Metro Bk Hldgs Plc

Good morning. Welcome to Metro Bank's full year 2022 results. I'm Dan Frumkin, CEO of Metro Bank, which I hope all of you already knew. I'm joined today by James Hopkinson, who joins us as CFO. He joined us in September. His timing couldn't have been more impeccable. We're really thrilled to have him. It was a global search. We started with quite a long list of candidates, got down to a short list of about a half a dozen, and James was always our preferred candidate. We were glad to woo him into the organization in typical Metro Bank style and in a desire to save money. I met him in Wimbledon at a Costa Coffee and had a cup of coffee with him. And I was actually late arriving, so he had to pay for the coffee. But we're really thrilled he's here, and you'll get to see him later. I'm going to start with a brief overview. Then James is going to come on and talk about the financials. And then I'll come back and talk about the path forward. So let's kick off. So we're... Stating today very clearly that what I stood up and talked about in February 20, that presentation that went on almost a lifetime, that the turnaround is now complete. We were profitable on an underlying basis for quarter four 2022. That is earlier than we've ever guided. We didn't guide that pre-pandemic. We didn't guide that pre-war pandemic. We have always said we would turn profitable in 2023, and we managed to bring that forward and turn profitable in late 2022. And the turnaround was about fixing things and transforming the operation. So on the end of the day, we have a much more stable and resilient organization. We've increased heads in risk and regulatory functions by 67% since 2019. We've fundamentally rebuilt the governance structures. The board's broadly new. EXCO's been reconstituted. We've also successfully closed legacy issues that at the time I stood up in 2020, people thought were existential threats. Both the RWA investigation and the OFAC investigations have been closed. I'm most pleased about the financial performance transformation. We said that we were going to drive improved financial performance by shifting mix on deposits and shifting mix on lending and becoming much more focused on risk-adjusted returns on regulatory capital while maintaining a strong cost discipline. So you can see the NIM improvement in the chart in the middle top. NIM bottomed out after the mortgage sale at 94 basis points. For the second half of 22, we generated a 211 basis point NIM, and our exit NIM in 22 was 222 basis points. That was done through a lot of hard work, repositioning the balance sheet both on the asset and liability side. I'm most pleased about the operating draws we generated during 2022. The fact that revenue grew by 31% and cost reduced by 3%, creating an operating jaws of 34%. And again, we're not done. We have lots of diversified growth opportunities in front of us, which I'll come back to in the second half of my presentation. But we have a scalable and dynamic asset generating base. And everybody needs to remember, we win market share every day. We're opening new accounts that are choosing to bank with Metro because of our exceptional service, our value proposition, and our deep commitment to the communities. And by staying focused on operational accounts, PCAs, personal current accounts, business current accounts, and instant access savings accounts, we've managed to reduce our cost of deposits by 58 basis points from 2019. And that's all about mix. We are now 96% funded with core deposits. Now, this slide's very busy. I'm not going to spend a lot of time on it. But to be clear, I stood up here in 2020 and promised that I'd fix things. Well, this is evidence that Metro Bank has been broadly fixed. And the key outcomes on the right-hand side is just a small fraction of everything we did. To be honest, one of the hardest parts of pulling together the presentation was choosing the bullets. But we always said it wasn't a cost story, but we've been extremely disciplined about cost. And James will come on to that in more detail. We've had 100 basis points in yield. We fundamentally rebuilt technology platforms, re-engineered our risk, and enhanced our IT resilience. We'll talk about balance sheet optimization. I bet most of you probably remember the $3.1 billion mortgage sale at a premium that we got away and then took that capital freed up and reinvested it into unsecured personal lending. At the time, it was a bold move that has paid off handsomely. And ultimately, the thing that genuinely matters is we preserved our unique culture through communications. Now, let's talk about Metro Bank post-turnaround. I get asked quite often, so what is Metro Bank now? Metro Bank is still driven by great colleagues who are engaged in the mission of becoming the best community bank in the UK. When we run our Voice of the Colleague survey, it's sponsored by Glint. We use the Glint Global Benchmark. Glint is owned by Microsoft. It has companies in it like Roche and Sky and large global companies. And 95% of our scores in our employee opinion survey are better than the Glint global benchmark. That's made up of retailers, manufacturers, some of the best companies in the world. And 95% of the time, our colleagues say they're more engaged with Metro's vision, purpose, and future than the others. We're still best in class for service. We're number one on the high street for the 10th time running. Actually, ever since the survey was started, we've always been number one. We have a deep commitment to our communities. We do days to amaze for volunteering. Days to amaze for colleagues are up over 70% year on year. We've educated over 250,000 children in our Money Zone program. And again, we have local business managers in every store. We have local directors. We have area directors, all who are committed to making the communities in which we operate better. We're on numerous local bids to help the high street get better. We invest in the communities in which we operate. We raise money for the communities we operate. We are completely committed to our localness. We're still growing. Personal current accounts grow on a compound annual growth rate since 2019 of 11%. Business current accounts, 9%. We opened 188,000 personal current accounts in 2022. 42,000 business current accounts in 2022. That is as much or more than some of our much larger competitors. We've built a strong commercial edge. We are now much more focused on generating appropriate returns. For everything we invest, for every loan we make, we are completely focused on what it does for all stakeholders. And we have a lot of strategic optionality. I'll come back to that later. All of that, all of that led to us achieving underlying profitability in quarter four. And it makes us very confident to target mid single digit return on tangible equity by 2024. So thank you very much. I'm going to turn over to James now to walk through the financials.

Thank you, Dan. Just before I start, maybe a personal statement to say thank you very much for the introduction. I'm delighted to have joined Metrobank last year at this important stage in our journey. I was excited to join a truly customer-focused organisation where the culture is infectious and the potential for the next phase is amazing. I found an organization that's put a lot of energy and focus into its turnaround plan, has invested in risk compliance and systems, but has not lost sight of its customers, its community, its risk appetite, its point of difference, and on the opportunity of what it could become. So today I'm going to step through a few slides that describe the momentum in the business and hopefully underlines why I chose to join this team. First, just stepping through the P&L at the top left-hand side of the slide. In a normalised rate environment, our model has really come into its own. Overall income was up 31% year-on-year. That's up by over £124 million, with net interest income up 37%, and fee income up 16%. Costs, on the other hand, were down 3% year on year, despite emerging inflation, driving positive jaws of 34%, as Dan mentioned earlier. ECL was up to just under £40 million, reflecting the growth in the lending book and the prevailing environment, which I'll talk about a little later. Exceptional costs of just over £20 million were down, as previously guided, significantly year on year. Taken together, these factors drove more than a £129 million reduction in underlying losses and a 71% reduction in statutory losses to £72.7 million for the year. the overall Metro Bank performance was probably best framed by the fact that the income uplift flew entirely into the bottom line. Customer activity is also at the heart of our income performance. As you can see from the top right-hand chart, fee income grew 16% year-on-year, with positive growth across FX, with volumes up 11.5%, more demand for our safe deposit boxes and increased customer activity driving other transactional income streams. Moving to the NIM waterfall at the bottom of the chart. You can see that our NIM grew strongly up 52 basis points to 1.92% and with an exit NIM of 2.22% in December. This strong NIM expansion reflects the significant reshaping of the balance sheet, coupled with the prevailing interest rate environment. Our lending yield has increased consistently over the past two years as we have built out our product offerings, including integrating the rate setter platform. We've built a strong mortgage origination engine and we selectively maintained our largely variable rate commercial book. Lending yield and mix drove a 36% increase in NIM. The loan-to-deposit ratio also increased from 75% to 82%, adding five basis points to NIM. Our cost of deposits, as Dan mentioned earlier, was down four basis points year-on-year to 20 basis points, despite an increasing base rate environment. Treasury assets have also been reinvested into that higher rate environment, benefiting NIM. So turning to the next slide, I'll go into costs in a little more detail. Cost discipline has been a key pillar of the turnaround plan. As you can see from the sequential bar chart, which sets out how we've controlled the cost run rate well, despite the more recent inflationary pressures and the action we've taken to support our colleagues through salary increases. As a result of the action stemming from our turnaround plan, our cost-income ratio has continued to improve, reaching 93% for the second half of 2022. We're stepping up our cost productivity as we have serviced more clients, we're processing more transaction volumes, and we have more products on a largely stable cost base. This has partly been achieved as we've invested into scalability. We've automated key customer journeys, such as the business online overdraft, and we've launched digital end-to-end products like Autofinance on our rate setter platform towards the end of 2022. Overall, we believe we now have the infrastructure that can enable growth without significant additional cost. Finally, on exceptional items... The 73% reduction year-on-year reflects the fact that we've now closed out legacy issues and have delivered on most of the restructuring and transformation activity which we set out to deliver in our earlier turnaround plan. The only new exceptional cost area relates to the set-up costs of our new holding company, which is progressing well towards the June deadline this year. Turning to the balance sheet. The balance sheet has been successfully reshaped over the last few years as we've increasingly optimised assets for risk-adjusted return on regulatory capital, whilst building core deposits through our differentiated service offering. Looking at the lending mix charts in the top right of the slide, you can see that we've grown the overall level of loans and advances 7% year-on-year to £13.1 billion. Mortgage lending remains the main proportion of our lending at 58%. And our unsecured portfolio has increased its share from 7% to 11% of the portfolio. Offsetting these growth areas, we've been actively running off our commercial real estate and professional buy-to-let portfolios, alongside them maturing and repaying government-backed COVID lending. One point that the year on year chart doesn't quite cover is the fact that in Q4, alongside reaching underlying profitability, we actively constrained asset origination to around replacement levels. A move which underpinned our capital ratios, but will result in lower assets growth going forward. Moving down to the bottom right hand of the slide to touch on deposits quickly. The deposit story has also been a significant driver of our performance. As you can see, we grew our current accounts strongly, up 8% year on year, and increasing to a 49% overall share of deposits. And together with demand accounts, core deposits represent 96% of our deposit stock. Looking forward, we do expect to selectively re-enter the fixed deposit market from 2023 onwards, as we can redeploy into low or no RWA investments. Now, turning to the bottom left ECL waterfall chart. As you can see, we have prudently built our stock provision from £34 million in 2019 to £187 million last year. 16%, or £30.5 million of that, remains as an overlay. The main overlays relate to additional conservatism around inflation and property valuations. We believe that we are appropriately provisioned for the shape of our book and to take into account the uncertain macroeconomic conditions. Our ECL coverage ratio has also increased to 1.42% from 1.35% last year. This is primarily driven by our maturing unsecured portfolios as well as the prevailing macro outlook. As we stand here today, we're not seeing any early signs of credit stress emerging, but we remain watchful of what has been a changeable environment. Our assessment of the macro scenarios is set out in the appendix to the slide, so I won't go through them here, but we do feel we have an appropriately balanced view of our macro risks. Turning to the next slide and looking at the quality of our loan growth in a little more detail. The overarching theme of this slide is that we have grown our lending in a disciplined way, starting with the three sets of bar charts. New mortgage lending volumes were up 83% year-on-year to £2.2 billion, showing the capacity of the bank to originate. Yet, new mortgage lending in 2022 was of better quality overall than the prior year, where average origination LTVs were 69% versus 73% in the prior year. Our unsecured lending story is similar. The recent growth in unsecured has been targeted at more prime cohorts. where the average annual salary now sits at around £52,000 per annum, up 30% since the end of 2020. Additionally, using our internal credit score ratings, the new lending is almost 50% in our strongest four categories, double the rate in 2020. On commercial term loans, we're supporting our existing customers whilst continuing to rebalance the portfolio. where we continue to selectively reduce exposures to the commercial real estate and professional buy-to-let sectors, down 23% year-on-year, to optimise return on risk-adjusted regulatory capital. So in conclusion, we believe that we've added quality assets to the book. We believe we are well provided, and while we remain watchful, we're not currently seeing signs of stress in the market. Moving to capital then. We've turned around the business and reached profitability in Q4. During this period, we've also continued to operate within capital buffers. However, importantly, we've remained above all regulatory minima throughout 2022. Reaching profitability and constraining lending growth, which started in Q4 2022, should see us achieve sustainable capital generation from here. It's also worth highlighting that, in line with the industry, the IFRS 9 reliefs stepped down on the next few New Year days, so the 1st of January each year from here on. The impact of the step-down in reliefs on the 1st of January this year was to reduce our MREL ratios by around 30 basis points and our CET1 ratio by around 35 basis points. Importantly, though, the additional reduction in our Pillar 2A requirement which was also effective on the 1st of January, largely offset the reduction in reliefs, meaning that the headroom above our regulatory minima shown on this slide was broadly maintained. Finally, this is a good opportunity to highlight that our regulators have provided several important capital approvals over the course of 2022, including setting our MREL requirement at two times our Pillar 1 and Pillar 2A, reducing our Pillar 2A requirement from 1.11% to 0.5% and then again to 0.36% from 1 January 2023, as I just mentioned. Confirming that our Tier 2 notes can continue to count towards our MREL ratio after we have established our new holding company this year. And finally, our application for AIRB continues to progress. So bringing this all together then, and as we look forward to 2023, which will be for us a transitional year. As I mentioned in my previous slides, we feel that there is still opportunity for NIM accretion, balancing higher interest rates and our asset maturity profile, and the expected increased cost of deposit pressure, which we are seeing in the current market. Inflation is likely to be hard to contain within management cost initiatives. We believe current provisioning levels and the cost of risk are reflective of the likely economic outturn and the shape of our book. And we're constraining asset and RWA growth so that we can start to sustainably strengthen our capital ratios and importantly, grow our headroom to the minimum requirements. Taken together, we are now targeting mid-single-digit return on tangible equity by 2024. I'm moving to my last slide. Before I hand back to Dan, who will talk you through the outlook and the future for Metrobank, let me briefly remind you of the key financial takeaways. We reported underlying profits for Q4. We have actively reshaped the balance sheet. We've built powerful asset origination engines. And our clients are becoming more active. We've controlled costs well, despite inflationary pressures. We are appropriately provisioned but are watchful. And we're targeting sustainable, profitable growth within our current capital constraints. And with that, I'll hand back to Dan. Thank you very much.

Thanks, James. I'm genuinely glad you're here. So listen, we've said 2023 is a transitional year, and I want to talk a little bit about the future for Metro Bank. I think it's really important to draw a line under the transformation and the turnaround and really stop looking back and start looking forward. So as we start to think about the path forward, the path forward has a lot of the components that are at the core of Metro Bank and have been at the core of Metro Bank since its founding. We're a service-led model to create fans. We're a multi-channel organization with stores at the heart of what we do. We have a great culture brought together by amazing and engaged colleagues. The one thing that separates us from almost every other challenger bank in the market is we are a full-service bank. We have a corporate lending division. We have a regional commercial lending business. We have asset finance, invoice finance. We do unsecure personal. We do auto lending. We have a great SME franchise. We have all of the product sets that the large incumbents have. We have cash management systems for our corporates. We have cash management systems for SME customers. We do a lot of FX, a lot of transactional business. We are a full service bank. That gives us a lot of strategic optionality as we move forward. We remain community focused. We believe we win one store at a time. We win in every community we operate in and we win by staying local. And again, we've improved the foundations of the organization. We've added risk and regulatory colleagues. We've improved our asset-generating capabilities, both through the acquisition of rates that are repositioning our mortgage offering, building an auto platform that's digital and embedded in our suppliers. It is a different organization. And I did talk about credit cards quite a bit way back in 2020. And even there, while still a small part of our business, we increased credit card sales over four times in 2022 versus what we did in 2019. We're in a place where we still get recognized for how special we are. So we've talked about the CMA results. But two of the things on the right that are really important to me is we're one of the top 10 most loved workplaces. And we were viewed as a top 10 inclusive employer. We want our colleagues to be the best version of themselves they can be. It's all we ask. Be yourself and be the best version of yourself you can be. So that helps us build a sustainably profitable business. So we talked about briefly on a prior slide that we opened personal current accounts at 11% KGAR and business current accounts at a 9% KGAR. That's between 2019 and 2022. And for those of you with a short memory, a bit like myself, the reality is, is don't forget two of those years included COVID. It's a phenomenal performance. And then we talked about shifting the asset mix and starting to get into business lines that gave us a bit more margin for every pound of risk-weighted assets. So we've done two and a half times more mortgage applications at a higher yield than what we were doing in 2019. And the bottom chart is accurate. In 2019, throughout the whole year, we did 11 million pounds of unsecured personal lending. In 2022, even constraining in the fourth quarter asset origination because of the capital constraints, we still did over $1.1 billion of unsecured consumer lending, up from $11 million just three years before. And the top right is a chart we've created, but I think it gives you an idea of what we said we would achieve. When I stood up here, we said we were going to focus on risk-adjusted return on regulatory capital. That's what that chart shows you. It's a reasonable proxy, loan interest income divided by RWAs, and it's consistent throughout. So we've added 300 basis points from the lows in 2019 and early 2020 to where we sit today by changing the asset mix of the organization, by refocusing our efforts where we get paid for the quality service we deliver. And then a more traditional measure is just the spread between lending yield and cost of deposits. Every bank shows it. But if you go back and look at the second half of 2019 or even the first half of 20, that spread was 190 to 200 basis points. That spread today in the second half of 22 was 360 basis points. All of that was done through the hard work of focusing on core deposits and and changing the asset mix of the organization. So stores. You will have seen it, and I'm sure for some of you it will be a topic of conversation. We are going to open more stores. We are going to open 11 stores between 24 and 25 in the north of England. We believe that communities like Newcastle and Leeds and York and Hull and others absolutely deserve the benefits of having a Metro Bank embedded in their communities. And we're excited to go there. But let's be clear, we're going to go there in a different way. We're going to go there making sure the stores are much, much less expensive to build. They're going to have much less excess space in them. And we have learned the value of break clauses. So while we'll have long-term leases, they will have frequent and often breaks. But let me tell you what will be the same. They will look like a Metro store. They will have phenomenal Metro colleagues inside of them. They will be open seven days a week, and they will be open early to late. That's not changing. And when we talk about stores, everybody needs to remember the physical presence is about brand building as well as it is about service. So 90% of our personal current accounts that are open digitally are are within 20 miles of a store. The stores are a beacon. They create a lot of activity because they exist. And the bottom left of this chart is hugely powerful. Our stores, when it comes to personal current accounts, are two and a half times more productive than the big four. And when it comes to business current accounts, they are four times more productive than the big four. And, again, our mix of digital versus store-based openings is meaningfully different than what you would see in the big four because we believe in that face-to-face personal service. So, again, a bit like other retail banks, we have a huge difference. So there are a fair number of retail banks in the U.K. who are of scale. who are unlikely to grow meaningfully because they're constrained by their existing size. Metro Bank is uniquely positioned to continue to grow significantly from this point forward. We can grow accounts. We win every day. 188,000 PCAs, 42,000 BCAs. We grow every day. We still have a limited product set. I talked about filling the shelves. We're a little bit better off than we were, but to be honest, there's room to grow. And you saw the fee growth, 16% fee growth year on year. As we grow accounts, as we expand products, we get more transactionals, we get more customers walking through the door, and it generates more fees. There's lots of communities we're not in. So we'll do the next 11 stores up north, and we'll continue to invest in those communities. But the reality is there's lots of places outside the north where we're not, who deserve to have a metro bank. We're not in Norwich. We're not in Ipswich. The East Midlands is an area we're not well covered in. We're not in Exeter. There's lots of places that deserve to have a Metro Bank. And we continue to grow in all our existing stores. None of our existing stores have reached maturity. They're all still growing. And our digital offering is quite well rated and is really pretty good, but we need to continue to invest in it. And we will continue to invest in it as we move forward. The bottom left is broadly new since I arrived. We have a lot of asset-generating capability, and we can choose how we deploy that asset-generating capability depending upon risk-adjusted returns on regulatory capital. We can stress in and out of various business markets, which you've seen. So we've constrained commercial lending, in particular commercial real estate lending. We've broadly shrunk our professional buy-to-let book, as we said we would. to create capacity to do more unsecured personal lending and more mortgage lending because that gave us a better risk-adjusting return on regulatory capital. We will remain disciplined about trading amongst the asset side. Not to mention, we now have a moment, given the base rate rises we've seen, to actually generate really good returns on very low risk weights by buying gilt and or structured product. We don't do any balance sheet optimization today. We don't do any securitizations. We don't have any forward flow agreements. Again, there are lots of ways for us to use this balance sheet in anger that we're not currently doing. And the bottom right is probably our single biggest constraint. We need to optimize the capital stack. And as we get an opportunity to optimize the capital stack, everything above the bottom right can be accelerated and taken advantage of. So... The reposition model works. We're very happy with where we've ended up post the turnaround. It is a bank designed for our customer colleagues and communities, and it is still a bank designed for our customers, colleagues, and communities. We delivered the turnaround and protected the organization. It's still a service-led model. It has a wonderfully diversified asset base that allows us to do creative things. It has a scalable cost base, as James said. We are ready for much more volume to leverage up what is broadly a fixed cost base. We have a much more resilient bank, a much more stable bank than it was. And the chart on the right, you can recreate. It's all from public information. It's pretty simple to get at. But we have fundamentally repositioned Metro Bank from being close to a building society to now being in clear blue water. We have the funding advantages of a high street bank and we're generating yields like a specialist lender. There is nobody, nobody in the UK who's in that position. We have lots of strategic optionality to continue to take advantage of that clear blue water. And that clear blue water gives us an opportunity to generate outsized returns as we move forward. Thank you very much for your time this morning. We're now happy to take your questions.