Metro Bk Hldgs Plc

Good morning. Welcome to Metro Bank's Full Year Results 2023. I'm Dan Frumkin, the CEO of Metro Bank, which I hope you actually knew. I'm joined by Christina this morning, who is interim CFO and will walk through the financials. Christina was kind enough to join us and we were lucky enough to recruit her. She has lots of experience from her time at GE Capital. and then in Oak North. She'll make the handover to Mark Page, who we announced as our permanent CFO, who will be joining us late in the summer or early in the autumn. And we're excited Mark's joining us. His experience, both at Barclays, Lloyds, and Halifax, means he has a deep knowledge of the UK retail banking, which is where we are focused and going to stretch our legs. So with that, let me kick on with the presentation. I'm going to talk for a few minutes, then I'm going to turn it over to Christina. So listen, significant progress in 2023. 2023, from an operational perspective, was an excellent year. We delivered across almost every key KPI. The strategy is working. The results coming off the back of the strategy are self-evident in the numbers. Deposits grew in the second half of the year. They were up 1% half on half. They continued to grow into February. At the end of February, we had 16.5 billion pounds of deposits. That is within 100 million of the highest ever in the history of Metro Bank. Costs. We remain disciplined about cost. We remain disciplined about reducing cost. We guided initially $30 million of cost savings when we did the capital raise. We increased that to $50. That $50 million has been actioned and will be delivered by early April. In addition, we're increasing guidance from $50 million to $80 million by identifying another $30 million in cost savings on a run rate basis by the end of the year. we opened 246,000 PCA and BCA accounts. That is the most we've ever done in the history of the bank. In the second half of 2023, we opened the same number of PCA and BCA accounts that we did in the second half of 2022. We also solidified our capital position and have no debt maturities until 2028. And I want to make sure I take a moment right now to thank all of the support received, all of the folks who invested in the business, be they equity or debt, believe in the model. We were able to successfully reposition the capital stack because people believe in the path forward for Metro. They believe in our service-led, store-based proposition. And all of that was only possible because of all of the hard work and dedication of our colleagues. Everybody who invested has some experience with Metro. Every key stakeholder, be it a regulator or others, has interacted with Metro. They may walk into a store. They may have a cousin, an aunt, an uncle who banks with us. Every time we look after somebody at the tills, every time we have a conversation with a CSR, every time we answer the phones in a maze direct. All of that leads to the belief that Metro is special, different, and has a wonderful path forward. I think some people were expecting a different strategy to be announced today. I think people thought we would be somehow different. We're not. We still remain a people-people bank focused on our colleagues, our customers, and our communities. We're very much focused on being the number one community bank in the U.K., We will make a pivot to SME lending and commercial, but we already have it. We already have teams, we already have systems, we already have platforms, but we will continue to stretch our legs in that area. And we continue to give back in the communities we're a part of. And we continue to win awards. I think one of the things that I think everybody should be aware of is the resilience of Metro Bank's model. So if you look at the middle, upper chart, deposits grew half on half and they continued to grow as we got into 2024. They grew by almost a billion pounds year to date. I'm not sure anybody turning up today expected Metro to be talking about the fact that it has too much liquidity, that it actually has too much cash. But that's where we find ourselves today. because of the success of the deposit campaign we ran in quarter four. On the left-hand side, we continue to grow our lending yield, and we continue to be disciplined about cost of deposits, although cost of deposits will clearly be under pressure as we get into 24. But again, that creates opportunities for us to move forward. And I want to just spend a moment and highlight on the upper left, you'll notice we brought cost of deposits down and held it, to a large part of 20 and 21 into 22, before it started to grow during 2023, that discipline around cost of deposits is proof we will begin to bring down cost of deposits and improve NIM as we make our way through 24. And all of that growth was in a market that's under real pressure. So business current accounts, personal current accounts, Nibbles, non-interest bearing liabilities, as an industry, have been under real pressure. You can see that from the bottom graph. That dividend of COVID where people weren't doing anything, spending any money, the reality is this balance is built up in current accounts. Clearly, as the economy's picked up, activities increased, current account balances are drifting down. And on the right-hand side, Christina will talk about this more, but all of that is just opportunity. All of that is opportunity to expand NIM and grow Rhody. We have Too many deposits, too much liquidity, and we have a loan-to-deposit ratio that is significantly lower than our peer group. That mix will allow us to bring down cost of deposits and increase RODI. And with that, I'm going to turn it over to Christina, who will walk you through the financials. Thank you.

Thank you, Dan. And good morning, everyone. As Dan said, I'm Cristina Albaochoa. I'm the interim CFO, and I'm going to be taking you through the financials today. Looking at the key performance indicators here in this slide, you can see the points that Dan has made are crystallized here. We've raised customer accounts to over $3 million. The customer deposit balances as we finished last year were at $15.6 billion, but as Dan anticipated a minute ago, we are already at $16.5 billion as we see here end of February. Liquidity coverage ratio is very strong, which demonstrates that we've been very successful raising those deposits. We are above 360% at the moment, and that is the highest we've ever had, which means an opportunity to optimize that. On the lower half of the page, we can see high level how margins progress and the improvement in the bottom line. As close as a year at 188%, reflecting the improved product mix with increased yields and the very active management cost of deposits that we're going to detail later in another slide. On the absolute numbers and net fees and other income, we have seen a very good evolution of these. And last year, they were up 12%. And they've been increasing year on year on the back of the transactional activity, FX, the offer service that we've got, the combination between stores and online. And this speaks to the benefits of our full service offering. All in all, this reflects the positive moments over the P&L. On a statutory basis, you can see we've turned a profit of 31 million, and that's coming on the back of the benefit of a one-off for refinancing the tier two debt. And the underlying loss has reduced to 17 million. This is significantly below last year, 51 million, and even lower what we saw at the levels of 2020. Talking about capital, that was a big topic during last year. You're aware, we have strengthened our capital position. We are now operating at 22% MREL, and that's above minimum requirements and buffers. And we've extended all our debt. MREL is going to be having a call date in 2028, and tier 2 debt as we move back to 2029. This gives us Very good, strong position, and the headroom that we need to optimize the portfolio. If we're looking at the composition of the liabilities and our deposits, we can see that 37%, as we close the year, are non-interest-based liabilities. And on the back of the tactical campaigns that we did to raise deposits on the fourth quarter, we've increased the fixed-term deposits up to 13%. Customer type, most of that decrease came from SMEs, but as we said now in February, of the total $16.5 billion we've got, the mix is shifting back to what we had in 2022. Looking at the right-hand side of this page, I think it's important that we take a moment to realize that the first half of last year, we had record openings and accounts, and then in the second half, we went back to the run rate of the prior years, even higher. And this is despite all the challenges that were faced during the fourth quarter. I like looking at the bottom right of the page where we can see that the peer analysis shows that Metro Bank model still proves very resilient and above average on the non-interest income liabilities with 37%, which is more than double the average market. If we look at the next slide, we've got on the assets, the shift on lending, it's a work in progress. We're going through transitional years. We finished last year with 63% mortgages because we were pushing initially this area at the beginning of last year. As we continue to evaluate A or B over the medium term, we're going to build our balance sheet more fit for a standardized model. as we transition our mortgage portfolio and will pivot more to specialized mortgages and commercial lending. We are starting to see very good signs on the SME lending in the first two months of 2024. We've already seen more approvals in these two months than what we did in the whole of 2023, proving that we have the resources and operational capabilities to do it. Commercial lending, you can see, stays in line at 11%, and the government-backed lending is running off following the natural attrition. If you look at the bottom of the page, you can see that there's a significant increase in yield over risk-weighted assets, and it's almost double what we had in 2020. This is not random. It's a deliberate focus on improving the product mix, also coupled with capital resources consumption. So our main goal is to drive towards sustainable profitability. If we look at the right-hand side of the slide, our fixed rate lending and treasury assets are going to be benefiting simply by repricing as the natural maturities are going to be running off and repricing. The quality of our lending has not decreased. We have very good credit streams and you can see The levels of our provisions remain very stable. We have good management of ECL. On the commercial side, even, you can see a small reduction in single-name exposure. That active management and focus on asset rotation of the balance sheet is obviously translating very positively onto the P&L. You can see here the improvements in the underlying net interest income. It has gone up to $860 million, again, demonstrating the shift into the mix with higher-yielding assets and benefiting from all the range of services of FX, safety deposit boxes, and again, the value of our stores and online products. NIM has remained broadly stable to the 188%, up from the 182% last year, benefiting from the asset rotation. But then you can see here we have an impact, a negative impact, from the cost of the very successful deposit campaign that we did in the fourth quarter. That increase in revenue is the biggest contributor to the improvement in cost-to-income ratio that, as you can see, over the last four years has come down significantly. Coupled with our actions at the margin level, we have been taking a very disciplined approach to cost. Dan has already mentioned that we had an initial commitment of 30 million round rate cost decrease, and we've raised that to 50 million, which is almost all action as we are sitting here, and it will be all action by mid-April. We are now increasing that target to achieve 30 million of annualised cost savings by the end of the fourth quarter and that's going to come through a mix of different initiatives from procurement negotiation to optimising the cost of third party suppliers. If you look at our treasury portfolio, which is sitting at 8.8 billion, you can see how it is progressing. We are going to be seeing here again the benefit of the running of lower yielding assets, and they're going to be replaced by higher yielding assets over the next three to four years. We are very actively going to be managing our LCR. Again, the success, we've been victims of the success of the deposit campaign that we launched at the end of last year. The February 2024 position, we are at record LCR and we are going to be very tactical on how we approach and optimize this deposit base so that the cost of deposit benefits going forward. we're going to be letting these deposits that were tactical raised, they're going to be running off and repriced at lower rates. So looking at all the 2023, the events of the year, the headwinds that we saw on the market with the lower rates, the headwinds that we saw, idiosyncratic events as well with our... speculative news that we had that led to a bit of pressure on our liquidity, you can see that we are very proud of what we achieved in 2023. Guidance in general has moved down in several of our peers because of that compressing margin and lower benchmarks and top rates. Our ambition for 2024 is going in line with what we said earlier. We are targeting long growth of mid-single digit over the next five years and focusing on optimizing our use of capital and deliver high return on risk-weighted assets. We are going to see over time that our asset density is shifting, which will support this higher yield and the NIM, and then as a result, our cost-to-income ratio is going to be benefiting very much from this change. This is not going to be compromising our risk appetite. We're going to be tailoring credit processes and the discipline around credit is going to continue. Ultimately, we're targeting to a cost-to-income ratio by 2028, close to 60%. And with regards to return on equity, we are aiming for low single digits by 2025, then upper single digits by 2026, and then move to a low mid-teens thereafter. With this, I'll thank you, and I'll hand back to Dan.

Thank you, Cristina. I'm really glad you're here. So let's just finish up with just a couple of slides about where we go from here. So we've talked about pivoting to SME and specialist mortgages. I think the slide draws you to the two boxes. Your eye just immediately goes to the two boxes. I just want to raise your eyes up just ever so slightly to look at the two bullets. So the turnaround plan we've already delivered has given us scalable asset generating platforms that are primed for growth. So we have been working for a few years to get to a position to be able to stretch our legs. And the second bullet point, I can only tell you how nice it is to have capital to allocate. So we are now in a position where we can unleash the embedded potential that we've built over the last few years. So in SME, commercial and corporate, we already have the people, the platforms, and the products to meaningfully grow that business. We have a strong relationship channel that is well-established, well-skilled, and well-positioned. We have a credit team that's independent of the line that is seasoned, knowledgeable, and happy to challenge. But we can still do more. There are more sectors. There's more process simplification we can do to free up more time, both on the credit teams and the relationship management teams, to give us more time to look after new customers and service existing. And we'll continue to expand in the regions. We already have local business managers, local directors, and regional commercial lenders in the north of England right now, before the stores. And in specialist mortgages, we have the people. We're really knowledgeable in the space. We have a great manual underwriting process. We have some work to do on platforms, and we have some work to do on products. Both of those things will let us stretch our legs and continue to deliver more growth. This slide's here for two reasons. I won't spend much time on it. But these have been the five pillars since the day I arrived. Our strategy is not changing. We will continue to deliver as we have up until this point. I will just drag your attention down to the very last bullet points on a few of the graphs, on a few of the boxes. So in revenue, we target a roadie of low to mid-teens by 2027. We're targeting 60% cost-to-income ratio by 2027. Those are outstanding numbers. And in balance sheet optimization, we say optimize for risk-adjusted return on capital. What does that mean? It means we will trade the balance sheet if the right opportunity comes up. We chose not to move forward with the mortgage sale because we didn't think it provided the right risk-adjusted return for ourselves. If an opportunity came up where we could trade part of the balance sheet, we would look at it. We will be as aggressive as we need to be to drive the overall profitability of the organization. So 2023 performance, repositioning the balance sheet for higher risk-adjusted return on regulatory capital and position us for growth. You'll see that we talk about SME commercial banking and specialists being where we're going to grow. We talk about growing low-cost, sticky deposits, current accounts, non-interest-bearing liabilities. Christina made it very clear that as we sit here today, our non-interest-bearing liabilities as a percentage of overall deposits are twice, twice what is in the market. The deposit franchise works. We have some elevated liquidity, which gives us some optionality. We can put it to work in higher-yielding assets. We can be more disciplined about pricing and deposits. It gives us optionality. And we do have a broadly naturally hedged balance sheet. And what does that mean? It means you need to be patient. We don't get the benefit of hedges that some of our competitors get. We actually need the assets to reprice. So in the upper right, we've shown this chart a few times. The dots keep moving a little bit, but broadly, Metro is still uniquely positioned where it has a low cost of deposits and a good risk-adjusted lending yield. We're committed to moving that dot to the right and not too far to the south. And listen, you say, how are you going to deliver low to mid-teens or OD in 2027? That seems like a pipe dream. It seems almost impossible from where you are. It's actually really a quite simple path. There is lots of execution that needs to occur, but by now I hope we've demonstrated our ability to deliver. So we need to be disciplined about cost. 24 costs will be lower than 23, and 25 costs will be lower than 24. I think given the fact that we've already delivered the 50 million savings we guided to in October... I think you can trust us that we will be disciplined about cost. Asset rotation. We need to grow commercial and corporate banking. Commercial lending decreased 14% last year because of the constraints that Metro was under. To date this year, we have already credit approved. So independent of the line, credit approved. enough lending that it equals 140% of all of the lending we did during 2023. So in 10 weeks, we've approved 140% of all of the lending we did last year. So I think the asset rotation, you can have confidence we're going to deliver. We can improve the cost of deposits. We've shown you how we can do it before. We will do it again. And again... In terms of asset repricing, we just need the earth to continue to rotate on its axis and continue to rotate around the sun. We just need time to pass. We have $2.6 billion of fixed-rate treasury investments that roll off between now and 2026 that earn us less than 90 basis points. That will create a huge uplift in NIM and a huge uplift in RODI. So you need to believe we can deliver costs, you need to believe we can rotate assets to higher yielding, better risk-adjusted returns, you need to believe we can bring down COD, and you need to just let time pass for assets to reprice. When we do all of that, we will quintuple profits between 2025 and 2028. There are not any other banks I'm aware of that are guiding a quintupling of profitability. Metro is uniquely positioned, finally in a place where it can stretch its legs. And I'm very confident in the growth from here. And with that, I'm happy to take your questions. Thank you.