Metro Bank Regulatory News (MTRO)

Metro Bank PLC

Full year results

Trading Update 2020

24 February 2021

Metro Bank PLC (LSE: MTRO LN)

Results for Year ended 31 December 2020

Highlights:

· Continued support for customers, communities and colleagues through COVID-19

· Accelerated transition to higher yielding assets

o £3.1 billion mortgage disposal

o RateSetter platform and back book acquisitions drive growth in unsecured lending

o Shift towards specialist mortgages (>80% of applications)

· Extended over 36,000 government-backed business loans totalling £1.5 billion

· 11% growth in deposits; meaningful mix shift to more current accounts

· #1 high street bank for service for the sixth time in a row

· 10% growth in customer accounts

Summary

Key Financials:

1. Pro forma on completion of the residential mortgage portfolio sale, including the settlement of a receivable outstanding at year end

2. Underlying revenue excludes amounts grant income recognised relating to the Capability & Innovation fund and the gain on the mortgage portfolio sale

3. Underlying loss before tax excludes the FSCS levy (for half year figures only), Listing Share Awards, impairment and write-off of property, plant & equipment (PPE) and intangible assets, net BCR costs, transformation costs, remediation costs, business acquisition and integration costs and mortgage portfolio sale. Statutory loss after tax is included in the Profit and Loss Account.

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

"It has been a truly unprecedented year for our business, colleagues and customers. Never has the role of a community bank been more important for people across the UK and I am incredibly proud of the way Metro Bank has continued to support and deliver for our customers. Whether through our colleagues who have kept all stores open and been available on the phone throughout national and regional lockdowns, or through our back office colleagues who have helped business and personal customers access much-needed government backed loan schemes, Metro Bank has made a real difference to the communities we serve. 

"The pandemic has clearly impacted performance, leading to significant expected credit losses, but our transformation strategy is firmly on track and we have accelerated initiatives to shift our asset mix, bringing higher yield and improving net interest margin, as evidenced in the second half. The purchase of the RateSetter platform has allowed us to enter the unsecured lending market. In addition, we have made progress against each of our strategic pillars, including the sale of part of our residential mortgage portfolio to further optimise our balance sheet, the launch of higher yielding products including specialist mortgages, and we have grown customer accounts to 2.2 million.

"2020 marked Metro Bank's 10th anniversary and whilst challenging, the strategic actions we have taken, supported by our incredible team of dedicated colleagues, means we remain on track to achieve our transformation plan as the UK's best community bank."

A presentation for investors and analysts will be held at 11:30AM (UK Time) on 24 February 2021.

The presentation will be webcast on:

https://onlinexperiences.com/Launch/QReg/ShowUUID=581E4973-0E91-467D-A85E-8C23D1FCA10D

For those wishing to dial-in:

From the UK dial: 0800 358 9473

From the US dial: +1 855 85 70686

Participant Pin: 78468426#

URL for other international dial in numbers: https://event.sharefile.com/share/view/s7bae1d9235d495a8

Progress on strategic plan

Differentiated customer proposition and customer centric model has once again been recognised in the CMA Service Quality Survey, with Metro Bank the highest rated high street bank for overall service quality for personal and business customers. We were also awarded Moneynet Banking Brand of Year 2021 and MoneyAge Bank of the Year 2020.

Strategic pillars unchanged. The liability-led strategy supplemented by the acceleration of asset mix shift, in response to the significant reduction in treasury yields resulting from COVID-19. The actions taken in 2020 reflect this change of emphasis.

Driving profitable revenue growth through meeting more customer needs by better executing and enhancing product offerings remains a key part of our strategy which in turn supports our acceleration towards higher yielding assets.

Committed to leveraging our existing network of 77 stores, with no expansion beyond stores in Bradford and Leicester in 2021. Future expansion is subject to review, with no new stores planned in 2022 or 2023.

2020 actions

2021 priorities and outlook

2021 economic and market outlook remains uncertain but commitment to customers, colleagues and communities is unwavering.

Financial performance for the year and six months ended 31 December 2020

Deposits

Loans

Expected Credit Loss

Profit and Loss Account

Capital, Funding and Liquidity

Board and Executive Committee Changes

Metro Bank PLC

Summary Balance Sheet and Profit & Loss Account

(Unaudited)

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

7 Comprises property, plant & equipment, intangible assets and other assets. Other assets at 31 December 2020 include £2.6 billion receivable from NatWest. This was received post year-end upon the completion of the transaction.

8 Change the Bank costs consists of investment spend, including amortisation

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 / Abigail Whittaker

+44 (0) 7811 246016 / +44 (0) 7989 876136

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 serves more than two million customer accounts and is celebrated for its exceptional customer experience. It is the highest rated high street bank for overall service quality for personal and business customers and the number one bank for service in stores in the Competition and Market Authority's Service Quality Survey in February 2021. It was recognised as 'Bank of the Year' at the 2020 MoneyAge Awards and 'Banking Brand of The Year' at the Moneynet Personal Finance Awards 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 77 stores open seven days a week, early until late, 362 days a year; on the phone through its UK-based 24/7 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

Preliminary Announcement

(Unaudited)

For the year ended 31 December 2020

Chief executive officer's statement

In February 2020, shortly after being appointed as CEO and having completed a comprehensive review of the business, we launched our strategic priorities with a clear plan to return the Bank to sustainable profitability built around a community banking model.

It's hard to believe that only a few weeks later the country was in lockdown, and the world entered the most difficult social and economic crisis of a generation. It has been a truly unprecedented year for our business, colleagues and customers. But never has the role of a community bank been more important for people across the UK and I'm incredibly proud of the way colleagues have stepped up to support each other, our customers and the communities we serve.

Our community banking model has proven itself over the past 12 months, with the Competition and Market Authority's Service Quality Survey once again confirming that Metro Bank is number one for store service and number one on the high street for overall service. We pride ourselves on giving customers the choice to bank however, whenever and wherever they choose by delivering full-service banking across stores, digital and telephony - and customers continue to choose us, with customer accounts growing to more than 2.2 million by the end of 2020.

Despite the pandemic weighing on our financial performance during the course of the year, we've made good progress delivering against the strategic priorities we set out in February 2020 and while there is still much to do, we remain on track to achieve our transformation plan as the UK's best community bank.

COVID-19

The response of Metro Bank colleagues to the pandemic has left me humbled, and the resilience they have shown has been inspiring. The unique culture that we have built and our unwavering focus on serving customers has shone through. Whether it be our front line colleagues who have kept stores and been available on the phone open throughout national and regional lockdowns, through our back office colleagues who have helped business and personal customers access much-needed government backed loan schemes, those who have worked remotely to keep our essential services running while continuing to launch new products, or those that have volunteered and fundraised for local causes in need of support.

Our colleagues have made a real difference to the communities we serve. I want to say a huge thank you to them for all their efforts during 2020 to look after our customers, our communities and most importantly each other.

OUR STRATEGY

In February 2020 we identified five strategic drivers to help return us to delivering adequate shareholder return in line with our ambition to become the UK's best community bank.

In spite of the challenges that the pandemic brings, those drivers remain unchanged and the business has remained resilient. Our underlying performance and the foundations on which our turnaround plan is built are strong.

Fundamentally we have seen, and continue to see, a significant opportunity to deepen relationships with existing customers by improving our product offering, enhancing our channels and by continuing to remain completely focused on delivering excellent customer service.

STRATEGIC RESPONSE TO THE PANDEMIC

While the key strategic drivers and the transformation plan we set out last year remain appropriate, the pandemic's impact on the macro-economic environment meant we've clearly had to adapt and accelerate the delivery of some strategic initiatives.

Starting in April, alongside the significant operational response and initiatives put in place to support customers, colleagues and communities, we worked to understand the impact of the pandemic on our plan. It is clear that the pandemic has caused both shorter term effects and more systemic medium term effects that influence our plans. Shorter term effects arise from lower customer activity, for example with notable impact on interchange fees, ATM and foreign exchanges volumes. However these are transitory, evidenced by a strong bounce back in activity during the period of lockdown easing over the summer.

Clearly the resulting fall in economic activity has in turn created pressure on our customers leading to a rise in credit provisioning. While we have seen limited actual losses to date, the underlying impact of the pandemic cannot yet be fully understood as a result of the appropriate government support schemes that remain in place. We therefore anticipate the impact on our customers will become clearer over the next 12-18 months. We remain committed to supporting consumers and businesses as we navigate the months ahead.

In line with the government support measures announced during the course of 2020, we worked hard to support our customers through these government backed lending schemes, notably BBLS, CBILS and CLBILS. These loans provide lending with little capital and credit risk impact due to them being partly or fully underwritten by the Government. To date, we have helped more than 36,000 customers and lent out £1.5 billion.

The more systemic medium term effects of the pandemic revolve around lower interest rates and quantitative easing measures taken by the Bank of England that have meaningfully depressed yields on investible assets. In February 2020, we were clear that our transformation agenda would be driven by a liability-led strategy given Metro Bank's proven ability to grow deposits. The deposits would then be invested in low risk weight investments which, while weighing on net interest margin, would have meaningfully improved our return on tangible equity.

While shifting our asset mix and the associated yield enhancement alongside this was a core part of our plan, these activities were not due to be a focus until the latter years of our plan. However, in an enduring lower for longer interest-rate environment, and given there is less inherent value in excess liquidity, we have accelerated some initiatives to deliver a different asset mix quicker - with higher yielding assets and improving net interest margin. As a result, the Executive team took several actions during the course of the year including:

· Purchasing the RateSetter platform bringing technology and talented colleagues with deep expertise in the unsecured lending market to accelerate our entry into this area.

· Continuing the use of the RateSetter brand on aggregator sites, opening up a new distribution channel that was not in our plans a year ago with the Metro Bank brand not present on aggregators.

· An immediate shift away from prime residential mortgages into more specialist offerings generating higher yield.

· Repricing fixed term deposits, moving from best on high street rates and bringing us into line with incumbent providers.

While it is still early days, and acknowledging that it will take time to change the shape of the balance sheet to ultimately improve net interest margin, the early results are encouraging.

For example, RateSetter lending is now available through the Metro Bank website and app, and ready to launch in Metro Bank stores when lockdown restrictions ease. Since launch, we have extended more than £120 million unsecured consumer loans to customers; this is more than twelve times the value of consumer lending that Metro Bank has delivered organically in any year since launch. 

Furthermore, following the decision to more quickly focus on specialist products, more than 80% of applications in the last six months of 2020 were for specialist mortgages. Cost of deposits and our deposit mix at the year-end show the results of our focus on repricing fixed term deposits during the course of the year, and it should be expected that we will remain disciplined on deposit mix, deposit pricing and deposit growth - given the lower inherent value of excess liquidity going forward.

As a result of the impact of the pandemic on financial performance, capital has been reduced more quickly than anticipated and access to capital markets has been more volatile. Given this, and the desire to shift our asset mix more quickly to enhance yield, we were swift to identify and deliver on opportunities presented by the current climate with the sale of a portfolio of residential mortgages in December 2020. We are pleased with the outcome of this transaction, with both the gain on sale and the resulting release of risk-weighted assets removing the need to raise additional capital as well as allowing us to increase our lending in higher yielding areas. In February 2021 we announced our intention to deploy some of this capital to acquire the RateSetter back book from peer-to-peer investors, to accelerate the optimisation of our balance sheet.

STRATEGIC PROGRESS

Alongside the actions taken to support customers through COVID-19 and to react to the changing external environment, as outlined above, we have continued to make solid progress on delivering against our strategic pillars. We're continuing to deliver what we said we would do, and the business has demonstrated its resilience with the pandemic having limited effect on our ability to drive and deliver change.

1) Cost initiatives

Despite the high fixed cost base nature of retail banking, we have controlled business as usual ('Run the Bank') costs. Cost growth was 1% on a like for like basis, adjusting for the RateSetter acquisition, COVID-19 related costs, six store openings, and colleague reward, or 9% in total. Costs to transform the business ('Change the Bank') have increased 130%. We always anticipated these change costs would be frontloaded and remain focused on keeping these appropriately contained.

We are taking a more proactive management approach to our property estate. In our interim results we announced we had taken the decision to vacate our office at Old Bailey, London. The success of our working from home arrangements as well as feedback from colleagues is leading us to explore other opportunities for office space rationalisation, including better utilising excess space in our store network rather than occupying standalone office space. An example of this is our new operations centre in our Bristol store, using previously underused space.

We have also taken the opportunity to capitalise on our strong liquidity position to take advantage of the current commercial property market. This has seen us buy the freeholds of certain stores at an attractive yield and either at, or close to, the carrying amount of their right of use asset - meaning only a marginal upfront capital impact in exchange for longer-term run rate savings and flexibility.

2) Revenue initiatives

Despite various national and regional lockdowns throughout the year, we have continued to grow our customer accounts - increasing to 2.2 million as at the year-end (31 December 2019: 2.0 million). During 2020 we opened six stores, including two, in Sheffield and Cardiff, following the initial COVID-19 outbreak. We will open two further stores in 2021.

In August 2020, we launched the Bank's first switching offer, helping us give something back to our existing customers by rewarding them for referring friends to open an account whilst welcoming new customers too. In September we launched Business Account Online (BAO) that enables new customers to open a business account on their mobile or online, 24 hours a day, and taking just 15 minutes from application to approval. We had to pause applications temporarily due to the overwhelming demand received, but we started to resume openings in 2021. We have also continued to see a meaningful share of the business switching market join us from RBS through the Incentivised Switching Scheme.

Furthermore, this year we will begin to make insurance products available to better serve Metro Bank customers and drive incremental revenue - initially through a partnership with Churchill Expert providing SME insurance, and with further partnerships to follow during the course of 2021.

3) Infrastructure

Alongside building the digital application system for BBLS in less than six weeks, we have continued to launch digital initiatives throughout the year including launching Business Account Online (BAO); account sweeping; Direct Debit origination in partnership with Bottomline Technologies; in-app receipt management technology in partnership with Sensibill; and an accounting software partnership with Clear Books.

We have also demonstrated the operational resilience of the bank - moving a significant proportion of colleagues to home-based working almost overnight, alongside delivering a significant programme of mandatory, regulatory and discretionary change.

4) Balance sheet optimisation

Our main focus this year has been on increasing our return on regulatory capital. We continue to explore corporate transactions where there are attractive opportunities that would be strategically advantageous to us, although our predominant focus remains on growing organically. We have accelerated the delivery of this pillar of our strategy in particular as outlined in our strategic response to the pandemic above.

5) Internal and external communications

The start of the year saw us launch our first marketing campaign - people-people banking - which showcased our incredible colleagues and was designed to help customers and potential customers understand Metro Bank's differentiators.

Following the success of our first advertising campaign, we are planning to launch a new advertising campaign focusing on business banking for SMEs. This is an area we see as key for future growth enabling us to deepen relationships, earn greater levels of fee income and is an area that remains underserved by larger competitors.

As well as a greater level of communications with customers we have continued to remain fully engaged with colleagues, regulators and shareholders. As a large proportion of colleagues have been working fully from home, maintaining effective communication has been critical in preserving our culture. This will continue to be important moving forward as we move towards a more flexible model with regard to location.

RESULTS

COVID-19 has weighed heavily on our financial performance during 2020, with us making a loss before tax of £311.4 million (2019: loss of £130.8 million). Adjusted for non-underlying items the loss for the year was £271.8 million (2019: loss of £11.7 million).

The loss has primarily been driven by an increase in our expected credit loss expense which rose from £11.7 million in 2019 to £126.7 million in 2020, reflecting the worsened economic outlook. The results also reflect the low interest rate environment and competitive marketplace as well as the costs of delivering our turnaround plan.

However, excluding the impact of COVID-19, financial performance is on track and in line with our expectations one-year into our turnaround plan. And half-on-half P&L performance demonstrates the momentum of the transformation plan - with underlying loss before tax halving in H2 compared with H1.

BUILDING THE TEAM

In April 2020, I also began making a series of changes to our Executive Committee (ExCo) in order to ensure we were best set up with the right skills and experience to support customers and colleagues in executing our strategy. This included bringing onboard a number of external hires - Richard Lees joined as Chief Risk Officer, Martin Boyle as Chief Transformation Officer, and Carol Frost as Chief People Officer.

With our refreshed ExCo now established, I am confident they will help me and the Bank to navigate the ongoing choppy waters and deliver our ambition to be the UK's best community bank.

THE FUTURE

This year marked the 10-year anniversary of our first store in Holborn, as the first high street bank to open in more than 100 years. We've since grown from 79 colleagues and one location to more than 3,500 colleagues, 77 stores and more than 2.2 million customer accounts today.

In February 2021, we were rated the top high street bank for overall service for personal and business customers in the latest Competition and Market Authority's Service Quality Service and number one for store service for the 6th time running. This is a huge endorsement to all our colleagues and the professionalism they have shown through very trying times.

Whilst the past decade had not been without its challenges, and there is plenty of heavy lifting still to do, we have built a business to be proud of. The level of dedication amongst my colleagues, the strong start we have made in executing our strategic plan, and our relentless focus on delivering great customer service across all channels gives me every confidence we can deliver on our growth ambitions and meet more customer needs.

One year into my role I am continually reminded what an amazing group of colleagues I work alongside. Their dedication to our FANS, communities and each other allows us to drive Metro Bank forward. It has been an extremely challenging year, but I could not ask more from our colleagues.

Finally, it would be remiss not to remember the real cost of the pandemic and extend my deepest sympathies to anyone who has lost a loved one.

Daniel Frumkin

Chief Executive Officer

24 February 2021

Finance review (unaudited)

Our financial performance in 2020 reflects the challenging year we have faced, as the anticipated costs of our turnaround have been compounded by a difficult operating environment.

Notwithstanding these challenges, we have made good progress against our turnaround plan, whilst at the same time maintaining a strong balance sheet. Our underlying performance is on track against our expectations, once adjusted for the impacts of COVID-19.

Entering 2020, the main constraint on the business remained regulatory capital. In response to this, and in line with our strategy, we took the decision in December 2020 to divest £3.1 billion of residential mortgages (90% were derecognised at year-end). The sale increased total capital plus MREL resources by 4%, removing the need to raise additional capital in the near term, as well as allowing us to continue to shift our product portfolio towards higher yielding segments.

Further supporting this strategy, in September 2020 we acquired RateSetter which provided immediate capabilities to accelerate our reach into the unsecured lending. In February 2021 we further announced our intention to utilise some of the capital freed up from the mortgage sale to buy the back book of peer-to-peer loans from the RateSetter investors. Additionally, during 2020 we significantly increased the proportion of mortgage lending in speciality segments.

Our statutory loss before tax for the year was £311.4 million, up from the loss of £130.8 million we made in 2019. A key driver of the increased loss was a higher expected credit loss expense which was £126.7 million compared to £11.7 million in 2019. Non-underlying items, particularly transformation and remediation costs, remained a significant component during 2020 reflecting the costs of the turnaround plan.

However, these costs were partly offset by a £63.7 million gain recognised on the mortgage sale (net of costs) in 2020. A further gain of £8.0 million for this sale (net of costs) was recognised in 2021.

Income

Total statutory income increased 4% year-on-year to £432.6 million from £415.6 million. This was driven by the £69.0 million gain recognised in relation to the mortgage sale. Adjusting for this and for grant income relating to the C&I programme, underlying income reduced by 15% year-on-year from £400.1 million to £340.9 million. This principally reflects margin compression due to the timing lag on asset and liability pricing following the 65bps base reduction in March, as well as the reduction in the loan to deposit ratio. These effects were most keenly felt in the first half of the year with net interest margin (NIM) reducing to 1.15% in H1.

NIM recovered somewhat in H2 to 1.28%, due to repricing actions taken on the deposit book, improved deposit mix benefiting from an 11% reduction in fixed term deposits and a 9% increase in non-interest bearing current accounts, plus improved asset mix. While the full year cost of deposits was 0.65%, the exit rate was 0.39%. In 2021, we anticipate further improvements in NIM as we continue to reprice deposits and move to higher yielding assets.

Fee income was materially impacted by lower volumes due to the various COVID-19 lockdowns and regional restrictions implemented throughout the year. Despite this, underlying fee and other income only fell 5%, reflecting continued account growth, as well as fee optimisation and other initiatives. Of note is the material recovery we saw in H2, with a 39% increase in underlying fees and other income from H1 as lockdown restrictions were eased over the summer and autumn. At the timing of writing it is difficult to predict when the current lockdown will end, however we do expect to see a normalisation of fee levels over the course of 2021, supported by current account growth and our SME propositions, as well as the introduction of new products during 2021.

COSTS

Total statutory costs grew by 15% during the year to £617.3 million (2019: £534.7 million). This reflects continued growth in non-underlying expenditure, most notably ongoing remediation costs, as well as previously communicated front-loaded 'Change the Bank' investment spend. 'Run the Bank' costs, which exclude investments and reflect our core operating expenses, grew 9% year-on-year. However, this growth includes the increased store footprint, the acquired costs from RateSetter, as well as COVID-19 related costs. Excluding these items, 'Run the Bank' cost increases were contained to 1% on a like for like basis, demonstrating improved cost discipline within the business.

The majority of 'Change the Bank' expenditure has been focused on required infrastructure and regulatory programmes during 2020. While this will continue into 2021, we do anticipate focusing more spend on revenue and cost avoidance initiatives.

During the year we took the decision to vacate one of our central London offices. The costs of this exit are reflected within transformation and impairment and write-off of PPE and intangible assets lines.

Alongside this we have taken advantage of the opportunities afforded to us by our strong liquidity position and a weakened commercial property market to buy the freeholds of three of our stores. The stores purchased were on 25-year leases with no break clauses and were bought at amounts close or equal to their right of use asset - meaning only a marginal upfront capital impact in exchange for longer-term savings and flexibility. Freeholds now make up 30% of our store estate.

2021 will also see us start to realise synergies from the integration of RateSetter as well as focus on other areas where costs can be reduced across the business.

Depreciation and amortisation remained flat at £74.4 million during 2020 (2019: £76.4 million) reflecting reduced amortisation as a result of the write-offs made in 2019, offset by the increased store presence and new digital initiatives.

EXPECTED CREDIT LOSS EXPENSE

Expected credit losses were severely impacted by the deteriorating macro-economic conditions resulting from the COVID-19 pandemic, increasing £115.0 million to £126.7 million (2019: £11.7 million) representing a cost of risk of 0.86% (2019: 0.08%).

Balance sheet expected credit loss provisions were £154 million at the year-end (31 December 2019: £34 million) which represents coverage ratio of 1.30% of our total gross lending.

The increase in expected credit losses has been driven by deteriorating macro-economic scenarios which have primarily increased the probability of default. Observed losses still remain relatively low, however will likely increase through 2021 as COVID-19 related government support measures roll off.

We have applied a number of post-model adjustments and overlays to reflect the continued uncertainties in the economic environment, particularly in relation to sectors heavily impacted by the COVID-19 pandemic.

Throughout the course of the pandemic we have been committed to supporting customers and, in line with regulatory requirements, we offered payment deferrals to mortgage and personal customers who required support. This was initially for a three-month period from March to June, however this has been subject to extensions. In addition, we offered support measures to commercial customers and in total offered support arrangements on 29% of our commercial lending portfolio (based on gross exposure).

In line with regulatory guidance, the use of a support measure by a customer does not in itself signify an increase in credit risk for that loan.

At 31 December 2020 less than 1% of the mortgage portfolio were subject to support measures with weighted average debt-to-values of 64% on these loans.

Deposits

Deposits from customers ended the year at £16.1 billion up 11% from £14.5 billion at the end of 2019. The increase has primarily been driven by an 10% increase in new accounts as well as higher savings levels during the pandemic, a trend that has been seen across the market. Deposits have also increased as a result of the BBLS loans being redeposited, where businesses have secured funding but are yet to fully utilise the loan. These effects are particularly prevalent in our core deposit base of retail customers and SMEs.

We continue to use funds from the BoE's Term Funding Scheme (TFS) which was closed to further drawdowns in February 2018. In 2020 we rolled over £550 million of TFS drawing that matured into TFSME - a similar style scheme aimed at supporting lending to SMEs.

Assets

Total assets increased to £22.6 billion from £21.4 billion at the end of 2019.

Loans and advances to customers fell to £12.1 billion from £14.7 billion, this decrease primarily reflects the £3.1 billion mortgage sale to NatWest. Following the sale, retail mortgages now make up 56% of our gross lending (31 December 2019: 71%).

Following the acquisition of RateSetter in September, unsecured personal loans ended the year at £121 million. Whilst this still only represents a small part of our lending, this will increase as we scale up the volumes over the course of 2021.

During the year we also grew our commercial lending by 27% to £5.1 billion (31 December 2019: £4.1 billion). The increase has been driven by government-backed lending schemes in the form of BBLS, CBLS and CLBLS which totalled £1.5 billion at year end.

Our loan to deposit ratio returned to below 100% ending the year at 75% (31 December 2019: 101%). The sale of the mortgage portfolio in December lowered the ratio. Excluding the mortgage sale, the loan to deposit ratio would have been 94%.

Taxation

During 2020 we made a total tax contribution of £132.9 million (2019: £123.1 million), which comprised £86.5 million (2019: £78.2 million) of taxes we paid and a further £46.4 million (2019: £44.9 million) of taxes we collected.

In 2020 our tax credit recognised in the income statement was £9.7 million (2019: expense £51.8 million).

Acquisition of RateSetter

In September 2020 we acquired Retail Money Market Ltd ('RateSetter'). The acquisition was in line with our strategy to shift our lending mix and the acquisition provided a quicker and more cost-efficient route to market than building out the capability in-house. As part of the acquisition we recognised £32 million of intangible assets in respect of RateSetter's unsecured lending platform.

RateSetter was bought for consideration of £12 million, of which £0.5 million was deferred for 12 months from purchase and £9 million is payable up to three years from purchase subject to certain lending volumes being met. Goodwill of £6 million was recognised in relation to the purchase.

Prior to acquisition by Metro Bank, the RateSetter peer-to-peer business was put into run off, which closed the platform to new investors and started the process of running down the back book of loans.

Since the acquisition we have injected further capital into the business allowing it to repay £21 million of external debt, on which it was paying an average of 7% interest. Whilst RateSetter will continue to be loss making in the short term, in the near term we anticipate achieving cost synergies as it becomes more closely integrated into the Group and as we increase lending volumes.

On 2 February 2021 we announced our intention to purchase the back book of loans from the RateSetter peer-to-peer investors, in line with our strategy of increasing this area of lending.

Capital

As a result of the pandemic the regulator took a number of measures in relation to regulatory capital. These included a reduction in the countercyclical buffer to 0% from 1% (previously expected to increase to 2% in December 2020) and the Capital Requirements Regulation (CRR) 'Quick Fix' package including a revised IFRS 9 transitional agreement and changes to the SME supporting factor.

In addition, further capital relief has been provided through the EBA's changes to the capital treatment of software, although the PRA has announced through CP5/21 their intention to modify the regulatory requirements and we expect that software will return to being fully deducted prior to 1 January 2022. We are therefore not considering this benefit when making capital decisions today or in our longer term strategic planning.

We ended the year with a CET1 ratio of 15.0% (2019: 15.6%) and a total capital ratio plus MREL 22.4% (2019: 22.1%). On a pro forma basis adjusting for the mortgage portfolio sale which was in the process over the year end these ratios would be 16.3% and 24.4% respectively.

Looking ahead

Despite the clear challenges resulting from the COVID-19 pandemic, 2020 brought many encouraging signs which demonstrate our turnaround is beginning to take effect.

Whilst the external challenges we face will inevitably continue into 2021, we are now in a stronger position to tackle these. The sale of the residential mortgage portfolio has removed the immediate need to raise additional capital, as well as allowing us to reinvest the proceeds in higher yielding assets to maximise capital efficiency.

The capabilities and systems obtained via our acquisition of RateSetter will allow us to accelerate a shift in our product mix to focus on yield over volume.

We will continue to focus on cost control and ensure that we can return to sustainable profitability. That remains our key focus.

David Arden

Chief Financial Officer

24 February 2021

risk report 

Effective risk management underpins everything we do and is critical to realising our strategic priorities. We have an established risk management framework to manage and report the various risks that we face over the course of our daily business. The framework:

· is the totality of systems, structures, policies, processes and people that identify, measure, evaluate, control, mitigate, monitor, and report all internal and external sources of material risk;

· ensures all principal and emerging risks are identified, assessed, mitigated, monitored and reported;

· ensures risk appetite is clearly articulated and influences the strategic plan;

· promotes a clearly defined risk culture that emphasises risk management across all areas of the Bank; and

· undertakes ongoing analysis of the environment in which we operate and proactively address potential risk issues as they arise.

We have a structured risk governance framework to support the Board of Directors' aim of achieving long-term and sustainable growth. The risk governance structure strengthens risk evaluation and management, while also positioning us to manage the changing regulatory environment in an efficient and effective manner.

Principal risks

As at 31 December 2020 we had the following principal risk:

Consolidated statement of comprehensive income (unaudited)

For the year ended 31 December 2020

Consolidated balance sheet (unaudited)

As at 31 December 2020

Consolidated statement of changes in equity (unaudited)

For the year ended 31 December 2020

Consolidated cash flow statement (unaudited)

For the year ended 31 December 2020

Notes to the financial statements (unaudited)

1. Basis of preparation and significant accounting policies

Basis of preparation

The Group's consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU, the IFRS Interpretations Committee (IFRS IC) and the Companies Act 2006 applicable to companies reporting under IFRS. They were authorised by the Board for issue on 24 February 2021.

The financial statements are prepared on a going concern basis, the Directors are satisfied that the Group has the resources to continue in business for the foreseeable future.

Changes in accounting policy and disclosures

The accounting policies and methods of computation are consistent with those applied and disclosed in the Group's 2019 Annual Report and Accounts, other than where specifically disclosed within these notes.

2. Net interest income

Interest income

Interest expense

3. Taxation

Tax expense

The components of the tax credit/(expense) for the year are:

Reconciliation of the total tax expense

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

A reconciliation between the tax expense and the accounting loss multiplied by the UK corporation tax rate is as follows: