Metro Bk Hldgs Plc

Good morning and thank you so much for joining us. This is the Half One 2022 results presentation of Metro Bank. You'll hear my dulcet tones for the whole session, I'm afraid. I'm going to cover off both the strategic bets and the financial bets. As you've seen, we've just appointed James as CFO. We're quite pleased that James Hopkins has chosen to join us and he will come to meet most of you over the next few months and you'll see him at the year-end presentation. I think before I even click forward, there's a couple of points that I want to really make clear. The numbers show the momentum in the business. The numbers show the strategy delivering. The numbers show the balance sheet being rebuilt to generate sustainable profitability going forward. We're in a position now where we are now demonstrating the actions we've taken, and we're really pleased. So let me kick off the presentation. So we start here and we'll always start here because the key to making Metro Bank successful, the key to actually making Metro Bank win day in and day out is our colleagues and their focus on the communities in which we operate in. By holding dear the values which are the foundations of Metro, it allows us to compete and win on a daily basis. And that service and focus on service quality and the desire to create fans comes through when you look at the CMA rankings where we've been number one on the high street since the rankings began. We continue to win awards, be it for mortgages, credit cards, or even our current account proposition. We continue to grow customer numbers, and we continue to do things in our local communities that keep us local. The key to winning as a community bank is staying local. And that's what we do. And the way we win is through exemplary customer service that is still disruptive in UK banking. Now, we've been asked this question repeatedly. So if the model works, when do you start making money? We reach breakeven during quarter one of 2023. And again, just in case you missed it, we repeated it on the slide. So we're saying it twice. Once is the header and once in the blue box. We will reach monthly break even during quarter one 2023. And the way we do that is pretty straightforward. It's having built a balance sheet that generates more lending yield and being disciplined around cost of deposits, which expands NIM, which allows us to generate enough revenue to cover our costs. We always said this was about growing into our skin. We always said this was about how we generated more revenue for every risk-adjusted pound of capital. And that's what we've successfully done. So you can see lending yield increasing to 356. You can see cost of deposits even after the rate rises being 15 basis points in quarter two. You can see the metrics down below where over the last couple of years, we've increased NIM by 76 basis points. We've increased lending yield by almost 100 basis points. And we brought down the cost-income ratio by 34 basis points. On the right-hand side, the way we've done that is we've changed the lending mix significantly. having grown consumer from pretty much nothing to 10% of our lending book, having grown government-backed lending from 5% to 12%, having shrunk the commercial book slightly and shrunk mortgages slightly. That's allowed us to generate the graph on the bottom. And again, the team humors me a little bit with this graph, but fundamentally, it's interest income divided by risk-weighted assets. So it is a proxy for return for every pound of risk-weighted assets. And we've grown that by 260 basis points. 260 basis points in a little over two years. That is what leads us to be able to grow NII by 12% half on half and 35% year on year. It allows total revenue to grow by 8% half on half and 31% year on year. It is that... focus on generating as much revenue as we can for every pound of risk-weighted assets that allowed us to get the jaws on the left and get the slope of the line on the right. In addition to be focused on the asset side, we've been very focused on the liability side. So the donuts in the upper right, we have significantly shrunk our fixed-term deposit book. The mix of our deposits are now very much focused on current accounts. and demand savings accounts. That allows us to have a relatively low cost of deposits, which again helps the jaws to allow us to get to break even. So this isn't one-off jiggery-pokery. This isn't some magic trick. This is good old-fashioned banking, good old-fashioned community banking, where we're building a balance sheet that's appropriate for the business we run, both on the liability side and on the asset side. The five pillars, again, I think the five pillars are relatively straightforward. They will stay the five pillars as we move forward. I think broadly every bank and pretty much every business should be focused on these five pillars. We continue to make progress against all five of the pillars. On cost, you'll see later costs are actually down half on half in year on year. We've made some real progress on the infrastructure, be it around financial crime or other activities. Revenue growth, as I've said, is quite strong. I think our communications, both internally and externally, are significantly enhanced. And balance sheet optimization, again, it is not easy to change the mix of a balance sheet the way we have. It is not easy to expand margin as much as we have. It is not easy to change the risk-adjusted return on regulatory capital as much as we have. We've worked very hard to optimize the balance sheet we have. And again, the KPIs, relatively straightforward, I would draw your attention to the second from the left on the bottom row. Net interest margin is up 45 basis points in a year. It's up 22 basis points and a half. It is going really well. And if you look at the KPI next to it, the underlying loss before tax, we've cut it by more than half. So it's down 56% year on year and down about 22% half on half. The progress in the business, I think, is relatively self-evident. I do know people's eyes will be drawn to customer deposits being flat because I do know it's a way that prior management would talk about the success of the business. Actually, when we come on to customer deposits in the next slides, I'll spend a bit more time on it because actually the fact that it's flat is covering up an extremely strong story. So deposits. So we have grown current accounts by 15% year on year. So while deposits are flat, it's because we have exited the fixed-term savings market for all intents and purposes and shrunk that business, while in turn growing current accounts. And in a rising rate environment, that leads us to be able to expand NIM in a way that folks who don't operate current account can't do. So the value of our current account franchise, the value of the stores, the value of the model increases dramatically as rates come off the bottom. as long as we remain disciplined about deposit pricing, which we have. Lending. So one of the other things we've done extremely well is change the mix of our lending portfolio. So the upper left shows that mixed change over time and the growth in consumer. It shows that we've shrunk commercial a bit and mortgages a bit. And again, repeating on the upper right, you'll see lending yield increasing, by 100 basis points and you see the risk adjusted return increasing by 260 basis points. The bottom left is slightly distorted because actually it's kind of a net movement. We've done a fair amount of new originations on mortgages, but we've had obviously some attrition as one does. I think you will see lending movement in the second half of the year be stronger than the first half of the year. We think year-on-year loan growth will be upper single digits to potentially low double digits. That will be driven by the fact that mortgages had an extremely strong second quarter. Applications for mortgages were up 87%. second quarter versus first quarter, and they were up 133% second quarter versus fourth quarter of 2021. We have more than doubled application activity from the fourth quarter. And again, we're quite pleased with the margins we're now seeing in the mortgage business. We're quite pleased we saved some RWA headroom to be able to take advantage of the dislocation occurring in the mortgage market as we speak. The consumer loan business continues to go from strength to strength. It is a fintech embedded within the bank. It is very technologically capable, and it's been averaging about $105 million a month of originations, all of high quality with an approval rate that's less than a third. The deposit discipline combined with the asset mix shift The discipline around pricing around mortgages allows us to get to this kind of revenue growth. So if you just take a look at the NIM bridge and you take a look at the second half of 20 and adjust it for the mortgage sale, we started the second half of 20, the start of 21, with a 97 basis point net interest margin. There's not a bank in the world that can make money at a 97 basis point net interest margin. We've taken that 97 basis points in over a couple of years, not even, 18 months. We've managed to expand it from 97 to 173 basis points. That 76 basis point increase in net interest margin is down to the repositioning of the balance sheet and the discipline around deposit pricing. It's a lot of hard work and a lot of graft to make that happen. It is not rates. It is not the movement in rates. Some of that will bleed through and provide more momentum as we move forward. It is down to the hard work of changing the lending mix and being disciplined around deposit pricing. Fees on the bottom left have recovered. They're flat, half on half, broadly, up significantly year on year. And fees, again, are driven by activity levels. As we've seen activity levels increase, the reality is fees increase with activity levels. Costs. So we said at year end that we would actually reduce costs this year, which I think might be the first year in the history of Metro that we actually reduce costs year on year. The reality is in the first half, we reduced costs 3% year on year and 2% half on half. And again, there was no big one-offs. That was just running staffing levels a little thinner. It was doing some property transactions that made some sense. It was doing what we needed to do to reduce costs. We anticipate costs reducing further as we get into the second half of the year. And again, we expect year on year to be down low single digits as we got it. I will say we're seeing some pressure as we go into 23. And I would expect costs to be flat to slightly up as we start to move into 23. The inflationary pressures eventually bleed through into the P&L. And we've always talked about this being a revenue story, not a cost-out story. And I think if you look at the donut on the bottom right, the reality is that a huge proportion of our costs are human beings and systems and stores. We need the human beings because we're a regulated business. The systems and stores are key to providing the service quality that allows us to stay number one in the CMA rankings for high street banks. All of that fits together to create a cost base that really is broadly fixed. And I don't anticipate meaningful reductions in the cost base. What I do anticipate is that the denominator and the cost income ratio in the upper right will continue to grow. The pace at which we're growing revenue significantly outpace what is reducing costs or flat costs on our overall cost base. So you see the cost income ratio in the upper right. We've gone from 147 down to 113. That is huge progress, mainly driven by discipline around costs to hold them flat and growing revenue significantly. The width of our jaws is the path back to break even. The ECL slide, there's not much to say on here. I think whenever you see an ECL, an asset quality slide that doesn't have many bullet points on it, it's a good sign. So at the end of the day, you'll see we have one bullet point on here, and it just basically tells you that the majority of the provision in the first half of 22, which we show in the walk in the bottom left, is down to the fact that we're growing our consumer lending business. Under IFRS 9, we have to provide up front. We provide up front as we generate new volume. As we grow that business, we have to create new provisions. As that business gets to be its natural size and new originations equal runoff, obviously the burden on provisions reduces as the runoff equals new originations. I would like to say what every other, I think, bank has said through the reporting cycle so far. We are seeing no signs of credit stress yet anywhere in our portfolio. No early delinquency, no issues whatsoever we're seeing. In the bottom right, you'll see non-performing loans are down significantly year on year. They're down in retail mortgages. They're down in commercial. Consumer are broadly flat, up slightly, which is just a seasoning of the portfolio. And overall, they're down by almost 100 basis points. We have held provisions. We've not done significant releases last year and we've not done significant releases in the first half of this year. I think it puts us in a good place with our coverage ratios and puts us in a good place with our post-model overlays and our post-model adjustments to give us some flexibility as we move forward. Capital, again, I think one of the things we've done really, really well is manage our capital stack. I know this creates difficulty for people. I know that people get concerned about us operating within buffers. I want to be clear. We are comfortable operating within buffers. We believe the regulator understands our position and it's comfortable with us operating within buffers. And we will continue to operate within buffers until we can get access to debt capital markets. We are making progress on our ARB application. As I use the analogy at year end and I'll use again, it's like playing tennis. They hit the ball back to us. We hit the ball back to them. We do a bit of work. They do a bit of work. And eventually we will get to the resolution we hope to achieve. But the reality is I don't know if it's a five-set tennis match or a four-set tennis match or a three-set tennis match. I do not yet know when we will get to it. It is not within my gift. to be able to pick a timeline. All we can do is play the game as well as we can. And we put a ton of effort and a ton of energy into preparing high class materials and doing high quality modeling that puts us in a good position in the conversations with the regulator. And it'll come when it comes. Our current requirements have been reduced. You will have seen we got a Pillar 2A offset from the regulator. I think it's a sign from the regulator about their belief in the turnaround, about their belief in the quality of our balance sheet, about the belief in the credit quality of our consumer and mortgage lending that allowed them to be comfortable to provide us a bit of Pillar 2A relief. And the resolution director was kind enough to accelerate our end state MRO to match our interim MRO. This slide will spend some more time on year end. But for now, the bit I don't want people to lose is there is a lot of momentum in the business. But there are a lot of things we're constrained from doing because we have to manage capital as aggressively as we have to manage capital. Yeah. So there's further upside on rates. There's further upside on mortgage applications, as we talked about. There's further upside on consumer lending as that book continues to grow. We're launching auto lending in quarter four, which will be quite successful. We're pretty confident in the processes we built. And we've launched a digital SME product that seems to be really well received. But we are throttling growth in our commercial business and our regional commercial business. And while we're stretching our legs in invoice finance and asset finance, there's more we could do in that space. There are businesses on the asset generating side that we could unleash and will unleash once we have access to debt capital markets. And the liability engine continues to produce. The fact that we grew current accounts 15% year on year is a sign of the quality of our liability engine. We do have commitments under BCR to open further stores up north. We're revisiting those decisions now. We're figuring out where they would be, what the stores would look like. What I can tell you is whatever we do, we will live within our means. We do not anticipate doing an equity capital raise, and we believe we can fund the growth going forward. The upper right is rate sensitivity. Again, we have $9 billion sitting in the Treasury portfolio. If you exclude cash, duration's a little over two years. The reality is as that cash rolls back in year two and year three, the reality is rate rises are very beneficial for us. And some of that's coming through only marginally through the P&L now because we're still in the early stages of those rate rises. But as we get into next year and the year after, they're clearly wind in our sails. Outlook and guidance. We're reaffirming what we said at year end. I think we've done a really nice job of delivering across all of it, margin in particular. The exit run rate for NIM was 156. We posted a 173 for the first half, and our exit run rate for NIM was closer to the mid to upper 180s. The only number that's slightly challenging is the exceptionals line being less than 20% of last year. We had a write-off of a system in the first half of the year that made exceptions a bit higher. We're still confident we can get the overall exception line to come in below 20%. And on the right, I just can't say this strongly enough. There is a clear path to profitability. We will be profitable in the first quarter of 2023. And that monthly break-even isn't predicated on A or B occurring, and it's not predicated on significant rate rises. We have forecast broadly flat rates and not having ARB, and we still get to break even in the first quarter of 2023. And it's all because of the balance sheet we've built, the discipline on deposit pricing, and the margin expansion by changing the mix of lending. So with that, I'm happy to take questions.

If you would like to ask a question, please press star followed by one on your telephone keypad now. If you would like to remove your question, please press star followed by two. And when preparing to ask your question, please ensure your phone is unmuted locally. We take our first question from Benjamin Toms from RBC. Please go ahead, Benjamin.

Good morning and thank you very much for taking my questions. Two for me, please. Can you walk through some of the more details on your assumptions in relation to the assertion of being profitable on a monthly basis in Q1 2023? You mentioned rate rises, but can you just give some colour on the assumption on deposit meters and whether the assumption is that this is on a reported or an adjusted basis? And then secondly, in relation to NIM, can you give us a feeling of where you think the exit rate for NIM could be by the end of this year? Thank you very much.