite.
Table 6: Retail mortgage lending by DTV banding
30 June 2022 (unaudited) 31 December 2021 (audited)
Retail owner occupied Retail Total retail mortgages Retail owner occupied Retail Total retail mortgages
£'million buy-to-let £'million £'million buy-to-let £'million
£'million £'million
Less than 50% 1,863 536 2,399 1,907 524 2,431
51-60% 787 416 1,203 767 415 1,182
61-70% 1,112 607 1,719 1,092 564 1,656
71-80% 806 241 1,047 805 188 993
81-90% 362 2 364 400 3 403
91-100% 47 3 50 51 3 54
More than 100% - 3 3 - 4 4
Total retail mortgage lending 4,977 1,808 6,785 5,022 1,701 6,723
Table 7: Residential mortgage lending by repayment type
30 June 2022 (unaudited) 31 December 2021 (audited)
Retail owner occupied Retail Total retail mortgages Retail owner occupied Retail Total retail mortgages
£'million buy-to-let £'million £'million buy-to-let £'million
£'million £'million
Interest 2,017 1,723 3,740 2,113 1,620 3,733
Capital and interest 2,960 85 3,045 2,909 81 2,990
Total retail mortgage lending 4,977 1,808 6,785 5,022 1,701 6,723
Table 8: Residential mortgage lending by geographic exposure
30 June 2022 (unaudited) 31 December 2021 (audited)
Retail owner occupied Retail Total retail mortgages Retail owner occupied Retail Total retail mortgages
£'million buy-to-let £'million £'million buy-to-let £'million
£'million £'million
Greater London 1,802 1,035 2,837 2,130 1,048 3,178
South East 1,251 338 1,589 1,157 283 1,440
South West 432 83 515 434 82 516
East of England 470 120 590 309 69 378
North West 238 60 298 264 62 326
West Midlands 204 67 271 190 61 251
Yorkshire and the Humber 170 31 201 139 34 173
East Midlands 152 39 191 140 25 165
Wales 100 17 117 110 20 130
North East 62 9 71 62 10 72
Scotland 96 9 105 87 7 94
Total retail mortgage lending 4,977 1,808 6,785 5,022 1,701 6,723
The geographic distribution of our retail mortgages customer balances is set
out above. All of our loan exposures which are secured on property are secured
on UK-based assets. Our current retail mortgages portfolio is concentrated
within London and the South-East, which is representative of our original
customer base and store footprint. We are expanding our footprint over time
which will reduce the geographical concentration of lending.
Consumer lending
Consumer balances have increased to £1.27 billion as at June 2022 (31
December 2021: £890 million) driven by strong growth through the RateSetter
platform.
The majority (84%) of the portfolio now comprises new lending through the
RateSetter platform. The performance of this portfolio is aligned with
expectations, with moderate increases in arrears and non-performing loans in
line with the growth of the book and normal portfolio maturation.
The total stock position has increased in 2022 by £14.6m to £56.0 million as
at 30th June 2022. This relates to the new originations through the
RateSetter platform and the expected maturation of the book, partially offset
by the reduction in the legacy portfolio, and a post model overlay to reflect
the uncertainty due to high inflation.
The total ECL coverage position for consumer has reduced slightly to 4.4% as a
result of the continued growth in new lending in the first half of the year
(31 December 2021: 4.7%).
Commercial lending
Table 9: Summary of commercial lending
30 June 31 December
2022 2021
(unaudited) (audited)
£'million £'million
Professional buy-to-let 853 950
Other term loans 1,638 1,791
Non-Government backed commercial term loans 2,491 2,741
Bounce back loans 984 1,304
Coronavirus business interruption loans 145 165
Recovery loan scheme 357 157
Government backed commercial term loans 1,486 1,626
Total commercial term loans 3,977 4,367
Overdrafts and revolving credit facilities 110 156
Credit cards 4 3
Asset and invoice finance 390 320
Total commercial lending 4,481 4,846
Our commercial lending remains largely comprised of term loans secured against
property and Government supported lending. In addition, commercial lending
includes facilities secured by other forms of collateral (such as debentures
and guarantees), and Asset Finance and Invoice Finance.
Our commercial balances have decreased from £4,846 million to £4,481 million
in the first six months of 2022. This reflects the business strategy to reduce
our Portfolio Buy to Let and Real Estate lending, and reductions in bounce
back loans. New commercial business over 2022 includes RLS lending to support
customers impacted by COVID-19, with government supported RLS lending balances
increasing to £357 million as of 30 June 2022.
Commercial customers are managed through an early warning categorisation where
there are early signs of financial difficulty, thereby allowing timely
engagement and appropriate corrective action to be taken. Early Warning
categories support our IFRS 9 stage classification. Total lending in Early
Warning categories has fallen since December 2021.
Table 10: Commercial term lending (exc. BBLS) by DTV banding
30 June 2022 (unaudited) 31 December 2021 (audited)
Professional Other term loans Total commercial term loans Professional Other term loans Total commercial term loans
buy-to-let £'million £'million buy-to-let £'million £'million
£'million £'million
Less than 50% 295 836 1,131 306 770 1,076
51-60% 209 377 586 232 483 715
61-70% 242 193 435 282 158 440
71-80% 86 51 137 112 63 175
81-90% 9 37 46 8 30 38
91-100% 6 29 35 6 27 33
More than 100% 6 617 623 4 582 586
Total commercial term lending 853 2,140 2,993 950 2,113 3,063
As of June 2022, 76% of property secured lending had a DTV of 80% or less,
reflecting the prudent risk appetite historically applied. Lending with DTV
>100% includes loans which benefit from additional forms of collateral,
such as debentures. The value of this additional collateral is not included in
the DTV or the estimation of expected credit losses but does provide an
additional level of credit risk mitigation. The guarantees supporting CBILS
and RLS lending is not included in the debt to value assessment, and DTV
>100% also includes government backed lending where the facility does not
also benefit from property collateral. The increase in DTV>100% in 2022
reflects the increase in lending under the government's recovery loan scheme.
Table 11: Commercial term lending (exc. BBLS) by industry exposure
30 June 2022 (unaudited) 31 December 2021 (audited)
Professional Other term loans Total commercial term loans Professional Other term loans Total commercial term loans
buy-to-let £'million £'million buy-to-let £'million £'million
£'million £'million
Real estate (rent, buy and sell) 853 807 1,660 950 837 1,787
Hospitality - 359 359 - 361 361
Health & Social Work - 243 243 - 225 225
Legal, Accountancy & Consultancy - 208 208 - 206 206
Retail - 139 139 - 136 136
Real estate (management of) - 8 8 - 46 46
Construction - 94 94 - 88 88
Recreation, cultural and sport - 87 87 - 85 85
Investment and unit trusts - 12 12 - 17 17
Education - 19 19 - 9 9
Real estate (development) - 8 8 - 6 6
Other - 156 156 - 97 97
Total commercial term lending 853 2,140 2,993 950 2,113 3,063
We manage credit risk concentration to individual borrowing entities and
sectors. Our credit risk appetite includes limits for individual sectors where
we have higher levels of exposure.
The sector profile for commercial term lending is broadly consistent with the
position as at 31 December 2021. There has been an overall reduction in
commercial real estate of approximately 7%.
Table 12: Commercial term lending (exc. BBLS) by repayment type
30 June 2022 (unaudited) 31 December 2021 (audited)
Professional Other term loans Total commercial term loans Professional Other term loans Total commercial term loans
buy-to-let £'million £'million buy-to-let £'million £'million
£'million £'million
Interest 809 259 1,068 897 230 1,127
Capital and interest 44 1,881 1,925 53 1,883 1,936
Total commercial term lending 853 2,140 2,993 950 2,113 3,063
Table 13: Commercial term lending (exc. BBLS) by geographic exposure
30 June 2022 (unaudited) 31 December 2021 (audited)
Professional Other term loans Total commercial term loans Professional Other term loans Total commercial term loans
buy-to-let £'million £'million buy-to-let £'million £'million
£'million £'million
Greater London 554 1,102 1,656 676 1,186 1,862
South East 169 365 534 160 390 550
South West 24 159 183 28 151 179
East of England 58 150 208 39 71 110
North West 18 168 186 18 150 168
West Midlands 9 96 105 9 84 93
Yorkshire and the Humber 3 23 26 3 17 20
East Midlands 11 34 45 9 27 36
Wales 3 12 15 4 12 16
North East 3 20 23 3 17 20
Northern Ireland 1 3 4 1 2 3
Scotland - 8 8 - 6 6
Total commercial term lending 853 2,140 2,993 950 2,113 3,063
Liquidity and funding risk
Our liquidity position continues to be strong, with our LCR standing at 257%
as at 30 June 2022 (31 December 2021: 281%). This reflects our capital
position and our conservative approach to lending.
We ended the period with a loan to deposit ratio of 75% (31 December 2021:
75%) and we continue to be deposit funded with no reliance on the wholesale
markets although we continue to have access to, and have made use of, the Bank
of England's TFSME both of which provide us with additional cost-efficient
liquidity without creating reliance as a primary source of funding. Although
the use of this funding is NIM dilutive, it is still overall income accretive
as it is deployed into high quality securities which have also seen an
increase in yield, in addition to the liquidity benefit it provides.
Capital risk
We manage capital in accordance with prudential rules issued by the Prudential
Regulation Authority (PRA) and Financial Conduct Authority (FCA) and we are
committed to maintaining a strong capital base, under both existing and future
regulatory requirements.
Our CET1 capital ratio decreased to 10.6% at 30 June 2021 from 12.6% as at 31
December 2021. This was primarily due to the losses incurred during the period
as well as the changes in relation to the capital treatment of software
assets. On 1 January 2022 the capital treatment of software assets reverted to
the previous treatment of being deducted from capital, following changes
implemented by the PRA.
Capital remains the largest constraint on the business and we continue to
operate within our publicly disclosed MREL buffers and will continue to do so
for a period of time. The continued delivery of our strategic priorities and a
return to profitability will allow us to return above these requirements in
the medium term.
In June 2022 the PRA reduced our Pillar 2A requirements from 1.11% to 0.50%
and the Resolution Directorate of the Bank of England agreed for our binding
MREL requirement to be set as the lower of 18% and two times the sum of Pillar
1 and Pillar 2A. These changes had the effect of reducing our minimal MREL
requirements (excluding buffers) to 17.0%, and reflect the credit quality of
our lending portfolio as well as the strength of our balance sheet.
We are currently working on the implementation of a holding company which we
are required to have in place by 26 June 2023, which is in line with the call
date of our Tier 2 bond. Under the terms of the Bank of England's December
2021 MREL Policy Statement, the operating company issued Tier 2 bond will lose
MREL eligibility upon the holding company implementation. Management will work
with regulators, debt holders and advisers with a view to addressing this MREL
eligibility aspect before the implementation of the holding company. Our
Senior Non-Preferred bond includes an option for the issuer to be substituted
to the holding company once it is established and so will remain fully MREL
eligible.
Risk weighted assets ended the period at £7,702 million (31 December 2021:
£7,454 million) reflecting the continued change in asset mix. We continue to
optimise our risk weighted assets to ensure we are maximising our return on
regulatory capital and remain committed to achieving AIRB accreditation which
would free up risk-weighted assets and allow us to grow lending further.
Table 14: Capital resources
30 June 2022 31 December 2021
(unaudited) (audited)
£'million £'million
Ordinary share capital - -
Share premium 1,964 1,964
Retained earnings (1,004) (942)
Other reserves 9 13
Intangible assets (227) (243)
Other regulatory adjustments 74 144
Total Tier 1 capital (CET1) 816 936
Debt securities (Tier 2) 249 249
Total Tier 2 capital 249 249
Total regulatory capital 1,065 1,184
Operational risk
Fraud risk
We continue to work hard in a constantly evolving environment to minimise the
impact of fraud. Across the industry there has been a notable increase in
Authorised Push Payment fraud which has driven a significant rise in fraud
losses. The overall level of fraud-related losses has increased but this is in
proportion to the increase seen across the industry. Across the entire fraud
landscape, we have taken significant steps to mitigate the risk to both the
Bank and our customers, including but not limited to; enhanced fraud screening
capability, implementation of Secure Customer Authentication and changes to
core fraud detection tools to help better identify scams. We are also
providing support to vulnerable customers who have been victims of fraud and
are seeking to raise customer awareness of evolving fraud tactics via a range
of initiatives as well as training our front-line colleagues.
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. We have refined our objectives and principles and
realigned our work plan to the global standard NIST Cyber Security Framework
(CSF), allowing us to measure our maturity and benchmark more easily against
peer organisations. The outcomes observed from simulated cyber-attacks
undertaken by our cybersecurity teams provided further indication of
improvements.
Operational resilience
We have identified and mapped our Important Business Services, set impact
tolerances for the disruption of each service, carried out preliminary
scenario testing to identify vulnerabilities and prepared a self-assessment of
our resilience. Work to address our vulnerabilities and show that we can meet
impact tolerances for each Important Business Service is well underway.
Additionally, we have identified and assessed the materiality of our third
party relationships and continue to apply this increased emphasis on
operational resilience when assessing these relationships. All material
supplier contracts since 1st April 2021 are compliant with the PRA
requirements. This will enhance our capability to proactively prevent, respond
to, recover and learn from operational resilience events and to minimise the
impact to customers where these do occur.
Conduct risk
We continue to focus on the steps being taken to consistently demonstrate and
evidence the consideration of customer outcomes as a key part of
decision-making processes. We have taken significant steps to begin to address
areas of conduct risk (particularly where there is elevated risk of customer
detriment) and continue to invest funding and resource into these areas,
including the identification and ongoing management of vulnerable customers,
complaints management and retail arrears management.
Emerging risks
We consider emerging risks to be evolving threats which cannot yet be
quantified, with the potential to significantly impact our strategy, financial
performance, operational resilience and/or reputation. The emerging risks are
continually assessed and reviewed through a horizon scanning process, with
escalation and reporting to the Risk Oversight Committee and Board as
necessary. The horizon scanning process fully considers all relevant internal
and external factors and is designed to capture those risks which are present
but have not yet fully crystallised, as well as those which are expected to
crystallise in the future.
The emerging risk classifications reported in our 2021 Annual Report and
Accounts have been retained. Talent has been added as an emerging risk,
reflecting the importance of training and retaining a resilient talent pool.
Additionally, the emerging risks relating digitalisation and climate change
have already been shaping the future regulatory environment prior to the
pandemic, but the pandemic has accelerated them - the former by increasing
regulators' expectations around the need for resilient systems and controls in
the face of a faster adoption of digitised solutions. And the latter around
new obligations concerning reporting, disclosures and governance on all
aspects of sustainability, where the pandemic has been a catalyst for the
awareness of the importance of sustainable - or resilient - operations.
Emerging risks trend description mitigating actions
ExternaL
MACROECONOMIC ENVIRONMENT ì Along with COVID-19's long-term effects and scope, the recent geopolitical We continue to monitor economic and political developments in light of the
tensions in Europe due to the Russia-Ukraine conflict has had a substantial ongoing uncertainty, considering potential consequences for our customers,
impact on both domestic and international markets. There is also the spectre products and operating model. We actively monitor our credit portfolios and
of rising ransomware attacks emanating from Russian State-sponsored undertake robust internal stress testing to identify sectors that may come
cyber-criminals targeting UK infrastructure. under stress as a result of an economic slowdown in the UK.
Inflation and the gradually rising interest rates have also had a significant
impact on the cost of living in the UK.
Furthermore, there is lingering uncertainty over the ability of economies and
society to adapt to future variants of existing viruses or new strains. An
increase in restrictions could, therefore, pose a range of social, economic,
and technological risks.
Regulatory change è The regulatory landscape continues to evolve, with the requirement to respond We continue to monitor emerging regulatory initiatives to identify potential
to ongoing prudential and conduct driven initiatives. impacts on our business model and ensure we are well placed to respond with
effective regulatory change management. We continue to work with regulators to
ensure we meet all regulatory obligations, with identified implications of
upcoming regulatory activity incorporated into the strategic planning cycle.
Digitalisation ì COVID-19 has accelerated the digitalisation of the banking industry and will Our strategy is now predicated on new and exciting digital propositions, with
continue to lead to rapid change over the coming years as the industry rapidly the implications of the pandemic both supporting that ambition, but also
adapts to customers' evolving behaviours. This is spurring an acceleration of accelerating the timeframe for delivery. Our rapid response to the pandemic
investment and delivery by both incumbent banks and neo-banks to provide has demonstrated our ability to implement change and digital solutions
enhanced digital propositions to customers in both the consumer and business swiftly. We are continuing with our investment and digital development in the
markets. near term to position us for the future.
CLIMATE CHANGE & ESG ì Unlike in the past where this risk revolved mainly around climate risk, the Work continues to build our capability and enhance our policies and processes
current, broader definition of ESG risk acknowledges the uncertainty around to ensure these risks are identified, measured, monitored and managed. We are
the exact nature and impact of climate change on our strategy, performance, committed to working together with customers, colleagues and communities to
and operating model, as well as capturing the increased focus on how we report support the transition to a Net Zero economy by 2050, in line with the UK
the impact of its activities on the environment and on social challenges as government's ambitions and actions. We have also set a target to make our own
well as the broader governance surrounding such risks. operations Net Zero by 2030 and to build our own resilience by embedding
climate-related impacts in lending and investment decisions.
INTERNAL
Technology & CYBER Resilience è COVID-19 has highlighted the extent to which technology underpins our ability Our IT resilience programme has continued to deliver strategic enhancements
to serve its customers, as well as promoting a hybrid approach to work for our throughout 2022. We are investing in flexible, resilient cloud-based solutions
employees. and working with our strategic technology partners to simplify and streamline.
Where technology disruption does arise, we continue to undertake detailed
Progressive deployment of new technologies will change our risk profile, analysis of the underlying causes and rapidly take action to prevent
including increased supplier risks, evolved data risks, and enhanced cost recurrence. We continue to invest in our cyber security and resilience
risks where new technologies are running in parallel with existing capabilities in response to these rapidly evolving threats. Key areas of focus
architecture. Due to digital asset and transaction innovation, future digital relate to access controls, network security, disruptive technology and the
customer proposition and market landscape will become more competitive and denial of service capability. Progress has continued in patching and
uncertain. upgrading our IT platforms and we operate advanced technology solutions to
detect and prevent criminal attacks. We actively participate in the sharing of
threat information with other organisations, helping to ensure the continued
availability of our exceptional service offering whilst also making banking
safer for all.
TALENT ì Technological change, coupled with fast-changing customer requirements, places We are investing sensibly in talent acquisition and retention, together with
inordinate pressure on the resilience of our personnel as well as its system, more learning and development programmes to keep colleagues' skills in line
further exacerbated by the transition to digitalisation. with the demands of the marketplace and give them the time to take advantage
of those opportunities.
We are also looking at new, flexible work arrangements, location strategies,
and different ways of measuring colleague contributions to the success of the
Bank.
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' giving a
true and fair view of the assets, liabilities, financial position and profit
or loss as and as required by DTR 4.2.7R and DTR 4.2.8R, namely:
• An indication of important events that have occurred during the first six
months ended 30 June 2022 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 2022
and any material changes in the related-party transactions described in the
last annual report.
Signed on its behalf by:
Robert Sharpe Daniel Frumkin
Chairman Chief Executive Officer
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 2022 (the "period").
Based on our review, nothing has come to our attention that causes us to
believe that the interim financial statements are not prepared, in all
material respects, in accordance with UK adopted International Accounting
Standard 34, 'Interim Financial Reporting' and the Disclosure Guidance and
Transparency Rules sourcebook of the United Kingdom's Financial Conduct
Authority.
The interim financial statements comprise:
· the Condensed consolidated balance sheet as at 30 June 2022;
· the Condensed consolidated statement of comprehensive income for the
period then ended;
· the Condensed consolidated cash flow statement for the period then
ended;
· the Condensed 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.
Basis for conclusion
We conducted our review in accordance with International Standard on Review
Engagements (UK) 2410, 'Review of Interim Financial Information Performed by
the Independent Auditor of the Entity' issued by the Financial Reporting
Council for use in the United Kingdom. A review of interim financial
information consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other review
procedures.
A review is substantially less in scope than an audit conducted in accordance
with International Standards on Auditing (UK) and, consequently, does not
enable us to obtain assurance that we would become aware of all significant
matters that might be identified in an audit. Accordingly, we do not express
an audit opinion.
We have read the other information contained in the interim report and
considered whether it contains any apparent misstatements or material
inconsistencies with the information in the interim financial statements.
Conclusions relating to going concern
Based on our review procedures, which are less extensive than those performed
in an audit as described in the Basis for conclusion section of this report,
nothing has come to our attention to suggest that the directors have
inappropriately adopted the going concern basis of accounting or that the
directors have identified material uncertainties relating to going concern
that are not appropriately disclosed. This conclusion is based on the review
procedures performed in accordance with this ISRE. However, future events or
conditions may cause the group to cease to continue as a going concern.
Responsibilities for the interim financial statements and the review
Our responsibilities and those of the directors
The interim report, including the interim financial statements, is the
responsibility of, and has been approved by the directors. The directors are
responsible for preparing the interim report in accordance with the Disclosure
Guidance and Transparency Rules sourcebook of the United Kingdom's Financial
Conduct Authority. In preparing the interim report, including the interim
financial statements, the directors are responsible for assessing the group's
ability to continue as a going concern, disclosing, as applicable, matters
related to going concern and using the going concern basis of accounting
unless the directors either intend to liquidate the group or to cease
operations, or have no realistic alternative but to do so.
Our responsibility is to express a conclusion on the interim financial
statements in the interim report based on our review. Our conclusion,
including our Conclusions relating to going concern, is based on procedures
that are less extensive than audit procedures, as described in the Basis for
conclusion paragraph of this report. This report, including the conclusion,
has been prepared for and only for the company for the purpose of complying
with the Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority and for no other purpose. We do not, in
giving this conclusion, accept or assume responsibility for any other purpose
or to any other person to whom this report is shown or into whose hands it may
come save where expressly agreed by our prior consent in writing.
PricewaterhouseCoopers LLP
Chartered Accountants
London
27 July 2022
CONDENSED Consolidated statement of comprehensive income (unaudited)
For the half year to 30 June 2022
Note Half year to Half year to Half year to
30 June 31 December 2021 30 June
2022 £'million 2021
£'million £'million
Interest income 2 239.7 211.5 194.2
Interest expense 2 (58.9) (49.5) (60.9)
Net interest income 180.8 162.0 133.3
Net fee and commission income 39.5 36.9 32.7
Net gains on sale of assets - 1.2 8.2
Other income 16.2 22.1 22.1
Total income 236.5 222.2 196.3
General operating expenses 3 (233.2) (263.3) (272.8)
Depreciation and amortisation 7,8 (37.4) (39.9) (40.3)
Impairment and write offs of PPE and intangible assets 7,8 (8.2) (17.4) (7.5)
Total operating expenses (278.8) (320.6) (320.6)
Expected credit loss expense (17.9) (7.8) (14.6)
Loss before tax (60.2) (106.2) (138.9)
Tax expense 5 (1.5) (0.9) (2.2)
Loss for the period (61.7) (107.1) (141.1)
Other comprehensive expense for the period
Items which will be reclassified subsequently to profit or loss where specific
conditions are met:
Movements in respect of investment securities held at fair value through other
comprehensive income (net of tax):
- changes in fair value (6.7) (6.9) (1.2)
- changes in fair value transferred to the income statement on disposal - 0.1 (0.4)
Total other comprehensive expense (6.7) (6.8) (1.6)
Total comprehensive loss for the period (68.4) (113.9) (142.7)
Earnings per share
Basic earnings per share (pence) 12 (35.8) (62.1) (81.8)
Diluted earnings per share (pence) 12 (35.8) (62.1) (81.8)
CONDENSED Consolidated balance sheet (unaudited)
Note 30 June 31 December 30 June
2022 2021 2021
£'million £'million £'million
Assets
Cash and balances with the Bank of England 2,862 3,568 5,111
Loans and advances to customers 6 12,364 12,290 12,325
Investment securities held at FVOCI 781 798 1,198
Investment securities held at amortised cost 5,393 4,776 3,165
Financial assets held at fair value through profit and loss 2 3 5
Property, plant and equipment 7 749 765 786
Intangible assets 8 227 243 253
Prepayments and accrued income 80 68 75
Other assets 97 76 95
Total assets 22,555 22,587 23,013
Liabilities
Deposits from customers 16,514 16,448 16,620
Deposits from central banks 3,800 3,800 3,800
Debt securities 577 588 596
Repurchase agreements 166 169 212
Derivative financial liabilities 8 10 8
Lease liabilities 9 264 269 310
Deferred grants 10 19 19 22
Provisions 14 15 5
Deferred tax liabilities 5 12 12 13
Other liabilities 212 222 280
Total liabilities 21,586 21,552 21,866
Equity
Called up share capital 11 - - -
Share premium account 11 1,964 1,964 1,964
Retained earnings (1,004) (942) (835)
Other reserves 9 13 18
Total equity 969 1,035 1,147
Total equity and liabilities 22,555 22,587 23,013
As at 30 June 2022
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 2022 and were signed
on its behalf by:
Robert Sharpe Daniel Frumkin
Chairman Chief Executive Officer
CONDENSED Consolidated cash flow STATEMENT (unaudited)
For the half year to 30 June 2022
Note Half year to Half year to Half year to
30 June 31 December 2021 30 June
2022 £'million 2021
£'million £'million
Reconciliation of loss before tax to net cash flows from operating activities:
Loss before tax (60) (106) (139)
Adjustments for:
Impairment and write offs of property, plant and equipment and intangible 7,8 8 17 8
assets
Interest on lease liabilities 9 8 8 9
Depreciation and amortisation 7,8 37 40 40
Share option award charges 4 2 1 1
Grant income recognised in the income statement - (4) (7)
Amounts provided for - 5 -
Gain on sale of assets - (1) (8)
Accrued interest on and amortisation of investment securities 3 4 1
Changes in operating assets and liabilities
Changes in loans and advances to customers (74) 35 (235)
Changes in deposits from customers 66 (172) 548
Changes in operating assets (35) 30 2,817
Changes in operating liabilities (28) (115) 77
Net cash (outflows)/inflows from operating activities (73) (258) 3,112
Cash flows from investing activities
Net purchase of investment securities (607) (1,216) (953)
Purchase of property, plant and equipment (1) (42) -
Purchase and development of intangible assets 8 (12) (13) (26)
Net cash outflows from investing activities (620) (1,271) (979)
Cash flows from financing activities
Repayment of capital element of leases 9 (13) (14) (15)
Net cash outflows from financing activities (13) (14) (15)
Net (decrease)/increase in cash and cash equivalents (706) (1,543) 2,118
Cash and cash equivalents at start of period 3,568 5,111 2,993
Cash and cash equivalents at end of period 2,862 3,568 5,111
Loss before tax includes:
Interest received 235 206 203
Interest paid 65 52 74
CONDENSED Consolidated statement of changes in EQUITY (unaudited)
For the half year to 30 June 2022
Called-up Share Retained FVOCI Share Total
Share capital premium £'million earnings reserve option reserve equity
£'million £'million £'million £'million £'million
Balance at 1 January 2022 - 1,964 (942) (5) 18 1,035
Loss for the period - - (62) - - (62)
Other comprehensive expense (net of tax) relating to investment securities - - - (6) - (6)
designated at fair value through other comprehensive income
Total comprehensive expense - - (62) (6) - (68)
Net share option movements - - - - 2 2
Balance at 30 June 2022 - 1,964 (1,004) (11) 20 969
Balance at 1 July 2021 - 1,964 (835) 1 17 1,147
Loss for the period - - (107) - - (107)
Other comprehensive expense (net of tax) relating to investment securities - - - (6) (1) (7)
designated at fair value through other comprehensive income
Total comprehensive expense - - (107) (6) (1) (114)
Net share option movements - - 2 2
Balance at 31 December 2021 - 1,964 (942) (5) 18 1,035
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 - - - (2) - (2)
designated at fair value through other comprehensive income
Total comprehensive expense - - (141) (2) - (143)
Net share option movements - - - - 1 1
Balance at 30 June 2021 - 1,964 (835) 1 17 1,147
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of preparation and accounting policies
1 General information
Metro Bank PLC ("our" or "we") provides retail and commercial banking services
in the UK, is a public limited liability company incorporated and domiciled in
England and Wales and is listed on the London Stock Exchange (LON:MTRO). The
address of its registered office is: One Southampton Row London WC1B 5HA.
2 Basis of preparation
The condensed consolidated interim financial statements of Metro Bank and its
subsidiaries for the six months ended 30 June 2022 were authorised for issue
in accordance with a resolution of the Directors on 27 July 2022.
These condensed consolidated interim financial statements for the six months
ended 30 June 2022 have been prepared in accordance with UK adopted
International Accounting Standards (IAS 34 Interim Financial Reporting) and
the Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority. Whilst the change from IFRS as adopted
by EU to UK-adopted IAS constitutes a change in accounting framework, there is
no impact on recognition, measurement or disclosure from this transition.
In the year to 31 December 2022 our annual financial statements will be
prepared in accordance with IFRS as adopted by the UK Endorsement Board.
The comparative financial information as at and for the periods ending 31
December 2021 and 30 June 2021 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 2021 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 have adopted the going concern basis in preparing these
condensed consolidated interim financial statements. This assessment has been
reached after assessing the Group's principal risks, which remain unchanged
from those disclosed in the risk report of the 2021 Annual Report and
Accounts. As with the assessment undertaken at the year end the Directors
placed additional consideration on capital risk given that the Group continues
to utilise its regulatory buffers. Further details on the Group's capital risk
can be found in the risk report.
In reaching their conclusion the Directors reviewed an updated central
projection to reflect the changes in outlook since the full year. The
projection remains in line with the delivery of the Group's strategic
priorities as outlined within the 2021 Annual Report and Accounts and on which
an update is provided within the Business Review section of this report. As
well as considering the Group's central forecast the Directors considered
associate scenarios and sensitivities which included severe but plausible
downside risks. These scenarios and sensitivities focused on areas where the
greatest level of judgement had been applied in the forecast assumptions. On
top of this consideration was given to the possibility of a worsened economic
environment over the forecast period leading to an increase in expected credit
losses, costs as well as a reduction in income.
Under all scenarios considered, the Directors believe the Group to remain a
going concern on the basis that it maintains sufficient resources 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. In the most severe
scenarios this would require making reasonable adjustments to the Group's
operating plans, including slowing down the pace of future originations to
limit risk weighted asset growth.
The Directors did not deem there to be any material uncertainties with regards
to the assessment on going concern.
Accounting policies
The accounting policies applied in these condensed consolidated interim
financial statements are the same as those applied in the Group's consolidated
financial statements as at and for the year ended 31 December 2021.
Future accounting developments
There are no known future accounting developments that are likely to have a
material impact on the Group.
3 Critical accounting judgements
In our 2021 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
Following the conclusion of matters with the US Office of Foreign Assets
Control (OFAC) in relation to Cuba and Iran without fine or penalty, the
recognition of provisions is no longer considered a critical accounting
judgement.
Further details on the remaining critical accounting judgements are set out
below. No new critical accounting judgements have been identified during the
period.
Measurement of the expected credit loss allowance -significant increase in
credit risk
IFRS 9 requires accounts to be allocated into one of three stages. Stage 3
reflects accounts in default. Stage 2 are the accounts which have shown a
significant increase in credit risk since origination (SICR), and Stage 1 is
everything else. IFRS 9 requires a higher level of expected credit loss to be
recognised for underperforming loans. For loans in Stage 2 and Stage 3 a
lifetime ECL is recognised compared to a 12-month ECL for performing loans
(Stage 1).
Judgement is required to determine when a significant increase in credit risk
has occurred. An assessment of whether credit risk has increased significantly
since initial recognition is performed at each reporting period by considering
the change in the Probability of Default (PD) over the remaining life of the
financial instrument. The assessment explicitly or implicitly compares the PD
occurring at the reporting date to that at initial recognition, considering
reasonable and supportable information, including information about past
events, current conditions, and future economic conditions.
IFRS 9 requires a higher level of expected credit loss to be recognised for
underperforming loans. This is considered based on a staging approach:
Stage Description ECL recognised
Stage 1 Financial assets that have had no significant increase in credit risk since 12-month expected credit losses
initial recognition or that have low credit risk (high quality investment
securities only) at the reporting date. Total losses expected on defaults which may occur within the next 12 months.
Losses are adjusted for probability-weighted macroeconomic scenarios.
Stage 2 Financial assets that have had a significant increase in credit risk since Lifetime expected credit losses
initial recognition but that do not have objective evidence of impairment.
Losses expected on defaults which may occur at any point in a loan's lifetime.
Financial instruments that are classified in Early Warning List 1 and 2 will Losses are adjusted for probability-weighted macroeconomic scenarios.
be reported in Stage 2.
The IFRS 9 standard also provides a rebuttable presumption which states that
financial instruments falling 30 DPD due on contractually defined payments are
to be considered as having deteriorated significantly since origination.
Stage 3 Financial assets that are credit impaired at the reporting date. A financial Lifetime expected credit losses
asset is credit impaired when it has met the definition of default. We define
default to have occurred when a loan is greater than 90 days past due Losses expected on defaults which may occur at any point in a loan's lifetime.
(non-performing loan) or where the borrower is considered unlikely to pay, Losses are adjusted for probability-weighted macroeconomic scenarios.
this includes customers who are categorised as Early Warning List 3.
Interest income is calculated on the carrying amount of the loan net of credit
allowance.
Purchased or originated credit impaired (POCI) assets Financial assets that have been purchased and had objective evidence of being Lifetime expected credit losses
'non-performing' or 'credit impaired' at the point of purchase.
At initial recognition, POCI assets do not carry an impairment allowance.
Lifetime expected credit losses are incorporated into the calculation of the
asset's effective interest rate. Subsequent changes to the estimate of
lifetime expected credit losses are recognised as a loss allowance.
In light of the classification outlined above, our stage allocation criteria
must include:
· A relative measure of creditworthiness deterioration since
origination.
· An absolute measure of creditworthiness deterioration since
origination.
There are two main criteria driving the SICR assessment identified as follows:
· Quantitative criteria - where the numerically calculated
probability of default on a loan has increased significantly since initial
recognition. This is determined when the lifetime PD at observation is greater
than the lifetime PD at origination by a portfolio specific threshold. Given
the different nature of the products and the dissimilar level of lifetime PDs
at origination, different thresholds are used by sub-products within each
portfolio (term loans, revolving loan facilities and mortgages). The threshold
is set at three times the median PD of the portfolio at origination.
· Qualitative criteria - instruments that are 30 days past due or
more are allocated to Stage 2, regardless of the results of the quantitative
analysis. In addition, instruments classified on the Early Warning List as
higher risk, are allocated to Stage 2, regardless of the results of the
quantitative analysis.
There are additional SICR rules utilised across portfolios. These rules, as
well as more granular detail of both quantitative and qualitative criteria,
are captured within the IFRS 9 model methodology and are approved as part of
the annual model review process at Model Governance and Model Oversight
Committees. The low credit risk exemption allowed under IFRS 9 has not been
applied across the retail mortgage or consumer portfolios to identify SICR.
Measurement of the expected credit loss allowance -use of post model overlays
and adjustments
We have applied Post Model Adjustments (PMAs) and Post Model Overlays (PMOs)
in the assessment of ECL. PMAs supplement the models to account for where
there are limitations in model methodology or data inputs and PMOs accounts
for downsides risks which are not fully captured through the economic
scenarios. The appropriateness of PMAs and PMOs is subject to rigorous review
and challenge, including review by our Model Governance, Impairment Committee
and Audit Committee.
PMAs and PMOs are defined as follows:
· Post model adjustments (PMAs): 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.
· Post model overlays (PMOs): 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.
Given the ongoing economic uncertainty, we continue to maintain prudent levels
of PMOs. The level of PMAs/PMOs has remained stable during 2022 with the total
percentage of ECL stock comprised of PMAs/PMOs remaining at 26.4% (2021:
26.3%).
PMAs contribute £7.9 million of ECL stock as at 30 June 2022 (31 December
2021: £9.1 million) and are held in anticipation of IFRS 9 commercial models
planned for implementation in the second half of 2022.
· IFRS 9 commercial secured LGD model (30 June 2022: £7.6 million;
31 December 2021: £9.8 million).
· IFRS 9 commercial business loans lifetime PD model scope extended
to commercial revolving facilities (30 June 2022: (£0.5) million; 31 December
2021: (£0.7) million).
· IFRS 9 commercial fixed term EAD model (30 June 2022: £0.8
million; 31 December 2021: £nil).
PMOs have been reassessed during the period to ensure an appropriate level of
ECL to account for the high level of macroeconomic uncertainty, following the
Russian invasion of Ukraine, high inflation environment and cost of living
pressures.
PMOs make up £37.1 million of the ECL stock for the half year ending 30 June
2022 (31 December 2021: £35.0 million) and comprise of:
· High inflation environment and cost-of-living risks - Management
overlay has been introduced in the period to reflect high inflation and cost
of living pressures, which are not fully captured through the economic
scenarios and IFRS 9 models (30 June 2022: £29.6 million; prior period
COVID-19 overlays of £28.7 million have been released). This reflects the
associated risks across retail mortgage, consumer, and commercial portfolios.
· Climate change impact - An expert judgement overlay raised in
2021 has been maintained for 30 June 2022 and reflects the impact of climate
change on property values for the mortgage and commercial portfolios (30 June
2022: £5.1 million; 31 December 2021: £5.1 million).
· Concentration risk adjustment - An overlay raised in 2021 has
been maintained for the first half of 2022 to reflect Metro Bank's
geographical concentration risk on the retail mortgage and commercial property
portfolios (30 June 2022: £1.2 million; 31 December 2021: £1.2 million).
· Commercial impairment calculation enhancements - An overlay of
£1.2 million raised in anticipation of refinements to the impairment
calculation for the commercial portfolio in the second half of 2022 (30 June
2022: £1.2 million; 31 December 2021: £nil).
4 Critical accounting estimates
The ECL recognised in the financial statements reflects the effect on expected
credit losses of a range of possible outcomes, calculated on a
probability-weighted basis, based on a number of economic scenarios, and
including management overlays where required. These scenarios are
representative of our view of forecasted economic conditions, sufficient to
calculate unbiased ECL, and are designed to capture material 'non-linearities'
(i.e., where the increase in credit losses if conditions deteriorate, exceeds
the decrease in credit losses if conditions improve).
In line with our approved IFRS 9 models, macroeconomic scenarios provided by
Moody's Analytics are used in the assessment of provisions. The use of an
independent supplier for the provision of scenarios helps to ensure that the
estimates are unbiased. Since the inception of COVID-19, the macroeconomic
scenarios are assessed and reviewed monthly to ensure appropriateness and
relevance to the ECL calculation. The weightings of these scenarios reflect
the latest UK economic outlook. The selection of scenarios and the appropriate
weighting to apply are considered and discussed internally and proposed
recommendations for use in the IFRS 9 models are made to the monthly
Impairment Committee (designated Executive Risk Committee for impairments) for
formal approval.
Our credit risk models are subject to internal model governance including
independent validation. We undertake annual model reviews and have regular
model performance monitoring in place. The impairment provisions recognised
during the year reflect our best estimate of the level of provisions required
for future credit losses as calibrated under our conservative weighted
economic assumptions and following the application of expert credit risk
judgement overlays.
Scenarios and probability weights used as at 30 June 2022 are as follows are
as follows:
Scenario weighting Half year to Half year to Half year to
30 June 31 December 2021 30 June
2022 2021
Baseline 40% 40% 40%
Upside 20% 20% 20%
Downside 30% 30% 30%
Severe Downside 10% 10% 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 10% probability the economy will perform better than in
this scenario, broadly speaking, and a 90% probability it will perform worse.
· Downside scenario (30% weight): In this recession scenario, in
which a deep downturn develops, there is a 90% probability the economy will
perform better, broadly speaking, and a 10% probability it will perform worse.
· Severe Downside scenario (10% weight): In this recession
scenario, in which a deep downturn develops, there is a 96% probability the
economy will perform better, broadly speaking, and a 4% probability it will
perform worse.
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 2023 2024 2025 2026
UK five year mortgage interest rates (%) Baseline 3.6% 4.0% 4.1% 4.2%
Upside 3.9% 4.2% 4.3% 4.3%
Downside 2.3% 2.8% 3.0% 3.1%
Severe Downside 2.2% 2.8% 2.9% 3.0%
Unemployment (%) Baseline 4.4% 4.6% 4.7% 4.8%
Upside 3.7% 3.8% 4.0% 4.2%
Downside 7.1% 7.4% 7.2% 6.6%
Severe Downside 8.4% 8.1% 8.2% 7.7%
House price index (YoY%)(1) Baseline 2.9% 4.8% 2.2% 0.9%
Upside 13.1% 4.6% (1.8%) (2.5%)
Downside (8.8%) 0.3% 3.7% 4.4%
Severe Downside (15.7%) (0.5%) 3.3% 3.0%
UK GDP (YoY%) Baseline 1.6% 1.4% 1.2% 1.0%
Upside 2.7% 1.2% 1.0% 1.2%
Downside (2.2%) 2.9% 1.7% 0.9%
Severe Downside (4.0%) 2.6% 2.9% 1.3%
The period-end assumptions used for the ECL estimate as at 31 December 2021
are as follows:
Macroeconomic variable Scenario 2022 2023 2024 2025
UK five year mortgage interest rates (%) Baseline 2.7% 3.3% 3.7% 4.1%
Upside 3.0% 3.6% 4.2% 4.6%
Downside 2.3% 2.8% 3.1% 3.1%
Severe Downside 2.1% 2.6% 2.9% 3.1%
Unemployment (%) Baseline 4.7% 4.4% 4.4% 4.5%
Upside 3.9% 3.3% 3.5% 3.8%
Downside 6.2% 6.6% 6.5% 6.3%
Severe Downside 7.2% 7.5% 7.2% 7.1%
House price index (YoY%)(1) Baseline 3.4% 6.0% 5.2% 3.7%
Upside 14.2% 8.5% 4.8% 2.1%
Downside (12.8%) (8.1%) (1.9%) 4.4%
Severe Downside (16.3%) (10.3%) (2.5%) 4.3%
UK GDP (YoY%) Baseline 3.9% 3.1% 1.4% 1.0%
Upside 7.7% 1.7% 1.2% 1.1%
Downside (2.3%) 5.7% 2.4% 1.7%
Severe Downside (3.9%) 5.4% 2.2% 1.8%
1. The HPI economic forecast has been stressed on the downside and
more severe downside scenarios to reflect Metro Bank's geographical
concentration risk.
Key assumptions underpinning the baseline June 2022 scenarios:
· The U.K. economic outlook has darkened following Russia's
invasion of Ukraine and the resulting increase in energy and food commodity
prices, as well as the exacerbation of global supply-chain disruptions. The
pace of growth remains subdued for the remainder of the year.
· Global oil prices remain elevated for several months before they
start reducing to prior levels. European natural gas and electricity prices
remain high for the next 12 months.
· Global supply-chain bottlenecks ease but fail to abate by the end
of the year.
· U.K. headline CPI inflation continues to increase in the coming
months owing to higher energy, food, and manufactured goods prices. Higher
wages and strong services demand add to the price pressures, ensuring
inflation remains far above target throughout 2022.
· Volatility in financial markets remains contained despite the
tightening financial conditions, and the U.K. government bonds do not lose
their risk-free status.
The June 2022 base case macroeconomic estimates and assumptions reflect a more
negative economic outlook compared to December 2021, with the exception of
HPI. Deterioration has been observed in the majority of the macroeconomic
factors in the course of 2022, such as Unemployment rate, GDP, CPI and Wage
Growth, and reflect the rising inflation and cost of living pressures
exacerbated as a result of the war in Ukraine. The HPI forecast has improved
since the start of the year reflecting the continued increase in observed
house prices. A comparison of the base case macroeconomic estimates across the
forecast period between 31 December 2021 and 30 June 2022 is shown in the
tables above. 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. We note that the scenarios applied comprise our best estimate of
economic impacts on the ECL, and the actual outcome may be different.
We have also assessed the IFRS 9 ECL sensitivity impact at a total portfolio
level, by applying a 100% weighting to each of the four chosen scenarios.
Scenario ECL Variance to reported weighted ECL at 30 June 2022
£'million
Weighted 171 100%
Baseline 155 (9%)
Upside 144 (16%)
Downside 193 13%
Severe Downside 223 31%
We note that the sensitivities disclosed above represent example scenarios and
may not represent actual scenarios which occur in the future. If one of these
scenarios did arise then at that time the ECL would not equal the amount
disclosed above, as the amounts disclosed do not take account of the
alternative possible scenarios which would be considered at that time. We also
note that the sensitivities disclosed above do not consider movements in
impairment stage allocations that would result under the different scenarios.
5 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 Half year to Half year to
30 June 31 December 2021 30 June
2022 £'million 2021
£'million £'million
Cash and balances held with the Bank of England 9.5 2.1 2.3
Loans and advances to customers 208.0 195.9 182.2
Investment securities held at amortised cost 21.9 11.5 9.1
Investment securities held at FVOCI 0.3 2.0 0.6
Total interest income 239.7 211.5 194.2
Interest expense
Half year to Half year to Half year to
30 June 31 December 2021 30 June
2022 £'million 2021
£'million £'million
Deposits from customers 12.4 14.6 25.5
Deposits from central banks 13.1 2.1 1.9
Repurchase agreements 0.8 1.1 1.1
Debt securities 25.0 23.8 23.6
Lease liabilities 7.6 7.9 8.8
Total interest expense 58.9 49.5 60.9
3. General operating expenses
Half year to Half year to Half year to
30 June 31 December 2021 30 June
2022 £'million 2021
£'million £'million
People costs 119.9 117.5 121.5
Information technology costs 29.9 29.9 27.3
Occupancy expenses 15.0 16.7 16.2
Money transmission and other banking related costs(1) 24.5 24.2 26.4
Transformation costs 1.0 7.1 1.8
Remediation costs 3.0 20.5 25.4
Capability & Innovation fund (C&I) costs 0.3 2.3 5.8
Legal and Regulatory fees 3.3 3.2 3.4
Professional Fees 20.2 22.7 27.4
Contractor costs - - 2.1
Printing, postage and stationery costs 3.1 3.2 2.4
Travel costs 0.8 0.6 0.5
Marketing and advertising costs 3.5 3.2 1.5
Business acquisition and integration costs - 0.1 2.3
Other(1) 8.7 12.1 8.8
Total general operating expenses 233.2 263.3 272.8
1. During the second half of 2021 we reclassified certain costs from
money transmission and other banking related costs to other costs to better
reflect their nature. The half year to 30 June 2021 comparator figure has been
updated to reflect this changes.
4. People costs
Half year to Half year to Half year to
30 June 31 December 2021 30 June
2022 £'million 2021
£'million £'million
Wages and salaries 99.2 98.1 103.1
Social security costs 11.5 10.8 11.2
Pension costs 6.8 6.9 6.5
Equity-settled share based payments 2.4 1.7 0.7
Total people costs 119.9 117.5 121.5
5. Taxation
Tax expense for the period
The components of tax expense for the six months ended 30 June 2022, 31
December 2021 and 30 June 2021 are:
Half year to Half year to Half year to
30 June 31 December 2021 30 June
2022 £'million 2021
£'million £'million
Current tax
Current tax - (0.5) -
Adjustment in respect of prior years - 0.7 (0.1)
Total current tax credit/(expense) - 0.2 (0.1)
Deferred tax
Origination and reversal of temporary differences (0.9) 1.1 2.3
Effect of changes in tax rates (0.6) (1.0) (4.4)
Adjustment in respect of prior periods - (1.2) -
Total deferred tax expense (1.5) (1.1) (2.1)
Total tax expense (1.5) (0.9) (2.2)
Reconciliation of the total tax expense
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 2022, 31
December 2021 and 30 June 2021 are as follows:
Half Effective tax rate Half Effective tax rate Half Effective tax rate
year to % year to % year to %
30 June 31 December 2021 30 June
2022 £'million 2021
£'million £'million
Loss before tax (60.2) (106.2) (138.9)
Tax credit at statutory income tax rate of 19% 11.4 19.0% 20.2 19.0% 26.4 19.0%
Tax effects of:
Non-deductible expenses - depreciation on non-qualifying fixed assets (0.9) (1.5%) (1.9) 1.8% (0.8) (0.6%)
Non-deductible expenses - investment property impairment - - (1.8) 1.7% - -
Non-deductible expenses - remediation (0.5) (0.8%) (2.5) 2.4% (4.6) (3.3%)
Non-deductible expenses - other 0.5 0.8% - - (0.1) (0.1%)
Impact of intangible asset impairment on R&D deferred tax liability 0.2 0.3% 1.1 (1.0%) 1.9 1.4%
Share based payments (0.1) (0.2%) (0.1) 0.1% (0.2) (0.1%)
Adjustment in respect of prior years - - (0.5) 0.5% (0.1) -
Losses for the period for which no deferred tax asset has been recognised (11.5) (19.1%) (14.4) 13.6% (20.3) (14.6%)
Derecognition of tax losses arising in prior years - - - - - -
Effect of changes in tax rates (0.6) (0.9%) (1.0) 0.9% (4.4) (3.2%)
Tax expense reported in the consolidated income statement (1.5) (2.4%) (0.9) (0.8%) (2.2) (1.5%)
Effective tax rate
The effective tax rate for the period is (2.4%) (half year to 30 June 2021:
(1.5%); half year to 31 December: (0.8%)). This has been calculated by
applying the effective tax rate which is expected to apply to the Group for
the half year ended 30 June 2022 using rates substantively enacted by 30 June
2022 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.
An increase in the UK corporation rate from 19% to 25% for taxable profits
over £250,000 (effective 1 April 2023) was substantively enacted on 24 May
2021.
Losses for which no deferred tax asset has been recognised
The tax effected value of losses for which no deferred tax asset has been
recognised is £11.5 million (half year to 30 June 2021: £20.3 million). This
is due to our long term investment in cost, revenue and infrastructure
transformation impacting the Bank's profits in the short term.
Deferred tax
A deferred tax asset must be regarded as recoverable and therefore recognised
only when, on the basis of all available evidence, it can be regarded as more
likely than not there will be suitable tax profits from which the future of
the underlying timing differences can be deducted.
The following table shows deferred tax recorded in the statement of financial
position and changes recorded in the tax expense:
Unused tax losses Investment securities & impairments Property, plant & equipment Intangible assets Total
£'million £'million £'million £'million £'million
30 June 2022
Deferred tax assets 12 4 - - 16
Deferred tax liabilities - 3 (24) (7) (28)
Deferred tax liabilities (net) 12 7 (24) (7) (12)
At 1 January 2022 13 5 (23) (7) (12)
Income statement (1) - (1) - (2)
Other comprehensive income - 2 - - 2
At 30 June 2022 12 7 (24) (7) (12)
31 December 2021
Deferred tax assets 13 3 - - 16
Deferred tax liabilities - 2 (23) (7) (28)
Deferred tax liabilities (net) 13 5 (23) (7) (12)
At 1 July 2021 13 3 (21) (8) (13)
Income statement - - (2) 1 (1)
Other comprehensive income - 2 - - 2
At 31 December 2021 13 5 (23) (7) (12)
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)
Unrecognised deferred tax assets
The Group had total unused tax losses of £918.2 million for which a deferred
tax asset of £217.6 million has not been recognised as we continue to be loss
making in the short term. The impact of recognising the deferred tax asset in
the future would be material although tax benefits would be spread over a
number of years. In addition the 50% corporate loss restriction in place
extends the timeline over which the Bank can offset losses against future
profits. This will be reassessed for the year ending 31 December 2022 in light
of actual performance against management forecasts and prevailing market
conditions. There is no time limit beyond which these losses expire.
Due to an investment property impairment being unrealised there is an
unrecognised deferred tax asset of £2.6 million (30 June 2021: £3.1
million).
6. Loans and advances to customers
30 June 2022
Gross carrying amount ECL Net carrying amount
£'million allowance £'million £'million
Retail mortgages 6,785 (18) 6,767
Consumer lending 1,269 (56) 1,213
Commercial lending 4,481 (97) 4,384
Total loans and advances to customers 12,535 (171) 12,364
31 December 2021
Gross carrying amount ECL Net carrying amount
£'million allowance £'million £'million
Retail mortgages 6,723 (19) 6,704
Consumer lending 890 (42) 848
Commercial lending 4,846 (108) 4,738
Total loans and advances to customers 12,459 (169) 12,290
30 June 2021
Gross carrying amount ECL Net carrying amount
£'million allowance £'million £'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
Loans and advances to customers by category
30 June 31 December 30 June
2022 2021 2021
£'million £'million £'million
Residential owner occupied 4,977 5,022 5,028
Retail buy-to-let 1,808 1,701 1,787
Total retail mortgages 6,785 6,723 6,815
Overdrafts 70 66 71
Credit cards 16 13 11
Term loans 1,183 811 622
Total consumer lending 1,269 890 704
Total retail lending 8,054 7,613 7,519
Professional buy-to-let 853 950 1,037
Bounce back loans 984 1,304 1,394
Coronavirus business interruption loans 145 165 162
Recovery loan scheme 357 157 -
Other term loans 1,638 1,791 1,963
Commercial term loans 3,977 4,367 4,556
Overdrafts and revolving credit facilities 110 156 133
Credit cards 4 3 3
Asset and invoice finance 390 320 280
Total commercial lending 4,481 4,846 4,972
Total gross loans to customers 12,535 12,459 12,491
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 2022
Stage 1 Stage 2 Stage 3 POCI(1)
£'million £'million £'million £'million
Up to date 5,420 1,226 27 -
1 to 29 days past due 1 18 10 -
30 to 89 days past due - 19 14 -
90+ days past due - - 50 -
Gross carrying amount 5,421 1,263 101 -
1. Purchase or originated credit impaired
31 December 2021
Stage 1 Stage 2 Stage 3 POCI
£'million £'million £'million £'million
Up to date 5,544 1,010 38 -
1 to 29 days past due 2 27 9 -
30 to 89 days past due - 26 16 -
90+ days past due - - 51 -
Gross carrying amount 5,546 1,063 114 -
30 June 2021
Stage 1 Stage 2 Stage 3 POCI
£'million £'million £'million £'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 -
Consumer lending
30 June 2022
Stage 1 Stage 2 Stage 3 POCI
£'million £'million £'million £'million
Up to date 1,089 133 2 -
1 to 29 days past due 3 2 - -
30 to 89 days past due - 10 4 -
90+ days past due - - 26 -
Gross carrying amount 1,092 145 32 -
31 December 2021
Stage 1 Stage 2 Stage 3 POCI
£'million £'million £'million £'million
Up to date 786 71 2 -
1 to 29 days past due - 2 - -
30 to 89 days past due - 9 3 -
90+ days past due - - 16 1
Gross carrying amount 786 82 21 1
30 June 2021
Stage 1 Stage 2 Stage 3 POCI
£'million £'million £'million £'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
Commercial lending
30 June 2022
Stage 1 Stage 2 Stage 3 POCI
£'million £'million £'million £'million
Up to date 3,646 510 89 -
1 to 29 days past due 8 46 17 -
30 to 89 days past due - 56 14 -
90+ days past due - 3 92 -
Gross carrying amount 3,654 615 212 -
31 December 2021
Stage 1 Stage 2 Stage 3 POCI
£'million £'million £'million £'million
Up to date 3,727 656 118 -
1 to 29 days past due 12 46 2 -
30 to 89 days past due - 78 23 -
90+ days past due - - 184 -
Gross carrying amount 3,739 780 327 -
30 June 2021
Stage 1 Stage 2 Stage 3 POCI
£'million £'million £'million £'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 -
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 2022 5,546 1,063 114 - 6,723 (2) (12) (5) - (19) 5,544 1,051 109 - 6,704
Transfers to/from stage 1(1) 199 (189) (10) - - (3) 2 1 - - 196 (187) (9) - -
Transfers to/from stage 2(1) (343) 346 (3) - - - - - - - (343) 346 (3) - -
Transfers to/from stage 3(1) (3) (10) 13 - - - - - - - (3) (10) 13 - -
Net remeasurement due to transfers(2) - - - - - 2 (1) - - 1 2 (1) - - 1
New lending(3) 511 147 - - 658 (3) (2) - - (5) 508 145 - - 653
Repayments, additional drawdowns and interest accrued (57) (13) (1) - (71) - - - - - (57) (13) (1) - (71)
Derecognitions(4) (432) (81) (12) - (525) 1 - 1 - 2 (431) (81) (11) - (523)
Changes to assumptions(5) - - - - - - 3 - - 3 - 3 - - 3
Balance at 30 June 2022 5,421 1,263 101 - 6,785 (5) (10) (3) - (18) 5,416 1,253 98 - 6,767
1. Represents the stage transfers prior to any ECL remeasurement
2. Represents the remeasurement between the twelve month and lifetime
ECL due to stage transfer, including any changes to the model assumptions and
forward looking information
3. Represents the increase in balances resulting from loans and
advances that have been newly originated, purchased or renewed
4. Represents the decrease in balances resulting from loans and
advances that have been fully repaid, disposed of or written off
5. Represents the change in loss allowances resulting from changes to
assumptions notably forward looking macro-economic information and changes in
the customer's risk profile
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 2021 5,918 786 111 - 6,815 (4) (6) (5) - (15) 5,914 780 106 - 6,800
Transfers to/from stage 1 (7) 7 - - - (1) 2 (1) - - (8) 9 (1) - -
Transfers to/from stage 2 (189) 189 - - - - - - - - (189) 189 - - -
Transfers to/from stage 3 (10) (5) 15 - - - - - - - (10) (5) 15 - -
Net remeasurement due to transfers - - - - - 1 (1) - - - 1 (1) - - -
New lending 349 156 - - 505 - (3) - - (3) 349 153 - - 502
Repayments, additional drawdowns and interest accrued (39) (6) (1) - (46) - - - - - (39) (6) (1) - (46)
Derecognitions (476) (64) (11) - (551) - - 1 - 1 (476) (64) (10) - (550)
Changes to assumptions - - - - - 2 (4) - - (2) 2 (4) - - (2)
Balance at 31 December 2021 5,546 1,063 114 - 6,723 (2) (12) (5) - (19) 5,544 1,051 109 - 6,704
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 1 369 (352) (17) - - (7) 6 1 - - 362 (346) (16) - -
Transfers to/from stage 2 (280) 288 (8) - - 1 (1) - - - (279) 287 (8) - -
Transfers to/from stage 3 (9) (21) 30 - - - 1 (1) - - (9) (20) 29 - -
Net remeasurement due to transfers - - - - - 6 - - - 6 6 - - - 6
New lending 545 77 - - 622 (1) (1) - - (2) 544 76 - - 620
Repayments, additional drawdowns and interest accrued (92) (11) (1) - (104) - - - - - (92) (11) (1) - (104)
Derecognitions (526) (58) (11) - (595) 1 1 - - 2 (525) (57) (11) - (593)
Changes to assumptions - - - - - 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
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 2022 786 82 21 1 890 (18) (8) (16) - (42) 768 74 5 1 848
Transfers to/from stage 1 16 (16) - - - (2) 2 - - - 14 (14) - - -
Transfers to/from stage 2 (108) 108 - - - 1 (1) - - - (107) 107 - - -
Transfers to/from stage 3 (9) (4) 13 - - - 2 (2) - - (9) (2) 11 - -
Net remeasurement due to transfers - - - - - 1 (5) (9) - (13) 1 (5) (9) - (13)
New lending 583 10 2 - 595 (10) (1) (1) - (12) 573 9 1 - 583
Repayments, additional drawdowns and interest accrued (93) (26) (2) (1) (122) - - - - - (93) (26) (2) (1) (122)
Derecognitions (83) (9) (2) - (94) 4 1 1 - 6 (79) (8) (1) - (88)
Changes to assumptions - - - - - 4 1 - - 5 4 1 - - 5
Balance at 30 June 2022 1,092 145 32 - 1,269 (20) (9) (27) - (56) 1,072 136 5 - 1,213
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 2021 642 43 18 1 704 (20) (5) (17) - (42) 622 38 1 1 662
Transfers to/from stage 1 (6) 6 - - - 1 (1) - - - (5) 5 - - -
Transfers to/from stage 2 (2) 2 - - - - - - - - (2) 2 - - -
Transfers to/from stage 3 (1) (1) 2 - - - - - - - (1) (1) 2 - -
Net remeasurement due to transfers - - - - - - - (1) - (1) - - (1) - (1)
New lending 185 42 7 - 234 1 (4) (6) - (9) 186 38 1 - 225
Repayments, additional drawdowns and interest accrued (9) (3) - - (12) - - - - - (9) (3) - - (12)
Derecognitions (23) (7) (6) - (36) 1 1 6 - 8 (22) (6) - - (28)
Changes to assumptions - - - - - (1) 1 2 - 2 (1) 1 2 - 2
Balance at 31 December 2021 786 82 21 1 890 (18) (8) (16) - (42) 768 74 5 1 848
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
Commercial lending
Gross carrying amount Loss allowance Net carrying amount
£'million Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total
Balance at 1 January 2022 3,739 780 327 - 4,846 (27) (29) (52) - (108) 3,712 751 275 - 4,738
Transfers to/from stage 1 164 (163) (1) - - (6) 6 - - - 158 (157) (1) - -
Transfers to/from stage 2 (135) 137 (1) - 1 1 (1) - - - (134) 136 (1) - 1
Transfers to/from stage 3 (98) (108) 206 - - - 4 (4) - - (98) (104) 202 - -
Net remeasurement due to transfers - - - - - 3 (4) - - (1) 3 (4) - - (1)
New lending 427 54 2 - 483 (7) (2) (1) - (10) 420 52 1 - 473
Repayments, additional drawdowns and interest accrued (180) (25) (5) - (210) - - - - - (180) (25) (5) - (210)
Derecognitions (263) (60) (316) - (639) 1 1 22 - 24 (262) (59) (294) - (615)
Changes to assumptions - - - - - 2 (8) 4 - (2) 2 (8) 4 - (2)
Balance at 30 June 2022 3,654 615 212 - 4,481 (33) (33) (31) - (97) 3,621 582 181 - 4,384
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 2021 3,986 800 186 - 4,972 (21) (37) (51) - (109) 3,965 764 134 - 4,863
Transfers to/from stage 1 63 (63) - - - (2) 2 - - - 61 (61) - - -
Transfers to/from stage 2 (173) 174 (1) - - - - - - - (173) 174 (1) - -
Transfers to/from stage 3 (163) (3) 166 - - - 1 (1) - - (163) (2) 165 - -
Net remeasurement due to transfers - - - - - (1) (6) (6) - (13) (1) (6) (6) - (13)
New lending 299 (1) 1 - 299 (3) 4 (1) - - 296 3 - - 299
Repayments, additional drawdowns and interest accrued (26) (22) - - (48) - - - - - (26) (22) - - (48)
Derecognitions (247) (105) (25) - (377) 1 4 8 - 13 (246) (101) (17) - (364)
Changes to assumptions - - - - - (1) 2 - - 1 (1) 2 - - 1
Balance at 31 December 2021 3,739 780 327 - 4,846 (27) (29) (52) - (108) 3,712 751 275 - 4,738
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 4,115 906 127 - 5,148 (19) (44) (40) - (103) 4,096 863 86 - 5,045
Transfers to/from stage 1 126 (121) (5) - - (5) 5 - - - 121 (116) (5) - -
Transfers to/from stage 2 (124) 130 (6) - - 1 (2) 1 - - (123) 128 (5) - -
Transfers to/from stage 3 (18) (78) 96 - - - 2 (2) - - (18) (76) 94 - -
Net remeasurement due to transfers - - - - - 4 (4) (11) - (11) 4 (4) (11) - (11)
New lending 267 59 5 - 331 (3) (6) - - (9) 264 53 5 - 322
Repayments, additional drawdowns and interest accrued (141) (9) (13) - (163) - - - - - (141) (9) (13) - (163)
Derecognitions (239) (87) (18) - (344) 2 4 4 - 10 (237) (83) (14) - (334)
Changes to assumptions - - - - - (1) 8 (3) - 4 (1) 8 (3) - 4
Balance at 30 June 2021 3,986 800 186 - 4,972 (21) (37) (51) - (109) 3,965 764 134 - 4,863
7. Property, plant and equipment
Investment property Leasehold improvements Freehold land & buildings Fixtures fittings & equipment IT hardware Right of use assets Total
£'million £'million £'million £'million £'million £'million £'million
Cost
1 January 2022 18 280 341 24 1 295 959
Additions - - 1 - - - 1
Write-offs - (10) - (2) - - (12)
30 June 2022 18 270 342 22 1 295 948
Accumulated depreciation
1 January 2022 12 68 28 19 - 67 194
Charge for the period - 6 3 1 - 7 17
Write-offs - (10) - (2) - - (12)
30 June 2022 12 64 31 18 - 74 199
Net book value at 6 206 311 4 1 221 749
30 June 2022
Cost
1 July 2021 18 300 290 25 11 330 974
Additions - 4 37 - 1 (4) 38
Disposals - - - - - (29) (29)
Write-offs - (10) - (1) (11) (2) (24)
Transfers - (14) 14 - - - -
31 December 2021 18 280 341 24 1 295 959
Accumulated depreciation
1 July 2021 13 72 23 18 8 54 188
Charge for the period (1) 8 2 1 1 11 22
Impairments - - - - - 6 6
Disposals - - - - - (4) (4)
Write-offs - (9) - - (9) - (18)
Transfers - (3) 3 - - - -
31 December 2021 12 68 28 19 - 67 194
Net book value at 6 212 313 5 1 228 765
31 December 2021
Cost
1 January 2021 18 292 298 25 11 330 974
Additions - 8 (8) - - - -
30 June 2021 18 300 290 25 11 330 974
Accumulated depreciation
1 January 2021 12 66 21 15 7 47 168
Charge for the period 1 6 2 3 1 7 20
30 June 2021 13 72 23 18 8 54 188
Net book value at 5 228 267 7 3 276 786
30 June 2021
8. Intangible assets
Goodwill Brands Software Total
£'million £'million £'million £'million
Cost
1 January 2022 10 2 336 348
Additions - - 12 12
Write-offs - - (16) (16)
30 June 2022 10 2 332 344
Accumulated amortisation
1 January 2022 - - 105 105
Charge for the period - - 20 20
Write-offs - - (8) (8)
30 June 2022 - - 117 117
Net book value at 30 June 2022 10 2 215 227
Cost
1 July 2021 10 2 355 367
Additions - - 13 13
Write-offs - - (32) (32)
31 December 2021 10 2 336 348
Accumulated amortisation
1 July 2021 - - 114 114
Charge for the period - - 18 18
Impairment (1) (1)
Write-offs - - (26) (26)
31 December 2021 - - 105 105
Net book value at 31 December 2021 10 2 231 243
Cost
1 January 2021 10 2 328 340
Additions - - 26 26
Deferred grant (see note 10) - - 1 1
30 June 2021 10 2 355 367
Accumulated amortisation
1 January 2021 - - 86 86
Charge for the period - - 20 20
Impairment - - 8 8
30 June 2021 - - 114 114
Net book value at 30 June 2021 10 2 241 253
9. Lease liabilities
Half year to Half year to Half year to
30 June 31 December 2021 30 June
2022 £'million 2021
£'million £'million
At beginning of the period 269 310 327
Additions and modifications - (6) -
Disposals - (29) (11)
Lease payments made (13) (14) (15)
Interest on lease liabilities 8 8 9
At the end of the period 264 269 310
10. Deferred grants
Half year to Half year to Half year to
30 June 31 December 2021 30 June
2022 £'million 2021
£'million £'million
At beginning of the period 19 22 28
Released to the income statement - (3) (7)
Offset against capital expenditure (see note 8) - - 1
At the end of the period 19 19 22
Our only deferred grant relates to amounts awarded in relation to the
Capability and Innovation Fund which formed part of the RBS alternative
remedies programme. The programme was aimed to increase competition in the UK
business banking marketplace.
As part of the grant we are subject to delivering a number of public
commitments. These commitments can be found on BCR's (the awarding body)
website. As at 30 June 2022 we are currently on track with the delivery of
these commitments.
11. Share capital
As at 30 June 2022 we had 172.4 million ordinary shares of 0.0001 pence (31
December 2021: 172.4 million, 30 June 2021: 172.4 million) in issue.
Called up ordinary share capital (issued and fully paid)
Half year to Half year to Half year to
30 June 31 December 2021 30 June
2022 £'million 2021
£'million £'million
At beginning of the period - - -
At end of the period - - -
Share premium
Half year to Half year to Half year to
30 June 31 December 2021 30 June
2022 £'million 2021
£'million £'million
At beginning of the period 1,964 1,964 1,964
At end of the period 1,964 1,964 1,964
12. Earnings per share
Basic earnings per share (EPS) is calculated by dividing the loss attributable
to our ordinary equity holders by the weighted average number of ordinary
shares in issue during the year.
Half year to Half year to Half year to
30 June 31 December 2021 30 June
2022 2021
(Loss) attributable to ordinary equity holders (£'million) (61.7) (107.1) (141.1)
Weighted average number of ordinary shares in issue 172,421 172,421 172,420
(thousands)
Basic earnings per share (pence) (35.8) (62.1) (81.8)
Diluted EPS has been calculated by dividing the loss attributable to our
ordinary equity holders by the weighted average number of ordinary shares in
issue during the year plus the weighted average number of ordinary shares that
would be issued on the conversion to shares of options granted to colleagues.
As we were loss making during the six month periods to 30 June 2022 31
December 2021 and 30 June 2021, the share options would be antidilutive, as
they would reduce the loss per share. Therefore, all the outstanding options
have been disregarded in the calculation of dilutive EPS.
Half year to Half year to Half year to
30 June 31 December 2021 30 June
2022 2021
(Loss)/profit attributable to ordinary equity holders (£'million) (61.7) (107.1) (141.1)
Weighted average number of ordinary shares in issue 172,421 172,421 172,420
(thousands)
Diluted earnings per share (pence) (35.8) (62.1) (81.8)
13. Fair value of financial instruments
Carrying Quoted market price Using observable inputs With significant unobservable inputs Total
value
Level 1
Level 2
Level 3
fair value
£'million £'million £'million £'million
£'million
30 June 2022
Assets
Loan and advances to customers 12,364 - - 12,498 12,498
Investment securities held at FVOCI 781 743 38 - 781
Investment securities held at amortised cost 5,393 3,685 1,482 53 5,220
Financial assets held at FVTPL 2 - - 2 2
Liabilities
Deposits from customers 16,514 - - 16,377 16,377
Deposits from central banks 3,800 - - 3,800 3,800
Debt securities 577 447 - - 447
Derivative financial liabilities 8 - - 8 8
Repurchase agreements 166 - - 166 166
31 December 2021
Assets
Loan and advances to customers 12,290 - - 12,356 12,356
Investment securities held at FVOCI 798 760 38 - 798
Investment securities held at amortised cost 4,776 2,977 1,710 60 4,747
Financial assets held at FVTPL 3 - - 3 3
Liabilities
Deposits from customers 16,448 - - 16,452 16,452
Deposits from central banks 3,800 - - 3,800 3,800
Debt securities 588 495 - - 495
Derivative financial liabilities 10 - 10 - 10
Repurchase agreements 169 - - 169 169
30 June 2021
Assets
Loan and advances to customers 12,325 - - 12,287 12,287
Investment securities held at FVOCI 1,198 1,198 - - 1,198
Investment securities held at amortised cost 3,165 1,480 1,632 64 3,176
Financial assets held at FVTPL 5 - - 5 5
Liabilities
Deposits from customers 16,620 - - 16,663 16,663
Deposits from central banks 3,800 - - 3,800 3,800
Debt securities 596 503 - - 503
Derivative financial liabilities 8 - - 8 8
Repurchase agreements 212 - - 212 212
Cash and balances with the Bank of England, trade and other receivables, trade
and other payables, assets classified as held for sale and other assets and
liabilities which meet the definition of financial instruments are not
included in the tables. Their carrying amount is a reasonable approximation of
fair value.
Information on how fair values are calculated are explained below:
Loans and advances to customers
Fair value is calculated based on the present value of future principal and
interest cash flows, discounted at the market rate of interest at the balance
sheet date, adjusted for future credit losses and prepayments, if considered
material.
Investment securities
The fair value of investment securities is based on either observed market
prices for those securities that have an active trading market (fair value
Level 1 assets), or using observable inputs (in the case of fair value Level 2
assets).
Financial assets and liabilities held at fair value through profit and loss
The financial assets at fair value through profit and loss relate to the loans
and advances previously assumed by the RateSetter provision fund. Following
the purchase of the RateSetter back book from peer-to-peer investors in April
2021 the provision fund ceased to have liability for further claims which
resulted in a net release of £18 million of assets and liabilities held at
fair value through profit and loss.
Deposits from customers
Fair values are estimated using discounted cash flows, applying current rates
offered for deposits of similar remaining maturities. The fair value of a
deposit repayable on demand is approximated by its carrying value.
Debt securities
Fair values are determined using the quoted market price at the balance sheet
date.
Deposits from central banks/repurchase agreements
Fair values are estimated using discounted cash flows, applying current rates.
Fair values approximate carrying amounts as their balances are generally
short-dated.
Derivative financial liabilities
The fair values of derivatives are obtained from discounted cash flow models
or option pricing models as appropriate.
14. Legal proceedings and regulatory matters
As part of the normal course of business we are subject to legal and
regulatory matters, the majority of which are not considered to have a
material impact on the business.
The only contingent liability which we have, which could potentially have a
material impact, is the FCA's enquiries regarding our financial crime systems
and controls. We continue to engage and co-operate fully with the FCA on these
matters and their enquiries remain at a relatively early stage.
The inclusion of these enquiries does not constitute any admission of
wrongdoing or legal liability. The outcome and timing of these matters is
inherently uncertain and based on the facts currently known, it is not
possible to predict the outcome or reliably estimate any financial impact. As
such, at the reporting date no provision has been made within the financial
statements.
15. Post balance sheet events
There have been no material post balance sheet events.
END OF the condensed consolidated interim financial statements
RECONCILIATION OF STATUTORY TO UNDERLYING RESULTS (UNAUDITED)
Underlying loss represents an adjusted measure, excluding the effect of
certain items that are considered to distort year-on-year comparisons, in
order to provide readers with a better and more relevant understanding of the
underlying trends in the business. Details of the item that are considered to
be non-underlying and their reasons for exclusion can be found on page 225 of
our 2021 Annual Report and Accounts.
A reconciliation from our statutory to underlying results for the period is
set out below:
Half year to 30 June 2022 Statutory basis Impairment and write offs of PPE and intangible assets Net BCR costs Transformation costs Remediation costs £'million Underlying basis
£'million £'million £'million £'million £'million
Interest income 239.7 - - - - 239.7
Interest expense (58.9) - 0.1 - - (58.8)
Net interest income 180.8 - 0.1 - - 180.9
Net fee and commission income 39.5 - - - - 39.5
Net gains on sale of assets - - - - - -
Other income 16.2 - (0.4) - - 15.8
Total income 236.5 - (0.3) - - 236.2
General operating expenses (233.2) - 0.3 1.0 3.0 (228.9)
Depreciation and amortisation (37.4) - - - - (37.4)
Impairment and write offs of property, plant & equipment and intangible (8.2) 8.2 - - - -
assets
Total operating expenses (278.8) 8.2 0.3 1.0 3.0 (266.3)
Expected credit loss expense (17.9) (17.9)
Loss before tax (60.2) 8.2 - 1.0 3.0 (48.0)
Details of our other alternative performance measures including the
methodology used to calculating them can be found on page 224 of our 2021
Annual Report and Accounts.
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