Metro Bank plc: Results for Year ended 31 December 2022
Metro Bank plc (MTRO) Metro Bank PLC Full year results Trading Update 2022 2 March 2023
Metro Bank PLC (LSE: MTRO LN)
Results for Year ended 31 December 2022
Highlights
Key Financials
Daniel Frumkin, Chief Executive Officer at Metro Bank, said:
“I’m pleased with Metro Bank’s performance over the past year and the successful completion of our transformation plan. We returned to profitability, resolved our legacy issues and further strengthened the foundations for future sustainable growth. While I remain confident in the underlying business, material headwinds do exist, including the macro-economic environment and increasing competition for liabilities. We have established the basis to transition back to being a profitable growth engine, committed to serving our communities through our network of stores, digital offerings and stand-out customer service, as seen in the latest CMA results.”
A presentation for investors and analysts will be held at 9:00AM (UK time) on Thursday 2 March 2023. The presentation will be webcast on:
https://webcast.openbriefing.com/metrobank-mar23/
For those wishing to dial-in:
From the UK dial: +44 800 640 6441 From the US dial: +1 855 9796 654 Access code: 172474
Financial performance for the year ended 31 December 2022
Deposits
Profit and Loss Account
Capital, Funding and Liquidity
Guidance
Targeting mid-single digit RoTE by 2024.
Summary Balance Sheet and Profit & Loss Account (Unaudited)
Enquiries For more information, please contact: Metro Bank PLC Investor Relations Jo Roberts +44 (0) 20 3402 8900
Metro Bank PLC Media Relations Tina Coates / Mona Patel +44 (0) 7811 246016 / +44 (0) 7815 506845
Teneo Charles Armitstead / Haya Herbert Burns +44 (0)7703 330269 / +44 (0) 7342 031051
ENDS
About Metro Bank
Metro Bank services 2.7 million customer accounts and is celebrated for its exceptional customer experience. It is the highest rated high street bank for overall service quality for personal customers and the best bank for service in-store for personal and business customers, in the Competition and Markets Authority’s Service Quality Survey in February 2023. Metro Bank has also been awarded “2023 Best Lender of the Year – UK” in the M&A Today, Global Awards, “Best Mortgage Provider of the Year” in 2022 MoneyAge Mortgage Awards, “Best Business Credit Card” in 2022 Moneynet Personal Finance Awards, “Best Business Credit Card 2022”, Forbes Advisor, “Best Current Account for Overseas Use” by Forbes 2022 and accredited as a top ten Most Loved Workplace 2022. It was “Banking Brand of The Year” at the Moneynet Personal Finance Awards 2021 and received the Gold Award in the Armed Forces Covenant’s Employer Recognition Scheme 2021.
The community bank offers retail, business, commercial and private banking services, and prides itself on giving customers the choice to bank however, whenever and wherever they choose, and supporting the customers and communities it serves. Whether that’s through its network of 76 stores open seven days a week, 362 days a year; on the phone through its UK-based contact centres; or online through its internet banking or award-winning mobile app, the bank offers customers real choice.
Metro Bank PLC. Registered in England and Wales. Company number: 6419578. Registered office: One Southampton Row, London, WC1B 5HA. ‘Metrobank’ is the registered trademark of Metro Bank PLC.
It is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. Most relevant deposits are protected by the Financial Services Compensation Scheme. For further information about the Scheme refer to the FSCS website www.fscs.org.uk. All Metro Bank products are subject to status and approval.
Metro Bank PLC is an independent UK bank – it is not affiliated with any other bank or organisation (including the METRO newspaper or its publishers) anywhere in the world. Please refer to Metro Bank using the full name.
Metro Bank PLC Preliminary Announcement (Unaudited) For the year ended 31 December 2022 Chief executive officer’s statement
I am very pleased that the Bank ended 2022 in its strongest position for several years. We completed our transformation plan, despite facing into a series of challenging economic and external headwinds, and have built the foundations to drive sustainable profitable growth. Perhaps the most significant proof point of our progress is recording in Q4 2022 our first full quarter of underlying profit since Q2 2019 and ahead of our announced intention to break even in Q1 2023. We’ve achieved this as a result of ongoing cost control, building a wider suite of asset products and the rising interest rate environment, in parallel to maintaining our unwavering commitment to local communities and our focus on excellent customer service. We are proud to have kept our position for the tenth time in a row as the top rated high street bank for overall service quality to personal customers, plus ranking as the best high street bank for in-store personal and business service in the CMA service quality survey. We have a solid platform on which to build in 2023, having established strong momentum in 2022, although we recognise the economic challenges which are expected. This is a testament to tireless work by all my colleagues right across the Bank, and I would like to take this opportunity to thank them for their ongoing skill, effort, dedication and laser-like focus on creating FANS. I am proud to lead such an inspiring and hardworking team, and look forward to serving our customers and creating more FANS in 2023. Strong momentum towards a sustainably profitable community bank By delivering our transformation plan, we have proved what we have always known – that our model works and can deliver sustainable growth and profitability. Our delivery of market-leading service helps us attract core deposits allowing us to grow lending, which we flex and balance across a range of asset classes, to generate high-quality earnings. Community banking via our store network is integral to this and will remain a core component of our model and service offering. Our newest store opened in Leicester at the start of 2022 and is performing well. Our transformation plan has enabled newer stores to open at much reduced cost and in 2023 we will undertake planning work with a view to resuming store openings in 2024, focused on locations in the North of England with large local populations and strong SME presence. We remain committed to the elements that have always made our 76 stores stand out, including being open seven days a week, 362 days a year, from early until late. We know we cannot succeed without investing in excellent digital services to complement our store network. As customers’ digital expectations evolve, we will continue to invest in and refine our digital customer services while remaining true to our guiding customer promises. Successful completion of our transformation plan Our strategic priorities were launched three years ago with the objective of setting the Bank on a path back to sustainable profitability and growth, while staying true to our community banking model. Execution against the strategic priorities has been excellent throughout the transformation period and has been instrumental in returning us to profitability. Revenue In a more normalised interest rate environment our model has really come into its own with the combination of core deposits attracted by our excellent customer service proposition and a strategically rebalanced asset mix towards higher yield lending leading to improved net interest margin. We have continued to expand the range of products we offer to meet our customers’ needs. For example, our new enhanced business overdraft product was launched in March and has quickly become popular with our business customers, due to the fully digital journey. In December we launched our motor finance lending product, which operates under our RateSetter brand using the latest technology to ensure a market-leading, fast and efficient customer journey. We’ve also supported customers by growing our mortgage and invoice finance propositions, including developing new products, such as asset based lending. Costs We have retained tight control of our costs by further ingraining discipline across all business functions. Examples of this in practice include simplifying our IT processes; improvements to our online and mobile app which have reduced calls to our AMAZE Direct contact centres; freeing up time to focus on more complex calls. We’ve also continued to embed Agile working practices to deliver better products and services more efficiently and safely. We recognise the need to continue to target low marginal costs and efficient operations to support our future profitability. Like any responsible retailer we regularly review our store estate, and during 2022 we completed the closure of three stores. This was a difficult decision, but we ensured the impacts were minimal with customers supported and there were no redundancies. We don’t have any plans for further closures and are pleased with how our stores are performing. Infrastructure Our objective is to make the Bank safer, more resilient and fit for the future. We have continued to invest in core infrastructure, enhance risk management and integrate channels to further improve our service offering. We have implemented a programme to identify and respond to the needs of our vulnerable customers with our customary AMAZEING service. We have also invested in regulatory reporting, sanctions compliance, anti-money laundering controls and in systems scalability and resilience. To prepare for the introduction of the Consumer Duty, we are enhancing our products, services, communications and customer journeys, along with monitoring customer outcomes to align with the requirements.
Balance sheet optimisation We continued to shift the balance towards assets with better risk-adjusted returns on regulatory capital, growing our unsecured consumer finance under the RateSetter brand along with higher-yielding residential mortgage lines and asset finance. Communication Our commitment to supporting our colleagues and communities is deep and enduring. Inclusion is at the heart of our culture and we demonstrate this through the local colleagues we employ, the market-leading service we deliver to all our customers and the local causes we support. Our new D&I strategy celebrates our achievements and further raises our ambitions for the future. Being named as one of the UK’s Most Loved Workplaces is a great testament to how special our culture is. I’m delighted to say that we promoted more than 600 colleagues in 2022 across all teams and levels, including the Executive Committee (ExCo). In response to the rising cost of living pressures, in the second half of the year we delivered a 2.75% salary increase to colleagues. This was made up of passing on to colleagues our saving as an employer from the Government’s 1.25% National Insurance reduction and contributing a further 1.5% ourselves. This was on top of the average 5% salary increase delivered at the start of the year – meaning that 98% of colleagues have received on average a 7.75% salary increase during 2022. We decided to take this approach, as opposed to a one-off payment, to provide lasting support to help our colleagues with cost of living challenges. We remain customer-focused As a people-people relationship-based bank, creating FANS has always been and always will be our motivation for delivering superb customer service, and our commitment to delighting our customers is reflected in our recurring position on top of the high street customer service rankings. In 2022, initiatives such as local marketing around our stores and improved digital communications helped deliver strong growth in our personal and business accounts. In addition, our hands-on support for communities is unwavering, from our financial literacy programme, Money Zone, which we have expanded to include young adult care leavers, to our colleagues directly volunteering to help local causes. We’ve drawn a line under the Bank’s legacy issues 2022 has also seen us substantially close out the Bank’s main legacy issues. This included the conclusion of the OFAC investigation into sanctions breaches, with no financial penalty. Following the finalisation of the PRA’s regulatory reporting investigation at the end of 2021, the FCA concluded its RWA investigation in December 2022. The outcome was within the range of outcomes we expected and we can now put this legacy issue firmly behind us, having greatly improved our reporting processes and controls. Navigating through the economic cycle 2022 was a year of political turbulence and economic challenges which we expect to continue into 2023, with the economy slowing and inflation remaining elevated. We now have engines to generate risk-adjusted returns through the economic cycle. Our lending continues to be conservative and our approach to provisioning for loan performance stands us in good stead to navigate economic fluctuations. We will continue to manage our capital position carefully. We know our model can deliver more growth, but we are constrained by our capital and MREL requirements. We will look to optimise our capital stack Capital is a core focus for us, as while we meet all of our minimum requirements, we continue to operate within our capital buffers. Our return to sustainable capital generation, and therefore our path to exiting capital buffers, will consist of our return to profitability combined with a continued focus on balance sheet optimisation, including actively managing lending. Alongside this we are progressing our application to adopt an Internal Ratings Based (IRB) approach to calculating credit risk with the regulator. We will also seek to access the capital markets to raise additional regulatory debt, as and when conditions allow. Evolving our strategic priorities As we come to the end of our transformation journey and are positioned for profitable growth, now is the time to increase focus on our strategic priorities so we can deliver on the things that are important for our stakeholders. In achieving this, our headline priorities will remain unchanged during this transitional year. Our focus will, however, shift from fixing the problems of the past to leveraging the strengths of our business model for future growth. While 2023 is going to be a transitional year, the following few years will see us place a renewed focus on growth, ensuring this is done in both a responsible and sustainable way. We will continue to operate above our minimum requirements although will remain within our capital buffers in the short term. If our capital constraints were to ease we know that we could grow more quickly and generate greater shareholder returns. Momentum towards meeting our goals We have built strong momentum over the last three years by successfully implementing our transformation plan: driving higher revenue, keeping costs firmly under control and optimising our balance sheet, while maintaining our service standards, protecting our culture and supporting communities. Maintaining this disciplined approach for future years instils confidence that our goals of achieving sustainable profitability and realising our ambition to be the number one community bank is within our sights.
Finance review
Summary of the year 2022 was a significant year for Metro Bank with continued momentum in financial performance, marked by a return to underlying profitability in the final quarter of the year, and the continued execution of our ambition to be the number one community bank. We now have a clear opportunity to deliver for our customers, colleagues and shareholders and build sustainable profitability in 2023 and beyond. Underlying loss before tax for the year reduced to £50.6 million down from £171.3 million in 2021 as a result of strong income growth combined with continued tight cost discipline. On a statutory basis losses before tax reduced to £70.7 million (2021: £245.1 million) as we continued to put legacy issues, and their associated remediation costs, behind us. The economic backdrop remains uncertain and during the year we recognised an ECL expense of £39.9 million (2021: £22.4 million). We continue to take a prudent approach to origination and our ECL reflect the quality of our lending. Alongside this we remain deposit funded with a loan-to-deposit ratio as at 31 December 2022 of 82% (31 December 2021: 75%) and retain a strong liquidity position. While we continue to operate in capital buffers we have remained above regulatory minima throughout 2022. We have taken active measures to protect our capital ratios by constraining asset origination to around replacement levels. This, combined with a return to profitability has seen our capital ratios start to stabilise in the fourth quarter. At 31 December 2022 our CET1, Tier 1 and total capital plus MREL ratios were 10.3%, 10.3% and 17.7% respectively (31 December 2021: 12.6%, 12.6% and 20.5%). Income statement
Income Underlying net interest income rose by 37% to £404.2 million (2021: £295.7 million), driven by an increase in net interest margin which rose 52 basis points (bps) to 1.92% (2021: 1.40%). This was a result of active management of the deposit base to maintain our low cost of deposits, continued balance sheet management including growing our mortgage and consumer finance books together with the benefits of the higher Bank of England base rates. During the year our current account balances increased 8% or £570 million while we continued the managed reduction in higher rate fixed-term accounts. The result of these actions saw our cost of deposits remain significantly below base rate at 0.20% (2021: 0.24%). Our business model is service-led and is supported by a compelling store proposition and this has resulted in a cost of deposits significantly below the majority of sector peers. Non-interest income Non-interest income growth has reflected the normalisation of volumes following 2021 COVID-19 related restrictions. Underlying non-interest income increased to £117.9 million (2021: £102.2 million), driven largely by continued fee growth, in part by higher customer transaction fees. This included a 23% increase in income from customer foreign currency transactions which rose to £34.1 million from £27.7 million in 2021. Service charges and other fee income also increased, rising to £30.9 million from £25.5 million in 2021, as we continued to grow our customer base and service their financial needs. This is particularly the case for SMEs, where we believe our service approach fills a need which is largely underserved by the wider market. Safe deposit boxes income increased to £16.5 million (2021: £15.1 million), with new net box openings in existing stores offsetting the loss from the net stores reduction. Visits to safe deposit boxes are now above pre-pandemic levels.
Operating expenses
Despite the rising inflation environment through the year, underlying operating expenses fell by 3% year-on-year to £532.8 million (2021: £546.8 million). This reduction in costs, combined with rising income, saw our underlying cost:income ratio improve from 137% in 2021 to 102% in 2022. People costs remain the largest component of our cost base and during the year these fell by 1% to £236.6 million (2021: £239.0 million). This is despite an average 5% salary rise given to colleagues in March followed by a further cost of living increase for all but our most senior colleagues in December. In addition to this our active management of our underlying non-people related expenses has resulted in a 4% year-on-year reduction from £307.8 million to £296.2 million in these costs. Inflation is still being felt across the UK. Despite achieving lower costs in 2022 than 2021, we expect the broad inflationary pressures in the economy will likely mean our costs will increase in 2023 across colleague and supplier costs. Depreciation and amortisation charges fell during in the year, reducing from £80.2 million to £77.0 million as the pace of our investment slowed from the peak spending set out as part of our transformation plan.
Non-underlying items
Non-underlying costs continued to fall as we closed out legacy issues and also delivered functionality prioritised under our transformation plan. This normalisation in non-underlying costs aided in total statutory operating expense falling from £641.2 million in 2021 to £554.3 million in 2022. In 2022 we saw the conclusion of the OFAC investigation into sanctions breaches, with no financial penalty. In December, we also settled with the FCA in respect of the 2019 RWA matters for £10 million, within the range outlined last year and drawing this matter to a close. We had recognised a provision of £5 million in respect of this matter during 2021, with the remainder recognised within remediation costs during the year. We have started to prepare for the implementation of our holding company which we are required to have in place by June 2023. The related costs are being treated as non-underlying due to their one-off nature. This was the only new non-underlying item during 2022. Expected credit loss expense
Our ECL expense increased 78% during 2022 to £39.9 million (2021: £22.4 million). This reflects both the uncertain economic outlook and high inflationary environment that has emerged during the year, as well as increased consumer lending within our asset mix. The majority of the ECL charge was due to a £33 million increase in consumer impairments. The consumer coverage ratio ended the year at 5.07% (31 December 2021: 4.72%) in line with our expectations as these balances start to mature. As we potentially enter a more challenging phase of the credit cycle, we continue to monitor our portfolio for early signs of deterioration and where necessary take proactive action to both support our customers and ensure losses are minimised. We continue to see very few early signs of deterioration in our lending book with non-performing loans (NPLs) representing 2.65% of gross lending (31 December 2021: 3.71%), reflecting the resilient nature of our balance sheet. Our mortgage portfolio is well collateralised with average debt-to-value (DTV) of 56% (31 December 2021: 55%) and our consumer portfolio is geared towards prime customers with an average borrower income for RateSetter loans in 2022 of £48,000. Our new origination quality has remained strong and mortgage applicant quality, as measured through credit scorecards, has remained stable over the course of 2022. The proportion of new business with a loan-to-value (LTV) over 80% has reduced from 41% in 2021 to 18% in 2022. In the RateSetter loan portfolio the proportion of higher rated credit scoring applicants has increased during the year as has the average income of customers for new loans. This prudent lending approach should mean that these customers are less exposed to inflationary risks as the cost of living increases. The impact of high inflation, exacerbated by the Russian invasion of Ukraine has led to deterioration in the economic outlook during the year. Within the retail mortgage portfolio, this deterioration and the increase in balances has contributed to a £1 million increase in impairments held. Despite the increases in provisions, the portfolio is well placed to provide resilience in the face of the economic outlook. In the commercial portfolio we are actively rolling off older balances, in particular in the commercial real estate portfolio where balances fell to £681 million as at 31 December 2022 from £837 million in 2021. Across the commercial book our average DTV is 55% (31 December 2021: 57%) and we maintain appropriate coverage ratios. The reduction in commercial ECL stock from £108 million as at 31 December 2021 to £92 million as at year-end reflects the continued repayment of balances combined with the write-off of a number of individually assessed impairments on larger loans. We continue to evolve our ECL models and where necessary apply expert judgements in the form of PMOs and PMAs to captured emerging factors not captured by the models. In the unsecured space this is aided by the 12 years of credit data that came with the acquisition of RateSetter. This has seen the proportion of our expected credit losses made up of PMOs and PMAs fall to 16% of as at 31 December 2022 down from 26% as at 31 December 2021. Balance sheet Lending
Net lending increased by 7% year-on-year ending the year at £13,102 million (31 December 2021: £12,290 million) with retail mortgages continuing to form the majority of lending at 58% of the portfolio (31 December 2021: 54%). During the year we received over £4 billion in mortgage applications, up 182% on 2021. We completed over £2.1 billion of mortgage lending (up 178% year-on-year), making us a top 20 mortgage lender. Our retail mortgage portfolio continues to be primarily focused on owner occupied loans. These make up 72% of balances as at 31 December 2022 (31 December 2021: 75%) with the remainder consisting of retail buy-to-lets. As at 31 December 2022 10% of our retail mortgages were variable rate (31 December 2021: 13%) with the remainder having an weighted average life of 2.45 years before they reprice (31 December 2021: 1.95 years). We have continued to build our consumer lending proposition so that, as at 31 December 2022, consumer lending formed 11% of gross lending, up from 7% as at 31 December 2021. As well as providing greater risk-adjusted returns than some of our historic lending, our unsecured personal loans have relatively short lives, allowing us to replace this lending more regularly as interest rates rise. Commercial balances fell 14% to £4,160 million (31 December 2021: £4,846 million) reflecting active portfolio management combined with the roll-off of COVID-19 related government-backed lending balances. As at 31 December 2022 government-backed lending made up 36% of our commercial term lending portfolio (31 December 2021: 37%), the majority consisting of amounts lent under the Bounce Back Loan Scheme (BBLS). During the year we claimed back £349 million (2021: n/a) in respect of defaulted BBLS loans. We continue to maximise recoveries on these loans to minimise taxpayer losses, and we received a green audit from the British Business Bank during the year for our collections and recovery activity.
Investment securities In 2022 we took the opportunity presented by rising gilt yields to redeploy surplus cash balances into capital-efficient treasury assets. As a result of this combined with our lending growth and the active reduction of high-cost fixed deposits, cash and balances at the Bank of England fell from £3,568 million at the end of 2021 to £1,956 million as at 31 December 2022, with investment securities rising to £5,914 million (31 December 2021: £5,574 million). Interest income earned on investment securities during the year rose from £23.2 million to £67.6 million. Our investment securities remain high quality with 68% having a AAA credit rating (31 December 2021: 73%). The remaining investment securities are all AA- or higher, the majority of which consists of UK gilts. Other assets Intangible assets reduced 11% as the pace of investment slowed, in line with our transformation plan. Property, plant and equipment balances continued to fall as we retained our pause on future store growth. This led to depreciation charges for the year offsetting the small level of additions in respect of the Leicester store which opened at the start of 2022 and the purchase of two freeholds during the year. Over the course of our transformation plan we have added 10 freehold and long-lease stores, with these now making up 38% of our store estate; providing us with greater flexibility over these sites and reducing our long-term liabilities. Deposits
Deposit balances fell 3% year-on-year to £16,014 million (31 December 2021: £16,448 million) as we continued to allow fixed rate balances to roll-off while continuing to acquire more business and personal current accounts during the year. As at 31 December 2022 current accounts made up 49% of deposits (31 December 2021: 44%). This aided in our cost of deposits falling from 0.24% to 0.20%. The base rates rises during the year have seen our interest expense on savings accounts increase, albeit at a lower rate than the base rate increases, reflecting the quality of our deposits and the value of our model.
Wholesale funding and liquidity We remain largely deposit funded with a loan-to-deposit ratio as at 31 December 2022 of 82% (31 December 2021: 75%). Alongside our deposit base we continue to utilise wholesale funding in the form of the Bank of England’s Term Funding Scheme with additional incentives for SMEs (TFSME). The cost of this funding is linked directly to the base rate and therefore has risen from £4.0 million in 2021 to £55.5 million in 2022. Despite this increase, it remains an additional stable cost of funding and is accretive to net interest income. Our TFSME drawdowns will start to mature in 2024 and continue through until 2027.
Lease liabilities
Lease liabilities fell by 8% during the year to £248 million as at 31 December 2022 (31 December 2021: £269 million) reflecting the continued pay down of our leases, combined with the freehold purchases in the year as well as the surrendering of the lease on one of the sites we closed. Our leases have an average remaining minimum term of 11 years, with the majority of our minimum lease payments falling within the next 10 years, meaning as our estate matures our lease liabilities will continue to decrease. Taxation We recognised a statutory tax charge of £2.0 million (2021: charge of £3.1 million). The small tax charge results primarily from current year losses for which no deferred tax asset is being recognised as well as statutory loss being adjusted for non-deductible expenses. We have a total of £859 million of brought forward tax losses on which we are not recognising a deferred tax asset of £215 million. We expect to re-recognise these assets on the balance sheet in the coming years as we establish a track record of sustainable profitability. The fact we are not currently recognising these tax losses does not limit our ability to utilise them and there is no time limit beyond which they expire. In 2022 we made a total tax contribution of £143.7 million (2021: £152.5 million) made up of £76.0 million (2021: £91.6 million) taxes we paid and a further £67.7 million (2021: £60.9 million) of taxes we collected. Liquidity Our liquidity position continues to be strong and we continue to hold large amounts of high-quality liquid assets which totalled £4,976 million as at 31 December 2022 (31 December 2021: £6,900 million). We ended the year with a liquidity coverage ratio of 213% (31 December 2021: 281%) and a net stable funding ratio of 134% (31 December 2021: n/a), both significantly ahead of requirements. Capital Overview We ended the year with CET1, Tier 1 and total capital plus MREL ratios of 10.3%, 10.3% and 17.7% respectively (31 December 2021: 12.6%, 12.6% and 20.5%).
In October 2021 the Bank of England’s Financial Policy Committee and the PRA published their changes to the UK leverage ratio framework. The changes, which came into effect from 1 January 2022, mean we are now only subject to the UK leverage ratio. The comparative figure of 5.2% differs to the regulatory ratio of 4.4% disclosed last year as it reflects the revised basis of calculation, which excludes claims on central banks.
We continue to operate in capital buffers although we remained above regulatory minima throughout 2022 and our return to profitability combined with constraining lending growth should see us return to steady capital generation. We remain engaged with the PRA in respect of our capital position as well as in relation to our IRB application, starting with our residential mortgage portfolio, which we continue to progress.
Capital requirements
Excludes any confidential buffer, where applicable.
Our capital requirement reduced during the year following the decision in June by the PRA to reduce our Pillar 2A capital requirement from 1.11% to 0.50% and the Bank of England agreeing that our binding MREL requirement applicable from 27 June 2022 would be equal to the lower of:
In December the PRA confirmed a further reduction to our Pillar 2A capital requirement from 0.50% to 0.36% effective from 1 January 2023, meaning that our MREL requirement (excluding buffers) reduced further to 16.7%.
Capital movements
On 1 January 2022 software assets reverted to being deducted from capital, reducing our CET1 and MREL ratios by 0.8% and 0.7% respectively. At the same time the original IFRS 9 ‘Financial Instruments’ transitional relief was reduced from 50% to 25% along with the COVID-19 transitionary relief which moved from 100% to 75%, reducing CET1 and MREL by 0.3%. A further 25% reduction in the transitional reliefs occurred on 1 January 2023, leading a further reduction in our CET1 and MREL ratios of 0.4% and 0.3% respectively. Risk-weighted assets ended the period at £7,990 million up 7% from £7,454 million at 31 December 2021, reflecting our lending growth and change in asset mix during the year.
Holding company We are working to implement our holding company (Metro Bank Holdings PLC) as part of our end-state MREL requirements. This will be in place by June 2023. Upon implementation of the holding company the Bank of England’s Resolution Directorate has agreed to provide a temporary, time-limited, adjustment for our Tier 2 Notes. This will see them continue to contribute to our MREL requirements up until 26 June 2025, although they will continue to be held by Metro Bank PLC. Our Tier 2 Notes have a one-time call date in June 2023 and, given the adjustment we do not expect to exercise the call provision, unless it would be economically rational to do so. By not calling these notes their Tier 2 eligibility amortises at a rate of 20% per year. In line with its conditions of issue, our existing MREL Notes will ‘flip up’ to Metro Bank Holdings PLC and be ‘back-to-backed’ by internal MREL issued down to Metro Bank PLC, which will remain our main operating company. Other than owning Metro Bank PLC, being the new listed entity and holding our external capital, Metro Bank Holdings PLC will undertake limited activities.
Looking ahead 2022 has been a year of clear progress as our turnaround plan completed. I am delighted to have joined the Metro Bank team as we build on the hard work of the past three years. From my first few months in the role I can see clearly that the Metro Bank model works. Our customer service focused model is ideally suited to a normalised rate environment, and with the acquisition of RateSetter we now have the asset flexibility to generate yield if interest rates fall again. As we focus on our next set of strategic priorities our attention will be serving the needs of our customers, while continuing to optimise our balance sheet to both build and maximise our return on regulatory capital, and maintain our prudent approach to liquidity management. Alongside this will be a renewed emphasis on achieving responsible and sustainable profitable growth through building front-book yields, carefully controlling deposit pricing and adopting a disciplined approach to managing the inflationary pressures in our cost base. Although we will continue to operate within our capital buffers in the short-term, our return to profitability and our disciplined approach to asset origination will see us protect our capital ratios and position us for future growth, both of which will be important factors in allowing us to ultimately restore our capital levels back above buffers. Aiding our delivery of this will be our continued investments in infrastructure. This includes preparing for the proposed enhancements to internal control requirements under the revised UK Corporate Governance Code which will see us continue to invest in our controls both within finance and across the Bank, building on the work that has already been undertaken over the past few years. We remain cautious in our outlook, given the political and economic uncertainty, however, we believe the Bank is in a good place to be able to respond to any further headwinds in the form of market volatility or economic downturn. Risk review
In line with the UK Corporate Governance Code requirements, we have performed a robust assessment of the principal and emerging risks we face, including those that could result in events or circumstances that might threaten our business model, future performance, solvency or liquidity, and reputation. In deciding on the classification of principal risks, we considered the potential impact and probability of the related events and circumstances and the timescale over which they may occur. An overview of the principal risks and how they have changed over the year are set out below.
Consolidated statement of comprehensive income For the year ended 31 December 2022
Consolidated balance sheet As at 31 December 2022
Consolidated statements of changes in equity For the year ended 31 December 2022
Consolidated cash flow statement For the year ended 31 December 2022
1. Basis of preparation and significant accounting policies Basis of preparation The Group’s consolidated financial statements have been prepared in accordance with UK adopted International Accounting Standards (IAS), International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and the Companies Act 2006 applicable to companies reporting under IFRS. They were authorised by the Board for issue on 2 March 2023.
Changes in accounting policy and disclosures During the period there have not been any changes in accounting policy or disclosures that have had a material impact on our financial statements. 2. Net interest income Interest income
Interest expense
3. Net fee and commission income
4. General operating expenses
5. Taxation Tax expense
Reconciliation of the total tax expense
Deferred tax assets
Unrecognised deferred tax assets We have total unused tax losses of £859 million for which a deferred tax asset of £215 million has not been recognised. The impact of recognising the deferred tax asset in the future would be material. Although there is an expectation for profits in the near future, the tax benefits would be spread over a number of years. In addition, the 50% corporate loss restriction in place extends the timeline over which we can offset losses against future profits. This will be reassessed for the year ending 31 December 2023 in light of actual performance against our forecasts and prevailing market conditions. There is no time limit beyond which these losses expire. 6. Financial instruments Our financial instruments primarily comprise customer deposits, loans and advances to customers and investment securities, all of which arise as a result of our normal operations. The main financial risks arising from our financial instruments are credit risk, liquidity risk and market risks (price and interest rate risk). The financial instruments we hold are simple in nature and we do not consider that we have made any significant or material judgements relating to the classification and measurement of financial instruments under IFRS 9. Cash and balances with the Bank of England, trade and other receivables, trade and other payables and other assets and liabilities which meet the definition of financial instruments are not included in the following tables. Classification of financial instruments
7. Loans and advances to customers
An analysis of the gross loans and advances by product category is set out below:
8. Investment securities
Investment securities held at FVOCI
Investment securities held at amortised cost
9. Property, plant and equipment
10. Intangible assets
11. Leases Lease liabilities
Minimum lease payments
12. Expected credit losses and credit risk Expected credit loss expense
1. Represents the movement in ECL stock during the year and therefore excludes write-offs which are shown separately.
The write-offs and other movements during 2022 primarily related to the write-off of a small number of large commercial single name exposures. These amounts had previously been fully provided for.
Loss allowance
Total loans and advances to customers
1. Represents stage transfers prior to any ECL remeasurements. 2. Represents the remeasurement between the 12 month and lifetime ECL due to stage transfer. In addition it includes any ECL change resulting from model assumptions and forward-looking information on these loans. 3. Represents the increase in balances resulting from loans and advances that have been newly originated, purchased or renewed as well as any ECL that has been recognised in relation to these loans during the year. 4. Represents the decrease in balances resulting from loans and advances that have been fully repaid, sold or written off. 5. Represents the change in ECL to those loans that remain within the same stage through the year.
Retail mortgages
Consumer lending
Commercial lending (excluding asset and invoice finance)
Our top 10 commercial exposures total £310 million (2021: £326 million), representing 8% (2021: 7%) of our total commercial lending.
Asset and invoice finance
Credit risk exposures Retail mortgages
Consumer lending
Commercial lending (excluding asset and invoice finance)
Asset and invoice finance
Credit risk concentration
Retail mortgage lending by repayment type
Retail mortgage lending by geographic exposure
Retail mortgage lending by DTV
Commercial lending – excluding BBLS by repayment type
Commercial term lending – excluding BBLS by geographic exposure
Commercial term lending – excluding BBLS by sector exposure
Commercial term lending – excluding BBLS by DTV
13. Legal and regulatory matters As part of the normal course of business we are subject to legal and regulatory matters. The matters outlined below represent contingent liabilities and as such at the reporting date no provision has been made for any of these cases within the financial statements. This is because, based on the facts currently known, it is not practicable to predict the outcome, if any, of these matters or reliably estimate any financial impact. Their inclusion does not constitute any admission of wrongdoing or legal liability. Financial Crime The FCA is currently undertaking enquiries regarding our financial crime systems and controls. We continue to engage and co-operate fully with the FCA in relation to these matters. Magic Money Machine litigation In 2022 Arkeyo LLC, a software company based in the United States, filed a civil suit with a stated value of over £24 million against us in the English High Court alleging, among other matters, that we infringed their copyright and misappropriated their trade secrets relating to money counting machines (i.e. our Magic Money Machines). We believe Arkeyo LLC’s claims are without merit and are vigorously defending the claim. 14. Fair value of financial instruments
Information on how fair values are calculated are explained below: Loans and advances to customers Fair value is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the balance sheet date, adjusted for future credit losses and prepayments, if considered material. Investment securities The fair value of investment securities is based on either observed market prices for those securities that have an active trading market (fair value Level 1 assets), or using observable inputs (in the case of fair value Level 2 assets). Financial assets held at fair value through profit and loss The financial assets at fair value through profit and loss relate to the loans and advances previously assumed by the RateSetter provision fund. They are measured at the fair value of the amounts that we expect to recover on these loans. Deposits from customers Fair values are estimated using discounted cash flows, applying current rates offered for deposits of similar remaining maturities. The fair value of a deposit repayable on demand is approximated by its carrying value. Debt securities Fair values are determined using the quoted market price at the balance sheet date. Deposits from central banks/repurchase agreements Fair values are estimated using discounted cash flows, applying current rates. Fair values approximate carrying amounts as their balances are either short-dated or are on a variable rate which aligns to the current market rate. Derivative financial liabilities The fair values of derivatives are obtained from discounted cash flow models as appropriate.
15. Related party transactions Key management personnel Our 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 Committee 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:
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. Banking transactions with key management personnel We provide banking services to Directors and other key management personnel and persons connected to them. Deposit transactions during the year and the balances outstanding as at 31 December 2022 and 31 December 2021 were as follows:
Loan transactions during the year and the balances outstanding as at 31 December 2022 and 31 December 2021 were as follows:
There were two (31 December 2021: three) loans outstanding at 31 December 2022 totalling £2.1 million (31 December 2021: £3.2 million). Both are residential mortgages secured on property; all loans were provided on our standard commercial terms. In addition to the loans detailed above, we have issued credit cards and granted overdraft facilities on current accounts to Directors and key management personnel. Credit card balances outstanding as at 31 December 2022 and 31 December 2021 were as follows:
As with all of our lending we recognise an ECL on loans and credit card balances outstanding with key management personnel. As at 31 December 2022 the only ECL recognised on the balances above was our standard modelled ECL with no individual impairments recognised (31 December 2021: £nil). We have not written-off any balances to key management personnel in either 2021 or 2022. 16. Loss per share Basic loss per share is calculated by dividing the loss attributable to our ordinary equity holders by the weighted average number of ordinary shares in issue during the year.
Diluted loss per share has been calculated by dividing the loss attributable to our ordinary equity holders by the weighted average number of ordinary shares in issue during the year plus the weighted average number of ordinary shares that would be issued on the conversion to shares of options granted to colleagues. As we made a loss during both the years to 31 December 2022 and 31 December 2021, the share options would be antidilutive, as they would reduce the loss per share. Therefore, all the outstanding options have been disregarded in the calculation of dilutive loss per share.
There have been no transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of the completion of these financial statements which would require the restatement of loss per share. 17. Non-cash items
18. Post balance sheet events There have been no material post balance sheet events.
Reconciliation from statutory to underlying results
Capital information The information set out within this section does not form part of the statutory accounts for the years ended 31 December 2022 or 31 December 2021. Key metrics The table below summarises our key regulatory metrics as at 31 December 2022 and 31 December 2021.
In October 2021 the Bank of England’s Financial Policy Committee and the PRA published their changes to the UK leverage ratio framework. The changes, which came into effect from 1 January 2022, mean we are now only subject to the UK leverage ratio. The comparative figure of 5.2% differs to the regulatory ratio of 4.4% disclosed last year as it reflects the revised basis of calculation, which excludes claims on central banks.
Leverage ratio The table below shows our Tier 1 Capital and Total Leverage Exposure that are used to derive the UK leverage ratio. The UK leverage ratio is the ratio of Tier 1 Capital to Total Leverage exposure.
In October 2021 the Bank of England’s Financial Policy Committee and the PRA published their changes to the UK leverage ratio framework. The changes, which came into effect from 1 January 2022, mean we are now only subject to the UK leverage ratio. The comparative figure of 5.2% differs to the regulatory ratio of 4.4% disclosed last year as it reflects the revised basis of calculation, which excludes claims on central banks.
Our UK leverage ratio is 4.2% which is in excess of the minimum requirement of 3.0% and our 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.
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.
Credit risk exposures by exposure class Our Pillar 1 capital requirement for credit risk is set out in the table below.
Capital resources The table below summarises the composition of regulatory capital.
Our capital adequacy was in excess of the minimum required by the regulators at all times.
Dissemination of a Regulatory Announcement, transmitted by EQS Group. The issuer is solely responsible for the content of this announcement. |
ISIN: | GB00BZ6STL67 |
Category Code: | FR |
TIDM: | MTRO |
LEI Code: | 213800X5WU57YL9GPK89 |
Sequence No.: | 226824 |
EQS News ID: | 1572577 |
End of Announcement | EQS News Service |
UK Regulatory announcement transmitted by EQS Group AG. The issuer is solely responsible for the content of this announcement.