Metro Bank Regulatory News (MTRO)

Metro Bank PLC

H1 Trading Update 2018

 July 24, 2018

METRO BANK'S HALF YEAR PROFIT QUADRUPLES YEAR-ON-YEAR

AS CUSTOMERS CONTINUE TO JOIN THE REVOLUTION

Metro Bank PLC (LSE: MTRO LN)

Note: All figures contained in this trading update are unaudited. All figures in US$ have been translated at a rate of $1.33 to the £.

1. Underlying profit before tax excludes Listing Share Awards, the FSCS levy, impairment of property, plant & equipment ("PPE") and intangible assets, and costs relating to the RBS alternative remedies package application. Underlying profit after tax for H2 17 also excludes the effect of changes in the tax rate on the deferred tax asset. Statutory Profit after tax is included in the Profit and Loss Account.

Craig Donaldson, Chief Executive Officer at Metro Bank said:

"Almost eight years to the day we opened the doors to our first store and I'm delighted with the momentum demonstrated by the performance in the first half of 2018. We have delivered a 55% growth in lending and 40% growth in deposits year-on-year, and welcomed a record 201,000 new customer accounts. Every day, every month and every quarter Metro Bank continues to win customers and grow through our disruptive service-led model.

"Our investment in the customer experience continues, delivering the best in store, online and mobile banking. So far this year we have opened two new stores - Southampton and Watford - with a further eight in build and over 20 more in the pipeline, and launched our online Current Account opening service. This month, we launched our developer portal, which opens up our banking platform to third parties to develop products and services to help make customers' lives easier. Our AI-powered money management service 'Insights' will also be available to customers using our banking app in the coming weeks. This commitment to meeting the digital and physical needs of our customers continues to attract new FANS every day."

Vernon Hill, Chairman and Founder at Metro Bank, added:

"From a standing start of literally zero, we have won over 1.4 million customer accounts from the big banks, proving British consumers and businesses are turning their backs on poor customer experience and demanding more. Our blend of service, convenience and award winning technology is not just attracting new customers in London and the South, it is helping to make us famous across the UK. The Revolution goes from strength to strength."

Financial highlights for the Half Year Ended 30 June 2018

Deposits

· Total deposits increased to £13,736m as at 30 June 2018, up from £11,669m at 31 December 2017 and £9,805m at 30 June 2017; representing year-on-year growth of 40% and 18% growth in the last six months. Deposits from commercial customers continue to be strong, representing 54% of 30 June 2018 total deposits (31 December 2017: 53%).

· Net deposit growth per store per month of £6.2m in H1 2018, representing annualised deposit growth per store of £74m ($99m).

· Comparative store deposit growth (a "like for like" measure of deposit growth using deposit numbers from stores that have been operating for more than a full year) is 37%.

· Continued growth in current accounts, largely non-interest bearing, now comprise 31% of total deposits. Online current account opening has complemented the store network.

· Cost of deposits of 57bps in H1 2018 (H1 2017: 57bps). Quarter-on-quarter cost of deposits rose 3bps to 59bps due to an increased customer preference for fixed deposits over variable as expectations of a base rate increase reduced. We expect cost of deposits to stabilise around this level over the year, absent any base rate movements.

Loans

· Total net loans increased to £12,013m as of 30 June, up from £9,620m at 31 December 2017 and £7,750m at 30 June 2017; an uplift of 25% in the half year and 55% year-on-year. Loans to commercial customers represent 32% of total lending as of 30 June 2018 (31 December 2017: 33%).

· Loan to deposit ratio increased to 87% (31 December 2017: 82%), already within our 2020 and 2023 target range, driven by record organic lending growth of over £1bn in Q2 18 and supported by £523m portfolio acquisition in Q1 18.

2. The allowance for impairment is calculated under IAS 39 as at 30 June 2017 and 31 December 2017, and under IFRS 9 at 30 June 2018.

Credit

· Asset quality remains strong as we grow. Non-performing loans reduced to 0.17% of the portfolio (31 December 2017: 0.27%). Cost of risk remained low at 0.08% in the six months to 30 June 2018 (H1 2017: 0.12%).

· Loan portfolio remains highly collateralised, with average debt to value ("DTV") of 59% for residential mortgages and 61% for commercial loans.

Profit and Loss Account

· Underlying profit before tax has grown 301% year-on-year to £24.1m, quadrupling from £6.0m in the six months to 30 June 2017. Statutory profit before tax of £20.8m has grown 373% compared to £4.4m in H1 2017.

· Underlying earnings per share of 20.6p in H1 2018 (H1 2017: 3.7p), a year-on-year increase of 457%.

· Improvement in underlying Cost:Income ratio to 85% in H1 2018 from 88% in H2 2017 and 93% in H1 2017 driven by strong positive P&L "jaws", with total revenue up 45% year-on-year and operating expenses up 33%.

· Customer net interest margin increased to 2.22% (H1 2017: 2.17%). Quarter-on-quarter competitive pressures on mortgage yields, combined with an increased cost of deposits, resulted in Customer NIM declining 4bps. We expect the market to remain competitive on lending yields but anticipate that fees will start to increase with the launch of more services to business customers in H2 2018. Net interest margin for H1 2018 was 1.85%.

Capital

· Capital ratios remain robust. Common Equity Tier 1 Capital ("CET1") as a percentage of risk weighted assets is 12.7%, currently exceeding our Tier 1 regulatory minimum of 9.7%3. Risk weighted assets at 30 June 2018 were £6,944m. The Regulatory Leverage ratio is 4.6%.

· Successful completion of a £250m Tier 2 debt raise supports growth, diversifies our capital base and helps to deliver a total capital ratio of 16.2% as at 30 June 2018, in excess of our current regulatory minimum of 12.1%3.

· Further growth supported by proposed equity capital raise announced separately today. This will enhance already robust capital ratios.

· Our Pillar 2A requirement of 1.7% is currently under review with the PRA. We anticipate receiving capital relief as part of the Pillar 2A offset, in effect temporarily reducing the regulatory minimum and hence increasing management buffers, ahead of transitioning to the advanced internal ratings based approach (AIRB) on residential mortgages, expected H2 2019.

· Whilst our target CET1 ratio remains >12%, as we trend towards AIRB implementation we will have sufficient management buffers to be comfortable between 11-12%.

3. Based on current capital requirements, excluding any confidential PRA buffer, if applicable

Customer Experience

· Brand recognition in London remains consistently high at 88%. Across the UK, brand recognition has risen to 58% according to a recent independent survey conducted by YouGov4.

· Launch of developer portal for open banking. Built in collaboration with Apigee (Google), this enables third-parties to build new and innovative services on top of our platform using APIs, creating more choice and opportunities for customers.

· Expanded the network with store openings in Watford and Southampton. A further ten stores are planned for 2018, with eight currently in build from Bristol to Northampton, and more than 20 in the pipeline.

· Award winning current account opening online continues apace, named Retail Banker's 2018 "Best Digital Onboarding Strategy", with c.70% of accounts opened around the existing store network.

· Created c.400 new jobs as we continue to invest in our colleagues and our culture, and celebrated being named in Glassdoor's "2018 Best Places to Work."

· Our bid application for the RBS alternative remedies package is complete and we are ready to submit once the process commences in November. This presents a huge opportunity for us to accelerate both our offering and reach across the UK and to deliver real choice for SMEs.

4. All figures, unless otherwise stated, are from YouGov Plc and are taken from four surveys. Total sample size was 1006 adults. Fieldwork was undertaken between 10-12 July 2018. The figures have been weighted and are representative of all London adults (aged 18+). Total sample size was 2079 adults. Fieldwork was undertaken between 10-11 July 2018. The figures have been weighted and are representative of all GB adults (aged 18+).

Summary

· Momentum in the business progresses as the bank grows from strength to strength. We reiterate our 2020 and 2023 targets, apart from a revised 2020 ROE target of c11.5% (from c14%), reflecting the proposed growth capital raise.

Metro Bank PLC

Summary Balance Sheet and Profit & Loss Account

(Unaudited)

5. Comprises investment securities, cash & balances with the Bank of England, and loans and advances to banks

6. Comprises property, plant & equipment, intangible assets and other assets

Analyst and investor call

An analyst and investor call will be held as follows:

For more information, please contact:

Metro Bank PLC Investor Relations

Jo Roberts

+44 (0) 20 3402 8900

jo.roberts@metrobank.plc.uk

Metro Bank PLC Media Relations

Tina Coates/Deborah Lewis

+44 (0) 7811 246016/ +44 (0) 7811 994 554

pressoffice@metrobank.plc.uk 

Martin Pengelley/ Latika Shah

Tulchan Communications

+44 (0)7718 967 508/+44 (0)7950 671 948

metrobank@tulchangroup.com 

ENDS

About Metro Bank

Metro Bank is the revolution in British banking. It is celebrated for its exceptional customer experience and was awarded 'Best All Round Personal Finance Provider' at the Moneynet Personal Finance Awards 2018, as well as

'Most Trusted Financial Provider' at the Moneywise Customer Service Awards in 2016 and 2017 and 'Best Financial Provider' at the Evening Standard Business Awards 2017. It is also recognised by Glassdoor in its 'Best Place to Work UK 2018' top 50 list.

Offering retail, business, commercial and private banking services, it prides itself on using technology to give customers the choice to bank however, whenever and wherever they choose. Whether that's through its growing network of stores open seven days a week, from early in the morning to late at night, 362 days a year; on the phone through its UK-based 24/7 contact centres manned by people not machines; or online through its internet banking or award-winning mobile app: the bank offers customers real choice.

The bank employs over 3,000 colleagues and is headquartered in Holborn, London.

Metro Bank PLC. Registered in England and Wales. Company number: 6419578. Registered office: One Southampton Row, London, WC1B 5HA. 'Metrobank' is the registered trade mark 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

Interim Report

Six months ended 30 June 2018

Contents

Company Information

Key Highlights

1. Underlying profit before tax excludes Listing Share Awards, the FSCS levy (included when reporting on a full year basis), impairment of property, plant & equipment ("PPE") and intangible assets, and costs relating to the RBS alternative remedies package application

2. 56 stores at 30 June 2018; our 57th store in Southampton opened on 20 July 2018.

Business and financial review

We are delighted to report our results for the first six months of 2018. Once again this has been another exceptional period of growth driven by the strength of our model and our focus on the integration of stores and technology to create FANS. 

Our continued investment has helped to deliver a statutory profit before tax of £20.8 million for the first six months of 2018, quadruple the same period last year and already greater than our full year 2017 profit.

Income statement review

Total operating income increased 45% to £189.8 million (six months to 30 June 2017: £131.1 million) driven by strong lending volumes and supported by an increase in the loan to deposit ratio which rose to 87% as at 30 June 2018 (79% at 30 June 2017).

Cost of deposits remained flat at 0.57% in the six months to 30 June 2018 (0.57% six months to 30 June 2017) despite the base rate rise in November 2017.

Customer net interest margin increased to 2.22% (six months to 30 June 2017: 2.17%) reflecting an increased loan to deposit ratio. We note that the market has been and is expected to remain competitive on lending yields. Net interest margin for the six months to 30 June 2018 was 1.85% (six months to 30 June 2017: 1.97%) reflecting increased drawings from the Term Funding Scheme.

Operating expenses rose by 34% reflecting significant investment in technology, stores and colleagues as we build the bank for the long term. The biggest driver of cost growth was people costs as we created c.400 new jobs and continued to invest in our culture. This was reflected in being named in Glassdoor's "2018 Best Places to Work". We have also incurred costs associated with regulatory projects and our bid for the RBS alternative resolutions fund (separately disclosed in our income statement).

Balance sheet review

We continue to be focussed on diversified deposit growth in order to fund high quality customer loans. Deposits from customers were £13,736 million at 30 June 2018 up 18% since 31 December 2017. Deposits from commercial customers now represent 54% (31 December 2017: 53%) of deposits and current account deposits represent 31% of the book (31 December 2017: 32%).

This increase in deposits enabled us to fund lending growth. Loans and advances to customers have increased 25% to £12,013 million (31 December 2017: £9,620 million) driven primarily through organic lending. In addition we purchased a portfolio of UK mortgages for total consideration of £523 million in March 2018. The purchased portfolio consists predominantly of seasoned mortgages and has a similar credit risk profile to our existing loan book.

We drew down a further £480m from the TFS before it closed in February. Our business model continues to be primarily that of a deposit-led bank - with more deposits than loans.

During the six months to June 2018, property, plant and equipment increased by 9% reflecting our continued investment in stores. During the period we opened our 56th store in Watford followed by our 57th in Southampton in July. We are on track to open a further 10 stores in 2018, with eight already in build, and we have a pipeline of 20 further sites. In 2018 we have continued to expand our digital infrastructure. We launched our developer portal for open banking; built in collaboration with Apigee (Google), this enables third-parties to build new and innovative services on top of our platform using APIs, creating more choice and opportunities for customers. Our award winning current account opening online, named Retail Banker's 2018 "Best Digital Onboarding Strategy", continues apace with c.70% of accounts opened around the existing store network.

The credit quality of our lending book remains high, with a cost of risk of 0.08% at 30 June 2018, compared to 0.12% for the same period last year. On 1 January 2018 the Group adopted IFRS 9. This resulted in an increase in credit impairment provisions of £22.7 million as we moved from an incurred loss model for calculating impairments to an expected loss model. The model assumptions set out in our 2017 Annual Report and Accounts continue to be applied. We have not noted a significant increase in our cost of risk as a result of adopting IFRS 9, although we do expect to see increased volatility going forward.

Capital structure

We are committed to maintaining a strong capital base under both existing and future regulatory requirements. On 18 June 2018 the Group raised £250 million of subordinated Tier 2 debt which provides additional regulatory capital in order to help facilitate growth. We intend to support further growth through a proposed equity capital raise announced upon release of this report.

Capital ratios remain above regulatory requirements. Common Equity Tier 1 Capital ("CET1") as a percentage of risk weighted assets is 12.7% as at 30 June 2018 exceeding our Tier 1 regulatory minimum of 9.7%1. Our total capital ratio at 30 June 2018 was 16.2%, in excess of our current regulatory minimum of 12.1%1. The Regulatory Leverage ratio was 4.6%.

In the medium term we have the opportunity to achieve greater capital efficiency through applying an advanced internal ratings based ("AIRB") to calculating credit risk capital requirements. Our AIRB application for residential mortgages was submitted earlier in the year, with transition expected in the second half of 2019.

Going concern

These financial statements are prepared on a going concern basis, as the Directors are satisfied that the both the Group and parent company have the resources to continue in business for the foreseeable future. In making this assessment, the Directors considered a wide range of information relating to present and future conditions, including future projections of profitability, cash flows and capital resources.

Looking ahead

As we approach our eighth birthday we celebrate yet another AMAZEING year. Looking ahead we expect to maintain momentum by continuing to provide a credible alternative to the incumbent banks. This includes submitting our bid for the RBS alternative remedies package which will help accelerate our offering to small and medium sized businesses, an area of the market which remains underserved.

We will be continuing to invest in the customer experience through the opening of a further 10 stores in 2018 in addition to the delivery of new digital and technological capabilities starting with the launch of our AI-powered money management service 'Insights', and "walk out trading" enabling businesses to start accepting card payments in a matter of hours of account opening.

Our unrelenting commitment to meeting the digital and physical needs of our customers and our unparalleled culture will ensure we continue to generate FANS in record numbers. This will in turn ensure our deposits and low risk lending continue to grow delivering sustained increases in profitability.

Craig Donaldson

Chief Executive Officer

24 July 2018 

1. Regulatory minimums of 9.7% and 12.1% are based on current capital requirements excluding any confidential PRA buffer, if applicable.

Principal risks and uncertainties

There has been no significant change to our business model, risk management framework or risk appetite during the six month period ended 30 June 2018.

A detailed description of the principal risks and uncertainties to which the Group is exposed, along with the Group's approach to mitigating these risk, is set out in the Risk Factors and Management on pages 30 to 37 of the 2017 Annual Report and Accounts. These risks include:

· strategic risk - the risk that Metro Bank fails to achieve short and long term business objectives;

· credit risk - the risk of financial loss due to an obligor's failure to meet the terms of any contract or otherwise fail to perform as agreed;

· market risk - the risk that changes in market factors, such as interest rates or prices of investment securities, will affect the Group's income or the value of its holdings of financial instruments;

· liquidity risk - the risk that the Group will encounter difficulty in meeting obligations associated with its financial liabilities that are settled by delivering cash or another financial asset;

· conduct risk - the risk that our operating model, culture or actions result in unfair outcomes for customers;

· compliance and regulatory risk - the risk of financial loss or reputational damage due to regulatory fines or penalties, restriction or suspension of business, or cost of mandatory corrective action as a result of failing to adhere to applicable laws, regulations and supervisory guidance;

· operational risk - the risk of direct or indirect loss from failed or inadequate processes, people or systems, or exposure to external events; and

· financial crime - the risk of financial loss or reputational damage due to regulatory fines or penalties, restriction or suspension of business, or cost of mandatory corrective action as a result of failing to comply with prevailing legal and regulatory requirements relating to financial crime.

During the six months to 30 June 2018, the Group has identified one new principal risk that will impact the remaining six months of the year, namely:

· model risk - the potential for adverse consequences from decisions based on incorrect or misused model outputs and reports, which can lead to financial loss, poor business and strategic decisions, or damage to a bank's reputation.

The Board has ultimate responsibility for setting the Group's strategy, corporate objectives and risk appetite. The strategy and risk appetite take into consideration the interests of customers, shareholders and other stakeholders. The Board specifically approves the level of risk which the Group is willing to accept, and ensures there is an adequate framework in place for the reporting and management of those risks. It is responsible for maintaining an appropriate control environment to manage the principal risks, and for ensuring the capital and liquidity resources are adequate to achieve the Group's objectives within risk appetite.

The Board has delegated responsibility for reviewing the effectiveness of the Group's internal controls to the Audit Committee. The Audit Committee monitors and considers the internal control environment focusing on operational risks, internal and external audits and credit assurance, and is assisted in its oversight role by Internal Audit. Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee.

The Risk Oversight Committee assists the Board in providing leadership, direction, and oversight with regard to the Group's risk governance and management, and also assists the Board in fostering a culture within the Group that emphasises and demonstrates the benefits of a risk-based approach to risk management and internal control.

The Group's risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. The risk management policies and controls are reviewed regularly to reflect changes in market conditions and the Group's activities. Through our training and management standards and procedures, we aim to develop a robust and effective control environment in which all colleagues understand their roles and obligations.

Metro Bank's Chief Risk Officer ("CRO") is accountable for leadership of the risk function, which is independent from the Group's operational and commercial functions. It is responsible for ensuring that appropriate risk management processes, policies and controls are in place, and that they are sufficiently robust, thereby ensuring that key risks are identified, assessed, monitored and mitigated. Through the risk function, the CRO is responsible for providing assurance to the Board and Directors that the principal risks are appropriately managed and that the Group is operating within risk appetite.

Directors' Responsibility Statement

The Directors are responsible for preparing the interim financial report in accordance with applicable law and regulations.

We confirm that to the best of our knowledge:

(a) the condensed set of financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting';

(b) the interim management report includes a fair review of the information required by DTR 4.2.7R (indication of important events and their impact during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

(c) the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).

On behalf of the Board

Craig Donaldson David Arden

Chief Executive Officer Chief Financial Officer

24 July 2018 24 July 2018

Independent review report to Metro Bank PLC

Report on the Interim Financial Statements

Our conclusion

We have reviewed Metro Bank Plc's interim financial statements (the "interim financial statements") in the interim report of Metro Bank Plc for the 6 month period ended 30 June 2018. Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

What we have reviewed

The interim financial statements comprise:

· the condensed consolidated balance sheet as at 30 June 2018;

· the condensed consolidated statement of comprehensive income for the period then ended;

· the condensed consolidated cash flow statement for the period then ended;

· the condensed consolidated statement of changes in equity for the period then ended; and

· the explanatory notes to the interim financial statements.

The interim financial statements included in the interim report have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

As disclosed in note 1 to the interim financial statements, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

Responsibilities for the interim financial statements and the review

Our responsibilities and those of the directors

The interim report, including the interim financial statements, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the interim report in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

Our responsibility is to express a conclusion on the interim financial statements in the interim report based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

What a review of interim financial statements involves

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim financial statements.

PricewaterhouseCoopers LLP

Chartered Accountants

London

24 July 2018

Condensed consolidated statement of comprehensive income

For the half year to 30 June 2018

Condensed consolidated balance sheet

 As at 30 June 2018

1. Figure as at 30 June 2018 comprises of investment securities held at fair value through other compressive income (FVOCI) following the introduction of IFRS 9 on 1 January 2018. The 31 December 2017 comparator comprises of investment securities held as available for sale under IAS 39.

2. Figure as at 30 June 2018 comprises of investment securities held at amortised cost following the introduction of IFRS 9 on 1 January 2018. The 31 December 2017 comparator comprises of investment securities held to maturity under IAS 39.

3. Deposits from central banks comprises solely of amounts drawn down under the Bank of England's Term Funding Scheme ("TFS").

The accounting policies, notes and information on pages 16 to 31 form part of the financial statements.

These financial statements were approved and authorised for issue by the Board of Directors on 24 July 2018 and were signed on its behalf by:

Vernon W. Hill II Craig Donaldson David Arden

Chairman Chief Executive Officer Chief Financial Officer

Condensed consolidated cash flow statement

For the half year to 30 June 2018

Condensed consolidated statement of changes in equity

For the half year to 30 June 2018

1. On 1 January 2018 the Group adopted IFRS 9 which replaced IAS 39. Upon adoption of IFRS 9 the balance the available for sale reserve was replaced by the fair value through other comprehensive income (FVOCI) reserve in accordance with the new requirements.

Notes to the financial statements

1. Basis of preparation and accounting policies

1.1 General information

Metro Bank ("our" or "we") provides retail and corporate banking services in the UK and is a public limited liability company incorporated and domiciled in England and Wales. The address of its registered office is: One Southampton Row London WC1B 5HA.

1.2 Basis of preparation

The condensed consolidated interim financial statements of Metro Bank and its subsidiaries ("the Group") for the six months ended 30 June 2018 were authorised for issue in accordance with a resolution of the Directors on 24 July 2018.

These condensed consolidated interim financial statements for the six months ended 30 June 2018 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority (FCA) and IAS 34 Interim Financial Reporting as adopted by the European Union (EU). They do not include all the information required by International Financial Reporting Standards (IFRS) in full annual financial statements and should be read in conjunction with our Annual Report and Accounts for the year ended 31 December 2017 which is available on our website.

The comparative financial information for the year ended 31 December 2017 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for that year has been delivered to the Registrar of Companies. The auditor's report on those accounts was not qualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report and did not contain statements under section 498(2) or (3) of the Companies Act 2006.

The Directors consider that it is appropriate to continue to adopt the going concern basis of accounting in preparing the condensed consolidated interim financial statements. In reaching this assessment, the Directors have considered projections for our capital and funding position and have had regard to the principal risks and uncertainties of the liquidity and capital requirements of the business over the next 12 months.

1.3 Accounting policies

The accounting policies and methods of computation are consistent with those applied in our 2017 Annual Report and Accounts, other than the following.

Adoption of IFRS 9

On 1 January 2018 we adopted IFRS 9 ("Financial Instruments") which resulted in changes in accounting policies and adjustments to the amounts previously recognised in the financial statements. In accordance with the transitional provisions in IFRS 9, comparative figures have not been restated. For full details of the adjustments made on transition to IFRS 9, please refer to note 30 of our 2017 Annual Report and Accounts. No changes have been made to the preliminary assessment discussed in that note.

Adoption of IFRS 15

On 1 January 2018 we adopted IFRS 15 ("Revenue from Contracts with Customer"). The majority of the Group's income is accounted for under other accounting standards and as such there was no significant impact to the financial statements upon transition. Additionally, no changes to the accounting policies as disclosed in the 2017 Annual Report and Accounts have been made.

Debt securities in issue

On 18 June 2018 we issued £250 million of subordinate debt securities. These are accounted for in line with our current accounting policy for financial liabilities. Recognition is initially at fair value, being the proceeds less transaction costs. Subsequently the debt securities have been measured at amortised cost using the effective interest method.

1.4 Future accounting developments

On 1 January 2019 we will adopt IFRS 16 ("Leases"). This provides guidance on the classification, recognition and measurement of leases by providing a single lessee accounting model. Upon adoption lessees will recognise right of use ("ROU") assets and lease liabilities for all applicable leases, with operating leases being brought onto the face of the balance sheet.

Preparations for the implementation of IFRS 16 are well advanced and we are currently in the process of implementing the relevant internal controls and key system functionality changes required. The net impact on the balance sheet and income statement is not expected to be material. We will provide more details on specific accounting policy implementation decisions in our full year report.

1.5 Critical accounting judgements and estimates

There have been no significant changes in the basis upon which critical estimates and judgements have been determined, compared to those applied at 31 December 2017, although we note that Impairment losses on loans and advances to customers are now modelled by applying the requirements of IFRS 9. The key assumptions used in our IFRS 9 models were described in Note 30 to the 2017 Annual Report & Accounts and include:

• Consideration of when a significant increase in credit risk occurs

• Probability of default, loss given default and exposure at default

• Macroeconomic scenarios to be applied.

1.6 Operating segments

We provide retail and corporate banking services. The Board considers the results of the Group as a whole when assessing the performance of the business and allocating resources. Accordingly we have a single operating segment.

We operate solely in the UK and as such no geographical analysis is required.

2 Net interest income

Interest income

Interest expense

3 Taxation

Tax charge for the period

The components of income tax expense for the six months ended 30 June 2018 and 2017 are:

Reconciliation of the total tax expense

The tax expense shown in the income statement differs from the tax expense that would apply if all accounting profits had been taxed at the UK corporation tax rate.

A reconciliation between the tax expense and the accounting profit multiplied by the UK corporation tax rate for the six months ended 30 June 2018 and 2017 is as follows:

3 Taxation (continued)

Effective tax rate

The effective tax rate for the period is 27.2% (Six months to 30 June 2017: 29.9%).

The effective tax rate for the year excluding the effect of changes in tax rates is 26.8% (Six months to 30 June 2017: 29.9%).

Deferred Tax

A deferred tax asset must be regarded as recoverable and therefore recognised only when, on the basis of all available evidence, it can be regarded as more likely than not there will be suitable tax profits from which the future of the underlying timing differences can be deducted.

The following table shows deferred tax recorded in the statement of financial position and changes recorded in the Income tax expense:

4 Loans and advances to customers

Loans and advances to customers by category

Collateral

We hold collateral against loans and advances to customers principally in the form of mortgages over residential and commercial real estate and guarantees which we have the ability to call on in the event of default of the borrower. The table below details our gross credit risk exposure and the effects of collateral. The value of collateral has been limited to the principal amount outstanding to eliminate effects of over-collateralisation.

4 Loans and advances to customers (continued)

Residential mortgage lending

The average debt to value ("DTV") of the residential mortgage book is 59% (31 December 2017: 60%).

An analysis of residential mortgages by DTV is set out below:

A geographical analysis of the location of residential mortgages is set out below:

4 Loans and advances to customers (continued)

Commercial lending

We monitor concentrations of credit risk by sector for commercial term loans exposure. Our risk appetite is set at the beginning of every year and monitored by a committee of the Board.

The average debt to value ("DTV") of the commercial term loan book is 61% (31 December 2017: 58%).