Metro Bank Regulatory News (MTRO)

Metro Bank PLC

Interim results

Trading update H1 2022

28 July 2022

Metro Bank PLC (LSE: MTRO LN)

Interim results for half year ended 30 June 2022

Highlights

1. Assuming no material deterioration in the macro-economic environment.

Daniel Frumkin, Chief Executive Officer at Metro Bank, said:

"We have delivered a strong first-half performance and I am encouraged by the continued momentum we are seeing across the bank. Initiatives we have put in place have helped us to improve NIM and lending yield, and drive record revenue growth. We have also maintained our cost discipline and improved our cost to income ratio, with the focus on generating greater earnings from our capital base. As a result, we have built a sustainable business and we now expect to reach monthly breakeven during Q1 2023.

"All of this has been made possible by focusing on our turnaround strategy over the past two years. We also retain, at our core, fantastic colleagues delivering highly-rated customer service and we remain committed to being the UK's best community bank. Collectively, we remain resolutely focused on continuing to execute our strategy and supporting our customers in the face of an increasingly complex macroeconomic environment."

Key Financials:

2. Underlying revenue excludes grant income recognised relating to the Capability & Innovation fund.

3. Underlying loss before tax is an alternative performance measure and excludes impairment and write-off of property, plant & equipment (PPE) and intangible assets, net Banking Competition Remedies Limited (BCR) costs, transformation costs, remediation costs, business acquisition and integration costs and net income resulting from the mortgage portfolio sale when comparing to our statutory loss.

Financial performance for the half year ended 30 June 2022

Deposits

Loans

Profit and Loss Account

Capital, Funding and Liquidity

Outlook and Guidance

A presentation for investors and analysts will be held at 8.30AM (UK time) on 28 July 2022. The presentation will be webcast on:

https://webcast.openbriefing.com/metrobank22/

For those wishing to dial-in:

From the UK dial: 0800 640 6441

From the US dial: +1 855 9796 654

Access code: 828004

Metro Bank PLC

Summary Balance Sheet and Profit & Loss Account

(Unaudited)

9. Comprises investment securities and cash & balances with the Bank of England.

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

For more information, please contact:

Metro Bank PLC Investor Relations

Jo Roberts

+44 (0) 20 3402 8900

IR@metrobank.plc.uk

Metro Bank PLC Media Relations

Tina Coates / Mona Patel

+44 (0) 7811 246016 / +44 (0) 7815 506845

pressoffice@metrobank.plc.uk

Teneo

Charles Armitstead / Haya Herbert Burns

+44 (0) 7703 330269 / +44 (0) 7342 031051

Metrobank@teneo.com

ENDS

About Metro Bank

Metro Bank services 2.6 million customer accounts and is celebrated for its exceptional customer experience. It is the highest rated high street bank for overall service quality and best bank for service in-store for personal and business customers, in the Competition and Market Authority's Service Quality Survey in February 2022. This year it has been awarded "Best Mortgage Provider of the Year" in 2022 MoneyAge Mortgage Awards, "Best Business Credit Card" in 2022 Moneynet Personal Finance Awards and "Best Current Account for Overseas Use" by Forbes 2022. It was "Banking Brand of The Year" at the Moneynet Personal Finance Awards 2021 and received the Gold Award in the Armed Forces Covenant's Employer Recognition Scheme 2021.

The community bank offers retail, business, commercial and private banking services, and prides itself on giving customers the choice to bank however, whenever and wherever they choose, and supporting the customers and communities it serves. Whether that's through its network of 76 stores open seven days a week, 362 days a year; on the phone through its UK-based contact centres; or online through its internet banking or award-winning mobile app, the bank offers customers real choice.

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

It is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. Most relevant deposits are protected by the Financial Services Compensation Scheme. For further information about the Scheme refer to the FSCS website www.fscs.org.uk. All Metro Bank products are subject to status and approval.

Metro Bank PLC is an independent UK bank - it is not affiliated with any other bank or organisation (including the METRO newspaper or its publishers) anywhere in the world. Please refer to Metro Bank using the full name.

METRO BANK PLC

INTERIM REPORT

Six months ended 30 June 2022

Forward-looking statements

This document contains forward-looking statements. Forward-looking statements are not historical facts but are based on certain assumptions of management regarding our present and future business strategies and the environment in which we will operate, which the Group believes to be reasonable but are inherently uncertain, and describe the Group's future operations, plans, strategies, objectives, goals and targets and expectations and future developments in the markets. Forward-looking statements typically use terms such as "believes", "projects", "anticipates", "expects", "intends", "plans", "may", "will", "would", "could" or "should" or similar terminology. Any forward-looking statements in this presentation are based on the Group's current expectations and, by their nature, forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond the Group's control, that could cause the Group's actual results and performance to differ materially from any expected future results or performance expressed or implied by any forward-looking statements. As a result, you are cautioned not to place undue reliance on such forward-looking statements. Past performance should not be taken as an indication or guarantee of future results, and no representation or warranty, express or implied, is made regarding future performance. The Group undertakes no obligation to release the results of any revisions to any forward-looking statements in this presentation that may occur due to any change in its expectations or to reflect events or circumstances after the date of this presentation and the parties named above disclaim any such obligation.

Company Information

sumMarised interim results

1. Underlying loss before tax is an alternative performance measure and excludes impairment and write-off of property, plant & equipment (PPE) and intangible assets, net Banking Competition Remedies Limited (BCR) costs, transformation costs, remediation costs, business acquisition and integration costs and net income resulting from the mortgage portfolio sale when comparing to our statutory loss.

2. The PRA Policy Statement 21/21 took affect from 1 January 2022 which required the exclusion of certain central bank claims from the total exposure measure. Had the central bank exposures been included the Leverage Ratio would have been 3.8%.

BUSINESS review

The first six months of 2022 mark a turning point in our transformation journey. The delivery of our strategic priorities over the past two years combined with a slow return towards a more normalised interest rate environment are seeing us meaningfully advance toward achieving sustainable profitability.

This progress clearly demonstrates the value of our proposition and underlines our commitment to becoming the UK's best community bank. Our continued reign as the highest rated high street bank for service combined with our low cost and stable deposit base shows that even in a rising rate environment our model continues to resonate; with customers willing to trade price for service. This approach continues to set us apart from our peers and will see us deliver long term value for all stakeholders.

Progress against strategic priorities

During the six month period to 30 June 2022 we recognised an underlying loss before tax of £48.0 million (half year to 30 June 2021: loss of £110.0 million, half year to 31 December 2021: loss of £61.3 million) which reflects the continued momentum in revenue as well as our disciplined approach to costs. We have also made strong progress in reducing statutory loss before tax for the period, which fell to £60.2 million (half year to 30 June 2021: loss of £138.9 million, half year to 31 December 2021: loss of £106.2 million) as we addressed legacy challenges and continue to finalise our transformation programme.

Revenue

Underlying revenue for the first six months continued its upwards trend to £236.2 million from £218.1 million in the second half of 2021 (half year to 30 June 2021: £179.8 million) as a result of the rebalancing of our lending portfolio as well as higher interest rates over the first six months of the year.

The Metro Bank business model has always been built for a normalised interest rate environment and the continued rise in the Bank of England base rates to 1.25% now sees it at a level we have not seen in our 12 year history. On lending, we are seeing these increases flow through to our front book pricing as well as variable rates, and this trend will continue as older fixed rate balances continue to attrite. At the same time as increasing lending yields we have held cost of deposits broadly flat, as current accounts make up 47% of our deposit base and higher yielding fixed rate balances continue to fall. These factors have driven a 45bps increase in net interest margin to 1.73% (half year to 30 June 2021: 1.28%, half year to 31 December 2021: 1.51%).

The rebalancing of our lending portfolio continued over the first half of 2022 and strong originations of RateSetter personal loans saw our gross consumer term lending exceed £1 billion for the first time. Credit standards are set high given our focus on prime customers leading to non-performing loans comprising only 2.75% of the portfolio. Consumer lending now makes up 10% of our portfolio and is a larger component of book than professional buy-to-let mortgages. Whilst residential mortgage lending remained broadly flat over the first six months of the year it remains the largest constituent of our lending at 54% (31 December 2021: 54%) and the first six months of the year has seen us replace older balances with higher-yielding specialist products.

Alongside this we continued to issue government backed lending schemes, growing Recovery Loan Scheme balances by £200 million since the start of the year. These continue to provide a strong return on risk-adjusted returns in line with our wider strategy as well as supporting our customers during this uncertain period.

Our revenue for the period has also benefited from an increase in investment yields, particularly noticeable in gilt pricing. This is allowing us to generate an increased return from the excess liquidity we carry. This additional liquidity also affords us the opportunity to quickly accelerate mortgage lending in the future, post successful AIRB accreditation, without having to aggressively grow deposits.

Fee income remained flat as customer activity was impacted by lockdowns and other social restrictions earlier in the year, with moderate customer accounts growth of 0.1 million during the first six months of the year. We continue to invest in initiatives to expand fee income and aim to see growth in the second half of 2022, although we are mindful of the economic outlook and the effects this has on consumer confidence which is a driver.

Costs

Underlying operating expenses fell 3% year-on-year to £266.3 million (half year to 30 June 2021: £275.2 million; half year to 31 December 2021: £271.6 million) despite inflationary pressures, reflecting the actions we have taken over the past couple of years to reduce both short term run-rate and longer-term growth. Our underlying cost income remains on a clear downward trajectory, reducing to 113% for the period, down from 125% in the half year to 31 December 2021 and 153% for the half year to 30 June 2021. On a statutory basis we are also seeing a reduction in costs following the conclusion of a large number of transformation initiatives and closure of legacy remediation issues. For example, we concluded the matter with US Office of Foreign Assets Control (OFAC) in relation to Cuba and Iran without fine or penalty. 

We recognised an expected credit loss expense of £17.9 million for the period, which largely reflects the change in the shape of our lending towards unsecured. Although this shift naturally incurs a higher cost of risk than some other areas of lending, we remain focused on the prime segments of the market and our observed levels of losses remain low. We do however continue to adopt a cautious economic outlook given that 2022 has seen heightened levels of global insecurity including the Russian invasion of Ukraine. As a solely focused UK bank we have no direct exposure to Ukraine or Russia, however like the majority of the customers and communities we serve, we are exposed to second order impacts, noticeably the increase in inflation that has in part resulted from the conflict. We have applied management overlays to our expected credit loss calculation to reflect these risks, offsetting the release of COVID-19 related adjustments.

The current inflationary environment is the highest we have witnessed in a generation however a tight cost discipline has helped us weather this headwind. A clear example of this is the action we have undertaken over the past couple of years to take advantage of the depressed commercial property market to buy the freeholds to a number of our stores. This saw us buy out the majority of our inflation linked leases with us now having only two sites remaining where rent is subject to inflation linked increases. The total number of freehold stores is now 28 representing 37% of our portfolio.

The largest increased in costs we have encountered is in relation to wage price inflation with the market for talent remaining fiercely competitive in particular in head-office and customer facing roles, and we provided colleagues on average with an above inflation increase in our pay review, effective 1 April 2022. This increase was offset by a reduction in change spend which as guided fell back during the period.

Infrastructure

The first half of 2022 has continued to see us develop our physical and digital infrastructure, although the pace has slowed as we return to normalised levels from the elevated investment we undertook in the first two years of our turnaround plan. The focus of change continues to be centred on enhancing our propositions and expanding our capacity to allow us to absorb the anticipated rate of balance sheet growth we envisage over the coming years.

The start of the year saw us open our newest store in Leicester, which is trading in line with expectations. We have also seen the continued recovery of the rest of our stores post-pandemic as footfall returns to the high street. It has been particularly pleasing to see the strong performance of our store in Bradford which we opened during 2021; this was designed with a significantly lower build cost than our previous stores, although retains distinct Metro Bank characteristics. The fact it is performing both in line with the rest of the estate demonstrates that significant savings can be achieved without compromising what our customers love about us. This should therefore allow us to deliver a significantly higher return on investment for future stores as we look to grow into new markets.

Alongside our physical footprint, we continue to invest in expanding our product offering with investment in building our motor finance proposition, which will be launched later in the year under the RateSetter brand. This builds upon the strong demand for prime unsecured lending and continues to leverage the skills and capabilities of the RateSetter acquisition.

As well as customer facing investments we are continuing to invest in back office infrastructure, with noticeable investments in financial crime. Protecting our customers and our communities from financial crime will continue to be an area of investment as we seek to remain ahead of this evolving landscape.

The first six months of the year saw continued progress on our AIRB application for residential mortgages. This remains a key strategic priority for us as it provides the potential to gain greater capital efficiencies and allow us to be more competitive in the mortgage market. We continue to engage with the PRA in respect of the application with the ambition of achieving accreditation in the near term, although the timing of any approval remains uncertain.

Balance Sheet optimisation

The balance sheet optimisation actions we have taken to date, noticeable our shift in lending mix, are now starting to bear fruit, with the effects clearly showing in our revenue growth.

Following the successful entry into the consumer unsecured market through RateSetter, we believe the motor finance product can also generate strong risk adjusted returns. However, given the uncertain economic outlook we retain a cautious approach to our roll-out and, as with our unsecured lending, will ensure that we target the prime end of the market.

Our RateSetter proposition has been highly effective in allowing to quickly and efficiently transition into higher yielding assets. The quick turnover of balances due to the short duration of lending also allows us to take advantage of rising interest rates as old balances attrite and are replaced with higher yielding front book loans. This approach will also allow us to quickly pivot back toward a focus on mortgage lending should rates to return to more normalised levels and appropriate risk-adjusted returns be made following successful AIRB accreditation.

Internal and External Communications

2022 has seen a positive start to the year in respect of our continued communications agenda. We undertook a brand campaign targeted at small businesses which showcased our incredible colleagues. The campaign was highly targeted, focused on Cardiff, Kingston, Clapham, Oxford and Manchester allowing us to maximise our impact in these important markets whilst containing costs. We have been able to track and measure the success of the campaign and have been pleased with the impact we have seen this deliver.

Colleagues and leadership

The key to our success remains our colleagues. The start of 2022 has seen the market for talent remain fiercely competitive and as such we remain focused on retaining and attracting colleagues through ensuring Metro Bank is a place that people want to join and can thrive whilst here.

In June we had the opportunity to celebrate colleagues from around the business at our AMAZE award ceremony; the first time we have been able to host the event since 2018 due to the pandemic. This provided a fantastic platform for us to be able to remind ourselves of the great work we undertake in serving our communities and how we go above and beyond to ensure we create and maintain FANS.

We also announced early this month that we have appointed James Hopkinson as our new Chief Financial Officer. James will be joining us in early September and we look forward to welcoming him at this exciting juncture. James joins us from ClearBank where he was Chief Financial Officer for the past few years and before that he spent almost 20 years at Standard Chartered in a variety of senior roles.

During the second half of the year, executive committee members Richard Lees, Cheryl McCuaig and Jessica Myers will be leaving the Bank. I would like to take the opportunity to extend my thanks to them for all their efforts and their contribution to my leadership team. They have provided immense support in helping get us to this stage of our turnaround journey and I wish them all the best in their future endeavours.

The first six months also saw Sally Clarke step down from the Board to pursue other opportunities and I thank her for her contribution over the past two years. Nick Winsor will become the designated NED for workforce engagement, a crucial role in helping maintain our colleague centric approach. Over the coming months our Chair, Robert Sharpe, will evaluate whether any further changes are required to committee compositions as a result of Sally's departure to maintain a strong and robust governance structure.

Capital

Capital remains the largest constraint on the business and we continue to utilise regulatory buffers. As we advance towards profitability this will allow us to return to growing our risk weighted assets, utilise some of our excess liquidity and maintain our positive momentum on income growth.

In June 2022 the PRA reduced our Pillar 2A requirements from 1.11% to 0.50% and the Resolution Directorate of the Bank of England agreed for our binding MREL requirement to be set as the lower of 18% and two times the sum of Pillar 1 and Pillar 2A. These changes had the effect of reducing our minimal MREL requirements (excluding buffers) to 17.0%, and reflect the credit quality of our lending portfolio as well as the strength of our balance sheet.

We are currently working on the implementation of a holding company which we are required to have in place by 26 June 2023, which is in line with the call date of our Tier 2 bond. Under the terms of the Bank of England's December 2021 MREL Policy Statement, the operating company issued Tier 2 bond will lose MREL eligibility upon the holding company implementation. Management will work with regulators, debt holders and advisers with a view to addressing this MREL eligibility aspect before the implementation of the holding company. Our Senior Non-Preferred bond includes an option for the issuer to be substituted to the holding company once it is established and so will remain fully MREL eligible.

Outlook

Thanks to the hard work of our colleagues through unprecedented times, we have reached an inflection point and can clearly demonstrate our trajectory back towards profitability. Although we continue to have significant work to do, with the momentum in the business I expect to achieve monthly breakeven during the first quarter of 2023.

We remain resolutely focused on the delivery of our strategic priorities and I would like to thank all of our stakeholders - our customers, colleagues, shareholders and regulators - for their continued support.

Daniel Frumkin

Chief Executive Officer

27 July 2022

Finance review

The continued momentum we have seen in the business is reflected in our results for the first six months of the year with underlying loss before tax decreasing from £110.0 million to £48.0 million from the same period in 2021 (half year to 31 December 2021: £61.3 million). On a statutory basis losses before tax reduced to £60.2 million for the same period (half year to 30 June 2021: £138.9 million, half year to 31 December 2021: £106.2 million) as a result of the continued reduction in non-underlying items as we close out legacy remediation projects and finalise our transformation agenda.

The results were underpinned by strong income growth combined with a reduction in costs helping to drive positive operating jaws. Net interest income grew to £180.8 million (half year to 30 June 2021: £133.3 million, half year to 31 December 2021: £162.0 million) driven by actions taken on lending mix, rising base rates and a continued low-cost deposit base. Net interest Margin of 1.73% (half year to 30 June 2021: 1.28%, half year to 31 December 2021: 1.51%) also continued to increase as a result of these factors although it remains diluted by the excess liquidity we continue to hold.

We ended the period with CET1 capital ratio of 10.6% and an MREL ratio of 18.3%. These compare to the regulatory minima including buffers (excluding any confidential buffer) of 7.3% for CET1, 8.9% for Tier 1 and 19.5% for MREL.

Income statement review

Table 1: Summary income statement

Net interest income

Net interest income for the period was £180.8 million up from £162.0 million in the second half of 2021 and £133.3 million for the same period last year. This has been driven by increasing yield on our front book lending and repricing of variable rate products as base rates continued to rise alongside the continued rebalancing of our lending portfolio as we continue to execute on our strategic priorities.

2022 has seen four base rate rises, from 0.25% to 1.25%, following the increase from the historic low of 0.1% in December 2021. Further base rates are expected in the second half of the year and although the market remains fiercely competitive we should continue to see a strong pass through of these increases into our front book loan pricing.

At the same time our focus on retail and business current accounts should help to insulate the impact of these rate rises on our costs of deposits. Cost of deposits for the first six months of 2022 was 0.14%, three basis points down from the cost in the second half of 2021 (half year to 30 June 2021: 0.31%, half year to 31 December 2021: 0.17%).

Net interest income has also benefited from increases in the returns from the treasury portfolio where the impact of rate rises often filters through more quickly than in our lending portfolio, noticeably through the balances we hold at the Bank of England.

Finally, we have continued to see the incremental impacts of the actions we have taken in respect of our store lease portfolio to reduce the interest expense we recognise on IFRS 16 lease liabilities. The interest expense on lease liabilities has fallen from £8.8 million in the six months to 30 June 2021 to £8.3 million for the same period this year. This is largely as a result of the continued actions we took last year to purchase the freeholds of some of our stores. Alongside this, the disposal of our lease on a site at the Old Bailey, previous remeasurement of lease liabilities in respect of the stores announced for closure, the slowed pace of new store growth and continued maturation of the existing lease portfolio should all continue to push this expense down going forward.

Fee, commission and other income

Subdued customer activity in the first half of the year led underlying net fee and other income to remain broadly flat at £55.3 million (half year to 30 June 2021: £46.7 million, half year to 31 December 2021: £54.8 million). Growth in service charges, driven by continued current account growth, offset depressed foreign exchange volumes, with income from safe deposit boxes, interchange fees and ATMs remaining stable.

Operating expenses

Underlying operating expenses slightly decreased to £266.3 million from £271.6 million in the second half of 2021 and down from £275.2 million in the first six months of 2021. The reduction reflects the benefits realised from our transformation programme aided by a reduction in change expenditure, offset slightly by an increase from wage inflation.

Statutory costs also were down, falling 12% to £233.2 million from £263.3 million in the final six months of 2021 (half year to June 2021: £272.8 million), as a result of a marked reduction in transformation costs, reflecting where we are in our journey. Similarly, remediation costs have sharply reduced as we continue to close out legacy issues. Offsetting this was a £8.2 million write-off on intangible assets, although this item was capital neutral.

Expected credit loss expense

We recognised an expected credit loss expense of £17.9 million for the period (half year to 30 June 2021: £14.6 million, half year to 31 December 2021: £7.8 million), reflecting the change in make-up of the lending portfolio as well as our cautious macroeconomic outlook. Despite the worsening economic outlook, the credit performance of our portfolio during the first half of 2022 has remained stable with both non-performing loans and arrears both reducing in the first half of the year.

Whilst the portfolio continues to be resilient, we continue to adopt a cautious outlook given the macro-economic uncertainties and as such retain a material level of management overlay within our expected credit loss assessment.

Balance sheet review

Table 2: Summary balance sheet

Deposits

Deposits of £16,514 million at 30 June 2022 were broadly flat compared to £16,448 million at 31 December 2021. Given the amount of excess liquidity we carry we have continued to focus on deposit quality and pricing rather than volume. This manifested itself in the high proportion of current accounts, which made up 47% of total customer deposits as at 30 June 2022 (31 December 2021: 44%).

Lending

Net lending remained flat during the first six months ending the period at £12,364 million (31 December 2021: £12,290 million). However, we continued to shift our lending mix as legacy balances ran off and capital was redeployed into more capital efficient lending. Consumer lending, primarily in the form of term lending delivered under the RateSetter brand, now makes up 10% of total lending balances up from 6% a year ago and 7% at year end. Term lending now makes up a larger proportion of lending than professional buy-to-let mortgages, reflecting our transition away from this area of the market to focus on lending which is more relationship driven.

We also continued to grow Recovery Loan Scheme lending during the first six months of the year to over £357 million, up from £157 million at last year end. This lending benefits from an 80% guarantee and as such aligns with our aim of improving returns on regulatory capital at the same time as being able to support small and medium sized trading businesses during a difficult time. Balances on the closed government backed lending schemes continued to attrite, reflecting the maturity of this portfolio; the majority of these loans are now entering the second year of their five year term.

Property, plant & equipment and intangibles

Non-current assets and intangible asset balances continued to decrease during the period. Property, plant and equipment ended the first half of the year at £749 million, down from £765 million at year end, as additions continue to fall. The opening of our store in Leicester was the only planned store opening of the year and as such we should continue to see asset balances decrease in the second half.

Intangible assets also continued to decrease reflecting the slowing pace of investment, which was lower than amortisation charges recognised, reflecting where we are in our transformation journey. Although the rate of intangible additions has slowed, we continue to invest in enhancing our proposition and expanding our capacity to allow us to efficiently scale the balance sheet in the years ahead. This has seen us focus on such areas as our AIRB application and continued investment in financial crime as well as new propositions including auto-financing.

Capital

Our CET1, Tier 1 and MREL ratios at 30 June 2022 were 10.6%, 10.6% and 18.3% respectively, compared to the regulatory minimum of 4.8%, 6.4% and 17.0%, respectively, (excluding buffers). The MREL requirement of 17.0% reflects the reduction of our Pillar 2A requirements from 1.11% to 0.50% and the move to our binding MREL requirement being the lower of 18% and two times the sum of Pillar 1 and Pillar 2A, which were announced in June 2022. Including buffers (excluding any confidential buffer, where applicable) our CET1, Tier 1 and MREL requirements are 7.3%, 8.9% and 19.5% respectively.

Our capital ratios were impacted in 2022 from changes in relation to the capital treatment of software assets. On 1 January 2022 the capital treatment of software assets reverted to the previous treatment of being deducted from capital, following changes implemented by the PRA.

We continue to operate within our publicly disclosed MREL buffers and will continue to do so for a period of time. The continued delivery of our strategic priorities will expect us to see a return above these requirements in the medium term.

Risk weighted assets ended the period at £7,702 million (31 December 2021: £7,454 million) reflecting the continued change in asset mix. We continue to optimise our risk weighted assets to ensure we are maximising our return on regulatory capital and remain committed to achieving AIRB accreditation which would free up risk-weighted assets and allow us to grow lending further.

Liquidity and wholesale funding

Our liquidity position continues to be strong, owing to our conservative lending approach. We ended 30 June 2022 with a Liquidity Coverage Ratio (LCR) of 257%, which continues to be significantly in excess of regulatory requirements. This is also reflected in the maintenance of a robust loan to deposit ratio which remained stable at 75% as at 30 June 2022 (31 December 2021: 75%). As we grow our regulatory capital, these elevated levels of liquidity will allow us to continue to grow lending without having to aggressively expand our deposit base.

We maintained our level under the Bank of England's Term Funding Scheme (TFSME) at £3.8 billion, also contributing to our liquidity. As this cost of funding is linked to the base rate, this has led to a noticeable increase in the cost of this funding during the period, rising from £2.1 million in the second half of 2021 to £13.1 million in the first half of this year (half year to 30 June 2021: £1.9 million). The cost of servicing the TFSME now exceeds the total interest expense paid on customer deposits. Although the use of this funding source is NIM dilutive, however, it is still overall income accretive as it is deployed into high quality securities which have also seen an increase in yield, in addition to the liquidity benefit it provides.

Going concern

These condensed consolidated interim financial statements are prepared on a going concern basis, as the Directors are satisfied that the Group has the resources to continue to operate for a period of at least twelve months from when the interim financial statements are authorised for issue. In making this assessment, the Directors considered a wide range of information relating to present and future conditions, including future projections of profitability, liquidity and capital resources as well as factoring in the uncertainties relating to the economic outlook.

RISK review

As at 30 June 2022, there had been no significant change to the business model, risk management framework or risk appetites we outlined in our 2021 Annual Report and Accounts. We have reassessed the principal and emerging risks we face, including those that could result in events or circumstances that might threaten our business model, future performance, solvency or liquidity, and reputation. The principal risk categories remain the same to those outlined in the 2021 Annual Report and Accounts.

A detailed description of our principal risks and uncertainties to which we are exposed, along with our approach to mitigating these risks, is set out in the Risk Report which can be found on pages 52 to 92 of our 2021 Annual Report and Accounts. These risks consist of:

Further information on credit, liquidity, operational and conduct risks are outlined below.

Credit risk

Despite the challenging economic environment, the credit performance of our portfolio during the first half of 2022 has remained stable. Non-performing loans and early arrears have both reduced in the first half of the year and we have observed a reduction in commercial exposures under our Early Warning and Close Monitoring processes. We have observed modest growth in the balance sheet overall with originations in retail mortgages offsetting the reduction in our legacy acquired portfolios, and strong organic growth in consumer lending through the RateSetter platform. Whilst the portfolio continues to show resilience, we have retained a prudent level of management overlay within our expected credit loss assessment, reflecting the high level of macroeconomic uncertainty, following the Russian invasion of Ukraine, and the high inflation environment and cost of living pressures.

Total loans and advances to customers have increased by £76 million to £12.5 billion during the first half of 2022. This is reflective of our strategic focus with 43% growth in consumer balances which now contributes to 10.0% of total loans and advances to customers (31 December 2021: 7.0%). Retail mortgages and commercial balances remained relatively unchanged. However, whilst net commercial balances are relatively stable, there has been a change in composition which reflects our strategic growth of asset finance and invoice finance and new RLS lending, offset by repayments in BBLS and commercial real estate.

Expected credit losses

The below table provides a breakdown of IFRS 9 Expected credit losses (ECL) stock in the period by portfolio.

Table 3: Expected credit loss allowances

Expected credit losses (ECL) have increased during the year by £2 million to £171 million (2021: £169 million, 2020: £154 million) predominantly driven by originations in consumer lending, offset by repayments in commercial, particularly on some large single named cases. Management overlays are broadly flat compared to year end due the addition of overlays to reflect continued macroeconomic uncertainty following the Russian invasion of Ukraine and the high inflation and cost of living pressures offsetting releases of those relating to COVID-19 uncertainty.

Non-performing loans

The below table provides information on non-performing loans by portfolio.

Table 4: Non-performing loans

NPLs have reduced to £345 million (2021: £462 million). This decrease is primarily driven by repayments and write-offs in commercial, particularly on a small number of large commercial single name cases, and BBLS where the bank has successfully claimed against the government guarantee. NPLs for mortgages have also moderately reduced primarily driven by customers returning to contractual repayments. The NPL ratio for consumer lending has increased slightly to 2.5% (2021: 2.4%) driven by maturation of the portfolio, in line with expectations, following strong growth through the RateSetter platform.

Cost of risk

The below table provides information on the Cost of Risk (CoR). CoR is the credit impairment charge expressed as a percentage of average gross lending.

Table 5: Cost of risk

The change in overall cost of risk (CoR) is primarily driven by increased lending in consumer lending which now equates to 10% of the bank's portfolio and carries a higher CoR than retail mortgages and commercial. The decrease in CoR for consumer lending is the result of new originations through the RateSetter platform and the reduction in the legacy consumer portfolio.

In retail mortgages, the increase in CoR is driven by the deterioration in the majority of the macroeconomic factors feeding into the IFRS 9 models offset by improvements in the HPI forecast reflecting the continued increase in observed house prices. The increase in CoR for commercial is also driven by deterioration in macroeconomic scenarios.

Retail mortgage lending

Mortgage balances have increased slightly in the first six months of 2022 to £6,785 million (31 December 2021: £6,723 million) with originations offsetting the reduction in our legacy acquired portfolios.

Despite the challenging economic environment, the credit performance of the portfolio during the first half of 2022 has remained stable. DTV has increased slightly by 1% to 56% as at 30 June 2022 (31 December 2021: 55%) and the total ECL stock position has reduced by £1 million to £18 million (31 December 2021: £19 million). Arrears are stable with a moderate improvement observed in non-performing loans (30 June 2022: 1.5%; 31 December 2021: 1.7%).

Origination volumes have been strong in the first half of the year at £675 million in (half year to 31 December 2021: £510 million) and we have continued to adjust our credit policy and lending criteria in late 2021 and early 2022. Additional controls have been implemented to support these changes to ensure the credit risk profile remains within appetite.

Table 6: Retail mortgage lending by DTV banding

Table 7: Residential mortgage lending by repayment type

Table 8: Residential mortgage lending by geographic exposure

The geographic distribution of our retail mortgages customer balances is set out above. All of our loan exposures which are secured on property are secured on UK-based assets. Our current retail mortgages portfolio is concentrated within London and the South-East, which is representative of our original customer base and store footprint. We are expanding our footprint over time which will reduce the geographical concentration of lending.

Consumer lending

Consumer balances have increased to £1.27 billion as at June 2022 (31 December 2021: £890 million) driven by strong growth through the RateSetter platform.

The majority (84%) of the portfolio now comprises new lending through the RateSetter platform. The performance of this portfolio is aligned with expectations, with moderate increases in arrears and non-performing loans in line with the growth of the book and normal portfolio maturation.

The total stock position has increased in 2022 by £14.6m to £56.0 million as at 30th June 2022. This relates to the new originations through the RateSetter platform and the expected maturation of the book, partially offset by the reduction in the legacy portfolio, and a post model overlay to reflect the uncertainty due to high inflation.

The total ECL coverage position for consumer has reduced slightly to 4.4% as a result of the continued growth in new lending in the first half of the year (31 December 2021: 4.7%).

Commercial lending

Table 9: Summary of commercial lending

Our commercial lending remains largely comprised of term loans secured against property and Government supported lending. In addition, commercial lending includes facilities secured by other forms of collateral (such as debentures and guarantees), and Asset Finance and Invoice Finance.

Our commercial balances have decreased from £4,846 million to £4,481 million in the first six months of 2022. This reflects the business strategy to reduce our Portfolio Buy to Let and Real Estate lending, and reductions in bounce back loans. New commercial business over 2022 includes RLS lending to support customers impacted by COVID-19, with government supported RLS lending balances increasing to £357 million as of 30 June 2022.

Commercial customers are managed through an early warning categorisation where there are early signs of financial difficulty, thereby allowing timely engagement and appropriate corrective action to be taken. Early Warning categories support our IFRS 9 stage classification. Total lending in Early Warning categories has fallen since December 2021.

Table 10: Commercial term lending (exc. BBLS) by DTV banding

As of June 2022, 76% of property secured lending had a DTV of 80% or less, reflecting the prudent risk appetite historically applied. Lending with DTV >100% includes loans which benefit from additional forms of collateral, such as debentures. The value of this additional collateral is not included in the DTV or the estimation of expected credit losses but does provide an additional level of credit risk mitigation. The guarantees supporting CBILS and RLS lending is not included in the debt to value assessment, and DTV >100% also includes government backed lending where the facility does not also benefit from property collateral. The increase in DTV>100% in 2022 reflects the increase in lending under the government's recovery loan scheme.

Table 11: Commercial term lending (exc. BBLS) by industry exposure

We manage credit risk concentration to individual borrowing entities and sectors. Our credit risk appetite includes limits for individual sectors where we have higher levels of exposure.

The sector profile for commercial term lending is broadly consistent with the position as at 31 December 2021. There has been an overall reduction in commercial real estate of approximately 7%.

Table 12: Commercial term lending (exc. BBLS) by repayment type

Table 13: Commercial term lending (exc. BBLS) by geographic exposure

Liquidity and funding risk

Our liquidity position continues to be strong, with our LCR standing at 257% as at 30 June 2022 (31 December 2021: 281%). This reflects our capital position and our conservative approach to lending.

We ended the period with a loan to deposit ratio of 75% (31 December 2021: 75%) and we continue to be deposit funded with no reliance on the wholesale markets although we continue to have access to, and have made use of, the Bank of England's TFSME both of which provide us with additional cost-efficient liquidity without creating reliance as a primary source of funding. Although the use of this funding is NIM dilutive, it is still overall income accretive as it is deployed into high quality securities which have also seen an increase in yield, in addition to the liquidity benefit it provides.

Capital risk

We manage capital in accordance with prudential rules issued by the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) and we are committed to maintaining a strong capital base, under both existing and future regulatory requirements.

Our CET1 capital ratio decreased to 10.6% at 30 June 2021 from 12.6% as at 31 December 2021. This was primarily due to the losses incurred during the period as well as the changes in relation to the capital treatment of software assets. On 1 January 2022 the capital treatment of software assets reverted to the previous treatment of being deducted from capital, following changes implemented by the PRA.

Capital remains the largest constraint on the business and we continue to operate within our publicly disclosed MREL buffers and will continue to do so for a period of time. The continued delivery of our strategic priorities and a return to profitability will allow us to return above these requirements in the medium term.

In June 2022 the PRA reduced our Pillar 2A requirements from 1.11% to 0.50% and the Resolution Directorate of the Bank of England agreed for our binding MREL requirement to be set as the lower of 18% and two times the sum of Pillar 1 and Pillar 2A. These changes had the effect of reducing our minimal MREL requirements (excluding buffers) to 17.0%, and reflect the credit quality of our lending portfolio as well as the strength of our balance sheet.

We are currently working on the implementation of a holding company which we are required to have in place by 26 June 2023, which is in line with the call date of our Tier 2 bond. Under the terms of the Bank of England's December 2021 MREL Policy Statement, the operating company issued Tier 2 bond will lose MREL eligibility upon the holding company implementation. Management will work with regulators, debt holders and advisers with a view to addressing this MREL eligibility aspect before the implementation of the holding company. Our Senior Non-Preferred bond includes an option for the issuer to be substituted to the holding company once it is established and so will remain fully MREL eligible.

Risk weighted assets ended the period at £7,702 million (31 December 2021: £7,454 million) reflecting the continued change in asset mix. We continue to optimise our risk weighted assets to ensure we are maximising our return on regulatory capital and remain committed to achieving AIRB accreditation which would free up risk-weighted assets and allow us to grow lending further.

Table 14: Capital resources

Operational risk

Fraud risk

We continue to work hard in a constantly evolving environment to minimise the impact of fraud. Across the industry there has been a notable increase in Authorised Push Payment fraud which has driven a significant rise in fraud losses. The overall level of fraud-related losses has increased but this is in proportion to the increase seen across the industry. Across the entire fraud landscape, we have taken significant steps to mitigate the risk to both the Bank and our customers, including but not limited to; enhanced fraud screening capability, implementation of Secure Customer Authentication and changes to core fraud detection tools to help better identify scams. We are also providing support to vulnerable customers who have been victims of fraud and are seeking to raise customer awareness of evolving fraud tactics via a range of initiatives as well as training our front-line colleagues.

Cyber threat

The impact which a successful cyber-attack could have on our customers remains a very significant focus of attention, as we both manage our current IT systems and plan to deliver new technology for the future, recognising the changing cyber landscape and the increased focus on digital capabilities. This is mitigated by ongoing investment in our cyber and information security infrastructure, enabling us to make constant improvements to our monitoring, control and response capabilities to protect customer data and minimise the risk of disruption. We have refined our objectives and principles and realigned our work plan to the global standard NIST Cyber Security Framework (CSF), allowing us to measure our maturity and benchmark more easily against peer organisations. The outcomes observed from simulated cyber-attacks undertaken by our cybersecurity teams provided further indication of improvements.

Operational resilience

We have identified and mapped our Important Business Services, set impact tolerances for the disruption of each service, carried out preliminary scenario testing to identify vulnerabilities and prepared a self-assessment of our resilience. Work to address our vulnerabilities and show that we can meet impact tolerances for each Important Business Service is well underway. Additionally, we have identified and assessed the materiality of our third party relationships and continue to apply this increased emphasis on operational resilience when assessing these relationships. All material supplier contracts since 1st April 2021 are compliant with the PRA requirements. This will enhance our capability to proactively prevent, respond to, recover and learn from operational resilience events and to minimise the impact to customers where these do occur.

Conduct risk

We continue to focus on the steps being taken to consistently demonstrate and evidence the consideration of customer outcomes as a key part of decision-making processes. We have taken significant steps to begin to address areas of conduct risk (particularly where there is elevated risk of customer detriment) and continue to invest funding and resource into these areas, including the identification and ongoing management of vulnerable customers, complaints management and retail arrears management.

Emerging risks

We consider emerging risks to be evolving threats which cannot yet be quantified, with the potential to significantly impact our strategy, financial performance, operational resilience and/or reputation. The emerging risks are continually assessed and reviewed through a horizon scanning process, with escalation and reporting to the Risk Oversight Committee and Board as necessary. The horizon scanning process fully considers all relevant internal and external factors and is designed to capture those risks which are present but have not yet fully crystallised, as well as those which are expected to crystallise in the future.

The emerging risk classifications reported in our 2021 Annual Report and Accounts have been retained. Talent has been added as an emerging risk, reflecting the importance of training and retaining a resilient talent pool. Additionally, the emerging risks relating digitalisation and climate change have already been shaping the future regulatory environment prior to the pandemic, but the pandemic has accelerated them - the former by increasing regulators' expectations around the need for resilient systems and controls in the face of a faster adoption of digitised solutions. And the latter around new obligations concerning reporting, disclosures and governance on all aspects of sustainability, where the pandemic has been a catalyst for the awareness of the importance of sustainable - or resilient - operations.

STATEMENT OF DIRECTOR'S RESPONSIBILITIES

The Directors confirm to the best of their knowledge these condensed interim financial statements have been prepared in accordance with UK adopted International Accounting Standard 34, 'Interim Financial Reporting' giving a true and fair view of the assets, liabilities, financial position and profit or loss as and as required by DTR 4.2.7R and DTR 4.2.8R, namely:

Signed on its behalf by:

INDEPENDENT REVIEW REPORT TO METRO BANK PLC

Report on the condensed consolidated interim financial statements

Our conclusion

We have reviewed Metro Bank PLC's condensed consolidated interim financial statements (the "interim financial statements") in the interim report of Metro Bank PLC for the 6 month period ended 30 June 2022 (the "period").

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 UK adopted International Accounting Standard 34, 'Interim Financial Reporting' and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

The interim financial statements comprise:

· the Condensed consolidated balance sheet as at 30 June 2022;

· 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 of Metro Bank PLC have been prepared in accordance with UK adopted International Accounting Standard 34, 'Interim Financial Reporting' and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

Basis for conclusion

We conducted our review in accordance with International Standard on Review Engagements (UK) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Financial Reporting Council 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.

Conclusions relating to going concern

Based on our review procedures, which are less extensive than those performed in an audit as described in the Basis for conclusion section of this report, nothing has come to our attention to suggest that the directors have inappropriately adopted the going concern basis of accounting or that the directors have identified material uncertainties relating to going concern that are not appropriately disclosed. This conclusion is based on the review procedures performed in accordance with this ISRE. However, future events or conditions may cause the group to cease to continue as a going concern.

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. In preparing the interim report, including the interim financial statements, the directors are responsible for assessing the group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or to cease operations, or have no realistic alternative but to do so.

Our responsibility is to express a conclusion on the interim financial statements in the interim report based on our review. Our conclusion, including our Conclusions relating to going concern, is based on procedures that are less extensive than audit procedures, as described in the Basis for conclusion paragraph of this report. 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.

PricewaterhouseCoopers LLP

Chartered Accountants

London

27 July 2022

CONDENSED Consolidated statement of comprehensive income (unaudited)

For the half year to 30 June 2022