REG - Metro Bank PLC - Results for Year ended 31 December 2019
26/02/2020 07:00
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RNS Number : 1365E Metro Bank PLC 26 February 2020
Metro Bank PLC
Full year results
Trading Update 2019
26 February 2020
Metro Bank PLC (LSE: MTRO LN)
Results for Year ended 31 December 2019
· Financial performance reflects a challenging year
· Balance sheet strength retained
· Strong annual growth in customer accounts
· Ambition to become the UK's best community bank
Summary:
· Underlying loss before tax of £11.7 million (2018: £50.0 million profit)
reflecting balance sheet strengthening actions, IFRS 16 impact and debt
interest expense.
· Statutory loss before tax of £130.8 million (2018: £40.6 million profit)
primarily reflecting a £68 million write-down of intangible assets (no impact
on regulatory capital).
· 21% growth in retail and SME core deposits to £10.2 billion (2018: £8.4
billion).
· Net fee and other income up 43%, driven by customer growth and the launch of
fee-earning services.
· Strong capital position with Common Equity Tier 1 (CET1) ratio of 15.6% (2018:
13.1%).
· Surpassed 2.0 million customer accounts (2018: 1.6 million).
· Rated no. 1 for service in stores and for online and mobile banking(1).
· Strategic ambition to become the UK's best community bank.
· Strategic plan revised to achieve statutory RoTE >8.5% by 2024:
- Deliverable cost and revenue initiatives identified and being
implemented, complemented by targeted investments, with returns further
enhanced through balance sheet optimisation
Key Financials:
31 31 Change from 30 Change from
£ in millions December December full year 18 September Q3 19
2019 2018 2019
Assets £21,400 £21,647 (1%) £21,002 2%
Loans £14,681 £14,235 3% £14,891 (1%)
Deposits £14,477 £15,661 (8%) £14,231 2%
Loan to deposit ratio 101% 91% 10pp 105% (4pp)
CET 1 capital ratio 15.6% 13.1% 250bps 16.2% (60bps)
Total capital ratio 18.3% 15.9% 240bps 18.9% (60bps)
Liquidity coverage ratio 197% 139% 58pp - -
£ in millions Year ended Year ended Change
31 December 2019 31 December 2018
Total underlying revenue £400.1 £404.1 (1%)
Underlying (loss)/profit before tax(2) (£11.7) £50.0 (123%)
Statutory (loss)/profit before tax (£130.8) £40.6 (422%)
Net interest margin 1.51% 1.81% (30bps)
Underlying EPS- basic (10.8p) 39.4p (127%)
Underlying EPS- diluted (10.8p) 38.2p (128%)
1. Results from the Competition and Market Authority's February 2020
Service Quality Survey.
2. Underlying (loss)/profit before tax excludes Listing Share Awards,
impairment of property, plant & equipment ("PPE") and intangible assets,
net BCR costs, transformation costs and remediation costs. Statutory
(loss)/profit after tax is included in the Profit and Loss Account.
Dan Frumkin, Chief Executive Officer at Metro Bank, said:
"Our financial performance reflects a very challenging year for Metro Bank.
External headwinds, internal challenges and actions we took to put the
business on a more positive trajectory are reflected in the results. Despite
this, Metro Bank's market-leading service proposition continued to deliver
growth in customer accounts, and our balance sheet ended the year in a
materially stronger position. We've fully evaluated our strategy, and have a
clear plan which will return the bank to sustainable growth built around a
community banking model. An enhanced focus on costs, improved productivity,
and investment in our infrastructure will enable our deposit-led franchise to
deliver profitable growth over the medium term. Thanks to the steadfast
commitment of colleagues across the bank, I am confident we will successfully
execute against these priorities to become the UK's best community bank."
A presentation for investors and analysts will be held at 08:30 GMT on 26
February 2020.
The presentation will be webcast on:
https://event.on24.com/wcc/r/2180103/0B87C516F118372B20DA70B3C08A88FC
(https://event.on24.com/wcc/r/2180103/0B87C516F118372B20DA70B3C08A88FC)
For those wishing to dial-in:
From the UK dial: +44 3333 000 0804
From the US dial: +1 631 913 1422
Participant Pin: 49156297#
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Strategic update and outlook
· Following a challenging year, the bank has undertaken a comprehensive review
of its strategy. The refreshed strategy to become the UK's best community bank
is built on firm foundations: robust capital and liquidity; strong asset
quality; simple balance sheet; sector leading customer service underpinned by
a strong culture and engaged colleagues; and customer account growth momentum.
We will deliver a statutory RoTE of >8.5% by 2024.
· Outstanding customer service and convenience across a range of distribution
channels will remain at the core of Metro Bank's strategy. Being the UK's best
community bank means serving the local economy by focusing on the requirements
of individuals and small businesses. We will focus on five straight forward
pillars that will enable us to deliver for stakeholders:
1. Tight cost control through back office efficiencies and organisational
simplification. Metro Bank's fixed costs make up a significant portion of its
cost base, primarily due to the store network; this in time will deliver
significant operating leverage and drive revenue. In the meantime, the bank
has initiatives in place to ensure cost growth continues to moderate. New
stores will become more cost efficient and flexible in size, fit-out and
leasing terms. The bank will also streamline its back-office operations by
relocating to cost effective locations, modernise contact-centre technology,
aim to digitise/automate services and reduce organisational layers across the
bank.
2. Improve capability and meet more customer needs through better execution.
Metro Bank intends to maintain and improve its leading customer service to
both deepen existing relationships and attract new FANS with the aim of
driving revenue and NIM growth. The current product offering will be enhanced
and broadened, and the bank will invest in its colleagues and technology to
enhance accessibility for customers. A limited number of new stores will be
opened over the next few years, allowing Metro Bank to be embedded in more
communities. Existing and new stores will benefit from the new marketing
campaign which will raise awareness of Metro Bank's award-winning service.
3. Continued infrastructure investment to support the transformation.
Continued investment in Metro Bank's leading customer proposition with the aim
of bringing the physical and digital world together, making life easier for
FANS and colleagues. This will be underpinned by further investment in
technology, finance and risk infrastructure.
4. Optimise our balance sheet. Metro Bank will optimise its balance sheet
and asset mix whilst focusing on risk adjusted return on regulatory capital.
In the short-term, tactical asset disposals will be considered, and in the
longer term a number of funding diversification options will be considered to
deliver greater risk adjusted returns on capital. The bank will seek a better
yielding asset book and improved returns on regulatory capital by rebalancing
its lending mix towards areas such as specialist mortgages, SMEs and unsecured
loans.
5. Clear and refreshed external and internal communications strategy.
Metro Bank's refreshed strategy will focus on providing colleagues,
shareholders and other stakeholders with a clear message. Internally, the bank
will ensure colleagues have a clear understanding of its transformation plan
and their role within this. Externally, the bank is re-evaluating guidance,
KPIs, tone and frequency of reporting.
Guidance and Targets
FY2020 FY 2024
Guidance Targets Guidance
Deposits · Mid-single digit growth · <10% deposit CAGR 2020-2024 · Cost of deposits to reduce over time as the mix of current
accounts increases
· <100% loan to deposit ratio
Revenue · NIM in line with Q4 2019 · NIM expansion vs FY 2019 · Target lending mix (75% mortgages, 20% SME and 5% unsecured)
· Fee and other income to increase as proportion of revenue mix
· 15-30 bps cost of risk
Operating Costs · Mid-high-single digit growth excluding investment opex · New investment spend £250-£300m opex (excluding depreciation · 'Run the bank' cost low single digit CAGR 2020-2024
and amortisation) and c.£100m capex by 2024, front-end loaded
· Cost income ratio 70-75% by 2024 (includes new investment spend,
amortisation and depreciation)
Capital · CET1 ratio >12% · Minimum 12% CET1 and >22.5% Total Capital plus MREL · Additional MREL issuance post Jan 2022 in line with regulatory
requirements
· Up to £500m of MREL issuance before 1 Jan 2022
Returns · >8.5% statutory RoTE by FY2024 · Conservative target prudently excludes impact of AIRB approval
BCR Capability & Innovation Fund Award
· Revised Business Case submitted to, and approved by, BCR Ltd ("BCR") to align
Metro Bank's Public Commitments with its new strategy. Metro Bank will return
£50 million of the original £120 million funding it was awarded last year.
· Summary of key changes to the Public Commitments
o Metro Bank will continue to spend ~£2 of its own funds for every pound it
receives from the Capability & Innovation Fund
o Metro Bank will open a total of 15 rather than 30 stores in the North of
England by 2025
o Metro Bank will continue to build a range of game-changing digital
capabilities to help SMEs thrive
o Metro Bank will step away from niche SME propositions that benefit a
smaller group of SMEs, including secured lending transformation, virtual
accounts and pooling; it will re-phase a further three initiatives to create
near-term capacity for transformation.
· These commitments continue to allow Metro Bank to bring market-leading service
and convenience to SME customers with a targeted c.6% BCA market share by
2025, and deliver on its new strategy.
Financial performance for the year and quarter ended 31 December 2019
£ in millions 31 December2019 31 December2018 Change from full year 18 30 September2019 Change from
Q3 19
Demand: current accounts £4,278 £4,685 (9%) £4,181 2%
Demand: savings accounts £5,593 £6,924 (19%) £5,700 (2%)
Fixed term: savings accounts £4,606 £4,052 14% £4,350 6%
Deposits from customers £14,477 £15,661 (8%) £14,231 2%
Deposits from customers includes:
Retail customers (excl. retail partnerships) £6,891 £5,190 33% £6,351 9%
Retail partnerships £1,839 £2,239 (18%) £1,890 (3%)
Deposits from retail customers £8,730 £7,429 18% £8,241 6%
Commercial customers (excluding SMEs(3)) £2,486 £5,060 (51%) £2,829 (12%)
SMEs £3,261 £3,172 3% £3,161 3%
Deposits from business and commercial customers £5,747 £8,232 (30%) £5,990 (4%)
3. SME defined as enterprises which employ fewer than 250 persons and
which have an annual turnover not exceeding €50 million, and/or an annual
balance sheet total not exceeding €43 million, and have aggregate deposits
of less than €1 million.
Deposits
· Strong customer account growth of 385,000 in 2019 (2018: 403,000) to over 2
million.
· Total deposits were £14,477 million as at 31 December 2019. A net reduction
in deposits in H1 was followed by a 6% increase in the second half, supported
by strong growth in fixed term retail savings accounts and growth in SME
balance.
· Deposits increased in the fourth quarter (£246 million), as expected.
Deposits from personal and small business customers continued to demonstrate
resilience throughout the year.
· Cost of deposits was 78bps for the full year up from 61bps in 2018 due to
pricing actions taken during the year.
Loans
· Total net loans as at 31 December 2019 were £14,681 million, up from £14,235
million at 31 December 2018, reflecting proactive management of lending
growth. Loan balances contracted marginally in the fourth quarter (down 1%).
· Retail mortgages remained the largest component of the lending book at 71% of
gross lending (31 December 2018: 67%).
· Loan to deposit ratio at 101% is above the prior year (31 December 2018: 91%),
although below the 109% reported at H1, reflecting the bank's actions to
reduce the loan to deposit ratio in a controlled way.
· Asset quality remains strong, with full year cost of risk remaining low at
0.08% (31 December 2018: 0.07%). Non-performing loans remain low, although
increased to 0.53% (31 December 2018: 0.15%) reflecting seasoning of the loan
portfolio and a single name commercial exposure, the loan portfolio remains
highly collateralised.
£ in millions 31 31 Change from 30 Change from
December December full year 18 September Q3 19
2019 2018 2019
Gross Loans and advances to customers £14,715 £14,269 3% £14,922 (1%)
Less: allowance for impairment (£34) £(34) - (£31) 10%
Net Loans and advances to customers £14,681 £14,235 3% £14,891 (1%)
Gross loans and advances to customers includes:
Commercial loans £4,052 £4,356 (7%) £4,182 (3%)
Retail mortgages £10,430 £9,625 8% £10,495 (1%)
Consumer and other loans and advances £233 £288 (19%) £245 (5%)
Profit and Loss Account
· Net interest margin of 1.51% compared to 1.81% in the prior year, with the
decline primarily reflecting actions taken to maintain a resilient balance
sheet, including a £521 million loan portfolio disposal, £1.5 billion of
treasury asset sales and higher deposit costs. The movement also reflects the
impact of IFRS 16 lease accounting as well as continued pricing pressure in
the mortgage market. The issuance of MREL in October 2019 in order to comply
with interim MREL requirements contributed to a decline in the margin.
· Net interest income down 7% to £308.1 million (2018: £330.1 million)
reflecting the movements in NIM described above. These actions, including a
moderation of loan growth, reduced revenue by c.£12m in Q4 2019.
· Net fee and other income was up 43% in the year driven by customer growth,
addressing fee leakage and the launch of new fee earning services and
products.
· Underlying cost:income ratio increased to 100% year-on-year from 86% in 2018,
largely reflecting net interest income headwinds. The pace of cost growth
slowed significantly in the second half of 2019 compared to the rate of growth
in the second half of the previous year.
· Underlying loss before tax for the year was £11.7 million, compared to a
profit of £50.0 million in 2018, reflecting the income challenges and cost
pressures outlined above. Loss in the fourth quarter increased to £22.7
million.
· Statutory loss before tax of £130.8 million in 2019 (2018: £40.6 million
profit) including:
- Write-down of intangible assets (£68 million): relating to the
discontinuation of certain work-in-progress or older IT projects that do not
form part of the bank's revised strategy. This does not impact the bank's
capital position as intangible assets are excluded from regulatory capital.
- Transformation costs (£11 million): costs associated with the delivery
of the cost transformation programme.
- Remediation costs (£27 million): including work relating to the
January 2019 risk weighted assets ("RWA") adjustment and associated regulatory
investigations which are ongoing, as well as work undertaken in relation to a
previously disclosed review of the bank's sanctions procedures.
· Statutory loss after tax of £182.6 million in 2019 (2018: £27.1 million
profit) that includes a £53 million derecognition of the bank's deferred tax
asset for unused tax losses. This is an accounting non-cash item and does not
impact regulatory capital or liquidity. The derecognition reflects the impact
on the bank's short-term results of its investments announced as part of its
strategy update.
Capital, Funding and Liquidity
· Strong liquidity and funding position maintained, reflecting H2 2019 deposit
growth of £774 million, a £521 million loan portfolio disposal and £1.5
billion treasury asset sales. As a result, the bank's Liquidity Coverage Ratio
was 197% as of 31 December 2019 (2018: 139%), compared to the bank's
requirement of 100%.
· Total capital as a percentage of risk-weighted assets was 18.3%. Following the
£350 million senior non-preferred debt issuance in October, total capital
plus MREL resources were £2,018 million with a total capital plus MREL ratio
of 22.1% at 31 December 2019, above the 21.5% 1 January 2020 interim MREL plus
buffers requirement.
· CET1 capital of £1,427 million as at 31 December 2019 was 15.6% of RWAs
(2018: 13.1% and Q3 2019: 16.2%), compared to the bank's Tier 1 regulatory
minimum of 10.6%(4).
· RWAs as at 31 December 2019 were £9,147 million (2018: £8,936 million and Q3
2019: £9,242 million).
· Regulatory leverage ratio of 6.6% (2018: 5.4%).
4. Based on current capital requirements, excluding any confidential PRA
buffer, if applicable
Customer Experience
· Expanded coverage, opened a store in Manchester in the fourth quarter and new
stores in Wolverhampton, Cardiff and Hammersmith in early 2020. Metro Bank now
has 74 stores.
· Enhanced digital offering, launched Business Insights and MCash in the fourth
quarter. These new services use the latest technology to improve Metro Bank's
attractive product offering for SME customers.
Board Changes
· Vernon Hill stepped down from his role as Chairman in October and from the
Board on 17 December 2019. Sir Michael Snyder has been appointed as Interim
Chairman, while the recruitment process for a permanent Chair progresses.
· Craig Donaldson stepped down at the end of the year as CEO and will remain
available to the Board as an advisor until the end of 2020.
· Dan Frumkin, who joined Metro Bank in September 2019 as Chief Transformation
Officer, was appointed to the Board as Interim CEO from 1 January 2020 and
confirmed as CEO on 19 February 2020.
· Monique Melis, who joined the Board in June 2017, has been appointed as
Interim Senior Independent Director with effect from 1 December 2019,
following the appointment of Sir Michael Snyder as Interim Chairman.
· After 10 years on the Board, Alastair 'Ben' Gunn, stepped down as Deputy
Chairman and Non-Executive Director with effect from 31 December 2019.
· Sally Clark joined the Board on 1 January 2020 as an independent Non-Executive
Director. Most recently, Sally was Chief Internal Auditor at Barclays plc
where she was responsible for driving the vision and strategy for the internal
audit function.
Change of approach to quarterly reporting
Going forward, as the bank focusses on its new strategy and associated
transformation plans, the bank will report full and half year results in line
with UK practice, with short form trading updates at Q1 and Q3. These updates
will include deposit and loan balances, together with a short commentary
covering the performance of the business in the period.
Metro Bank PLC
Summary Balance Sheet and Profit & Loss Account
(Unaudited)
Annual Growth Rate 2019 2018
Balance Sheet 31-Dec 30-Sep 31-Dec
£'m £'m £'m
Assets
Loans and advances to customers 3% 14,681 14,891 14,235
Treasury assets(5) 5,554 4,837 6,604
Other assets(6) 1,165 1,274 808
Total assets (1%) 21,400 21,002 21,647
Liabilities
Deposits from customers (8%) 14,477 14,231 15,661
Deposits from central banks 3,801 3,801 3,801
Debt securities 591 249 249
Other liabilities 948 959 533
Total liabilities 19,817 19,240 20,244
Total shareholder's equity 1,583 1,762 1,403
Total equity and liabilities 21,400 21,002 21,647
5. Comprises investment securities and cash & balances with central banks
6. Comprises property, plant & equipment, intangible assets and other
assets
Annual 12 months to 31 December
Growth Rate
Profit & Loss Account 2019 2
0
1
8
£'m £'m
Net interest income 308.1 330.1
Net fee and other income 90.4 63.3
Net gains on sale of assets 1.6 10.7
Total underlying revenue (1%) 400.1 404.1
Operating costs 16% (400.1) (346.1)
Expected credit loss expense (11.7) (8.0)
Underlying (loss)/profit before tax (123%) (11.7) 50.0
Underlying taxation (4.3) (13.4)
Underlying (loss)/profit after tax (144%) (16.0) 36.6
Listing Share Awards (0.6) (0.9)
Impairment and write-down of property plant & equipment and intangible (75.8) (4.8)
assets
Net BCR costs(7) (2.1) (3.8)
Transformation costs (9.3) -
Remediation costs (26.1) -
Derecognition of deferred tax asset (52.7) -
Statutory (loss)/profit after tax (774%) (182.6) 27.1
Underlying earnings per share - basic (10.8p) 39.4p
Underlying earnings per share - diluted (10.8p) 38.2p
Number of shares - undiluted 147.4m 93.0m
Number of shares - diluted 147.4m 95.9m
Number of shares - at period end 172.4m 97.4m
Net interest margin (NIM) 1.51% 1.81%
NIM + fees 2.00% 2.15%
Cost of deposits 0.78% 0.61%
Cost of risk 0.08% 0.07%
Underlying cost:income ratio 100% 86%
7. Net BCR costs includes amounts previously disclosed under costs relating to
RBS alternative remedies package application, Capability & Innovation
costs and Capability & Innovation funding
Annual Growth Rate 2019 2018
Profit & Loss Account-Quarterly Q4 Q3 Q4
£'m £'m £'m
Net interest income 65.3 76.6 88.9
Net fee and other income(8) 18.7 25.3 18.3
Net (losses)/gains on sale of assets - (2.5) 2.0
Total underlying revenue (23%) 84.0 99.4 109.2
Operating costs(8) (101.5) (99.7) (96.0)
Expected credit loss expense (5.4) (1.9) (2.0)
Underlying (loss)/profit before tax (304%) (22.9) (2.2) 11.2
Underlying taxation (1.6) 1.0 (4.2)
Underlying (loss)/profit after tax (450%) (24.5) (1.2) 7.0
Listing Share Awards (0.1) (0.1) (0.2)
FSCS levy 0.4 - -
Impairment and write-down of property plant & equipment and intangible (74.8) - (3.0)
assets
Net BCR costs (1.1) - (1.9)
Transformation costs (3.9) (0.8) -
Remediation costs (22.3) (2.8) -
Derecognition of deferred tax asset (52.7) - -
Statutory (loss)/profit after tax (179.0) (4.9) 1.9
Underlying earnings per share - basic (14.2p) (0.7p) 7.2p
Underlying earnings per share - diluted (14.2p) (0.7p) 7.1p
Number of shares - undiluted 172m 172m 97.4m
Number of shares - diluted 172m 172m 99.8m
Net interest margin (NIM) 1.30% 1.50% 1.76%
NIM + fees 1.85% 1.99% 2.12%
Cost of deposits 0.87% 0.84% 0.67%
Cost of risk 0.14% 0.05% 0.06%
Underlying cost:income ratio 120% 100% 88%
8. In the fourth quarter £4.6m of fee and commission expenses relating to
2019 that were previously classified as operating costs were reclassified as
net fee and other income to better reflect their nature.
For more information, please contact:
Metro Bank PLC Investor Relations
Jo Roberts
+44 (0) 20 3402 8900
jo.roberts@metrobank.plc.uk
Metro Bank PLC Media Relations
Tina Coates / Abigail Whittaker
+44 (0) 7811 246016 / +44 (0) 7989 876136
pressoffice@metrobank.plc.uk (mailto:pressoffice@metrobank.plc.uk)
Teneo
Charles Armitstead / Haya Herbert Burns
+44 (0)7703 330269 / +44 (0) 7342 031051
Metrobank@teneo.com
ENDS
About Metro Bank
Metro Bank is celebrated for its exceptional customer experience. Its mobile
app and online service achieved the top spot in the Competition and Market
Authority's Service Quality Survey among personal and business current account
holders in February 2020; the bank also ranked in the top two for overall
service and store service for personal and business customers. It was awarded
'Best All Round Personal Finance Provider' at the Moneynet Personal Finance
Awards 2019.
Offering retail, business, commercial and private banking services, it prides
itself on giving customers the choice to Bank however, whenever and wherever
they choose. Whether that's through its network of stores open seven days a
week, early until late, 362 days a year; on the phone through its UK-based
24/7 contact centres; or online through its internet banking or award-winning
mobile app: the bank offers customers real choice.
The bank employs around 3,500 colleagues and is headquartered in Holborn,
London.
Metro Bank PLC. Registered in England and Wales. Company number: 6419578.
Registered office: One Southampton Row, London, WC1B 5HA. 'Metrobank' is the
registered trademark of Metro Bank PLC.
It is authorised by the Prudential Regulation Authority and regulated by the
Financial Conduct Authority and Prudential Regulation Authority. Most relevant
deposits are protected by the Financial Services Compensation Scheme. For
further information about the Scheme refer to the FSCS website
www.fscs.org.uk.
All Metro Bank products are subject to status and approval.
Metro Bank PLC is an independent UK bank - it is not affiliated with any other
bank or organisation (including the METRO newspaper or its publishers)
anywhere in the world. Please refer to Metro Bank using the full name.
CHIEF EXECUTIVE OFFICER'S STATEMENT
I was delighted to join Metro Bank in September 2019, initially as Chief
Transformation Officer and now as Chief Executive Officer. I would like to
begin by extending my deepest thanks to all the Metro Bank colleagues who have
welcomed me and more importantly have kept the customer focus at the heart of
all we do, even during a challenging year.
Building on our strengths
In many ways, the response to the challenges of 2019 has demonstrated the
underlying resilience of Metro Bank. The core strength of Metro Bank has been,
and will remain, an AMAZEING group of colleagues who are tirelessly focused on
customer service. It is our colleagues who will ensure Metro Bank achieves its
ambition to become the UK's best community bank.
The CMA results, where Metro Bank was rated number 1 for store service and
number 1 for mobile and online banking is external validation of what I have
learned over the last few months - Metro Bank is completely focused on its
customers. The ratings also show the commitment of Metro Bank to providing
full-service community banking, instore, online and over the phone.
The energy expended to surprise and delight customers has continued to create
FANS, even during a difficult 2019. Customer accounts grew almost 25% with
385,000 new accounts opened at Metro Bank during the year, bringing total
accounts to more than 2 million. In addition, retail customer deposit balances
grew 33% in the year and SME customer balances were up 3%.
Proving our community banking philosophy and 'clicks and bricks' model,
combined with an exceptional level of service resonates well with customers we
continue to be successful in growing the number of personal and business
current accounts. Also in our current heartland of London and the South East
the number of SME business current account switchers choosing Metro Bank
remained strong in 2019 at 15%.
We're absolutely committed to bringing market-leading service to SMEs and
injecting more competition into the market, and we have already demonstrated
our success in deploying Capability & Innovation funds to date. For
example, in 2019, Metro Bank launched Business Insights - an in-app account
insights tool for SMEs, MCash - an on-demand cash collection and delivery
service, and opened its first store in the North, in Manchester. In February
2020, we agreed a revised business case with BCR whereby we have aligned Metro
Bank's public commitments with our new strategy, and will return £50m of the
original £120m we were awarded. Looking forward, with a reduced amount of
£70m, alongside Metro Bank's own investment of c.£140m, the bank will
continue to transform the SME experience - through its market-leading service
proposition, 15 new stores opening in the North of England (reduced from 30),
and continued investment in its digital capabilities. With BCR's agreement,
we're pleased to have been able to forge a new plan which delivers for SMEs
and aligns with our new strategy.
The way forward - 'Becoming the UK's best community bank'
Over the last six months, my management team and I have worked with the Board
to evaluate a new strategy for Metro Bank to enable it to deliver acceptable
returns for shareholders. The inherent strengths of Metro Bank - AMAZEING
culture, AMAZEING colleagues, AMAZEING customer service and a history of
generating meaningful retail and SME deposit growth - provide solid
foundations for a straightforward strategy where execution is key.
We have developed a set of strategic priorities with the ambition of becoming
'the UK's best community bank'. Community banking means being embedded in the
local communities that we serve, ensuring local decision-making, providing
access to simple and straightforward retail, business banking and corporate
services that best meet the needs of residents and businesses in the
surrounding area.
However, to build a platform that delivers acceptable returns for our
shareholders, we must reduce the rate at which costs are growing, continue to
evolve our customer proposition, invest efficiently in our infrastructure and
be more effective with how we use our balance sheet to generate returns.
Our new strategy has these principles at its core:
1) Cost saving initiatives
Cost growth has outstripped revenue growth and this cannot continue. Metro
Bank has invested heavily in its store estate, creating a significant fixed,
or quasi-fixed, cost base. We have performed a detailed store by store
financial analysis to consider whether it made economic sense to close stores.
It doesn't. Every store is still growing - all are more profitable tomorrow
than today - and they provide a significant untapped potential as a
distribution channel.
There are another group of costs that are driven by the operations of the
business. These processing costs, including things like payment processing,
credit card processing, etc. are mostly volume driven and bound by existing
contracts. Another difficult area for reducing costs over the short-term.
The remaining costs, the addressable costs, are made up of non-store colleague
costs, non-store lease costs and non-store operations.
To effectively control these expenses, plans are in place to revisit our
non-store property leases, especially in central London. In addition, the
infrastructure investment in the plan includes several initiatives that allows
Metro Bank to scale more effectively. This includes new digital self-service
functionality, more straight through processing and new call centre
infrastructure.
We expect low single digit 'run the bank' cost growth CAGR 2020 to 2024,
allowing the cost:income ratio to fall to 70-75% by 2024. To enable this
objective, we will spend £250-£300 million of new opex investment (excluding
depreciation and amortisation) and c.£100 million of capex, front end loaded.
We have started to show our ability to moderate costs with sequential
reductions in the pace of cost growth through 2019, and our revised agreement
with BCR will allow us to become more cost efficient quicker while continuing
to deliver for SMEs. This gives me great confidence that we can deliver our
clear initiatives within the stated timeframe.
While there are a number of initiatives to contain costs, improving
shareholder returns is a revenue story. It is about creating scale through
deposit and revenue growth while holding costs and investments.
2) Revenue initiatives
There is significant opportunity to grow revenue at Metro Bank, through
building stronger relationships with our existing customers, continuing to
attract more people to our stores, embedding ourselves in more communities in
the UK, continuing to invest in our number 1 rated digital and online offering
and to upgrade our telephony infrastructure. This is a bricks, clicks and
phone strategy that will drive revenue.
We need to deepen relationships with our customers by improving the range of
our products and their availability through new and existing channels. For
example, we intend to meet more customer needs by offering a broader range of
unsecured customer loans, SME lending products, business and personal credit
cards and niche mortgages, all while maintaining our disciplined attitude
towards underwriting. This is an area Metro Bank has not previously focused
on, evidenced by the fact that we currently sell an average of 2 unsecured
personal loans per store per month and only 3% of our Personal Current Account
base hold our credit cards.
It also aligns perfectly with our customer service ethos, by meeting more
customer needs, we create more FANS. We will also build on Metro Bank's great
strength of winning new customers and I believe that there is a significant
opportunity to enhance footfall conversion in stores. We will do this by
developing more effective in-store processes and improving colleague training.
Whilst we have grown our deposits at a CAGR of 30% over the last five years,
our strategy conservatively budgets significantly lower deposit growth numbers
over the next five years. In addition, 2020 has the lowest deposit growth
forecast of any year in the plan and is only 25% of our annual deposit growth
in 2018, even though Metro bank has six more stores.
Revenue growth is predicated on doing more with what we already have. The
growth does not rely on significant store growth, although the plan does allow
us to open of a limited number of new stores. This includes six stores in 2020
and a further 18 between 2021-2024 including our revised C&I commitment.
This will give us the opportunity to embed Metro Bank in more communities and
bring our award-winning proposition closer to more people.
3) Infrastructure
We need to continue to build our number 1 service propositions in store and
digital/online to ensure we continue to offer the best channel experience in
an efficient way. To enable this, we need to continue to invest in our digital
and physical infrastructure to deliver process improvements and enhance our
core capabilities. We will continue to invest in stores, but in a more
cost-efficient way - our new stores will be flexible in both size and design
and we'll aim to streamline and improve in store processes. We'll also grow
our digital service offering and build out customer self-service
opportunities. By pivoting towards greater automation we will improve our
speed to market and streamline back-office functions.
It's important that all of this is done whilst also enhancing our internal
capabilities and resilience. This will be executed through investment in cyber
resilience as well as investment in core risk systems such as financial crime
infrastructure. We will of course continue investment in our core IT systems
to ensure that we keep pace with the ever-changing regulatory agenda.
4) Balance sheet optimisation
Metro Bank has not focused on risk adjusted return on regulatory capital as
much as is required to drive adequate returns to shareholders. Focusing on
risk adjusted returns and growth in tangible book value will allow better
planning decisions to be made going forward and deliver more value to
shareholders.
Business lines, portfolios and investments will be reviewed based on the above
discipline on an ongoing basis. We will sell assets, securitise portfolios and
rethink investment spend as necessary to ensure we are maximising the return
on the balance sheet.
The loan portfolio composition will shift over the life of the plan. Unsecured
credit will be offered to SME and retail customers, applying risk based
pricing. Niche mortgage lending will become a larger share of our mortgage
operations and commercial lending to our valued customers will continue to
grow.
5) Internal and external communications
I am pleased that we have launched our first marketing campaign -
People-People Banking - which showcases our incredible colleagues and helps
customers and potential customers to understand Metro Bank's differentiators.
We will set realistic expectations of the future direction of Metro Bank and
update on progress in a timely manner. For our colleagues we will continue
to provide full transparency to help inform and equip them to fulfil their
roles and maintain our already high levels of engagement.
A challenging 2019
Last year, we faced headwinds from industry-wide competitive pressures, an
evolving regulatory landscape, continued low interest rates and political
uncertainty from Brexit. While these external challenges have dampened returns
across the broader sector, Metro Bank faced specific challenges that impacted
growth and profitability. These have been well trailed in previous
announcements, and management undertook prudent steps to manage our capital
and liquidity positions in response. Although these actions have impacted on
profitability in the short to medium term, we enter 2020 with a resilient
balance sheet, loyal FANS and a committed colleague base.
In closing, it would be remiss not to thank Vernon Hill and Craig Donaldson
for all they have done for Metro Bank since it opened the doors to its first
store 10 years ago. I truly appreciate the AMAZEING colleagues they have
recruited into the business. It is these colleagues that give me confidence in
the future of Metro Bank.
Dan Frumkin
Chief Executive Officer
Financial review
The challenges we have faced this year are reflected in our trading
performance for 2019. Our underlying loss before tax of £11.7 million is a
decrease from the £50.0 million underlying profit we reported in 2018. This
reduction reflects a difficult market backdrop driven by sustained mortgage
market competition, low interest rates, the earnings impact of debt issuance,
and the adoption of IFRS 16 that changed how we account for our lease costs.
We are also absorbing the financial impacts of management actions taken to
maintain a strong capital and liquidity position following events of the first
half of the year. The sale of £1.5 billion interest-bearing treasury assets,
a £521 million loan portfolio disposal, adjustments to deposit pricing and a
slower pace of loan growth have reduced revenue in the second half of the
year. The statutory loss before tax of £130.8 million in 2019 reflects the
impact of certain non-recurring items including the write-down of certain
intangible assets as well as transformation and remediation costs.
Despite these challenges we have continued to deliver on key objectives.
During 2019 we made good progress with our cost transformation programme,
reducing the pace of cost growth in the second half of the year relative to
prior periods, whilst continuing to expand our physical presence and product
offering. We have also been successful in growing our customer base and
deepening relationships with existing customers, driving higher underlying net
fee and other income to £90.4 million, up 43% from £63.3 million in 2018.
Asset quality has remained strong, with 2019 cost of risk at 0.08% compared to
0.07% in the prior year. Our strongly performing credit portfolios and a
robust capital and liquidity position stands us in good stead as we enter
2020.
Deposits
Deposits from customers ended the year at £14.5 billion, with a reduction in
the first half of the year driven by the intense speculation that preceded the
£375 million equity capital raise in May 2019. Deposit withdrawals
predominantly came from a limited number of our larger commercial customers
with commercial deposit balances (excluding SMEs) reducing to £2.5 billion
from £5.1 billion in 2018.
Customer deposits 2019 2018 Change
£'billion £'billion
Retail customers (excluding retail partnerships) 6.9 5.2 33%
Retail partnerships 1.8 2.2 (18%)
Commercial customers (excluding SMEs) 2.5 5.1 (51%)
SMEs 3.3 3.2 3%
Total customer deposits 14.5 15.7 (8%)
Retail and SME deposits displayed significant resilience in 2019. Retail
deposits (excluding retail partnerships) continued to grow through the year to
£6.9 billion from £5.2 billion in 2018, supported in part by competitively
priced fixed-term retail savings. We also reported a 3% improvement in the SME
deposit base, which ended the year at £3.3 billion, compared to £3.2 billion
in 2018, demonstrating the strength of our SME proposition. These stable and
higher-liquidity value retail and SME deposits now represent 48% and 23% of
our deposit base respectively, up from 33% and 20% as at 31 December 2018.
2019 2018 Change
£'million £'million
Deposits 14,477 15,661 (8%)
Customer accounts (m) 2.0 1.6 25%
% current accounts 29% 30% (1pp)
Cost of deposits 0.78% 0.61% 17bps
Strong service recognition results, increasing brand awareness and new store
openings as well as competitive pricing on our fixed-term retail savings
products aided growth in the total number of customer accounts. 2019 was a
strong year for customer acquisition, with the number of customer accounts
growing to 2.0 million from 1.6 million at year-end 2018.
Deposit growth into 2020 and beyond, alongside excess liquidity and wholesale
funding, will support the repayment of drawdowns under the bank of England's
Term Funding Scheme ("TFS"). Our total borrowings under the scheme are £3.8
billion of which £543 million is repayable in the second half of 2020.
Assets
Total assets reduced marginally to £21.4 billion from £21.6 billion at the
end of 2018, which primarily reflects a £1.1 billion reduction in treasury
assets, partially offset by a £0.4 billion increase in net loans and advances
to customers and a one-off £313 million increase in right-of-use lease assets
following the adoption of IFRS 16. The reduction in treasury assets reflects
the sale of non-LCR eligible assets to prudently manage the bank's liquidity
position through the year.
2019 2018 Change
£'million £'million
Loans and advances to customers 14,681 14,235 3%
Total assets 21,400 21,647 (1%)
Loan to deposit ratio 101% 91% 10pp
Cost of risk 0.08% 0.07% -
Despite the £521 million disposal of a previously acquired loan portfolio,
net loans and advances increased by 3% to £14.7 billion (31 December 2018:
£14.2 billion). The disposed portfolio was not considered a strategic asset,
with its sale having no impact on our customer franchise given it was
continually serviced by an external provider. Lending growth in the year was
primarily driven by the ongoing support of our existing franchise and
fulfilment of our committed pipeline at the end of 2018 flowing through during
the first months of the year. As the year progressed, lending growth slowed as
we proactively managed our loan to deposit ratio and looked to reduce our
exposure to higher risk-density commercial lending following the RWA
adjustment in January 2019. Commercial lending as a percentage of total
lending reduced to 28% from 31% in 2018.
Our loan to deposit ratio increased during the first half of 2019 to 109% at
30 June 2019 from 91% at the end of 2018 following growth in customer loans.
However, we made good progress in reducing the ratio in the second half of the
year, supported by a return to deposit growth in the third and fourth quarters
and management of lending volumes through upward adjustments to asset pricing.
Asset quality remained particularly robust in 2019 with cost of risk broadly
remaining flat at 0.08% compared to 0.07% in the previous year. Non-performing
loans increased to 0.53% from 0.15% in 2018 reflecting seasoning of the loan
portfolio and a single name commercial exposure.
Income
Total underlying income decreased marginally year-on-year to £400.1 million
from £404.1 million, reflecting a 3% reduction in interest earning assets to
£20.3 billion and interest income pressure driven by sustained competition in
the residential mortgage market, offset by a 43% increase in underlying net
fee and other income. Interest expense increased to £188.1 million from
£114.3 million and captures the full year expense of the £250 million
subordinated Tier 2 notes issued in June 2018 and one quarter of interest on
the £350 million senior non-preferred notes issued in October 2019. Cost of
deposits has risen to an average of 78bps for full-year 2019, from 61bps in
2018 reflecting competitive pricing in retail fixed-term savings and
absorption of the impact of the August 2018 Bank of England base rate rise.
The adoption of IFRS 16, the new leasing standard, also had an impact on net
interest income through the recognition of an interest charge on the lease
liability, partly offset by a reduction in lease expenses. The net effect was
a c.£18 million reduction in revenue. Given growth in our store network and
our relatively young lease portfolio, the impact is more pronounced for us
compared with many of our peers.
The above trends resulted in a year-on-year reduction in our net interest
margin ("NIM") to 1.51% from 1.81%.
NIM Reconciliation Reconciliation
2018 Full Year Net Interest Margin 181bps
IFRS 16 adoption 7bps
Treasury assets (incl. disposal) 8bps
Lending yield 5bps
Cost of deposits 12bps
Debt cost 11bps
Loan-to-deposit ratio and other 13bps
2019 Full Year Net Interest Margin 151bps
The income impact from the reduction in NIM was partly offset by the strong
growth in fee and commission income, up 43% year-on-year to £90 million
(2018: £63 million) on the statutory basis. Non-interest income growth has
been an area of focus for the bank throughout 2019, with the increase driven
by optimisation of fee structures, strong growth in customer accounts and the
introduction of new value-added products and services. Net fee and other
income (excluding net gains on sale of assets) as a percentage of total
revenue has increased to 24% from 16% in 2018. Given our strong focus on
customer service and further expansion of our product offering for SMEs, we
expect non-interest income to continue to grow in 2020.
Operating expenses
2019 2018 Change
£'million £'million
Depreciation and amortisation 76.4 45.1 69%
Total operating expense 534.7 355.5 50%
Total underlying expenses 400.1 346.1 16%
Statutory cost:income ratio 129% 88%
Underlying cost:income ratio 100% 86%
Underlying operating expenses grew by 16% during the year to £400.1 million.
Given our focus on improving cost efficiency, the pace of cost growth slowed
in the second half of 2019 to just 2% versus the first half. The increase in
operating expenses primarily reflects the expansion of our store footprint
driving higher people and occupancy costs and growth in regulation and
technology costs.
Depreciation and amortisation grew to £76.4 million during 2019 (2018: £45.1
million) reflecting growth in the store network to 71 stores (2018: 65) and
ongoing investment in IT and digital to support our integrated offering. The
introduction of IFRS 16 lease accounting on 1 January 2019 also led to a
depreciation charge on the right-of-use asset amounting to £16 million.
The underlying cost/income ratio increased to 100% in 2019 from 86% in 2018,
driven by the income challenges outlined above. The bank-wide efficiency
programme that is now embedded in the organisation will help to partially
offset expected income pressure in 2020 by moderating the pace of operating
expense growth.
The difference between underlying loss before tax of £11.7 million and
statutory loss before tax of £130.8 million is driven by the write-down of
certain intangible assets as well as costs relating to the bank-wide
transformation programme and the remediation work undertaken following the RWA
adjustment in January 2019 and work undertaken in relation a review of the
bank's sanctions procedures. The RWA remediation programme is focused on
improving risk-related internal systems, processes, controls and governance
and is expected to be completed in 2020.
Stores
During 2019 we opened six stores, including the entry into new regions in the
Midlands and the North. The opening in Manchester is the first to be delivered
as part of our BCR commitments, and together with the new stores in the
Birmingham area, represent an important phase of growth into SME hotspots
outside of our existing geographical footprint.
At the year-end we had 71 stores and in early 2020 we opened in Wolverhampton,
Cardiff and Hammersmith. Going forward we will maximise the existing estate
and selectively expand in strategic locations. We will adapt the new store
formats to fit the communities that we will be serving, often with smaller
sites, yet retaining the exceptional levels of service our customers expect.
Taxation
During 2019 we made a total tax contribution of £123.1 million (2018: £120.3
million), which comprised £78.2 million (2018:£78.4 million) of taxes we
paid and a further £44.9 million (2018: £41.9 million) of taxes we
collected.
Taxes paid 2019 2018
Corporation tax 1.6% 4.6%
Business rates 12.9% 11.5%
Land transaction tax 3.3% 6.3%
Employer NICs 20.6% 18.7%
Irrecoverable VAT and Customs duty 61.3% 58.8%
Other 0.3% 0.1%
Total taxes paid £78.2m £78.4m
Taxes collected on behalf of HMRC 2019 2018
Employee NICs 23.6% 22.3%
PAYE 62.1% 61.2%
Net VAT 14.3% 15.4%
Other - 1.1%
Total taxes paid £44.9m £41.9m
In 2019 our tax expense recognised in the income statement was £51.8 million
(2018: £13.5 million). This
primarily relates to the derecognition of the deferred tax asset for unused
tax losses. This is an accounting non-cash item and does not impact our
regulatory capital or liquidity. The derecognition reflects the impact on our
short-term results of the investment announced as part of our strategy. Our
effective tax rate for the year was (39.5%) (2018: 33.2%).
Capital
We have maintained a robust capital position throughout 2019, supported by the
£375 million equity capital raise in May 2019 and a slowdown in the pace of
RWA growth, up 2% to £9.2 billion. Although the January 2019 adoption of IFRS
16 and RWA adjustment resulted in one-off capital impacts, our CET1 ratio
remained above both our 12.0% minimum target and our 10.6% minimum regulatory
requirement. Our 15.6% CET1 ratio and 18.3% total capital ratio demonstrate
the strength of our capital position and provide headroom for controlled
growth and the delivery of our strategy.
Reconciliation
Total capital ratio at 31 December 2018 15.9%
IFRS16 Adoption (capital charge against new right of use assets) (0.5%)
Annual operational risk increment (0.3%)
Organic Lending Growth (0.4%)
Profit & Loss Account (0.7%)
Investment in Intangibles and other (0.6%)
Asset Disposals 1.0%
2019 Equity Raise 3.9%
Total capital ratio at 31 December 2019 18.3%
Senior unsecured debt (issued October 2019) 3.8%
Total capital plus MREL ratio at 31 December 2019 22.1%
The senior non-preferred debt issuance in October 2019 ensured compliance with
our interim MREL requirement of 18% of RWAs plus 3.5% regulatory buffers, with
the bank closing 2019 with a total capital plus MREL ratio of 22.1%.
Other regulatory developments include the announcement in December 2019 by the
bank of England of a change in the countercyclical capital buffer ("CCyB") to
2.00% from 1.00% currently, which is binding from 16 December 2020. Reflecting
the additional resilience associated with higher macroprudential buffers, the
PRA has said that it will consult banks on the potential reduction on variable
capital requirements in order to leave overall loss-absorbing capacity
(capital plus bail-inable debt) requirements broadly unchanged.
2019 2018
£'million £'million
CET1 capital 1,427 1,171
Risk-weighted assets ("RWAs") 9,147 8,936
CET1 ratio 15.6% 13.1%
Total regulatory capital ratio 18.3% 15.9%
Total regulatory capital plus MREL ratio 22.1% N/A
Regulatory leverage ratio 6.6% 5.4%
Leverage 8.3% 6.4%
Looking ahead
FY2020 FY 2024
Guidance Targets Guidance
Deposits · Mid-single digit growth · <10% deposit CAGR 2020-2024 · Cost of deposits to reduce over time as the mix of current
accounts increases
· <100% loan to deposit ratio
Revenue · NIM in line with Q4 2019 · NIM expansion vs FY 2019 · Target lending mix (75% mortgages, 20% SME and 5% unsecured)
· Fee and other income to increase as proportion of revenue mix
· 15-30 bps cost of risk
Operating Costs · Mid-high-single digit growth excluding investment opex · New investment spend £250-£300m opex (excluding depreciation · 'Run the bank' cost low single digit CAGR 2020-2024
and amortisation) and c.£100m capex by 2024, front-end loaded
· Cost income ratio 70-75% by 2024 (incl. new investment spend,
amortisation and depreciation)
Capital · CET1 ratio >12% · Minimum 12% CET1 and >22.5% Total Capital plus MREL · Additional MREL issuance post Jan 2022 in line with regulatory
requirements
· Up to £500m of MREL issuance before 1 Jan 2022
Returns · >8.5% statutory RoTE by FY2024 · Conservative target prudently excludes impact of AIRB approval
The statements above were authorised by the Board for issue on 26 February
2020.
CONSOLIDATED condensed STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2019
Notes Year ended Year ended
31 December 31 December 2018
2019
£'million
£'million
Interest income 2 496.2 444.4
Interest expense 2 (188.1) (114.3)
Net interest income 308.1 330.1
Fee and commission income 67.4 42.5
Fee and commission expense (6.4) (4.9)
Net fee and commission income 61.0 37.6
Net gains on sale of assets 1.6 10.7
Other income 44.9 25.7
Total income 415.6 404.1
General operating expenses (380.6) (305.6)
Depreciation and amortisation 8, 9 (76.4) (45.1)
Impairment and write-off of property, plant, equipment and intangible assets 8, 9 (77.7) (4.8)
Total operating expenses (534.7) (355.5)
Expected credit loss expense (11.7) (8.0)
(Loss)/profit before tax (130.8) 40.6
Taxation 3 (51.8) (13.5)
(Loss)/profit for the year (182.6) 27.1
Other comprehensive expense for the year
Items which will be reclassified subsequently to profit or loss:
Movement in respect of investment securities held at fair value through other
comprehensive income (net of tax):
- changes in fair value 2.7 (2.4)
- fair value changes transferred to the income statement on disposal (2.4) (1.5)
Total other comprehensive income/(expense) 0.3 (3.9)
Total comprehensive (loss)/profit for the year (182.3) 23.2
Earnings per share
Basic (pence) 13 (123.9) 29.1
Diluted (pence) 13 (123.9) 28.2
CONSOLIDATED condensed BALANCE SHEET
AS AT 31 DECEMBER 2019
Notes 31 December 31 December
2019
2018
£'million £'million
Assets
Cash and balances with the bank of England 5 2,989 2,472
Loans and advances to customers 6 14,681 14,235
Investment securities held at fair value through other comprehensive income 7 411 674
("FVOCI")
Investment securities held at amortised cost 7 2,154 3,458
Property, plant and equipment 8 856 454
Intangible assets 9 168 197
Prepayments and accrued income 66 66
Deferred tax asset 3 - 41
Other assets 75 50
Total assets 21,400 21,647
Liabilities
Deposits from customers 14,477 15,661
Deposits from central banks 3,801 3,801
Debt securities 591 249
Repurchase agreements 250 344
Derivative financial liabilities 8 1
Lease liabilities 14 341 -
Deferred grant 10 50 -
Provisions 17 2
Deferred tax liability 3 15 -
Other liabilities 267 186
Total liabilities 19,817 20,244
Equity
Called-up share capital 11 - -
Share premium 11 1,964 1,605
Retained earnings (392) (209)
Other reserves 11 7
Total equity 1,583 1,403
Total equity and liabilities 21,400 21,647
CONSOLIDATED condensed STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2019
Called-up share Share Retained FVOCI Share Total
capital premium earnings £'million reserve option equity
£'million £'million £'million reserve £'million
£'million
Balance as at 1 January 2019 - 1,605 (209) (3) 10 1,403
Net loss for the year - - (183) - - (183)
Other comprehensive income (net of tax) relating to investment securities - - - - - -
designated at fair value through other comprehensive income
Total comprehensive loss - - (183) - - (183)
Shares issued - 375 - - - 375
Cost of shares issued - (16) - - - (16)
Net share option movements - - - - 4 4
Balance as at 31 December 2019 - 1,964 (392) (3) 14 1,583
Balance as at 1 January 2018 - 1,304 (236) 1 16 1,085
Net profit for the year - - 27 - - 27
Other comprehensive expense (net of tax) relating to investment securities - - - (4) - (4)
designated at fair value through other comprehensive income
Total comprehensive income - - 27 (4) - 23
Shares issued - 304 - - - 304
Cost of shares issued - (3) - - - (3)
Net share option movements - - - - (6) (6)
Balance as at 31 December 2018 - 1,605 (209) (3) 10 1,403
Notes 11 11
CONSOLIDATED condensed CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2019
Notes Year ended Year ended
31 December 2019 31 December 2018
£'million £'million
Reconciliation of (loss)/profit before tax to net cash flows from operating
activities:
(Loss)/profit before tax (131) 41
Adjustments for:
Impairment and write-off of property, plant, equipment and intangible assets 8, 9 78 5
Interest on lease liabilities 18 -
Depreciation and amortisation 8, 9 76 45
Share option charge 4 5
Grant income recognised in income statement (16) -
Amounts provided for 12 -
Gain on sale of assets and fair value gains on derivatives (2) (11)
Accrued interest on and amortisation of investment securities (8) (7)
Changes in operating assets and liabilities
Changes in loans and advances to customers (445) (4,615)
Changes in deposits from customers (1,184) 3,992
Changes in other operating assets (26) (36)
Changes in other operating liabilities (31) 734
Net cash (outflows)/inflows from operating activities (1,655) 153
Cash flows from investing activities
Sales of investment securities 2,193 1,522
Purchase of investment securities (618) (1,740)
Purchase of property, plant and equipment 8 (120) (150)
Purchase and development of intangible assets 9 (79) (75)
Net cash inflows/(outflows) from investing activities 1,376 (443)
Cash flows from financing activities
Shares issued 11 375 304
Cost of shares issued 11 (16) (3)
Debt securities issued 350 250
Cost of debt securities issued (8) (1)
Grant received 120 -
Repayment of capital element of leases (25) -
Net cash inflows from financing activities 796 550
Net increase in cash and cash equivalents 517 260
Cash and cash equivalents at start of year 5 2,472 2,212
Cash and cash equivalents at end of year 5 2,989 2,472
NOTES
1. Basis of preparation and significant accounting policies
Basis of preparation
The Group's consolidated financial statements have been prepared in accordance
with International Financial Reporting Standards ("IFRS") as adopted by the
EU, the IFRS Interpretations Committee ("IFRS IC") and the Companies Act 2006
applicable to companies reporting under IFRS.
The financial statements are prepared on a going concern basis as the
Directors are satisfied that the Group has the resources to continue in
business for the foreseeable future.
Changes in accounting policy and disclosures
The accounting policies and methods of computation are consistent with those
applied and disclosed in the Group's 2018 Annual Report and Accounts other
than changes owing to the adoption of IFRS 16 'leases'. Where disclosures have
been amended as a result of the adoption of IFRS 16, the updated policy has
been included within these preliminary results.
IFRS 16 'leases'
On 1 January 2019 the Group adopted IFRS 16. IFRS 16 provides guidance on the
classification, recognition and measurement of leases to help provide useful
information to the users of financial statements. IFRS 16 replaces IAS 17
'leases' and provides a single lessee accounting model, requiring lessees to
recognise right of use ("RoU") assets and lease liabilities for all applicable
leases, with operating leases thus being brought onto the face of the balance
sheet.
Transition approach
The Group adopted IFRS 16 on the modified retrospective basis and as such the
comparators within these financial statements have not been restated and
continue to be presented under IAS 17. The Group elected to adopt IFRS 16
using the modified retrospective basis as this prevents an opening adjustment
to equity and as such maintained the Group's CET1 capital upon transition.
On adoption of the standard on 1 January 2019, the Group recognised lease
liabilities for operating leases of £328 million. The Group elected the
transitional option to set the RoU asset equal to the related lease liability
for all leases as at 1 January 2019 and therefore there was no opening
adjustment to retained earnings. The total amount of RoU asset recognised on 1
January was £313 million, this differs to the opening lease liability due to
adjustments being made for the amounts accrued in respect of rent free periods
and any prepaid rentals as at the point of transition.
Key estimates
The only key estimate made at the point of transition was the discount rate
used to measure lease liabilities. Under IFRS 16 lease payments are discounted
using the interest rate implicit in the lease or, if that rate cannot be
readily determined, the Group's incremental borrowing rate. Due to the
interest rate implicit in the lease not being readily determinable for any
leases at transition the Group's incremental cost of borrowing was used. The
weighted average discount rate at transition was 5.5% and was determined by
reference to the rate that the Group would be able to borrow in the market for
similar assets on a similar basis (i.e. secured) and over a similar time
period. The table below shows what the impact would have been on the opening
lease liability had the discount rate been one per cent higher or lower.
Decrease in weighted average discount rate to 4.5% Increase in weighted average discount rate to 6.5%
£'million £'million
Lease liability at 1 January 2019 357 303
Key judgements
A key judgement was made in regards to whether the Group will exercise any
breaks contained within its leases as this has a significant impact on the
measurement of the lease liability. The majority of the Group's leases are
around 25 years in length and a proportion of these have break clauses part
way through. At transition it has been assumed all leases will be retained for
their full term, unless there is a specific plan to vacate the site at an
early break point in which case the lease term is deemed to be the period up
until that point. This is consistent with the period of time over which
leasehold improvements are depreciated over.
Practical expedients
The available practical expedients of exempting leases with a short life (less
than 12 months) or low value (less than £5,000) on an ongoing basis has been
applied. These leases will continue to be recognised on a straight line basis
over the lease term and in total are immaterial to the Group. As a result, the
key leases to which the full requirements of IFRS 16 have been applied are
property leases of stores and head office sites. At transition there were no
leases of 12 months or less (or any longer term leases in their final year)
other than those that had a value of below £5,000. The total value of low
lease assets at transition was immaterial.
Impact on the financial statements
Due to the Group's young age coupled with its store opening profile over
recent years, the vast majority of leases remain in the first half of their
terms, with an average remaining lease length of 20 years. The Group's current
business model will also see it continue to open stores in the years ahead,
albeit at a slower pace, leading to an expanding lease portfolio. These two
factors led to higher charges recognised in the income statement in the near
term when compared to IAS 17, reflecting a different profile of cost
recognition under each standard. Charges under IFRS 16 are front loaded in the
earlier years of a lease compared to IAS 17 which requires lease expenses to
be recognised on a straight line basis.
Net interest margin ("NIM") is reduced by the adoption of IFRS 16 since the
rental expense (part of operating expenses) under IAS 17 will be replaced by a
depreciation and an interest expense charge. The interest expense is
recognised within NIM, thus reducing it on an ongoing basis.
As stated above IFRS 16 has been adopted on a modified retrospective basis and
as such there is no adjustment to equity upon transition. A new RoU asset and
lease liability are included on the balance sheet. The addition of the RoU
asset has had an impact on regulatory capital as this has a 100% risk
weighting, compared to no risk weighting when these were held off balance
sheet under IAS 17.
The table below reconciles the undiscounted lease commitments as at 31
December 2019 to the opening lease liability and RoU recognised under IFRS 16
on 1 January 2019.
£'million
Total undiscounted lease commitments at 31 December 2018 (See note 14) 659
Exclusion of VAT from lease liability (116)
Discounting at a weighted average rate of 5.5% (215)
Lease liability included in the statement of financial position at 1 January 328
2019
Less amounts previously recognised in respect of prepaid rentals and rent free (15)
periods
Right of use asset included in the statement of financial position at 1 313
January 2019
Accounting policy
The updated accounting policy relating to leases can be found within note 14.
2. Net interest income
Interest income
2019 2018
£'million £'million
Cash and balances held with the bank of England 17.0 11.2
Loans and advances to customers 435.0 365.2
Investment securities held at amortised cost 40.6 57.7
Investment securities held at FVOCI 3.6 10.3
Total interest income 496.2 444.4
Interest expense
2019 2018
£'million £'million
Deposits from customers 112.4 83.7
Deposits from central banks 28.5 22.7
Lease liabilities 17.7 -
Debt securities 22.1 7.2
Repurchase agreements 7.4 0.7
Total interest expense 188.1 114.3
3. Taxation
Tax expense
The components of the tax expense for the year are:
2019 2018
£'million £'million
Current tax
Current tax 3.5 (2.8)
Adjustment in respect of prior years (0.3) (0.7)
Total current tax expense 3.2 (3.5)
Deferred tax
Origination and reversal of temporary differences (52.0) (9.8)
Effect of changes in tax rates (2.8) (0.7)
Adjustment in respect of prior years (0.2) 0.5
Total deferred tax expense (55.0) (10.0)
Total tax expense (51.8) (13.5)
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 is as follows:
2019 Effective 2018 Effective
£'million tax rate £'million tax rate
% %
Accounting (loss)/profit before tax (130.8) 40.6
Tax expense at statutory tax rate of 19% (2018: 19%) 24.9 19.0% (7.7) 19.0%
Tax effects of:
Non-deductible expenses - depreciation on non-qualifying fixed assets (3.0) (2.3%) (2.6) 6.4%
Non-deductible expenses - investment property impairment (1.1) (0.9%) (0.5) 1.2%
Non-deductible expenses - remediation (4.4) (3.3%) - -
Non-deductible expenses - other (0.7) (0.5%) (0.6) 1.4%
Impact of intangible asset impairment on R&D deferred tax liability 1.8 1.4% - -
Share based payments (1.9) (1.5%) (1.3) 3.1%
Adjustment in respect of prior years (0.5) (0.3%) (0.2) 0.5%
Current year losses for which no deferred tax asset has been recognised (11.4) (8.7%) - -
Derecognition of tax losses arising in prior years (52.7) (40.2%) - -
Effect of changes in tax rates (2.8) (2.2%) (0.6) 1.5%
Tax expense reported in the consolidated income statement (51.8) (39.5%) (13.5) 33.2%
The effective tax rate for the year is (39.5%) (2018: 33.2%). The main reasons
for this, in addition to the reported accounting loss before tax for the year
(2018: accounting profit before tax), are set out below:
Impact of Intangible Asset Impairment on R&D
During the year the Group impaired £68m of Intangible assets. This relates to
the discontinuation of certain work-in-progress or older IT projects that do
not form part of the Group's revised strategy. As some of these assets had
previously qualified for R&D tax relief the R&D deferred tax liability
has been adjusted to reflect this.
Share based payments
During the period the Group's share price fell from £16.94 to £2.02. This
had the impact of reducing the deferred tax asset held for share options and
contributed £1.2m to the deferred tax charge.
Derecognition of tax losses carried forward
The Group has derecognised the deferred tax asset arising in prior years due
to the expected impact on its forecast short term results of the investment in
cost, revenue and infrastructure transformation. The losses will remain
available for offset in the future and recognition will be revaluated at
future reporting periods.
Effect of changes in tax rates
This relate to the remeasurement of deferred tax due to rate changes.
Deferred tax
Unused Investment securities and impairments Share-based payments Property, plant and equipment Intangible Total
tax losses £'million £'million £'million assets £'million
£'million £'million
2019
Deferred tax assets - 6 - - - 6
Deferred tax liabilities - (2) - (15) (4) (21)
Deferred tax liabilities (net) - 4 - (15) (4) (15)
At 1 January 2019 53 5 1 (11) (7) 41
Income statement (53) (1) (1) (4) 3 (56)
At 31 December 2019 - 4 - (15) (4) (15)
Unused Investment securities and impairments Share-based payments Property, plant and equipment Intangible Total
tax losses £'million £'million £'million assets £'million
£'million £'million
2018
Deferred tax assets 53 7 1 - - 61
Deferred tax liabilities - (2) - (11) (7) (20)
Deferred tax assets (net) 53 5 1 (11) (7) 41
At 1 January 2018 57 4 11 (8) (6) 58
Income statement (4) (1) (1) (3) (1) (10)
Other comprehensive income - 2 - - - 2
Equity - - (9) - - (9)
At 31 December 2018 53 5 1 (11) (7) 41
4. Financial instruments
The Group's financial instruments primarily comprise customer deposits, loans
and advances to customers, cash and balances with the bank of England and
investment securities, all of which arise as a result of normal operations.
The main financial risks arising from financial instruments are credit risk,
liquidity risk and market risks (price and interest rate risk).
The financial instruments the Group holds are simple in nature and no
significant judgments have been made relating to the classification of
financial instruments under IFRS 9.
5. Cash and balances with the bank of England
31 December 31 December
2019 2018
£'million £'million
Unrestricted balances with the bank of England 2,751 2,242
Cash and unrestricted balances with other banks 178 230
Money market placements 60 -
Total cash and balances with the bank of England(9) 2,989 2,472
9. Balances held at other financial institutions have been reclassified during
the year as cash, rather than as loans and advances to banks to better reflect
the unrestricted nature of these balances.
6. Loans and advances to customers
31 December 2019
Gross carrying amount ECL Net carrying
£'million allowance amount
£'million £'million
Consumer lending 233 (13) 220
Retail mortgages 10,430 (8) 10,422
Commercial lending 4,052 (13) 4,039
Total loans and advances to customers 14,715 (34) 14,681
31 December 2018
Gross carrying amount ECL Net carrying
£'million allowance amount
£'million £'million
Consumer lending 288 (9) 279
Retail mortgages 9,625 (11) 9,614
Commercial lending 4,356 (14) 4,342
Total loans and advances to customers 14,269 (34) 14,235
Further information on the movements in gross carrying amounts and ECL can be
found in note 12. An analysis of the gross loans and advances by product
category is set out below:
31 December 31 December
2019 2018
£'million £'million
Overdrafts 77 70
Credit cards 11 11
Term loans 145 207
Total consumer lending 233 288
Residential owner occupied 8,493 7,351
Retail buy-to-let 1,937 2,274
Total retail mortgages 10,430 9,625
Total retail lending 10,663 9,913
Term loans (exc. professional buy-to-let) 2,327 2,448
Professional buy-to-let 1,219 1,380
Total commercial term lending 3,546 3,828
Overdrafts and revolving credit facilities 202 226
Credit cards 3 3
Asset and invoice finance 301 299
Total commercial lending 4,052 4,356
Gross loans and advances to customers 14,715 14,269
7. Investment securities
31 December 31 December
2019 2018
£'million £'million
Fair value through other comprehensive income ("FVOCI") 411 674
Amortised cost 2,154 3,458
Total investment securities 2,565 4,132
Fair value through other comprehensive income
31 December 31 December
2019 2018
£'million £'million
Sovereign bonds 283 351
Residential mortgage backed securities - 64
Covered bonds 128 104
Corporate bonds - 155
Total investment securities held at FVOCI 411 674
Amortised cost
31 December 31 December
2019 2018
£'million £'million
Sovereign bonds 61 58
Residential mortgage backed securities 1,752 2,997
Covered bonds 341 403
Total investment securities held at amortised cost 2,154 3,458
8. Property, plant and equipment
Accounting Policy applicable from 1 January 2019
policy
Property plant and equipment
The Group's property, plant and equipment primarily consists of investments
and improvements in its store network and is stated at cost less accumulated
depreciation and any recognised impairment.
Property, plant and equipment is depreciated on a straight-line basis to its
residual value using the following useful economic lives:
Leasehold improvements Lower of the remaining life of the lease or the useful life of the asset
Freehold land Not depreciated
Buildings Up to 50 years
Fixtures, fittings and equipment 5 years
IT hardware 3 to 5 years
Depreciation rates, methods and the residual values underlying the calculation
of depreciation of items of property, plant and equipment are kept under
review to take account of any change in circumstances.
All items of property, plant and equipment are reviewed at least annually for
indicators of impairment.
Right of use assets
Upon the recognition of a lease liability (see note 14 for further details) a
corresponding right of use ("RoU") asset is recognised. This is adjusted for
any initial direct costs incurred, lease incentives paid or received and any
restoration costs at the end of the lease (where applicable).
The RoU asset is depreciated on a straight line basis over the life of the
lease.
All right of use assets are reviewed at least annually for indicators of
impairment.
Investment property
Investment property is also stated at cost less accumulated depreciation and
any recognised impairment. Depreciation is calculated on a consistent basis
with that applied to land and buildings as disclosed in the table above.
Investment property Leasehold improvements Freehold land Fixtures, IT hardware Right of use assets relating to leased stores and offices Total
fittings and equipment
£'million £'million and buildings
£'million £'million £'million
£'million
£'million
Cost
31 December 2018 10 275 199 33 39 n/a 556
IFRS 16 transition adjustment - - - - - 313 313
1 January 2019 10 275 199 33 39 313 869
Additions - 51 62 5 2 26 146
Disposals - - - - - (7) (7)
Write-offs - (3) - (12) (31) - (46)
Transfers 8 (9) 1 - - - -
31 December 2019 18 314 262 26 10 332 962
Accumulated depreciation
31 December 2018 3 39 9 18 33 n/a 102
IFRS 16 transition adjustment - - - - - - -
1 January 2019 3 39 9 18 33 - 102
Charge for the year - 11 4 6 3 16 40
Impairments 7 - - - - - 7
Write-offs - - - (12) (31) - (43)
Transfers - (1) 1 - - - -
31 December 2019 10 49 14 12 5 16 106
Net book value 8 265 248 14 5 316 856
Investment property primarily consists of shops and offices which are located
within the same buildings as some of the Group's stores, where it has acquired
the freehold interest. In addition it consists of a store initially purchased
for the Group's own use which is no longer felt suitable for a site in its
current form and is currently being retained to generate rental income. At 31
December 2019 the Group's investment property had a fair value of £7 million
(31 December 2018: £7 million). The fair value has been provided by a
qualified independent valuer.
Investment property Leasehold improvements Freehold land Fixtures, IT hardware Total
fittings and equipment
£'million £'million and buildings
£'million £'million
£'million
£'million
Cost
1 January 2018 11 198 136 26 35 406
Additions - 80 59 7 4 150
Transfers (1) (3) 4 - - -
31 December 2018 10 275 199 33 39 556
Accumulated depreciation
1 January 2018 - 29 6 14 29 78
Impairments 3 1 - - - 4
Charge for the year - 10 2 4 4 20
Transfers - (1) 1 - - -
31 December 2018 3 39 9 18 33 102
Net book value 7 236 190 15 6 454
Write-offs
Write-offs in the year consisted of pipeline sites which were abandoned as
part of the change in the Group's strategy; these sites were no longer felt to
be in suitable locations or formats. In addition it included a number of
fixtures, fittings and equipment and IT hardware with a nil book value which
are no longer being used.
Transfers
Transfers represent costs associated with the improvements made to previously
leased stores which have been purchased. These stores were purchased where
there was a strong commercial rationale for doing so. Following the
introduction of IFRS 16 the capital impact of such purchases is considerably
less than previously under IAS 17 and gaining ownership provides greater
flexibility over the site in the future.
Additionally, during the year an acquired freehold site was transferred from
freehold land and buildings to investment property. The site was originally
acquired with the intent of converting into a store, however the change in the
Group's strategy has meant this course of action is no longer felt suitable.
Given there is no intention in the short to medium term to convert this site
into a store the decision was made to continue letting the property, and the
property is considered an investment property.
9. Intangible assets
Goodwill Customer contracts Software Total
£'million £'million £'million £'million
Cost
1 January 2019 4 1 249 254
Additions - - 79 79
Write-offs - (1) (100) (101)
Deferred grant (see note 10) - - (4) (4)
31 December 2019 4 - 224 228
Amortisation
1 January 2019 - 1 56 57
Charge for the year - - 36 36
Write-offs - (1) (32) (33)
31 December 2019 - - 60 60
Net book value 4 - 164 168
Goodwill Customer contracts Software Total
£'million £'million £'million £'million
Cost
1 January 2018 4 1 174 179
Additions - - 75 75
31 December 2018 4 1 249 254
Amortisation
1 January 2018 - 1 30 31
Impairments - - 1 1
Charge for the year - - 25 25
31 December 2018 - 1 56 57
Net book value 4 - 193 197
Write-offs
The write-offs in year consisted primarily of software and applications that
were work in progress that have been abandoned owing to the change in the
Group's strategy.
Goodwill
Goodwill is tested for any impairment on an annual basis. All of the £4
million (31 December 2018: £4 million) goodwill has been allocated to the
Group's asset and invoice finance business. This business was previously
acquired and is considered a standalone cash-generating unit. The recoverable
amount of the cash-generating unit, determined using the value-in-use basis,
was found to be in excess of its carrying amount and as such no impairment to
goodwill was required.
10. Deferred grants
Accounting Grants are recognised where there is reasonable assurance that the Group will
both receive the grant and will be able to comply with all the attached
policy conditions. When the grant relates to an expense item, it is recognised as
income on a systematic basis over the periods that the related costs, for
which it is intended to compensate, are expensed. When the grant relates to an
asset, it is recognised directly against the cost of the asset.
2019 2018
£'million £'million
1 January - -
Grants received 120 -
Released to the income statement (16) -
Offset against capital expenditure (see note 9) (4) -
Element of grant awaiting repayment (50) -
31 December 50 -
On 22 February 2019 the Group was awarded £120 million from the Capability
& Innovation fund (part of the RBS alternative remedies package).
Following changes to the Group's strategy a revised business case was
submitted to the BCR (the awarding body). The proposals put forward were
accepted by BCR on 25 February 2020 as part of which the public commitments
attached to the grant were amended. As part of this it was agreed that £50
million of the grant will be returned to BCR. As disclosed in note 17 the
acceptance of the Group's proposal by BCR post year-end is considered an
adjusting event and as such the £50 million to be repaid is classified as a
liability as at 31 December 2019. All of the sums recognised to date, either
in the income statement or offset against capital expenditure, are still
components of the revised commitments and as such no adjustments to these
amounts has been made.
11. Called-up share capital
The Group has a single class of shares. As at 31 December 2019 172.4 million
ordinary shares of 0.0001p (31 December 2018: 97.4 million) were authorised
and in issue.
In May 2019 the Group issued 75.0 million of ordinary shares for consideration
of £375 million. Associated costs of £16 million have been offset against
the amount raised.
Called-up ordinary share capital, issued and fully paid
The called-up share capital reserve is used to record the nominal share
capital. At the 31 December 2019 the Group's called up share capital was
£172.42 (31 December 2018: £97.40)
2019 2018
£'million £'million
1 January - -
Issued - -
31 December - -
Share premium
The share premium reserve is used to record the excess consideration of any
shares issued over the nominal share value.
2019 2018
£'million £'million
1 January 1,605 1,304
Issued 375 304
Costs of shares issued (16) (3)
31 December 1,964 1,605
12. Credit Risk
Retail mortgage lending
The table below stratifies credit exposures from retail mortgages by ranges of
debt-to-value ("DTV") ratio. The average DTV of the retail mortgage loan book
is 59% (2018: 61%).
31 December 2019 31 December 2018
£'million
£'million
Retail Retail Total retail mortgages Retail Retail Total retail mortgages
owner occupied buy-to-let owner occupied buy-to-let
DTV ratio
Less than 50% 2,647 464 3,111 2,124 458 2,582
51-60% 1,383 393 1,776 1,195 493 1,688
61-70% 1,422 505 1,927 1,374 553 1,927
71-80% 1,813 554 2,367 1,362 596 1,958
81-90% 1,201 13 1,214 1,205 129 1,334
91-100% 23 - 23 80 33 113
More than 100% 4 8 12 11 12 23
Total retail mortgage lending 8,493 1,937 10,430 7,351 2,274 9,625
A geographic analysis of the location of retail mortgage collateral is set out
below:
31 December 2019 31 December 2018
£'million
£'million
Retail Retail Total retail mortgages Retail Retail Total retail mortgages
owner occupied buy-to-let owner occupied buy-to-let
Region
Greater London 3,424 1,197 4,621 3,034 1,231 4,265
South east 2,094 337 2,431 1,797 383 2,180
South west 738 97 835 616 122 738
East of England 570 76 646 492 91 583
North west 482 66 548 405 138 543
West Midlands 340 62 402 293 81 374
Yorkshire and the Humber 275 37 312 207 73 280
East Midlands 243 26 269 241 57 298
Wales 169 21 190 141 36 177
North east 93 11 104 83 31 114
Northern Ireland - - - 4 27 31
Scotland 65 7 72 38 4 42
Total retail mortgage lending 8,493 1,937 10,430 7,351 2,274 9,625
An analysis of the retail mortgage book by repayment type is set out below:
31 December 2019 31 December 2018
£'million
£'million
Retail Retail Total retail mortgages Retail Retail Total retail mortgages
owner occupied buy-to-let owner occupied buy-to-let
Repayment
Interest 2,573 1,834 4,407 2,242 2,166 4,408
Capital and interest 5,920 103 6,023 5,109 108 5,217
Total retail mortgage lending 8,493 1,937 10,430 7,351 2,274 9,625
Commercial lending
The table below stratifies credit exposures from commercial term loans by
ranges of DTV. The average DTV of the commercial loan book is 60% (2018: 59%).
31 December 2019 31 December 2018
£'million £'million
DTV ratio
Less than 50% 1,274 1,277
51-60% 818 936
61-70% 747 791
71-80% 221 249
81-90% 41 100
91-100% 49 51
More than 100% 396 424
Total commercial term lending 3,546 3,828
A geographic analysis by location of customers who hold commercial term loans
is set out below:
31 December 2019 31 December 2018
£'million £'million
Region
Greater London 2,264 2,465
South east 648 677
South west 208 229
East of England 139 151
North west 136 145
West Midlands 60 50
Yorkshire and the Humber 37 26
East Midlands 17 33
Wales 14 29
North east 13 16
Northern Ireland 6 3
Scotland 4 4
Total commercial term loans 3,546 3,828
An analysis of the commercial term loan book by repayment type is set out
below:
31 December 2019 31 December 2018
£'million £'million
Repayment
Interest 1,483 1,592
Capital and interest 2,063 2,236
Total commercial term loans 3,546 3,828
A sector analysis of the commercial term loan book is set out below:
31 December 2019 31 December 2018
£'million £'million
Industry sector
Real estate (rent, buy and sell) 2,374 2,547
Legal, accountancy and consultancy 236 384
Health and social work 263 217
Hospitality 308 235
Real estate (management of) 11 72
Retail 100 99
Construction 35 60
Investment and unit trusts 8 1
Recreation, cultural and sport 51 19
Real estate (development) 62 52
Education 30 15
Other 68 127
Total commercial term loans 3,546 3,828
Credit risk exposures
Retail mortgages
31 December 2019
£' million
Stage 1 Stage 2 Stage 3 POCI
12 month ECL Lifetime ECL Lifetime ECL Lifetime ECL
Up to date 9,873 449 16 -
1 to 29 days past due 1 21 4 -
30 to 89 days past due - 32 10 -
90+ days past due - - 24 -
Gross carrying amount 9,874 502 54 -
31 December 2018
£' million
Stage 1 Stage 2 Stage 3 POCI
12 month ECL Lifetime ECL Lifetime ECL Lifetime ECL
Up to date 9,242 275 19 2
1 to 29 days past due 3 14 4 1
30 to 89 days past due - 47 7 1
90+ days past due - - 9 1
Gross carrying amount 9,245 336 39 5
Consumer lending
31 December 2019
£' million
Stage 1 Stage 2 Stage 3 POCI
12 month ECL Lifetime ECL Lifetime ECL Lifetime ECL
Up to date 213 - - -
1 to 29 days past due 10 - - -
30 to 89 days past due - - - -
90+ days past due - - 10 -
Gross carrying amount 223 - 10 -
31 December 2018
£' million
Stage 1 Stage 2 Stage 3 POCI
12 month ECL Lifetime ECL Lifetime ECL Lifetime ECL
Up to date 272 - - -
1 to 29 days past due 3 3 - -
30 to 89 days past due - 5 - -
90+ days past due - - 5 -
Gross carrying amount 275 8 5 -
Commercial lending
31 December 2019
£' million
Stage 1 Stage 2 Stage 3 POCI
12 month ECL Lifetime ECL Lifetime ECL Lifetime ECL
Up to date 3,900 - 7 -
1 to 29 days past due 29 18 4 -
30 to 89 days past due - 54 9 -
90+ days past due - - 31 -
Gross carrying amount 3,929 72 51 -
31 December 2018
£' million
Stage 1 Stage 2 Stage 3 POCI
12 month ECL Lifetime ECL Lifetime ECL Lifetime ECL
Up to date 4,213 6 2 -
1 to 29 days past due 52 44 - -
30 to 89 days past due - 27 5 -
90+ days past due - - 7 -
Gross carrying amount 4,265 77 14 -
Loss allowance
The following tables explain the changes in both the gross carrying amount and
loss allowances of the Group's loans and advances during the period.
Significant changes in the gross carrying amounts which contributed to changes
in the loss allowance are explained below. Other movements consist of changes
to model assumptions and forward looking information.
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
1 January 2019 9,245 336 39 5 9,625 - (5) (4) (2) (11) 9,245 331 35 3 9,614
Transfers to/(from) stage 1¹ 169 (162) (7) - - (1) 1 - - - 168 (161) (7) - -
Transfers to/(from) stage 2 (369) 370 (1) - - - - - - - (369) 370 (1) - -
Transfers to/(from) stage 3 (22) (16) 38 - - - - - - - (22) (16) 38 - -
Net remeasurement due to transfers² - - - - - 1 (1) (2) - (2) 1 (1) (2) - (2)
New lending³ 2,122 77 - - 2,199 - - - - - 2,122 77 - - 2,199
Repayments, additional drawdowns and interest accrued (244) (9) (3) - (256) - - - - - (244) (9) (3) - (256)
Derecognitions⁴ (1,027) (94) (12) (5) (1,138) - 2 2 2 6 (1,027) (92) (10) (3) (1,132)
Changes to model assumptions⁵ - - - - - - - (1) - (1) - - (1) - (1)
31 December 2019 9,874 502 54 - 10,430 - (3) (5) - (8) 9,874 499 49 - 10,422
Gross carrying amount Loss allowance Net carrying amount
£'million Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total
1 January 2018 6,065 129 33 4 6,231 (1) (3) (5) (1) (10) 6,064 126 28 3 6,221
Transfers to/(from) stage 1¹ 60 (52) (8) - - (1) 1 - - - 59 (51) (8) - -
Transfers to/(from) stage 2 (222) 223 (1) - - 1 (1) - - - (221) 222 (1) - -
Transfers to/(from) stage 3 (16) (7) 23 - - - 1 (1) - - (16) (6) 22 - -
Net remeasurement due to transfers² - - - - - 1 (2) (1) - (2) 1 (2) (1) - (2)
New lending³ 3,933 76 3 2 4,014 (1) (1) - - (2) 3,932 75 3 2 4,012
Repayments, additional drawdowns and interest accrued (151) (7) (1) (1) (160) - - - - - (151) (7) (1) (1) (160)
Derecognitions⁴ (424) (26) (10) - (460) 1 - 1 - 2 (423) (26) (9) - (458)
Changes to model assumptions⁵ - - - - - - - 2 (1) 1 - - 2 (1) 1
31 December 2018 9,245 336 39 5 9,625 - (5) (4) (2) (11) 9,245 331 35 3 9,614
1. Represents stage transfers prior to any ECL remeasurements
2. Represents the remeasurement between the twelve month and lifetime ECL due
to stage transfer
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 the
model assumptions, forward looking information and changes in the customers
risk profile
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
1 January 2019 275 8 5 - 288 (3) (3) (3) - (9) 272 5 2 - 279
Transfers to/(from) stage 1 5 (5) - - - - - - - - 5 (5) - - -
Transfers to/(from) stage 2 (1) 1 - - - - - - - - (1) 1 - - -
Transfers to/(from) stage 3 (3) (3) 6 - - - 2 (2) - - (3) (1) 4 - -
Net remeasurement due to transfers - - - - - - - (4) - (4) - - (4) - (4)
New lending 39 - - - 39 - - - - - 39 - - - 39
Repayments, additional drawdowns and interest accrued (37) - (1) - (38) - - - - - (37) - (1) - (38)
Derecognitions (55) (1) - - (56) - - - - - (55) (1) - - (56)
Changes to model assumptions - - - - - - - - - - - - - - -
31 December 2019 223 - 10 - 233 (3) (1) (9) - (13) 220 (1) 1 - 220
Gross carrying amount Loss allowance Net carrying amount
£'million Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total
1 January 2018 191 20 6 - 217 (1) (11) (5) - (17) 190 9 1 - 200
Transfers to/(from) stage 1 2 (2) - - - - - - - - 2 (2) - - -
Transfers to/(from) stage 2 (3) 3 - - - - - - - - (3) 3 - - -
Transfers to/(from) stage 3 (1) (1) 2 - - - - - - - (1) (1) 2 - -
Net remeasurement due to transfers - - - - - - (1) (1) - (2) - (1) (1) - (2)
New lending 160 2 1 - 163 (2) (1) - - (3) 158 1 1 - 160
Repayments, additional drawdowns and interest accrued (27) (1) - - (28) - - - - - (27) (1) - - (28)
Derecognitions (47) (13) (4) - (64) - 10 3 - 13 (47) (3) (1) - (51)
Changes to model assumptions - - - - - - - - - - - - - - -
31 December 2018 275 8 5 - 288 (3) (3) (3) - (9) 272 5 2 - 279
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
1 January 2019 4,265 77 14 - 4,356 (6) (3) (5) - (14) 4,259 74 9 - 4,342
Transfers to/(from) stage 1 43 (43) - - - (1) 1 - - - 42 (42) - - -
Transfers to/(from) stage 2 (64) 64 - - - - - - - - (64) 64 - - -
Transfers to/(from) stage 3 (17) (9) 26 - - - 1 (1) - - (17) (8) 25 - -
Net remeasurement due to transfers - - - - - 1 (1) (2) - (2) 1 (1) (2) - (2)
New lending 513 2 15 - 530 (1) - (2) - (3) 512 2 13 - 527
Repayments, additional drawdowns and interest accrued (203) (3) 6 - (200) - - - - - (203) (3) 6 - (200)
Derecognitions (608) (16) (10) - (634) - - 3 - 3 (608) (16) (7) - (631)
Changes to model assumptions - - - - - 1 1 1 - 3 1 1 1 - 3
31 December 2019 3,929 72 51 - 4,052 (6) (1) (6) - (13) 3,923 71 45 - 4,039
Gross carrying amount Loss allowance Net carrying amount
£'million Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total
1 January 2018 3,074 95 16 1 3,186 (5) (1) (3) - (9) 3,069 94 13 1 3,177
Transfers to/(from) stage 1 50 (50) - - - - - - - - 50 (50) - - -
Transfers to/(from) stage 2 (53) 53 - - - - - - - - (53) 53 - - -
Transfers to/(from) stage 3 (6) (4) 10 - - - - - - - (6) (4) 10 - -
Net remeasurement due to transfers - - - - - - (2) (2) - (4) - (2) (2) - (4)
New lending 1,654 10 1 - 1,665 (3) - - - (3) 1,651 10 1 - 1,662
Repayments, additional drawdowns and interest accrued (120) (7) (4) - (131) - - - - - (120) (7) (4) - (131)
Derecognitions (334) (20) (9) (1) (364) - - 1 - 1 (334) (20) (8) (1) (363)
Changes to model assumptions - - - - - 2 - (1) - 1 2 - (1) - 1
31 December 2018 4,265 77 14 - 4,356 (6) (3) (5) - (14) 4,259 74 9 - 4,342
Non-performing loans
Non-performing loans are loans which have more than three instalments unpaid
(90+ days past due) or where there is doubt a borrower can keep up with their
repayments. All non-performing loans are included within Stage 3.
31 December 2019 31 December 2018
Non-performing £'million Non-performing Non-performing loans Non-performing
loans ratio £'million loans ratio
Retail-residential mortgages 25 0.24% 9 0.09%
Retail-consumer and other 10 4.30% 5 1.74%
Commercial (including asset and invoice finance) 42 1.12% 7 0.16%
Total 77 0.53% 21 0.15%
Cost of risk
Cost of risk is credit impairment charges expressed as a percentage of average
gross lending.
2019 2018
Retail-residential mortgages 0.00% 0.01%
Retail-consumer and other 1.92% 1.54%
Commercial lending 0.11% 0.10%
Average cost of risk 0.08% 0.07%
13. Earnings per share
Basic earnings per share is calculated by dividing the (loss)/profit
attributable to ordinary equity holders of Metro Bank by the weighted average
number of ordinary shares in issue during the year.
2019 2018
(Loss)/profit attributable to ordinary equity holders of Metro Bank (182.6) 27.1
(£'million)
Weighted average number of ordinary shares in issue - basic ("000) 147,420 92,964
Basic earnings per share (pence) (123.9) 29.1
Diluted earnings per share has been calculated by dividing the (loss)/profit
attributable to ordinary equity holders of Metro Bank by the weighted average
number of ordinary shares in issue during the year plus the weighted average
number of ordinary shares that would be issued on the conversion to shares of
options granted to colleagues. As the Group made a loss during the year to
31 December 2019 the share options would be antidilutive, as they would reduce
the loss per share. Therefore all the outstanding options have been
disregarded in the calculation of dilutive earnings per share.
2019 2018
(Loss)/profit attributable to ordinary equity holders of Metro Bank (182.6) 27.1
(£'million)
Weighted average number of ordinary shares in issue - diluted ("000) 147,420 95,853
Diluted earnings per share (pence) (123.9) 28.2
14. Leases
Accounting policy Policy applicable from 1 January 2019
At the inception of a contract it is assessed whether the contract contains a
lease.
At the commencement of a lease, a lease liability and right of use asset is
recognised (see note 8 for further details). The lease liability is initially
measured as the present value for the future lease payments discounted at the
rate implicit in the lease (where available) or the Group's incremental cost
of borrowing. Generally the Group's uses its incremental cost of borrowing as
the discount rate. Following initial recognition the lease liability is
measured using the effective interest method.
Where it is certain a break will be exercised in the lease, only the lease
payments up until the date of the break are included.
The lease liability is remeasured when there is a change to an index or rate
used or when there is a change in expectation that a purchase option or break
clause will be exercised or if the lease term is extended. When such an
adjustment is made to the lease liability a corresponding adjustment is made
to the right of use asset.
Irrecoverable VAT on lease payments is excluded from the lease liability and
is taken to the income statement over the period which is due.
The Group has elected not to recognise a lease liability and right of use
assets for any leases that have a term of less than 12 months or are for an
asset which is deemed to be of low value (item is worth less than £5,000).
For these leases the lease payments are recognised as an expense in the income
statement on a straight-line basis over the life of the lease.
As outlined in note 1 on 1 January 2019 the Group implemented IFRS 16
'leases'. IFRS 16 was adopted under the modified retrospective approach and as
such no comparatives are shown for the tables below, as all of the Groups
leases are operating leases and as such were held off-balance sheet under IAS
17.
Lease liabilities
2019
£'million
31 December 2018 -
Transition adjustment 328
1 January 2019 328
Additions and modifications 23
Disposals (3)
Lease payments made (25)
Interest on lease liabilities 18
31 December 2019 341
Current 28
Non-current 313
Discount rate
The weighted average discount rate as at 31 December 2019 was 5.7%. The
increase in the discount rate from 5.5% at the point of transition reflects
the increased incremental cost of borrowing during the year (the discount rate
is not retrospectively adjusted for older leases).
Right of use assets
All disclosures relating to right of use assets, including the accounting
policy can be found in note 8.
Lease commitments
At the balance sheet date, future minimum lease payments, inclusive of
irrecoverable VAT at 20% (31 December 2018: 20%), were as follows:
31 December 31 December
2019 2018
£'million £'million
Within one year 34 31
Due in one to five years 142 133
Due in more than five years 516 495
Total 692 659
Low value and short leases
During the year to the ended 31 December 2019 £0.4 million was recognised in
the income statement with respect to assets of low value under a lease or
lease of less than 12 months.
Future income due under non-cancellable property leases
The Group leases out surplus space in some of its properties. The table below
sets out the cash payments expected over the remaining non-cancellable term of
each lease, exclusive of any VAT.
31 December 31 December
2019 2018
£'million £'million
Within one year 1 1
Due in one to five years 3 4
Due in more than five years 7 9
Total 11 14
15. Legal and regulatory matters
As part of the normal course of business the Group is subject to legal and
regulatory matters the majority of which are not considered to have a material
impact on the business.
The contingent liabilities detailed below are those which could potentially
have a material impact, although their inclusion does not constitute any
admission of wrongdoing or legal liability. The outcome and timing of these
matters is inherently uncertain. Based on the facts currently known, it is not
possible at the moment to predict the outcome of any of these matters or
reliably estimate any financial impact. As such at the reporting date no
provision has been made for any of these cases within the financial
statements.
PRA and FCA investigations
The Group is currently subject to enforcement investigations by both the
Prudential Regulation Authority ("PRA") and Financial Conduct Authority
("FCA").
• The PRA's investigation relates to potential breaches of the PRA's
Fundamental Rules 2 and 6. The PRA is investigating whether there were
failures to conduct regulatory reporting with due skill, care and diligence,
to remedy an issue identified by the PRA in a timely fashion and/or to provide
effective oversight and control to comply with its regulatory reporting
obligations. These issues relate to the Group's assessment and reporting of
its risk weighted assets. The Group is cooperating with the PRA's
investigation. As yet, the PRA has given no indication of the likely timeframe
for completing their investigation or of the action that might be taken as a
result. As a result it is therefore not possible to identify the likely
outcome of the investigation nor practicably quantify any potential liability
for penalties or possible costs associated with the investigation.
• The current scope of the FCA's investigation concerns potential breaches
of articles 15 and 17 of the Market Abuse Regulation (EU 596/2014), Principle
11 of the FCA's Principles for Business, and Listing Principle 1, Premium
Listing Principle 6 and Rule 1.3.3 of the Listing Rules, in the period between
1 June 2017 and 26 February 2019. The investigations relate to the
announcements made on 23 January 2019 and 26 February 2019 in relation to risk
weighted assets and AIRB accreditation respectively and the impact these
announcements had on the Group's share price. The Group is cooperating with
the FCA's investigation. As yet, the FCA has given no indication of the likely
timeframe for completing their investigation or of any action that might be
taken as a result. As a result it is therefore not possible to identify the
likely outcome of the investigation nor practicably quantify any potential
liability for penalties or possible costs associated with the investigation.
Sanctions related matters
In November 2017, on advice of external legal counsel the Group notified the
Office of Foreign Assets Control ("OFAC") that it had discovered that a UK
based entity with which it had a banking relationship was subject to US
sanctions relating to Cuba. The Group ended its relationship with the relevant
entity. In addition, in 2019, it was discovered that a payment made to a
customer's account, which it had received from a UK based financial
institution, had been routed to the UK based financial institution from Iran.
A further notification was made to OFAC. The Group has initiated a review of
the foregoing matters, together with a review of its sanctions compliance
policies with the support of external advisors. At this stage it is not
quantiftypracticable to identify the likely outcome or estimate the potential
financial impact of these matters.
US class action
The Group is also defending civil claims brought against it in the State of
California based on breaches of US Federal Securities laws arising from
allegedly false and misleading statements in relation to its loan book between
March 2018 and May 2019. The Group intends to vigorously defend these
proceedings. They are at an early stage, and as such it is not possible to
identify the likely outcome or nay potential financial impact.
16. Related parties
Key management personnel
The Group's key management personnel, and persons connected with them, are
considered to be related parties. Key management personnel are defined as
those persons having authority and responsibility for planning, directing and
controlling the activities of the Group. The Directors and members of the
Executive Leadership Team are considered to be the key management personnel
for disclosure purposes.
Key management compensation
Total compensation cost for key management personnel for the year by category
of benefit was as follows:
2019 2018
£'million £'million
Short-term benefits 5.8 6.0
Share-based payment costs 1.7 3.1
Total compensation for key management personnel 7.5 9.1
Short-term employee benefits include salary, medical insurance, bonuses and
cash allowances paid to key management personnel. The share-based payment cost
represents the IFRS 2 charge for the year which includes awards granted in
prior years that have not yet vested. The cost includes the in-year IFRS 2
costs for Listing Share Awards granted to selected key management personnel in
recognition of their significant contribution to the private placement and
admission of Metro Bank to the London Stock Exchange.
Banking transactions with key management personnel
The Group provides banking services to Directors and other key management
personnel and persons connected to them. Loan transactions during the year and
the balances outstanding at 31 December were as follows:
2019 2018
£'million £'million
Loans outstanding at 1 January 3.8 3.0
Loans relating to persons and companies newly considered related parties - 0.1
Loans relating to persons and companies no longer considered related parties (3.1) -
Loans issued during the year 0.2 0.8
Loan repayments during the year (0.2) (0.1)
Loans outstanding as at 31 December 0.7 3.8
Interest expense on loans payable to the Group (£'000) 90 82
There were five (31 December 2018: ten) loans outstanding at 31 December 2019
totalling £0.7 million (31 December 2018: £3.8 million). Of these, three are
residential mortgages secured on property, one is an asset finance loan one is
an unsecured loan; all loans were provided on standard commercial terms.
In addition to the loans detailed above, the Group has issued credit cards and
granted overdraft facilities on current accounts to Directors and key
management personnel and persons connected to them. Credit card balances
outstanding at 31 December were as follows:
2019 2018
£'000 £'000
Credit cards outstanding as at 31 December 16 34
Deposit balances outstanding at 31 December were as follows
2019 2018
£'million £'million
Deposits held at 1 January 4.5 3.4
Deposits relating to persons and companies newly considered related parties 2.1 0.3
Deposits relating to persons and companies no longer considered related (1.8) (0.2)
parties
Net amounts (withdrawn)/deposited (1.5) 1.0
Deposits outstanding as at 31 December 3.3 4.5
Other transactions with related parties
The following transactions were carried out with related parties:
2019 2018
£'000 £'000
Architectural design services 4,885 4,084
Creative and brand services 428 498
Total purchase of services with entities connected to key management personnel 5,313 4,582
Amounts outstanding as at 31 December owed by Metro Bank 82 51
Architecture, design, creative and brand services are provided by InterArch,
Inc. ("InterArch"), a firm which is owned by Shirley Hill, the wife of Vernon
W. Hill, II, who served as both Chairman and a non-executive director during
the year, before stepping down from the Board on 17 December 2019.
Architectural design services
InterArch provided various architectural design services during the year,
including pre-design, architectural design, interior design, construction
management, landscape architectural, signage, security design and layout and
procurement services. The fee structure for each project is based on a fixed
percentage of final construction costs with certain additional services
provided on an hourly basis.
Creative and brand services
InterArch also provided branding, marketing and advertising services.
In order to ensure that the terms of the InterArch arrangements are consistent
with those that could be obtained from an independent third party, and in
accordance with the Articles, the contractual arrangements with InterArch are
subject to an annual review by the Audit Committee using benchmarking reviews
conducted by independent third parties. For the architectural design contract,
which covers the build and design of stores, a 'big four' professional
services firms carries out the benchmarking review. For 2019 the Audit
Committee has concluded that the contracts for services with InterArch are at
arm's length and are at least as beneficial as those which could be obtained
in the market from an alternative supplier.
The creative and brand services contract and architectural design service
contract will end on 27 February 2020. In order to ensure the smooth
transition to new providers, the Group will be entering into a short agreement
with InterArch to support the transition until the end of June 2020.
17. Post balance sheet events
Following changes to the Group's strategy a revised business case was
submitted to BCR in respect of the £120 million grant it previously awarded
the Group as part of the Capability and Innovation fund (part of the RBS
alternative remedies package). The proposal put forward was accepted by BCR on
the 25 February 2020 as part of which the public commitments were amended. As
part of this it was agreed that £50 million of the grant would be returned to
BCR. The approval of the new proposal by the Board and its acceptance by BCR
post year-end is considered an adjusting event and as such the £50 million to
be repaid is classified within other liabilities as at 31 December 2019. All
of the sums recognised to date, either in the income statement or offset
against capital expenditure are still components of the revised commitments
and as such no adjustments to these amounts has been made.
Key capital disclosures
The information set out within this section does not form part of the
statutory accounts for the years ended 31 December 2019 or 31 December 2018.
Key Metrics
The table below summarises the key regulatory metrics.
31 December 2019 31 December 2018
£'million £'million
Available capital
CET1 capital 1,427 1,171
Tier 1 capital 1,427 1,171
Total capital 1,676 1,420
Risk weighted assets ("RWAs")
Total risk weighted assets 9,147 8,936
Risk-based capital ratios as % of RWAs
CET1 ratio 15.6% 13.1%
Tier 1 ratio 15.6% 13.1%
Total capital ratio 18.3% 15.9%
Additional CET1 buffer requirements as % of RWAs
Capital conservation buffer requirement 2.5% 1.875%
Countercyclical buffer requirement 0.99% 0.98%
Total of bank CET1 specific buffer requirements 3.49% 2.855%
Leverage ratio
Leverage ratio 6.6% 5.4%
Liquidity coverage ratio
Liquidity coverage ratio ("LCR") 197% 139%
Capital
Overall total capital resources have increased by £256 million in 2019 mainly
due to £375 million of equity raised in May 2019, partially offset by current
year losses of £183 million
RWA & CET1 ratio
The increase in RWAs during the year is mainly driven by the increase in
Operational Risk RWAs.
CET1 ratio increased to 15.6% at the end of 2019 up from 13.1% in 2018.
Buffer
Total CET1 buffers requirement 3.49% have increased due to:
· The Capital conservation buffer requirement increased to 2.5% on
1st January 2019. During 2018 this requirement was 1.875%.
· The UK Countercyclical Buffer (CcyB) requirement has remained
static at 1% during 2019. The 0.99% shown in the table above is the weighted
average of CcyB's issued by various countries.
Leverage Ratio
The table below shows the bank's Tier 1 Capital and Total Leverage Exposure
that are used to derive the Leverage Ratio. The leverage ratio is the ratio of
Tier 1 Capital to Total Leverage exposure.
31 December 2019 31 December 2018
£'million £'million
Common equity tier 1 capital 1,427 1,171
Additional tier 1 capital - -
Tier 1 capital 1,427 1,171
CRD IV Leverage exposure 21,506 21,704
Leverage ratio 6.6% 5.4%
The leverage ratio is 6.6% which is in excess of the Basel Committee's minimum
capital requirement of 3.0% and the bank's strategic target of maintaining a
UK leverage ratio of greater than 4.0%.
Liquidity coverage ratio
The table below shows the bank's Total HQLA and total net cash outflow that
are used to derive the liquidity coverage ratio.
31 December 2019 31 December 2018
£'million £'million
Total HQLA 3,356 3,489
Total net cash outflow 1,708 2,506
Liquidity coverage ratio ("LCR") 197% 139%
The LCR was 197% at 31(st) December 2019 which exceeds the Basel
Committee's minimum of 100%.
The bank's liquidity requirement, based on the LCR calculation, has reduced
reflecting the higher proportion of sticky retail deposits and SME deposits at
December 2019 versus December 2018.
Overview of RWAs and capital requirements
The table below sets out the risk weighted assets and Pillar 1 capital
requirements for Metro Bank. The bank has applied the standardised approach to
measure credit risk and the basic indicator approach to measure operational
risk. Under the approach the bank calculates its Pillar 1 capital requirement
based on 8% of total RWAs. This covers credit risk, operational risk, market
risk and counterparty credit risk.
31 December 2019 31 December 2018 Pillar 1 capital required
£'million £'million 31 December 2019
£'million
Credit risk (excluding counterparty credit risk (CCR)) 8,591 8,560 687
Of which the standardised approach 8,591 8,560 687
CCR 4 2 -
Of which mark to market 3 2 -
Of which CVA 1 - -
Market risk 6 3 -
Operational risk 546 370 44
Of which basic indicator approach 546 370 44
Amounts below the thresholds for deduction (subject to 250% risk weight) - - -
Total 9,147 8,936 731
The increase of £211 million in the RWAs is mainly due to increase in
Operational Risk RWAs resulting from Revenue growth over the three year period
that the standard multiplier for the calculation is based on.
Credit risk exposures by exposure class 2019
The Pillar 1 capital requirement for Credit Risk is set out in the table
below. The Pillar 1 requirement in respect of credit risk is based on 8% of
the RWAs for each of the following standardised exposure classes.
Exposures subject to the standardised approach Exposure Value RWA Capital Required £'million
£'million £'million
Central governments or central banks 3,200 - -
Institutions 212 42 3
Corporates 764 683 55
Retail 608 414 33
Secured by mortgages on immovable property 13,526 6,005 480
Covered bonds 469 47 4
Claims on institutions and corporates with a short-term credit assessment - - -
Securitisation position 1,580 316 25
Exposure at default 93 95 8
Items associated with particularly high risk 18 27 2
Other exposures 999 962 77
Total 21,469 8,591 687
Credit risk exposures by exposure class 2018
Exposures subject to the standardised approach Exposure Value RWA Capital Required £'million
£'million £'million
Central governments or central banks 2,652 - -
Institutions 188 38 3
Corporates 633 574 46
Retail 859 565 45
Secured by mortgages on immovable property 12,989 6,015 482
Covered bonds 507 51 4
Claims on institutions and corporates with a short-term credit assessment 134 66 5
Securitisation position 3,061 595 48
Exposure at default 59 65 5
Other exposures 622 591 47
Total 21,704 8,560 685
Total credit risk exposures at the end of 2019 have decreased by £235 million
primarily driven by the sale of £1.5 billion of Treasury assets but this is
partially offset by increases on lending secured on immovable property £574
million and increases in cash held with central banks £548 million.
Overall the RWAs have remained relatively flat. There was an increase in other
assets due to the adoption of IFRS 16 lease accounting during 2019 but this
was offset by the sale of Treasury Assets.
Capital Resources
The table below summarises the composition of regulatory capital.
31 December 2019 31 December 2018
£'million £'million
Share capital and premium 1,964 1,605
Retained earnings (210) (236)
(Loss)/profit for the year(18) (183) 27
Available for sale reserve (2) (3)
Other reserves 14 10
Intangible assets (168) (197)
Net deferred tax assets/deferred tax liabilities 4 (47)
Other regulatory adjustments 8 12
CET 1 capital 1,427 1,171
Tier 1 capital 1,427 1,171
Tier 2 capital 249 249
Total capital resources 1,676 1,420
The bank's capital adequacy was in excess of the minimum required by the
regulators at all times.
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