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Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
---|---|---|---|---|---|
Metro Bank Holdings Plc | LSE:MTRO | London | Ordinary Share | GB00BMX3W479 | ORD 0.0001P |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|---|---|
1.20 | 3.64% | 34.15 | 33.85 | 34.30 | 34.35 | 33.70 | 33.70 | 863,910 | 16:35:25 |
Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
---|---|---|---|---|---|
0 | 0 | N/A | 0 |
TIDMMTRO
RNS Number : 0026U
Metro Bank PLC
28 July 2022
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
-- Strategic plan remains on track and monthly breakeven expected during Q1 2023(1) . The liability-led strategy and accelerated asset mix shift has successfully widened margins, further supported by the rising rate environment. -- Total underlying revenue grew 31% YoY to GBP236.2 million (H1 2021: GBP179.8 million ), demonstrating margin expansion and continued momentum in revenue growth as lending is optimised for return on regulatory capital. -- Total underlying operating expenses fell 3% YoY to GBP266.3 million (H1 2021: GBP275.2 million) reflecting cost actions taken to reduce run-rate in the near term and limit future cost growth. -- Cost of deposits reduced 17bps YoY to 0.14% (H1 2021: 0.31%) with the impact of rate rises offset by the continued focus on mix improvement, 47% of deposits are current accounts (H1 2021: 41%). -- Underlying loss before tax of GBP48.0 million (H1 2021: loss of GBP110.0 million ) reflects the significant growth in revenue and actions taken to reduce cost, offset marginally by increased expected credit loss provisions. -- Statutory loss before tax of GBP60.2 million (H1 2021: loss of GBP138.9 million) includes one off items relating to capital neutral intangible asset write downs and remediation costs. Remediation costs of GBP3.0m (H1 2021: GBP25.4m) have reduced significantly as programs successfully conclude. -- Announced appointment of James Hopkinson as CFO. 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:
30 31 December Change 30 Change GBP in millions June 2021 from June from 2022 FY 2021 2021 H1 2021 Assets GBP22,555 GBP22,587 - GBP23,013 (2%) Loans GBP12,364 GBP12,290 1% GBP12,325 - Deposits GBP16,514 GBP16,448 - GBP16,620 (1%) Loan to deposit ratio 75% 75% - 74% 1 pps CET1 capital ratio 10.6% 12.6% (2.0 pps) 13.9% (3.3 pps) Total capital ratio (TCR) 13.8% 15.9% (2.1 pps) 17.2% (3.4 pps) MREL ratio 18.3% 20.5% (2.2 pps) 21.7% (3.4 pps) Liquidity coverage ratio 257% 281% (24 pps) 309% (52 pps) ---------- ------------ ---------- ---------- ---------- H1 H2 Change H1 Change from from GBP in millions 2022 2021 H2 2021 2021 H1 2021 Total underlying revenue(2) GBP236.2 GBP218.1 8% GBP179.8 31% Underlying loss before tax(3) (GBP48.0) (GBP61.3) (22%) (GBP110.0) (56%) Statutory loss before tax (GBP60.2) (GBP106.2) (43%) (GBP138.9) (57%) Net interest margin 1.73% 1.51% 22 bps 1.28% 45 bps Underlying EPS (28.5p) (36.0p) (21%) (65.1p) (56%) ---------- ----------- ---------- ----------- ----------
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
GBP in millions 30 31 December Change 30 Change June 2021 from June from 2022 FY 2021 2021 H1 2021 Demand: current accounts GBP7,770 GBP7,318 6% GBP6,749 15% Demand: savings accounts GBP7,817 GBP7,684 2% GBP7,402 6% Fixed term: savings accounts GBP927 GBP1,446 (36%) GBP2,469 (62%) ----------- ------------- --------- ---------- ----------- Deposits from customers GBP16,514 GBP16,448 - GBP16,620 (1%) ----------- ------------- --------- ---------- ----------- Deposits from customers includes: Retail customers (excluding retail partnerships) GBP6,267 GBP6,713 (7%) GBP6,964 (10%) SMEs(4) GBP4,892 GBP4,764 3% GBP4,605 6% ----------- ------------- --------- ---------- ----------- GBP11,159 GBP11,477 (3%) GBP11,569 (4%) ----------- ------------- --------- ---------- ----------- Retail partnerships GBP1,871 GBP1,814 3% GBP1,697 10% Commercial customers (excluding SMEs(4) ) GBP3,484 GBP3,157 10% GBP3,354 4% GBP5,355 GBP4,971 8% GBP5,051 6% ----------- ------------- --------- ---------- ----------- 4. SME defined as enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding EUR50 million, and/or an annual balance sheet total not exceeding EUR43 million, and have aggregate deposits less than EUR1 million. -- Total deposits held broadly flat in the first six months at GBP16,514 million as at 30 June 2022 (31 December 2021: GBP16,448 million ), focus remained on mix improvement as current accounts increased by GBP452 million and fixed term deposit (FTD) accounts fell by GBP519 million. -- Cost of deposits was 14bps in the first half, a decrease of 3bps compared to 17bps in H2 2021 despite the rising rate environment, the reduction continues to reflect the managed roll-off of higher cost FTD accounts and focus on mix improvement in favour of non-interest-bearing current accounts and demand savings accounts. -- Customer account growth of 0.1 million (H2 2021: 0.1 million) in the last six months to 2.6 million, reflects stable growth in account openings and incremental growth from the RateSetter acquisition offset by the roll-off of FTDs.
Loans
GBP in millions 30 31 December Change 30 Change June 2021 from June from 2022 FY 2021 2021 H1 2021 Gross loans and advances GBP12,535 GBP12,459 1% GBP12,491 - to customers Less: allowance for impairment (GBP171) (GBP169) 1% (GBP166) 3% ----------- ------------- --------- ---------- ------------- Net loans and advances to customers GBP12,364 GBP12,290 1% GBP12,325 0% ----------- ------------- --------- ---------- ------------- Gross loans and advances to customers consists of: ----------- ------------- --------- ---------- ------------- Commercial lending(5) GBP2,993 GBP3,220 (7%) GBP3,416 (12%) Government-backed lending(6) GBP1,488 GBP1,626 (8%) GBP1,556 (4%) Retail mortgages GBP6,785 GBP6,723 1% GBP6,815 - Consumer lending GBP1,269 GBP890 43% GBP704 80% ----------- ------------- --------- ---------- ------------- 5. Includes CLBILS.
6. BBLS, CBILS and RLS. -- Total net loans as at 30 June 2022 were GBP12,364 million, broadly flat from GBP12,290 million at 31 December 2021 reflecting continued growth in consumer lending and specialist mortgages, offset by the attrition of lower-yielding residential mortgages and commercial term loans including commercial real estate. Total net loans are expected to increase in the second half of the year, with continuing mix shift towards higher yielding assets. -- Commercial loans including commercial real estate (excluding BBLS, CBILS and RLS) decreased by 7% during H1 to GBP2,993 million at 30 June 2022 and are 12% below a year earlier following the attrition of lower-yielding commercial and commercial real estate term loans that provide a lower return on regulatory capital. -- Retail mortgages remained the largest component of the lending book at 54%, with lower-yielding residential mortgages rolling off and focus shifting to specialist mortgages as part of the balance sheet optimisation strategy. Mortgage application volumes in Q2 2022 were 87% higher than Q1 and 133% higher than Q4 2021. -- Consumer lending increased to 10% of the loan book from 7% at 31 December 2021 , resulting from continued growth across all channels. Consumer originations averaged GBP105 million per month during H1 2022 and this trajectory is expected to continue. An approval rate of less than a third (29%) during the period shows the focus on selective credit quality. -- Loan to deposit ratio remained stable at 75% (31 December 2021: 75%) reflecting the mix improvements in deposits and actions taken to optimise the balance sheet for accretive new lending despite current capital constraints. -- Government-backed lending decreased 8% in the first half to GBP1,488 million at 30 June 2022 and is down 4% from a year earlier. -- Annualised cost of risk at 0.29% (2H 2021: 0.12%) included recognition of ECL expense associated with organic growth in consumer lending. Non-performing loans reduced to 2.76% (31 December 2021: 3.71%) reflecting an improvement in Commercial single name exposures. The loan portfolio remains highly collateralised with average debt to value (DTV) of the residential mortgage book at 56% (31 December 2021: 55%), while DTV in the commercial book was 55% (31 December 2021: 57%).
Profit and Loss Account
-- Net interest margin (NIM) at 1.73% has increased 22 bps in the first half , reflecting the impact of lower cost of deposits, improved lending mix and higher lending yields. -- Underlying net interest income increased 12% in H1 2022 to GBP180.9 million (H2 2021: GBP162.1 million), and increased 35% YoY, highlighting the strong momentum in revenue following improvements in lending mix and the impact of rate rises. -- Underlying net fee and other income increased 1% sequentially to GBP55.3 million (H2 2021: GBP54.8 million) driven by growth in Safe Deposit Boxes, Services Charges and Interchange partially offset by a reduction in FX, gains and other. Fees are expected to continue recovering. -- Underlying cost:income ratio reduced to 113% in the first half of 2022, from 125% in the prior six months , reflecting the actions taken to reduce costs as well as the momentum gained in underlying revenue. -- Underlying loss before tax was GBP48.0 million, a reduction of 22% from the GBP61.3 million loss in H2 2021 and a reduction of 56% from the GBP110.0 million loss in H1 2021 , highlighting the trajectory towards sustainable profitability. -- Statutory loss before tax of GBP60.2 million in H1 2022 (H2 2021: loss of GBP106.2 million) includes the capital neutral impairment of intangible assets (GBP8.2 million) and remediation costs (GBP3.0 million). Remediation costs have sharply reduced as we continue to close out legacy 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. -- Statutory loss after tax of GBP61.7 million in H1 2022 (H2 2021: loss of GBP107.1 million) after a GBP1.5 million corporation tax charge.
Capital, Funding and Liquidity
-- Strong liquidity and funding position maintained, the Bank's Liquidity Coverage Ratio (LCR) remains elevated at 257% as of 30 June 2022 (31 December 2021: 281%). Whilst NIM dilutive, this excess liquidly is earnings neutral and provides flexibility and optionality. -- Common Equity Tier 1 (CET1) ratio of 10.6% as at 30 June 2022 (31 December 2021: 12.6%) compares to a minimum CET1 requirement of 4.8%(7) and minimum Tier 1 requirement of 6.4%(7) . -- Total capital ratio of 13.8% as at 30 June 2022 (31 December 2021: 15.9%) compares to a minimum requirement of 8.5%(7) . -- MREL ratio of 18.3% as at 30 June 2022 (31 December 2021: 20.5%) compares to a minimum requirement of 17.0%(7) . -- The PRA reduced the Bank's Pillar 2A capital requirement from 1.11% to 0.50% effective as of 27 June 2022. The Resolution Directorate of the Bank of England also agreed that the Bank's binding MREL applicable from 27 June 2022 shall be equal to the lower of: i) 18% of the Bank's RWAs; or ii) Two times the sum of the Bank's Pillar 1 and Pillar 2A Therefore the Bank's minimum MREL requirement(7) has been reduced to 17.0%. -- Total RWA as at 30 June 2022 was GBP7,702 million (31 December 2021: GBP7,454 million). The increase reflects the mix improvement towards higher yielding assets. The result is a loan risk weight density of 49% as at 30 June 2022 (31 December 2021: 48%). -- Regulatory leverage ratio(8) was 4.3%. 7. Minimum capital requirement excluding buffers. 8. 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%.
Outlook and Guidance
-- The path to profitability is supported by the continued mix improvements and balance sheet growth alongside ongoing cost control and benefits from rate rises. Profitability: Monthly breakeven is expected during Q1 2023, assuming no material deterioration in the macroeconomic environment. -- Momentum continues towards profitability as margins widen: FY21 FY21 Exit Rate H1 2022 Cost of deposits 0.24% 0.15% 0.14% Lending yield 3.07% 3.19% 3.40% Net interest margin 1.40% 1.56% 1.73% -- Guidance provided in February 2021 for 2022 full year, as set out below, is re-affirmed although we remain cognisant of the potential for unexpected adverse macroeconomic developments, which may impact our ability to deliver on guidance. Loan growth expectations are now higher for the year as the Bank continues to optimise balance sheet growth within capital constraints. Balance sheet: Higher growth than 2021 (2021: 2%) with continued focus on mix improvement. Margin: A 1.56% FY21 exit NIM holds us in good stead for 2022 with continued focus on lending mix and improved yields as a result of the base rate rises, potentially tempered by higher cost of deposits. Fees: Transaction-driven revenue streams influenced by the pace of recovery. Costs: Low single digit % reduction in total underlying operating expenses. Non-underlying items are expected to be less than 20% of 2021 (2021: GBP73.8 million) as remediation costs fall away. Capital: As previously stated we are comfortable operating in buffers and remain above regulatory minima (currently 17.0% for MREL). The Bank's AIRB application is progressing. Alternative capital actions remain available.
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)
Balance Sheet YoY change 30-Jun 31-Dec 30-Jun 2022 2021 2021 GBP'million GBP'million GBP'million Assets Loans and advances to customers - GBP12,364 GBP12,290 GBP12,325 Treasury assets(9) GBP9,036 GBP9,142 GBP9,474 Other assets(10) GBP1,155 GBP1,155 GBP1,214 ------------ ------------ -------------- Total assets (2%) GBP22,555 GBP22,587 GBP23,013 ------------ ------------ -------------- Liabilities Deposits from customers (1%) GBP16,514 GBP16,448 GBP16,620 Deposits from central banks GBP3,800 GBP3,800 GBP3,800 Debt securities GBP577 GBP588 GBP596 Other liabilities GBP695 GBP716 GBP850 ------------ ------------ -------------- Total liabilities - GBP21,586 GBP21,552 GBP21,866 ------------ ------------ -------------- Total shareholder's equity GBP969 GBP1,035 GBP1,147 ------------ ------------ -------------- Total equity and liabilities GBP22,555 GBP22,587 GBP23,013 ------------ ------------ -------------- 9. Comprises investment securities and cash & balances with the Bank of England. 10. Comprises property, plant & equipment, intangible assets and other assets. YoY Half year ended change Profit & Loss Account 30-Jun 31-Dec 30-Jun 2022 2021 2021 GBP'million GBP'million GBP'million Underlying net interest income 35% GBP180.9 GBP162.1 GBP133.6 Underlying net fee and other 18% GBP55.3 GBP54.8 GBP46.7 income Underlying net gains/(losses) - GBP1.2 (GBP0.5) on sale of assets ------------ ------------ ------------ Total underlying revenue 31% GBP236.2 GBP218.1 GBP179.8 ------------ ------------ ------------ Underlying operating costs (3%) (GBP266.3) (GBP271.6) (GBP275.2) Expected credit loss expense (GBP17.9) (GBP7.8) (GBP14.6) Underlying loss before tax (56%) (GBP48.0) (GBP61.3) (GBP110.0) ------------ ------------ ------------ Impairment and write-off of property (GBP8.2) (GBP17.4) (GBP7.5) plant & equipment and intangible assets Net BCR costs - GBP0.3 (GBP0.3) Transformation costs (GBP1.0) (GBP7.1) (GBP1.8) Remediation costs (GBP3.0) (GBP20.5) (GBP25.4) Business acquisition and integration - (GBP0.1) (GBP2.3) costs Mortgage portfolio sale - (GBP0.1) GBP8.4 Statutory loss before tax (57%) (GBP60.2) (GBP106.2) (GBP138.9) ------------ ------------ ------------ Statutory taxation (GBP1.5) (GBP0.9) (GBP2.2) Statutory loss after tax (56%) (GBP61.7) (GBP107.1) (GBP141.1) ------------ ------------ ------------ Half year ended Key metrics 30-Jun 31-Dec 30-Jun 2022 2021 2021 Underlying earnings per share - basic and diluted (28.5p) (36.0p) (65.1p) Number of shares 172.4m 172.4m 172.4m Net interest margin (NIM) 1.73% 1.51% 1.28% Cost of deposits 0.14% 0.17% 0.31% Cost of risk 0.29% 0.12% 0.24% Underlying cost:income ratio 113% 125% 153%
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
SAbout 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
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. ------------------------------------------------------------------------------------ Board of Directors Registered Office Chair One Southampton Row London WC1B 5HA Robert Sharpe (N*) Non-Executive Directors Independent Auditors Catherine Brown (N O R*) PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors 7 More London Riverside London SE1 2RT Monique Melis (A N) Paul Thandi (N R) Ian Henderson (A O*) Anne Grim (R) Nick Winsor (O) Michael Torpey (A*) (O) Registered Number 6419578 (A) Member of the audit committee www.metrobankonline.co.uk (N) Member of the nomination committee (O) Member of the risk oversight committee (R) Member of the remuneration committee * Chair of the committee Executive Directors Daniel Frumkin - Chief Executive Officer Company Secretary Melissa Conway Metro Bank PLC. Registered in England and Wales. Company number: 6419578. Registered office: One Southampton Row, London, WC1B 5HA. 'Metrobank' is the registered trade-mark of Metro Bank PLC. It is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. Most relevant deposits are protected by the Financial Services Compensation Scheme. For further information about the Scheme refer to the FSCS website www.fscs.org.uk . All Metro Bank products are subject to status and approval. Metro Bank PLC 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.
sumMarised interim results
Half year Half year Change Half Change to to year 30 June 31 December to 2022 2021 30 June 2021 Profit and loss Underlying loss before tax(1) (GBP48.0m) (GBP61.3m) (22%) (GBP110.0m) (56%) Statutory loss before tax (GBP60.2m) (GBP106.2m) (43%) (GBP138.9m) (57%) Total income (statutory) GBP236.5m GBP222.2m 6% GBP196.3m 20% Total operating expenses (statutory) GBP278.8m GBP320.6m (13%) GBP320.6m (13%) Net interest margin 1.73% 1.51% 22 bps 1.28% 45 bps Average cost of deposits 0.14% 0.17 % (3 bps) 0.31% (17 bps) 30 June 31 December Change 30 June Change 2022 2021 2021 Balance sheet Customer deposits GBP16,514m GBP16,448m 0% GBP16,620m (1%) Customer loans GBP12,364m GBP12,290m 1% GBP12,325m 0% Loan to deposit ratio 75% 75% 0 pps 74% 1 pps Total assets GBP22,555m GBP22,587m 0% GBP23,013m (2%) Asset quality Coverage ratio 1.36% 1.36% 0 bps 1.33% 3 bps Cost of risk (annualised) 0.29% 0.12% 17 bps 0.24% 5 bps Capital ratios Common Equity Tier 1 (CET1) ratio 10.6% 12.6% 13.9% Regulatory leverage ratio(2) 4.3% 4.4% 4.9% MREL ratio 18.3% 20.5% 21.7% Customer metrics Customer accounts 2.6m 2.5m 2.4m Stores 76 78 77
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 GBP48.0 million (half year to 30 June 2021: loss of GBP110.0 million, half year to 31 December 2021: loss of GBP61.3 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 GBP60.2 million (half year to 30 June 2021: loss of GBP138.9 million, half year to 31 December 2021: loss of GBP106.2 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 GBP236.2 million from GBP218.1 million in the second half of 2021 (half year to 30 June 2021: GBP179.8 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 GBP1 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 GBP200 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 GBP266.3 million (half year to 30 June 2021: GBP275.2 million; half year to 31 December 2021: GBP271.6 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 GBP17.9 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 GBP110.0 million to GBP48.0 million from the same period in 2021 (half year to 31 December 2021: GBP61.3 million). On a statutory basis losses before tax reduced to GBP60.2 million for the same period (half year to 30 June 2021: GBP138.9 million, half year to 31 December 2021: GBP106.2 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 GBP180.8 million (half year to 30 June 2021: GBP133.3 million, half year to 31 December 2021: GBP162.0 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
Half Half Half year year year to to to 30 June 31 December 30 June 2022 2021 2021 (unaudited) (unaudited) (unaudited) Year-on-year GBP'million GBP'million GBP'million growth --------------------------------- ------------- ------------- ------------- ------------- Net interest income 180.8 162.0 133.3 36% Net fee, commission and other income 55.7 59.0 54.8 Net gains on sale of assets - 1.2 8.2 --------------------------------- ------------- ------------- ------------- ------------- Total income 236.5 222.2 196.3 20% --------------------------------- ------------- ------------- ------------- ------------- General operating expenses (233.2) (263.3) (272.8) (15%) Depreciation and amortisation (37.4) (39.9) (40.3) Impairment and write-off of PPE and intangible assets (8.2) (17.4) (7.5) Expected credit loss expense (17.9) (7.8) (14.6) --------------------------------- ------------- ------------- ------------- ------------- Loss before tax (60.2) (106.2) (138.9) (57%) --------------------------------- ------------- ------------- ------------- ------------- Taxation (1.5) (0.9) (2.2) --------------------------------- ------------- ------------- ------------- ------------- Loss after tax (61.7) (107.1) (141.1) (56%) --------------------------------- ------------- ------------- ------------- -------------
Net interest income
Net interest income for the period was GBP180.8 million up from GBP162.0 million in the second half of 2021 and GBP133.3 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 GBP8.8 million in the six months to 30 June 2021 to GBP8.3 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 GBP55.3 million (half year to 30 June 2021: GBP46.7 million, half year to 31 December 2021: GBP54.8 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 GBP266.3 million from GBP271.6 million in the second half of 2021 and down from GBP275.2 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 GBP233.2 million from GBP263.3 million in the final six months of 2021 (half year to June 2021: GBP272.8 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 GBP8.2 million write-off on intangible assets, although this item was capital neutral.
Expected credit loss expense
We recognised an expected credit loss expense of GBP17.9 million for the period (half year to 30 June 2021: GBP14.6 million, half year to 31 December 2021: GBP7.8 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
30 June 31 December 2022 2021 (unaudited) (audited) GBP'million GBP'million Growth --------------------------------------------- -------------- -------------- -------- Assets Cash and balances with the Bank of England 2,862 3,568 (20%) Loans and advances to customers 12,364 12,290 1% Investment securities held at fair value through other comprehensive income 781 798 (2%) Investment securities held at amortised cost 5,393 4,776 13% Financial assets held at fair value through profit and loss 2 3 (33%) Property, plant and equipment 749 765 (2%) Intangible assets 227 243 (7%) Prepayments and accrued income 80 68 18% Other assets 97 76 28% --------------------------------------------- -------------- -------------- -------- Total assets 22,555 22,587 - --------------------------------------------- -------------- -------------- -------- Liabilities Deposits from customers 16,514 16,448 - Deposits from central banks 3,800 3,800 - Debt securities 577 588 (2%) Repurchase agreements 166 169 (2%) Derivative financial liabilities 8 10 (20%) Lease liabilities 264 269 (2%) Deferred grant 19 19 - Provisions 14 15 (7%) Deferred tax liability 12 12 - Other liabilities 212 222 (5%) --------------------------------------------- -------------- -------------- -------- Total liabilities 21,586 21,552 - --------------------------------------------- -------------- -------------- -------- Total equity 969 1,035 (7%) --------------------------------------------- -------------- -------------- --------
Deposits
Deposits of GBP16,514 million at 30 June 2022 were broadly flat compared to GBP16,448 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 GBP12,364 million (31 December 2021: GBP12,290 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 GBP357 million, up from GBP157 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 GBP749 million, down from GBP765 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 GBP7,702 million (31 December 2021: GBP7,454 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 GBP3.8 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 GBP2.1 million in the second half of 2021 to GBP13.1 million in the first half of this year (half year to 30 June 2021: GBP1.9 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:
-- Credit risk - The risk of financial loss should our borrowers or counterparties fail to fulfil their contractual obligations in full and on time. -- Operational risk - The risk that events arising from inadequate or failed internal processes, people and systems, or from external events cause regulatory censure, reputational damage, financial loss, service disruption and/or detriment to our FANS. -- Liquidity and Funding risk - The risk that we fail to meet our short-term obligations as they fall due or that we cannot fund assets that are difficult to monetise at short notice (i.e. illiquid assets) with funding that is behaviourally or contractually long term (i.e. stable funding). -- Market risk - The risk of loss arising from movements in market prices. Market risk is the risk posed to earnings, economic value or capital that arises from changes in interest rates, market prices or foreign exchange rates. -- Financial crime - The risk of financial loss or reputational damage due to regulatory fines, restriction or suspension of business, or cost of mandatory corrective action as a result of failing to comply with prevailing legal and regulatory requirements relating to financial crime. -- Regulatory risk - The risk of regulatory sanction, financial loss and reputational damage as a result of failing to comply with relevant regulatory requirements. -- Conduct risk - The risk that our behaviours or actions result in unfair outcomes or detriment to customers and/ or undermines market integrity. -- Model risk - The risk of potential loss, poor strategic decision making and regulatory non-compliance due to decisions that could be principally based on the output of models, due to errors in the assumptions, development, implementation or use of such models. -- Capital risk - The risk that we fail to meet minimum regulatory capital (and MREL) requirements. -- Strategic risk - The risk of having an insufficiently defined, flawed or poorly implemented strategy, a strategy that does not adapt to political, environmental, business and other developments and/or a strategy that does not meet the requirements and expectations of our stakeholders. -- Legal risk - The risk of loss, including to reputation, which can result from lack of awareness or misunderstanding of, ambiguity in, or reckless indifference to, the way law applies to the Directors, the business, its relationships, processes, products and services.
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 GBP76 million to GBP12.5 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
30 June 2022 31 December Change GBP'million 2021 GBP'million GBP'million --------------------------------------- ------------- ------------- ------------- Retail mortgages 18 19 (1) Consumer lending 56 42 14 Commercial lending 97 108 (11) --------------------------------------- ------------- ------------- ------------- Total expected credit loss allowances 171 169 2 --------------------------------------- ------------- ------------- -------------
Expected credit losses (ECL) have increased during the year by GBP2 million to GBP171 million (2021: GBP169 million, 2020: GBP154 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
31 December 2021 30 June 2022 (unaudited) (unaudited) --------------------------- ------------------------- NPLs NPL ratio NPLs NPL ratio GBP'million % GBP'million % -------------------- --------------- ---------- ------------- ---------- Retail mortgages 101 1.50% 114 1.70% Consumer lending 32 2.53% 21 2.36% Commercial lending 212 4.73% 327 6.75% -------------------- --------------- ---------- ------------- ---------- Total 345 2.75% 462 3.71% -------------------- --------------- ---------- ------------- ----------
NPLs have reduced to GBP345 million (2021: GBP462 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
Half year to Full year 30 June 2022 31 December annualised 2021 (unaudited) (unaudited) % % -------------- --------------- ------------- Cost of risk 0.29% 0.18% -------------- --------------- -------------
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 GBP6,785 million (31 December 2021: GBP6,723 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 GBP1 million to GBP18 million (31 December 2021: GBP19 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 GBP675 million in (half year to 31 December 2021: GBP510 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
30 June 2022 (unaudited) 31 December 2021 (audited) ------------------------------------------- ------------------------------------------- Retail Retail Total Retail Retail Total owner buy-to-let retail owner buy-to-let retail occupied GBP'million mortgages occupied GBP'million mortgages GBP'million GBP'million GBP'million GBP'million ---------------------- ------------- ------------- Less than 50% 1,863 536 2,399 1,907 524 2,431 51-60% 787 416 1,203 767 415 1,182 61-70% 1,112 607 1,719 1,092 564 1,656 71-80% 806 241 1,047 805 188 993 81-90% 362 2 364 400 3 403 91-100% 47 3 50 51 3 54 More than 100% - 3 3 - 4 4 ---------------------- ------------- ------------- ------------- ------------- ------------- ------------- Total retail mortgage lending 4,977 1,808 6,785 5,022 1,701 6,723 ---------------------- ------------- ------------- ------------- ------------- ------------- -------------
Table 7: Residential mortgage lending by repayment type
30 June 2022 (unaudited) 31 December 2021 (audited) ------------------------------------------- ------------------------------------------- Retail Retail Total Retail Retail Total owner buy-to-let retail owner buy-to-let retail occupied GBP'million mortgages occupied GBP'million mortgages GBP'million GBP'million GBP'million GBP'million ----------------------- ------------- ------------- Interest 2,017 1,723 3,740 2,113 1,620 3,733 Capital and interest 2,960 85 3,045 2,909 81 2,990 ----------------------- ------------- ------------- ------------- ------------- ------------- ------------- Total retail mortgage lending 4,977 1,808 6,785 5,022 1,701 6,723 ----------------------- ------------- ------------- ------------- ------------- ------------- -------------
Table 8: Residential mortgage lending by geographic exposure
30 June 2022 (unaudited) 31 December 2021 (audited) Retail Retail Total Retail Retail Total owner buy-to-let retail owner buy-to-let retail occupied GBP'million mortgages occupied GBP'million mortgages GBP'million GBP'million GBP'million GBP'million -------------------------- ------------- ------------- Greater London 1,802 1,035 2,837 2,130 1,048 3,178 South East 1,251 338 1,589 1,157 283 1,440 South West 432 83 515 434 82 516 East of England 470 120 590 309 69 378 North West 238 60 298 264 62 326 West Midlands 204 67 271 190 61 251 Yorkshire and the Humber 170 31 201 139 34 173 East Midlands 152 39 191 140 25 165 Wales 100 17 117 110 20 130 North East 62 9 71 62 10 72 Scotland 96 9 105 87 7 94 -------------------------- ------------- ------------- ------------- ------------- ------------- ------------- Total retail mortgage lending 4,977 1,808 6,785 5,022 1,701 6,723 -------------------------- ------------- ------------- ------------- ------------- ------------- -------------
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 GBP1.27 billion as at June 2022 (31 December 2021: GBP890 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 GBP14.6m to GBP56.0 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
30 June 31 December 2022 2021 (unaudited) (audited) GBP'million GBP'million --------------------------------------------- -------------- ------------- Professional buy-to-let 853 950 Other term loans 1,638 1,791 --------------------------------------------- -------------- ------------- Non-Government backed commercial term loans 2,491 2,741 --------------------------------------------- -------------- ------------- Bounce back loans 984 1,304 Coronavirus business interruption loans 145 165 Recovery loan scheme 357 157 Government backed commercial term loans 1,486 1,626 Total commercial term loans 3,977 4,367 Overdrafts and revolving credit facilities 110 156 Credit cards 4 3 Asset and invoice finance 390 320 Total commercial lending 4,481 4,846 --------------------------------------------- -------------- -------------
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 GBP4,846 million to GBP4,481 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 GBP357 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
30 June 2022 (unaudited) 31 December 2021 (audited) ------------------------------------------- ------------------------------------------- Total Total Professional Other commercial Professional Other commercial buy-to-let term loans term loans buy-to-let term loans term loans GBP'million GBP'million GBP'million GBP'million GBP'million GBP'million ---------------------- ------------- ------------- Less than 50% 295 836 1,131 306 770 1,076 51-60% 209 377 586 232 483 715 61-70% 242 193 435 282 158 440 71-80% 86 51 137 112 63 175 81-90% 9 37 46 8 30 38 91-100% 6 29 35 6 27 33 More than 100% 6 617 623 4 582 586 ---------------------- ------------- ------------- ------------- ------------- ------------- ------------- Total commercial term lending 853 2,140 2,993 950 2,113 3,063 ---------------------- ------------- ------------- ------------- ------------- ------------- -------------
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
30 June 2022 (unaudited) 31 December 2021 (audited) Total Total Professional Other commercial Professional Other commercial buy-to-let term loans term loans buy-to-let term loans term loans GBP'million GBP'million GBP'million GBP'million GBP'million GBP'million ---------------------------- ------------- ------------- Real estate (rent, buy and sell) 853 807 1,660 950 837 1,787 Hospitality - 359 359 - 361 361 Health & Social Work - 243 243 - 225 225 Legal, Accountancy & Consultancy - 208 208 - 206 206 Retail - 139 139 - 136 136 Real estate (management of) - 8 8 - 46 46 Construction - 94 94 - 88 88 Recreation, cultural and sport - 87 87 - 85 85 Investment and unit trusts - 12 12 - 17 17 Education - 19 19 - 9 9 Real estate (development) - 8 8 - 6 6 Other - 156 156 - 97 97 ---------------------------- ------------- ------------- ------------- ------------- ------------- ------------- Total commercial term lending 853 2,140 2,993 950 2,113 3,063 ---------------------------- ------------- ------------- ------------- ------------- ------------- -------------
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
30 June 2022 (unaudited) 31 December 2021 (audited) ------------------------------------------- ------------------------------------------- Total Total Professional Other commercial Professional Other commercial buy-to-let term loans term loans buy-to-let term loans term loans GBP'million GBP'million GBP'million GBP'million GBP'million GBP'million ----------------------- ------------- ------------- Interest 809 259 1,068 897 230 1,127 Capital and interest 44 1,881 1,925 53 1,883 1,936 ----------------------- ------------- ------------- ------------- ------------- ------------- ------------- Total commercial term lending 853 2,140 2,993 950 2,113 3,063 ----------------------- ------------- ------------- ------------- ------------- ------------- -------------
Table 13: Commercial term lending (exc. BBLS) by geographic exposure
30 June 2022 (unaudited) 31 December 2021 (audited) --------------------------------------------- ------------------------------------------- Total Total Professional Other commercial Professional Other commercial buy-to-let term loans term loans buy-to-let term loans term loans GBP'million GBP'million GBP'million GBP'million GBP'million GBP'million -------------------------- ------------- --------------- ------------- ------------- ------------- ------------- Greater London 554 1,102 1,656 676 1,186 1,862 South East 169 365 534 160 390 550 South West 24 159 183 28 151 179 East of England 58 150 208 39 71 110 North West 18 168 186 18 150 168 West Midlands 9 96 105 9 84 93 Yorkshire and the Humber 3 23 26 3 17 20 East Midlands 11 34 45 9 27 36 Wales 3 12 15 4 12 16 North East 3 20 23 3 17 20 Northern Ireland 1 3 4 1 2 3 Scotland - 8 8 - 6 6 -------------------------- ------------- --------------- ------------- ------------- ------------- ------------- Total commercial term
lending 853 2,140 2,993 950 2,113 3,063 -------------------------- ------------- --------------- ------------- ------------- ------------- -------------
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 GBP7,702 million (31 December 2021: GBP7,454 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
31 December 30 June 2022 2021 (unaudited) (audited) GBP'million GBP'million ------------------------------ -------------- ------------- Ordinary share capital - - Share premium 1,964 1,964 Retained earnings (1,004) (942) Other reserves 9 13 Intangible assets (227) (243) Other regulatory adjustments 74 144 ------------------------------ -------------- ------------- Total Tier 1 capital (CET1) 816 936 ------------------------------ -------------- ------------- Debt securities (Tier 2) 249 249 ------------------------------ -------------- ------------- Total Tier 2 capital 249 249 ------------------------------ -------------- ------------- Total regulatory capital 1,065 1,184 ------------------------------ -------------- -------------
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.
Emerging trend description mitigating actions risks -------------------- ------- ---------------------------------- ------------------------------ ExternaL MACROECONOMIC ì Along with COVID-19's We continue to monitor ENVIRONMENT long-term effects and economic and political scope, the recent geopolitical developments in light
tensions in Europe due of the ongoing uncertainty, to the Russia-Ukraine considering potential conflict has had a substantial consequences for our impact on both domestic customers, products and international markets. and operating model. There is also the spectre We actively monitor of rising ransomware our credit portfolios attacks emanating from and undertake robust Russian State-sponsored internal stress testing cyber-criminals targeting to identify sectors UK infrastructure. that may come under Inflation and the gradually stress as a result rising interest rates of an economic slowdown have also had a significant in the UK. impact on the cost of living in the UK. Furthermore, there is lingering uncertainty over the ability of economies and society to adapt to future variants of existing viruses or new strains. An increase in restrictions could, therefore, pose a range of social, economic, and technological risks. Regulatory è The regulatory landscape We continue to monitor change continues to evolve, emerging regulatory with the requirement initiatives to identify to respond to ongoing potential impacts prudential and conduct on our business model driven initiatives. and ensure we are well placed to respond with effective regulatory change management. We continue to work with regulators to ensure we meet all regulatory obligations, with identified implications of upcoming regulatory activity incorporated into the strategic planning cycle. Digitalisation ì COVID-19 has accelerated Our strategy is now the digitalisation of predicated on new the banking industry and exciting digital and will continue to propositions, with lead to rapid change the implications of over the coming years the pandemic both as the industry rapidly supporting that ambition, adapts to customers' but also accelerating evolving behaviours. the timeframe for This is spurring an acceleration delivery. Our rapid of investment and delivery response to the pandemic by both incumbent banks has demonstrated our and neo-banks to provide ability to implement enhanced digital propositions change and digital to customers in both solutions swiftly. the consumer and business We are continuing markets. with our investment and digital development in the near term to position us for the future. CLIMATE CHANGE ì Unlike in the past where Work continues to & ESG this risk revolved mainly build our capability around climate risk, and enhance our policies the current, broader and processes to ensure definition of ESG risk these risks are identified, acknowledges the uncertainty measured, monitored around the exact nature and managed. We are and impact of climate committed to working change on our strategy, together with customers, performance, and operating colleagues and communities model, as well as capturing to support the transition the increased focus on to a Net Zero economy how we report the impact by 2050, in line with of its activities on the UK government's the environment and on ambitions and actions. social challenges as We have also set a well as the broader governance target to make our surrounding such risks. own operations Net Zero by 2030 and to build our own resilience by embedding climate-related impacts in lending and investment decisions. INTERNAL Technology è COVID-19 has highlighted Our IT resilience & CYBER Resilience the extent to which technology programme has continued underpins our ability to deliver strategic to serve its customers, enhancements throughout as well as promoting 2022. We are investing a hybrid approach to in flexible, resilient work for our employees. cloud-based solutions Progressive deployment and working with our of new technologies will strategic technology change our risk profile, partners to simplify including increased supplier and streamline. Where risks, evolved data risks, technology disruption and enhanced cost risks does arise, we continue where new technologies to undertake detailed are running in parallel analysis of the underlying with existing architecture. causes and rapidly Due to digital asset take action to prevent and transaction innovation, recurrence. We continue future digital customer to invest in our cyber proposition and market security and resilience landscape will become capabilities in response more competitive and to these rapidly evolving uncertain. threats. Key areas of focus relate to access controls, network security, disruptive technology and the
denial of service capability. Progress has continued in patching and upgrading our IT platforms and we operate advanced technology solutions to detect and prevent criminal attacks. We actively participate in the sharing of threat information with other organisations, helping to ensure the continued availability of our exceptional service offering whilst also making banking safer for all. TALENT ì Technological change, We are investing sensibly coupled with fast-changing in talent acquisition customer requirements, and retention, together places inordinate pressure with more learning on the resilience of and development programmes our personnel as well to keep colleagues' as its system, further skills in line with exacerbated by the transition the demands of the to digitalisation. marketplace and give them the time to take advantage of those opportunities. We are also looking at new, flexible work arrangements, location strategies, and different ways of measuring colleague contributions to the success of the Bank.
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:
-- An indication of important events that have occurred during the first six months ended 30 June 2022 and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and -- Material related-party transactions in the first six months ended 30 June 2022 and any material changes in the related-party transactions described in the last annual report.
Signed on its behalf by:
Robert Sharpe Daniel Frumkin Chairman Chief Executive Officer
INDEPENT 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
Half year Half year Half year to to to 30 June 31 December 30 June 2022 2021 2021 Note GBP'million GBP'million GBP'million ------------------------------------------------- ----- ------------- ------------- ------------- Interest income 2 239.7 211.5 194.2 Interest expense 2 (58.9) (49.5) (60.9) ------------------------------------------------- ----- ------------- ------------- ------------- Net interest income 180.8 162.0 133.3 ------------------------------------------------- ----- ------------- ------------- ------------- Net fee and commission income 39.5 36.9 32.7 Net gains on sale of assets - 1.2 8.2 Other income 16.2 22.1 22.1 ------------------------------------------------- ----- ------------- ------------- ------------- Total income 236.5 222.2 196.3 ------------------------------------------------- ----- ------------- ------------- ------------- General operating expenses 3 (233.2) (263.3) (272.8) Depreciation and amortisation 7,8 (37.4) (39.9) (40.3) Impairment and write offs of PPE and intangible assets 7,8 (8.2) (17.4) (7.5) ------------------------------------------------- ----- ------------- ------------- ------------- Total operating expenses (278.8) (320.6) (320.6) Expected credit loss expense (17.9) (7.8) (14.6) ------------------------------------------------- ----- ------------- ------------- ------------- Loss before tax (60.2) (106.2) (138.9) ------------------------------------------------- ----- ------------- ------------- ------------- Tax expense 5 (1.5) (0.9) (2.2) ------------------------------------------------- ----- ------------- ------------- ------------- Loss for the period (61.7) (107.1) (141.1) ------------------------------------------------- ----- ------------- ------------- ------------- Other comprehensive expense for the period ------------------------------------------------- ----- ------------- ------------- ------------- Items which will be reclassified subsequently to profit or loss where specific conditions are met: Movements in respect of investment securities held at fair value through other comprehensive income (net of tax): - changes in fair value (6.7) (6.9) (1.2) - changes in fair value transferred to the income statement on disposal - 0.1 (0.4) ------------------------------------------------- ----- ------------- ------------- ------------- Total other comprehensive expense (6.7) (6.8) (1.6) ------------------------------------------------- ----- ------------- ------------- ------------- Total comprehensive loss for the period (68.4) (113.9) (142.7) ------------------------------------------------- ----- ------------- ------------- ------------- Earnings per share Basic earnings per share (pence) 12 (35.8) (62.1) (81.8) Diluted earnings per share (pence) 12 (35.8) (62.1) (81.8) ------------------------------------------------- ----- ------------- ------------- -------------
CONDENSED Consolidated balance sheet (unaudited)
30 June 31 December 30 June 2022 2021 2021 Note GBP'million GBP'million GBP'million ----------------------------------------- ----- ------------- ------------- ------------- Assets Cash and balances with the Bank of England 2,862 3,568 5,111 Loans and advances to customers 6 12,364 12,290 12,325 Investment securities held at FVOCI 781 798 1,198 Investment securities held at amortised cost 5,393 4,776 3,165 Financial assets held at fair value through profit and loss 2 3 5 Property, plant and equipment 7 749 765 786 Intangible assets 8 227 243 253 Prepayments and accrued income 80 68 75 Other assets 97 76 95 ----------------------------------------- ----- ------------- ------------- ------------- Total assets 22,555 22,587 23,013 ----------------------------------------- ----- ------------- ------------- ------------- Liabilities Deposits from customers 16,514 16,448 16,620 Deposits from central banks 3,800 3,800 3,800 Debt securities 577 588 596 Repurchase agreements 166 169 212 Derivative financial liabilities 8 10 8 Lease liabilities 9 264 269 310 Deferred grants 10 19 19 22 Provisions 14 15 5 Deferred tax liabilities 5 12 12 13 Other liabilities 212 222 280 ----------------------------------------- ----- ------------- ------------- ------------- Total liabilities 21,586 21,552 21,866 ----------------------------------------- ----- ------------- ------------- ------------- Equity Called up share capital 11 - - - Share premium account 11 1,964 1,964 1,964 Retained earnings (1,004) (942) (835) Other reserves 9 13 18 ----------------------------------------- ----- ------------- ------------- ------------- Total equity 969 1,035 1,147 ----------------------------------------- ----- ------------- ------------- ------------- Total equity and liabilities 22,555 22,587 23,013 ----------------------------------------- ----- ------------- ------------- -------------
As at 30 June 2022
The notes below form part of the condensed consolidated interim financial statements.
These condensed consolidated interim financial statements were approved and authorised for issue by the Board of Directors on 27 July 2022 and were signed on its behalf by:
Robert Sharpe Daniel Frumkin Chairman Chief Executive Officer
CONDENSED Consolidated cash flow STATEMENT (unaudited)
For the half year to 30 June 2022
Half Half year Half year to year to 31 December to 30 June 2021 30 June 2022 GBP'million 2021 Note GBP'million GBP'million ------------------------------------------------------ ----- ------------- ------------- ------------- Reconciliation of loss before tax to net cash flows from operating activities: Loss before tax (60) (106) (139) Adjustments for: Impairment and write offs of property, plant and equipment and intangible assets 7,8 8 17 8 Interest on lease liabilities 9 8 8 9
Depreciation and amortisation 7,8 37 40 40 Share option award charges 4 2 1 1 Grant income recognised in the income statement - (4) (7) Amounts provided for - 5 - Gain on sale of assets - (1) (8) Accrued interest on and amortisation of investment securities 3 4 1 Changes in operating assets and liabilities Changes in loans and advances to customers (74) 35 (235) Changes in deposits from customers 66 (172) 548 Changes in operating assets (35) 30 2,817 Changes in operating liabilities (28) (115) 77 ------------------------------------------------------ ----- ------------- ------------- ------------- Net cash (outflows)/inflows from operating activities (73) (258) 3,112 ------------------------------------------------------ ----- ------------- ------------- ------------- Cash flows from investing activities Net purchase of investment securities (607) (1,216) (953) Purchase of property, plant and equipment (1) (42) - Purchase and development of intangible assets 8 (12) (13) (26) Net cash outflows from investing activities (620) (1,271) (979) ------------------------------------------------------ ----- ------------- ------------- ------------- Cash flows from financing activities Repayment of capital element of leases 9 (13) (14) (15) Net cash outflows from financing activities (13) (14) (15) ------------------------------------------------------ ----- ------------- ------------- ------------- Net (decrease)/increase in cash and cash equivalents (706) (1,543) 2,118 Cash and cash equivalents at start of period 3,568 5,111 2,993 ------------------------------------------------------ ----- ------------- ------------- ------------- Cash and cash equivalents at end of period 2,862 3,568 5,111 ------------------------------------------------------ ----- ------------- ------------- ------------- Loss before tax includes: ------------------------------------------------------ ----- ------------- ------------- ------------- Interest received 235 206 203 Interest paid 65 52 74 ------------------------------------------------------ ----- ------------- ------------- -------------
CONDENSED Consolidated statement of changes in EQUITY (unaudited)
For the half year to 30 June 2022
Called-up Share Share Share Retained FVOCI option Total capital premium earnings reserve reserve equity GBP'million GBP'million GBP'million GBP'million GBP'million GBP'million Balance at 1 January 2022 - 1,964 (942) (5) 18 1,035 --------------------------- -------------- ------------- ------------- ------------- ------------- ------------- Loss for the period - - (62) - - (62) Other comprehensive expense (net of tax) relating to investment securities designated at fair value through other comprehensive income - - - (6) - (6) --------------------------- -------------- ------------- ------------- ------------- ------------- ------------- Total comprehensive expense - - (62) (6) - (68) Net share option movements - - - - 2 2 --------------------------- -------------- ------------- ------------- ------------- ------------- ------------- Balance at 30 June 2022 - 1,964 (1,004) (11) 20 969 --------------------------- -------------- ------------- ------------- ------------- ------------- ------------- Balance at 1 July 2021 - 1,964 (835) 1 17 1,147 --------------------------- -------------- ------------- ------------- ------------- ------------- ------------- Loss for the period - - (107) - - (107) Other comprehensive expense (net of tax) relating to investment securities designated at fair value through other comprehensive income - - - (6) (1) (7) --------------------------- -------------- ------------- ------------- ------------- ------------- ------------- Total comprehensive expense - - (107) (6) (1) (114) Net share option movements - - 2 2 --------------------------- -------------- ------------- ------------- ------------- ------------- ------------- Balance at 31 December 2021 - 1,964 (942) (5) 18 1,035 Balance at 1 January 2021 - 1,964 (694) 3 16 1,289 --------------------------- -------------- ------------- ------------- ------------- ------------- ------------- Loss for the period - - (141) - - (141) Other comprehensive expense (net of tax) relating to investment securities designated at fair value through other comprehensive income - - - (2) - (2) --------------------------- -------------- ------------- ------------- ------------- ------------- ------------- Total comprehensive expense - - (141) (2) - (143) Net share option movements - - - - 1 1 --------------------------- -------------- ------------- ------------- ------------- ------------- ------------- Balance at 30 June 2021 - 1,964 (835) 1 17 1,147 --------------------------- -------------- ------------- ------------- ------------- ------------- -------------
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of preparation and accounting policies 1 General information
Metro Bank PLC ("our" or "we") provides retail and commercial banking services in the UK, is a public limited liability company incorporated and domiciled in England and Wales and is listed on the London Stock Exchange (LON:MTRO). The address of its registered office is: One Southampton Row London WC1B 5HA.
2 Basis of preparation
The condensed consolidated interim financial statements of Metro Bank and its subsidiaries for the six months ended 30 June 2022 were authorised for issue in accordance with a resolution of the Directors on 27 July 2022.
These condensed consolidated interim financial statements for the six months ended 30 June 2022 have been prepared in accordance with UK adopted International Accounting Standards (IAS 34 Interim Financial Reporting) and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority. Whilst the change from IFRS as adopted by EU to UK-adopted IAS constitutes a change in accounting framework, there is no impact on recognition, measurement or disclosure from this transition.
In the year to 31 December 2022 our annual financial statements will be prepared in accordance with IFRS as adopted by the UK Endorsement Board.
The comparative financial information as at and for the periods ending 31 December 2021 and 30 June 2021 do not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for the year ended 31 December 2021 has been delivered to the Registrar of Companies.
The auditor's report on those accounts was not qualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report and did not contain statements under section 498(2) or (3) of the Companies Act 2006.
Going concern
The Directors have adopted the going concern basis in preparing these condensed consolidated interim financial statements. This assessment has been reached after assessing the Group's principal risks, which remain unchanged from those disclosed in the risk report of the 2021 Annual Report and Accounts. As with the assessment undertaken at the year end the Directors placed additional consideration on capital risk given that the Group continues to utilise its regulatory buffers. Further details on the Group's capital risk can be found in the risk report.
In reaching their conclusion the Directors reviewed an updated central projection to reflect the changes in outlook since the full year. The projection remains in line with the delivery of the Group's strategic priorities as outlined within the 2021 Annual Report and Accounts and on which an update is provided within the Business Review section of this report. As well as considering the Group's central forecast the Directors considered associate scenarios and sensitivities which included severe but plausible downside risks. These scenarios and sensitivities focused on areas where the greatest level of judgement had been applied in the forecast assumptions. On top of this consideration was given to the possibility of a worsened economic environment over the forecast period leading to an increase in expected credit losses, costs as well as a reduction in income.
Under all scenarios considered, the Directors believe the Group to remain a going concern on the basis that it maintains sufficient resources to be able to continue to operate for a period of at least twelve months from when the interim financial statements are authorised for issue. In the most severe scenarios this would require making reasonable adjustments to the Group's operating plans, including slowing down the pace of future originations to limit risk weighted asset growth.
The Directors did not deem there to be any material uncertainties with regards to the assessment on going concern.
Accounting policies
The accounting policies applied in these condensed consolidated interim financial statements are the same as those applied in the Group's consolidated financial statements as at and for the year ended 31 December 2021.
Future accounting developments
There are no known future accounting developments that are likely to have a material impact on the Group.
3 Critical accounting judgements
In our 2021 Annual Report and Accounts we identified the following critical accounting judgements:
-- Recognition of provisions -- Measurement of the expected credit loss allowance - significant increase in credit risk
-- Measurement of the expected credit loss allowance - use of post model overlays and adjustments
Following the conclusion of matters with the US Office of Foreign Assets Control (OFAC) in relation to Cuba and Iran without fine or penalty, the recognition of provisions is no longer considered a critical accounting judgement.
Further details on the remaining critical accounting judgements are set out below. No new critical accounting judgements have been identified during the period.
Measurement of the expected credit loss allowance -significant increase in credit risk
IFRS 9 requires accounts to be allocated into one of three stages. Stage 3 reflects accounts in default. Stage 2 are the accounts which have shown a significant increase in credit risk since origination (SICR), and Stage 1 is everything else. IFRS 9 requires a higher level of expected credit loss to be recognised for underperforming loans. For loans in Stage 2 and Stage 3 a lifetime ECL is recognised compared to a 12-month ECL for performing loans (Stage 1).
Judgement is required to determine when a significant increase in credit risk has occurred. An assessment of whether credit risk has increased significantly since initial recognition is performed at each reporting period by considering the change in the Probability of Default (PD) over the remaining life of the financial instrument. The assessment explicitly or implicitly compares the PD occurring at the reporting date to that at initial recognition, considering reasonable and supportable information, including information about past events, current conditions, and future economic conditions.
IFRS 9 requires a higher level of expected credit loss to be recognised for underperforming loans. This is considered based on a staging approach: Stage Description ECL recognised ---------------- -------------------------------------- ----------------------------------- Stage 1 Financial assets that have 12-month expected credit had no significant increase losses in credit risk since initial Total losses expected on recognition or that have low defaults which may occur credit risk (high quality within the next 12 months. investment securities only) Losses are adjusted for at the reporting date. probability-weighted macroeconomic scenarios. ---------------- -------------------------------------- ----------------------------------- Stage 2 Financial assets that have Lifetime expected credit had a significant increase losses in credit risk since initial Losses expected on defaults recognition but that do not which may occur at any have objective evidence of point in a loan's lifetime. impairment. Losses are adjusted for Financial instruments that probability-weighted macroeconomic are classified in Early Warning scenarios. List 1 and 2 will be reported in Stage 2. The IFRS 9 standard also provides a rebuttable presumption which states that financial instruments falling 30 DPD due on contractually defined payments are to be considered as having deteriorated significantly since origination. ---------------- -------------------------------------- ----------------------------------- Stage 3 Financial assets that are Lifetime expected credit credit impaired at the reporting losses date. A financial asset is Losses expected on defaults credit impaired when it has which may occur at any met the definition of default. point in a loan's lifetime. We define default to have Losses are adjusted for occurred when a loan is greater probability-weighted macroeconomic than 90 days past due (non-performing scenarios. loan) or where the borrower is considered unlikely to Interest income is calculated pay, this includes customers on the carrying amount who are categorised as Early of the loan net of credit Warning List 3. allowance. ---------------- -------------------------------------- ----------------------------------- Purchased Financial assets that have Lifetime expected credit or originated been purchased and had objective losses credit impaired evidence of being 'non-performing' At initial recognition, (POCI) assets or 'credit impaired ' at the POCI assets do not carry point of purchase. an impairment allowance. Lifetime expected credit losses are incorporated into the calculation of the asset's effective interest rate. Subsequent changes to the estimate of lifetime expected credit losses are recognised as a loss allowance. ---------------- -------------------------------------- -----------------------------------
In light of the classification outlined above, our stage allocation criteria must include:
-- A relative measure of creditworthiness deterioration since origination. -- An absolute measure of creditworthiness deterioration since origination.
There are two main criteria driving the SICR assessment identified as follows:
-- Quantitative criteria - where the numerically calculated probability of default on a loan has increased significantly since initial recognition. This is determined when the lifetime PD at observation is greater than the lifetime PD at origination by a portfolio specific threshold. Given the different nature of the products and the dissimilar level of lifetime PDs at origination, different thresholds are used by sub-products within each portfolio (term loans, revolving loan facilities and mortgages). The threshold is set at three times the median PD of the portfolio at origination.
-- Qualitative criteria - instruments that are 30 days past due or more are allocated to Stage 2, regardless of the results of the quantitative analysis. In addition, instruments classified on the Early Warning List as higher risk, are allocated to Stage 2, regardless of the results of the quantitative analysis.
There are additional SICR rules utilised across portfolios. These rules, as well as more granular detail of both quantitative and qualitative criteria, are captured within the IFRS 9 model methodology and are approved as part of the annual model review process at Model Governance and Model Oversight Committees. The low credit risk exemption allowed under IFRS 9 has not been applied across the retail mortgage or consumer portfolios to identify SICR.
Measurement of the expected credit loss allowance -use of post model overlays and adjustments
We have applied Post Model Adjustments (PMAs) and Post Model Overlays (PMOs) in the assessment of ECL. PMAs supplement the models to account for where there are limitations in model methodology or data inputs and PMOs accounts for downsides risks which are not fully captured through the economic scenarios. The appropriateness of PMAs and PMOs is subject to rigorous review and challenge, including review by our Model Governance, Impairment Committee and Audit Committee.
PMAs and PMOs are defined as follows:
-- Post model adjustments (PMAs): Post model adjustments (PMAs) refer to increases/decreases in ECL to address known model limitations, either in model methodology or model inputs. These rely on analysis of model inputs and parameters to determine the change required to improve model accuracy. These may be applied at an aggregated level however, they will usually be applied at account level.
-- Post model overlays (PMOs): Post model overlays (PMOs) reflect management judgement. These rely more heavily on expert judgement and will usually be applied at an aggregated level. For example, where recent changes in market and economic conditions have not yet been captured in the macroeconomic factor inputs to models.
Given the ongoing economic uncertainty, we continue to maintain prudent levels of PMOs. The level of PMAs/PMOs has remained stable during 2022 with the total percentage of ECL stock comprised of PMAs/PMOs remaining at 26.4% (2021: 26.3%).
PMAs contribute GBP7.9 million of ECL stock as at 30 June 2022 (31 December 2021: GBP9.1 million) and are held in anticipation of IFRS 9 commercial models planned for implementation in the second half of 2022.
-- IFRS 9 commercial secured LGD model (30 June 2022: GBP7.6 million; 31 December 2021: GBP9.8 million).
-- IFRS 9 commercial business loans lifetime PD model scope extended to commercial revolving facilities (30 June 2022: (GBP0.5) million; 31 December 2021: (GBP0.7) million).
-- IFRS 9 commercial fixed term EAD model (30 June 2022: GBP0.8 million; 31 December 2021: GBPnil).
PMOs have been reassessed during the period to ensure an appropriate level of ECL to account for the high level of macroeconomic uncertainty, following the Russian invasion of Ukraine, high inflation environment and cost of living pressures.
PMOs make up GBP37.1 million of the ECL stock for the half year ending 30 June 2022 (31 December 2021: GBP35.0 million) and comprise of:
-- High inflation environment and cost-of-living risks - Management overlay has been introduced in the period to reflect high inflation and cost of living pressures, which are not fully captured through the economic scenarios and IFRS 9 models (30 June 2022: GBP29.6 million; prior period COVID-19 overlays of GBP28.7 million have been released). This reflects the associated risks across retail mortgage, consumer, and commercial portfolios.
-- Climate change impact - An expert judgement overlay raised in 2021 has been maintained for 30 June 2022 and reflects the impact of climate change on property values for the mortgage and commercial portfolios (30 June 2022: GBP5.1 million; 31 December 2021: GBP5.1 million).
-- Concentration risk adjustment - An overlay raised in 2021 has been maintained for the first half of 2022 to reflect Metro Bank's geographical concentration risk on the retail mortgage and commercial property portfolios (30 June 2022: GBP1.2 million; 31 December 2021: GBP1.2 million).
-- Commercial impairment calculation enhancements - An overlay of GBP1.2 million raised in anticipation of refinements to the impairment calculation for the commercial portfolio in the second half of 2022 (30 June 2022: GBP1.2 million; 31 December 2021: GBPnil).
4 Critical accounting estimates
The ECL recognised in the financial statements reflects the effect on expected credit losses of a range of possible outcomes, calculated on a probability-weighted basis, based on a number of economic scenarios, and including management overlays where required. These scenarios are representative of our view of forecasted economic conditions, sufficient to calculate unbiased ECL, and are designed to capture material 'non-linearities' (i.e., where the increase in credit losses if conditions deteriorate, exceeds the decrease in credit losses if conditions improve).
In line with our approved IFRS 9 models, macroeconomic scenarios provided by Moody's Analytics are used in the assessment of provisions. The use of an independent supplier for the provision of scenarios helps to ensure that the estimates are unbiased. Since the inception of COVID-19, the macroeconomic scenarios are assessed and reviewed monthly to ensure appropriateness and relevance to the ECL calculation. The weightings of these scenarios reflect the latest UK economic outlook. The selection of scenarios and the appropriate weighting to apply are considered and discussed internally and proposed recommendations for use in the IFRS 9 models are made to the monthly Impairment Committee (designated Executive Risk Committee for impairments) for formal approval.
Our credit risk models are subject to internal model governance including independent validation. We undertake annual model reviews and have regular model performance monitoring in place. The impairment provisions recognised during the year reflect our best estimate of the level of provisions required for future credit losses as calibrated under our conservative weighted economic assumptions and following the application of expert credit risk judgement overlays.
Scenarios and probability weights used as at 30 June 2022 are as follows are as follows:
Half year Half year Half year to to to 30 June 31 December 30 June Scenario weighting 2022 2021 2021 -------------------- ---------- ------------- ---------- Baseline 40% 40% 40% Upside 20% 20% 20% Downside 30% 30% 30% Severe Downside 10% 10% 10% -------------------- ---------- ------------- ----------
The macroeconomic scenarios reflect the current macroeconomic environment as follows:
-- Baseline scenario (40% weight): Reflects the projection of the median, or '50%' scenario, meaning that in the assessment there is an equal probability that the economy might perform better or worse than the baseline forecast.
-- Upside scenario (20% weight): This above-baseline scenario is designed so there is a 10% probability the economy will perform better than in this scenario, broadly speaking, and a 90% probability it will perform worse.
-- Downside scenario (30% weight): In this recession scenario, in which a deep downturn develops, there is a 90% probability the economy will perform better, broadly speaking, and a 10% probability it will perform worse.
-- Severe Downside scenario (10% weight): In this recession scenario, in which a deep downturn develops, there is a 96% probability the economy will perform better, broadly speaking, and a 4% probability it will perform worse.
The following variables are the key drivers of ECL:
-- UK interest rate (five-year mortgage rate) -- UK unemployment rate -- UK HPI change, year-on-year (adjusted in the downside scenarios for regional concentration) -- UK GDP change, year-on-year
Macroeconomic scenarios impact the ECL calculation through varying the probability of Default (PD) and Loss Given Default (LGD). We use UK HPI to index mortgage collateral which has a direct impact on LGD. A wide range of potential metrics were initially considered, representing drivers which capture trends in the economy at large, and may indicate economic trends which will impact UK borrowers. This included variables which impact economic output, interest rates, inflation, stock prices, borrower income and the UK housing market. Statistical methods were then used to choose the subset of drivers which had the greatest significance and predictive fit to our data.
Macroeconomic variable Scenario 2023 2024 2025 2026 ----------------------------- ----------------- -------- ------- ------- ------- UK five year mortgage interest rates (%) Baseline 3.6% 4.0% 4.1% 4.2% ----------------------------- ----------------- -------- ------- ------- ------- Upside 3.9% 4.2% 4.3% 4.3% ----------------------------------------------- -------- ------- ------- ------- Downside 2.3% 2.8% 3.0% 3.1% ----------------------------------------------- -------- ------- ------- ------- Severe Downside 2.2% 2.8% 2.9% 3.0% ----------------------------------------------- -------- ------- ------- ------- Unemployment (%) Baseline 4.4% 4.6% 4.7% 4.8%
----------------------------- ----------------- -------- ------- ------- ------- Upside 3.7% 3.8% 4.0% 4.2% ----------------------------------------------- -------- ------- ------- ------- Downside 7.1% 7.4% 7.2% 6.6% ----------------------------------------------- -------- ------- ------- ------- Severe Downside 8.4% 8.1% 8.2% 7.7% ----------------------------------------------- -------- ------- ------- ------- House price index (YoY%)(1) Baseline 2.9% 4.8% 2.2% 0.9% ----------------------------- ----------------- -------- ------- ------- ------- Upside 13.1% 4.6% (1.8%) (2.5%) ----------------------------------------------- -------- ------- ------- ------- Downside (8.8%) 0.3% 3.7% 4.4% ----------------------------------------------- -------- ------- ------- ------- Severe Downside (15.7%) (0.5%) 3.3% 3.0% ----------------------------------------------- -------- ------- ------- ------- UK GDP (YoY%) Baseline 1.6% 1.4% 1.2% 1.0% ----------------------------- ----------------- -------- ------- ------- ------- Upside 2.7% 1.2% 1.0% 1.2% ----------------------------------------------- -------- ------- ------- ------- Downside (2.2%) 2.9% 1.7% 0.9% ----------------------------------------------- -------- ------- ------- ------- Severe Downside (4.0%) 2.6% 2.9% 1.3% ----------------------------------------------- -------- ------- ------- -------
The period-end assumptions used for the ECL estimate as at 31 December 2021 are as follows:
Macroeconomic variable Scenario 2022 2023 2024 2025 ----------------------------- ----------------- -------- -------- ------- ----- UK five year mortgage interest rates (%) Baseline 2.7% 3.3% 3.7% 4.1% ----------------------------- ----------------- -------- -------- ------- ----- Upside 3.0% 3.6% 4.2% 4.6% ----------------------------------------------- -------- -------- ------- ----- Downside 2.3% 2.8% 3.1% 3.1% ----------------------------------------------- -------- -------- ------- ----- Severe Downside 2.1% 2.6% 2.9% 3.1% ----------------------------------------------- -------- -------- ------- ----- Unemployment (%) Baseline 4.7% 4.4% 4.4% 4.5% ----------------------------- ----------------- -------- -------- ------- ----- Upside 3.9% 3.3% 3.5% 3.8% ----------------------------------------------- -------- -------- ------- ----- Downside 6.2% 6.6% 6.5% 6.3% ----------------------------------------------- -------- -------- ------- ----- Severe Downside 7.2% 7.5% 7.2% 7.1% ----------------------------------------------- -------- -------- ------- ----- House price index (YoY%)(1) Baseline 3.4% 6.0% 5.2% 3.7% ----------------------------- ----------------- -------- -------- ------- ----- Upside 14.2% 8.5% 4.8% 2.1% ----------------------------------------------- -------- -------- ------- ----- Downside (12.8%) (8.1%) (1.9%) 4.4% ----------------------------------------------- -------- -------- ------- ----- Severe Downside (16.3%) (10.3%) (2.5%) 4.3% ----------------------------------------------- -------- -------- ------- ----- UK GDP (YoY%) Baseline 3.9% 3.1% 1.4% 1.0% ----------------------------- ----------------- -------- -------- ------- ----- Upside 7.7% 1.7% 1.2% 1.1% ----------------------------------------------- -------- -------- ------- ----- Downside (2.3%) 5.7% 2.4% 1.7% ----------------------------------------------- -------- -------- ------- ----- Severe Downside (3.9%) 5.4% 2.2% 1.8% ----------------------------------------------- -------- -------- ------- -----
1. The HPI economic forecast has been stressed on the downside and more severe downside scenarios to reflect Metro Bank's geographical concentration risk.
Key assumptions underpinning the baseline June 2022 scenarios:
-- The U.K. economic outlook has darkened following Russia's invasion of Ukraine and the resulting increase in energy and food commodity prices, as well as the exacerbation of global supply-chain disruptions. The pace of growth remains subdued for the remainder of the year.
-- Global oil prices remain elevated for several months before they start reducing to prior levels. European natural gas and electricity prices remain high for the next 12 months.
-- Global supply-chain bottlenecks ease but fail to abate by the end of the year.
-- U.K. headline CPI inflation continues to increase in the coming months owing to higher energy, food, and manufactured goods prices. Higher wages and strong services demand add to the price pressures, ensuring inflation remains far above target throughout 2022.
-- Volatility in financial markets remains contained despite the tightening financial conditions, and the U.K. government bonds do not lose their risk-free status.
The June 2022 base case macroeconomic estimates and assumptions reflect a more negative economic outlook compared to December 2021, with the exception of HPI. Deterioration has been observed in the majority of the macroeconomic factors in the course of 2022, such as Unemployment rate, GDP, CPI and Wage Growth, and reflect the rising inflation and cost of living pressures exacerbated as a result of the war in Ukraine. The HPI forecast has improved since the start of the year reflecting the continued increase in observed house prices. A comparison of the base case macroeconomic estimates across the forecast period between 31 December 2021 and 30 June 2022 is shown in the tables above. Following the initial four-year projection period, the Upside, Downside and Severe Downside scenarios converge to the Baseline scenario. The rate of convergence varies based on the macroeconomic factor, but at a minimum convergence takes place three years from the initial four-year projection period. We note that the scenarios applied comprise our best estimate of economic impacts on the ECL, and the actual outcome may be different.
We have also assessed the IFRS 9 ECL sensitivity impact at a total portfolio level, by applying a 100% weighting to each of the four chosen scenarios.
Variance to reported ECL weighted ECL Scenario GBP'million at 30 June 2022 ----------------- ------------- --------------------- Weighted 171 100% Baseline 155 (9%) Upside 144 (16%) Downside 193 13% Severe Downside 223 31% ----------------- ------------- ---------------------
We note that the sensitivities disclosed above represent example scenarios and may not represent actual scenarios which occur in the future. If one of these scenarios did arise then at that time the ECL would not equal the amount disclosed above, as the amounts disclosed do not take account of the alternative possible scenarios which would be considered at that time. We also note that the sensitivities disclosed above do not consider movements in impairment stage allocations that would result under the different scenarios.
5 Operating segments
We provide retail and commercial banking services. The Board considers the results of the Group as a whole when assessing the performance of the business and allocating resources. Accordingly, we have only a single operating segment.
We operate solely in the UK and as such no geographical analysis is required
2. Net interest income
Interest income
Half year Half year Half year to to to 30 June 31 December 30 June 2022 2021 2021 GBP'million GBP'million GBP'million ------------------------------------------------- ------------- ------------- ------------- Cash and balances held with the Bank of England 9.5 2.1 2.3 Loans and advances to customers 208.0 195.9 182.2 Investment securities held at amortised cost 21.9 11.5 9.1 Investment securities held at FVOCI 0.3 2.0 0.6 ------------------------------------------------- ------------- ------------- -------------
Total interest income 239.7 211.5 194.2 ------------------------------------------------- ------------- ------------- -------------
Interest expense
Half year Half year Half year to to to 30 June 31 December 30 June 2022 2021 2021 GBP'million GBP'million GBP'million ----------------------------- ------------- ------------- ------------- Deposits from customers 12.4 14.6 25.5 Deposits from central banks 13.1 2.1 1.9 Repurchase agreements 0.8 1.1 1.1 Debt securities 25.0 23.8 23.6 Lease liabilities 7.6 7.9 8.8 Total interest expense 58.9 49.5 60.9 ----------------------------- ------------- ------------- ------------- 3. General operating expenses Half year Half year Half year to to to 30 June 31 December 30 June 2022 2021 2021 GBP'million GBP'million GBP'million ---------------------------------------------- ------------- ------------- ------------- People costs 119.9 117.5 121.5 Information technology costs 29.9 29.9 27.3 Occupancy expenses 15.0 16.7 16.2 Money transmission and other banking related costs(1) 24.5 24.2 26.4 Transformation costs 1.0 7.1 1.8 Remediation costs 3.0 20.5 25.4 Capability & Innovation fund (C&I) costs 0.3 2.3 5.8 Legal and Regulatory fees 3.3 3.2 3.4 Professional Fees 20.2 22.7 27.4 Contractor costs - - 2.1 Printing, postage and stationery costs 3.1 3.2 2.4 Travel costs 0.8 0.6 0.5 Marketing and advertising costs 3.5 3.2 1.5 Business acquisition and integration costs - 0.1 2.3 Other(1) 8.7 12.1 8.8 Total general operating expenses 233.2 263.3 272.8 ---------------------------------------------- ------------- ------------- -------------
1. During the second half of 2021 we reclassified certain costs from money transmission and other banking related costs to other costs to better reflect their nature. The half year to 30 June 2021 comparator figure has been updated to reflect this changes.
4. People costs Half year Half year Half year to to to 30 June 31 December 30 June 2022 2021 2021 GBP'million GBP'million GBP'million ------------------------------------- ------------- ------------- ------------- Wages and salaries 99.2 98.1 103.1 Social security costs 11.5 10.8 11.2 Pension costs 6.8 6.9 6.5 Equity-settled share based payments 2.4 1.7 0.7 Total people costs 119.9 117.5 121.5 ------------------------------------- ------------- ------------- ------------- 5. Taxation
Tax expense for the period
The components of tax expense for the six months ended 30 June 2022, 31 December 2021 and 30 June 2021 are:
Half year Half year Half year to to to 30 June 31 December 30 June 2022 2021 2021 GBP'million GBP'million GBP'million --------------------------------------------------- ------------- ------------- ------------- Current tax Current tax - (0.5) - Adjustment in respect of prior years - 0.7 (0.1) --------------------------------------------------- ------------- ------------- ------------- Total current tax credit/(expense) - 0.2 (0.1) --------------------------------------------------- ------------- ------------- ------------- Deferred tax Origination and reversal of temporary differences (0.9) 1.1 2.3 Effect of changes in tax rates (0.6) (1.0) (4.4) Adjustment in respect of prior periods - (1.2) - --------------------------------------------------- ------------- ------------- ------------- Total deferred tax expense (1.5) (1.1) (2.1) --------------------------------------------------- ------------- ------------- ------------- Total tax expense (1.5) (0.9) (2.2) --------------------------------------------------- ------------- ------------- -------------
Reconciliation of the total tax expense
The tax expense shown in the income statement differs from the tax expense that would apply if all accounting profits had been taxed at the UK corporation tax rate.
A reconciliation between the tax expense and the accounting profit multiplied by the UK corporation tax rate for the half year ended 30 June 2022, 31 December 2021 and 30 June 2021 are as follows:
Half year Half to Half year 30 year to Effective to June Effective 31 December tax 30 June Effective 2022 tax rate 2021 rate 2021 tax rate GBP'million % GBP'million % GBP'million % ------------------------------------- ------------- ---------- ------------- ---------- ------------- ---------- Loss before tax (60.2) (106.2) (138.9) ------------------------------------- ------------- ---------- ------------- ---------- ------------- ---------- Tax credit at statutory income tax rate of 19% 11.4 19.0% 20.2 19.0% 26.4 19.0% ------------------------------------- ------------- ---------- ------------- ---------- ------------- ---------- Tax effects of: Non-deductible expenses - depreciation on non-qualifying fixed assets (0.9) (1.5%) (1.9) 1.8% (0.8) (0.6%) Non-deductible expenses - investment property impairment - - (1.8) 1.7% - - Non-deductible expenses - remediation (0.5) (0.8%) (2.5) 2.4% (4.6) (3.3%) Non-deductible expenses - other 0.5 0.8% - - (0.1) (0.1%) Impact of intangible asset impairment on R&D deferred tax liability 0.2 0.3% 1.1 (1.0%) 1.9 1.4% Share based payments (0.1) (0.2%) (0.1) 0.1% (0.2) (0.1%) Adjustment in respect of prior years - - (0.5) 0.5% (0.1) - Losses for the period for which no deferred tax asset has been recognised (11.5) (19.1%) (14.4) 13.6% (20.3) (14.6%) Derecognition of tax losses arising - - - - - - in prior years Effect of changes in tax rates (0.6) (0.9%) (1.0) 0.9% (4.4) (3.2%) ------------------------------------- ------------- ---------- ------------- ---------- ------------- ---------- Tax expense reported in the consolidated
income statement (1.5) (2.4%) (0.9) (0.8%) (2.2) (1.5%) ------------------------------------- ------------- ---------- ------------- ---------- ------------- ----------
Effective tax rate
The effective tax rate for the period is (2.4%) (half year to 30 June 2021: (1.5%); half year to 31 December: (0.8%)). This has been calculated by applying the effective tax rate which is expected to apply to the Group for the half year ended 30 June 2022 using rates substantively enacted by 30 June 2022 as required by IAS34 'Interim Financial Reporting'.
Effect of changes in tax rates
This relates to the remeasurement of deferred tax rates following a change to the main UK corporation tax rate.
An increase in the UK corporation rate from 19% to 25% for taxable profits over GBP250,000 (effective 1 April 2023) was substantively enacted on 24 May 2021.
Losses for which no deferred tax asset has been recognised
The tax effected value of losses for which no deferred tax asset has been recognised is GBP11.5 million (half year to 30 June 2021: GBP20.3 million). This is due to our long term investment in cost, revenue and infrastructure transformation impacting the Bank's profits in the short term.
Deferred tax
A deferred tax asset must be regarded as recoverable and therefore recognised only when, on the basis of all available evidence, it can be regarded as more likely than not there will be suitable tax profits from which the future of the underlying timing differences can be deducted.
The following table shows deferred tax recorded in the statement of financial position and changes recorded in the tax expense:
Investment Property, Unused securities plant & Intangible tax losses & impairments equipment assets Total GBP'million GBP'million GBP'million GBP'million GBP'million -------------------------- ------------- --------------- ------------- ------------- ------------- 30 June 2022 Deferred tax assets 12 4 - - 16 Deferred tax liabilities - 3 (24) (7) (28) -------------------------- ------------- --------------- ------------- ------------- ------------- Deferred tax liabilities (net) 12 7 (24) (7) (12) -------------------------- ------------- --------------- ------------- ------------- ------------- At 1 January 2022 13 5 (23) (7) (12) Income statement (1) - (1) - (2) Other comprehensive income - 2 - - 2 -------------------------- ------------- --------------- ------------- ------------- ------------- At 30 June 2022 12 7 (24) (7) (12) -------------------------- ------------- --------------- ------------- ------------- ------------- 31 December 2021 Deferred tax assets 13 3 - - 16 Deferred tax liabilities - 2 (23) (7) (28) -------------------------- ------------- --------------- ------------- ------------- ------------- Deferred tax liabilities (net) 13 5 (23) (7) (12) -------------------------- ------------- --------------- ------------- ------------- ------------- At 1 July 2021 13 3 (21) (8) (13) Income statement - - (2) 1 (1) Other comprehensive income - 2 - - 2 At 31 December 2021 13 5 (23) (7) (12) -------------------------- ------------- --------------- ------------- ------------- ------------- 30 June 2021 -------------------------- ------------- --------------- ------------- ------------- ------------- Deferred tax assets 13 3 - - 16 Deferred tax liabilities - - (21) (8) (29) -------------------------- ------------- --------------- ------------- ------------- ------------- Deferred tax liabilities (net) 13 3 (21) (8) (13) -------------------------- ------------- --------------- ------------- ------------- ------------- At 1 January 2021 12 2 (16) (10) (12) Income statement 1 - (5) 2 (2) Other comprehensive income - 1 - - 1 At 30 June 2021 13 3 (21) (8) (13) -------------------------- ------------- --------------- ------------- ------------- -------------
Unrecognised deferred tax assets
The Group had total unused tax losses of GBP918.2 million for which a deferred tax asset of GBP217.6 million has not been recognised as we continue to be loss making in the short term. The impact of recognising the deferred tax asset in the future would be material although tax benefits would be spread over a number of years. In addition the 50% corporate loss restriction in place extends the timeline over which the Bank can offset losses against future profits. This will be reassessed for the year ending 31 December 2022 in light of actual performance against management forecasts and prevailing market conditions. There is no time limit beyond which these losses expire.
Due to an investment property impairment being unrealised there is an unrecognised deferred tax asset of GBP2.6 million (30 June 2021: GBP3.1 million).
6. Loans and advances to customers 30 June 2022 ------------------------------------------- Gross carrying ECL Net carrying amount allowance amount GBP'million GBP'million GBP'million --------------------------------------- ------------- ------------- ------------- Retail mortgages 6,785 (18) 6,767 Consumer lending 1,269 (56) 1,213 Commercial lending 4,481 (97) 4,384 --------------------------------------- ------------- ------------- ------------- Total loans and advances to customers 12,535 (171) 12,364 --------------------------------------- ------------- ------------- ------------- 31 December 2021 --------------------------------------------- Gross carrying ECL Net carrying amount allowance amount GBP'million GBP'million GBP'million --------------------------------------- --------------- ------------- ------------- Retail mortgages 6,723 (19) 6,704 Consumer lending 890 (42) 848 Commercial lending 4,846 (108) 4,738 --------------------------------------- --------------- ------------- ------------- Total loans and advances to customers 12,459 (169) 12,290 --------------------------------------- --------------- ------------- ------------- 30 June 2021 --------------------------------------------- Gross carrying ECL Net carrying amount allowance amount GBP'million GBP'million GBP'million --------------------------------------- --------------- ------------- ------------- Retail mortgages 6,815 (15) 6,800 Consumer lending 704 (42) 662 Commercial lending 4,972 (109) 4,863 --------------------------------------- --------------- ------------- ------------- Total loans and advances to customers 12,491 (166) 12,325 --------------------------------------- --------------- ------------- -------------
Loans and advances to customers by category
30 June 31 December 30 June 2022 2021 2021 GBP'million GBP'million GBP'million -------------------------------------------- ------------- ------------- ------------- Residential owner occupied 4,977 5,022 5,028 Retail buy-to-let 1,808 1,701 1,787 -------------------------------------------- ------------- ------------- ------------- Total retail mortgages 6,785 6,723 6,815 -------------------------------------------- ------------- ------------- ------------- Overdrafts 70 66 71 Credit cards 16 13 11 Term loans 1,183 811 622 -------------------------------------------- ------------- ------------- ------------- Total consumer lending 1,269 890 704 -------------------------------------------- ------------- ------------- ------------- Total retail lending 8,054 7,613 7,519 -------------------------------------------- ------------- ------------- ------------- Professional buy-to-let 853 950 1,037 Bounce back loans 984 1,304 1,394 Coronavirus business interruption loans 145 165 162 Recovery loan scheme 357 157 - Other term loans 1,638 1,791 1,963 Commercial term loans 3,977 4,367 4,556 Overdrafts and revolving credit facilities 110 156 133 Credit cards 4 3 3 Asset and invoice finance 390 320 280 Total commercial lending 4,481 4,846 4,972 -------------------------------------------- ------------- ------------- ------------- Total gross loans to customers 12,535 12,459 12,491 -------------------------------------------- ------------- ------------- -------------
Credit risk exposures
The following tables show the loans for each of our portfolios by days past due along with their corresponding staging. Where payment deferrals have been given as a result of COVID-19 the days past due figure exclude the deferral period. Overall COVID-19 has impacted a number of our customers, and this is reflected in the deterioration in the proportion of loans which are past due. We have provisioned for higher levels of expected credit losses to reflect this risk.
Retail mortgages
30 June 2022 ---------------------------------------------------------- Stage Stage Stage 1 2 3 POCI(1) GBP'million GBP'million GBP'million GBP'million ------------------------ ------------- ------------- ------------- ------------- Up to date 5,420 1,226 27 - 1 to 29 days past due 1 18 10 - 30 to 89 days past due - 19 14 - 90+ days past due - - 50 - ------------------------ ------------- ------------- ------------- ------------- Gross carrying amount 5,421 1,263 101 - ------------------------ ------------- ------------- ------------- ------------- 1. Purchase or originated credit impaired 31 December 2021 ---------------------------------------------------------- Stage 1 Stage 2 Stage 3 POCI GBP'million GBP'million GBP'million GBP'million ------------------------ ------------- ------------- ------------- ------------- Up to date 5,544 1,010 38 - 1 to 29 days past due 2 27 9 - 30 to 89 days past due - 26 16 - 90+ days past due - - 51 - ------------------------ ------------- ------------- ------------- ------------- Gross carrying amount 5,546 1,063 114 - ------------------------ ------------- ------------- ------------- ------------- 30 June 2021 ---------------------------------------------------------- Stage 1 Stage 2 Stage 3 POCI GBP'million GBP'million GBP'million GBP'million ------------------------ ------------- ------------- ------------- ------------- Up to date 5,917 751 32 - 1 to 29 days past due 1 17 10 - 30 to 89 days past due - 18 17 - 90+ days past due - - 52 - ------------------------ ------------- ------------- ------------- ------------- Gross carrying amount 5,918 786 111 - ------------------------ ------------- ------------- ------------- -------------
Consumer lending
30 June 2022 ---------------------------------------------------------- Stage Stage Stage 1 2 3 POCI GBP'million GBP'million GBP'million GBP'million ------------------------ ------------- ------------- ------------- ------------- Up to date 1,089 133 2 - 1 to 29 days past due 3 2 - - 30 to 89 days past due - 10 4 - 90+ days past due - - 26 - ------------------------ ------------- ------------- ------------- ------------- Gross carrying amount 1,092 145 32 - ------------------------ ------------- ------------- ------------- ------------- 31 December 2021 ---------------------------------------------------------- Stage 1 Stage 2 Stage 3 POCI GBP'million GBP'million GBP'million GBP'million ------------------------ ------------- ------------- ------------- ------------- Up to date 786 71 2 - 1 to 29 days past due - 2 - - 30 to 89 days past due - 9 3 - 90+ days past due - - 16 1 ------------------------ ------------- ------------- ------------- ------------- Gross carrying amount 786 82 21 1 ------------------------ ------------- ------------- ------------- ------------- 30 June 2021 ---------------------------------------------------------- Stage 1 Stage 2 Stage 3 POCI GBP'million GBP'million GBP'million GBP'million ------------------------ ------------- ------------- ------------- ------------- Up to date 641 34 1 - 1 to 29 days past due 1 1 - - 30 to 89 days past due - 8 1 - 90+ days past due - - 16 1 ------------------------ ------------- ------------- ------------- ------------- Gross carrying amount 642 43 18 1 ------------------------ ------------- ------------- ------------- -------------
Commercial lending
30 June 2022 ---------------------------------------------------------- Stage Stage Stage 1 2 3 POCI GBP'million GBP'million GBP'million GBP'million ------------------------ ------------- ------------- ------------- ------------- Up to date 3,646 510 89 - 1 to 29 days past due 8 46 17 - 30 to 89 days past due - 56 14 - 90+ days past due - 3 92 - ------------------------ ------------- ------------- ------------- ------------- Gross carrying amount 3,654 615 212 - ------------------------ ------------- ------------- ------------- ------------- 31 December 2021 ---------------------------------------------------------- Stage 1 Stage 2 Stage 3 POCI GBP'million GBP'million GBP'million GBP'million ------------------------ ------------- ------------- ------------- ------------- Up to date 3,727 656 118 - 1 to 29 days past due 12 46 2 - 30 to 89 days past due - 78 23 - 90+ days past due - - 184 - ------------------------ ------------- ------------- ------------- ------------- Gross carrying amount 3,739 780 327 - ------------------------ ------------- ------------- ------------- ------------- 30 June 2021 ---------------------------------------------------------- Stage 1 Stage 2 Stage 3 POCI GBP'million GBP'million GBP'million GBP'million ------------------------ ------------- ------------- ------------- ------------- Up to date 3,985 765 165 - 1 to 29 days past due 1 8 2 - 30 to 89 days past due - 27 10 - 90+ days past due - - 9 - ------------------------ ------------- ------------- ------------- ------------- Gross carrying amount 3,986 800 186 - ------------------------ ------------- ------------- ------------- -------------
Loss allowance
The following tables explain the changes in both the gross carrying amount and loss allowances of our loans and advances during the period.
Retail mortgages
Gross carrying amount Loss allowance Net carrying amount ------------------------------------- ------------------------------------- ------------------------------------- GBP'million Stage Stage Stage POCI Total Stage Stage Stage POCI Total Stage Stage Stage POCI Total 1 2 3 1 2 3 1 2 3 ------------------- ------ ------ ------ ----- ------ ------ ------ ------ ----- ------ ------ ------ ------ ----- ------ Balance at 1 January 2022 5,546 1,063 114 - 6,723 (2) (12) (5) - (19) 5,544 1,051 109 - 6,704 Transfers to/from stage 1(1) 199 (189) (10) - - (3) 2 1 - - 196 (187) (9) - - Transfers to/from stage 2(1) (343) 346 (3) - - - - - - - (343) 346 (3) - - Transfers to/from stage 3(1) (3) (10) 13 - - - - - - - (3) (10) 13 - - Net remeasurement due to transfers(2) - - - - - 2 (1) - - 1 2 (1) - - 1 New lending(3) 511 147 - - 658 (3) (2) - - (5) 508 145 - - 653 Repayments, additional drawdowns and interest accrued (57) (13) (1) - (71) - - - - - (57) (13) (1) - (71) Derecognitions(4) (432) (81) (12) - (525) 1 - 1 - 2 (431) (81) (11) - (523) Changes to assumptions(5) - - - - - - 3 - - 3 - 3 - - 3 ------------------- ------ ------ ------ ----- ------ ------ ------ ------ ----- ------ ------ ------ ------ ----- ------ Balance at 30 June 2022 5,421 1,263 101 - 6,785 (5) (10) (3) - (18) 5,416 1,253 98 - 6,767 ------------------- ------ ------ ------ ----- ------ ------ ------ ------ ----- ------ ------ ------ ------ ----- ------ 1. Represents the stage transfers prior to any ECL remeasurement
2. Represents the remeasurement between the twelve month and lifetime ECL due to stage transfer, including any changes to the model assumptions and forward looking information
3. Represents the increase in balances resulting from loans and advances that have been newly originated, purchased or renewed
4. Represents the decrease in balances resulting from loans and advances that have been fully repaid, disposed of or written off
5. Represents the change in loss allowances resulting from changes to assumptions notably forward looking macro-economic information and changes in the customer's risk profile
Gross carrying amount Loss allowance Net carrying amount ---------------------------------------- ------------------------------------- ---------------------------------------- GBP'million Stage Stage Stage POCI Total Stage Stage Stage POCI Total Stage Stage Stage POCI Total 1 2 3 1 2 3 1 2 3 ---------------- ------- ------- ------ ----- ------- ------ ------ ------ ----- ------ ------- ------- ------ ----- ------- Balance at 1 July 2021 5,918 786 111 - 6,815 (4) (6) (5) - (15) 5,914 780 106 - 6,800 Transfers to/from stage 1 (7) 7 - - - (1) 2 (1) - - (8) 9 (1) - - Transfers to/from stage 2 (189) 189 - - - - - - - - (189) 189 - - - Transfers to/from stage 3 (10) (5) 15 - - - - - - - (10) (5) 15 - - Net remeasurement due to transfers - - - - - 1 (1) - - - 1 (1) - - - New lending 349 156 - - 505 - (3) - - (3) 349 153 - - 502 Repayments, additional drawdowns and interest accrued (39) (6) (1) - (46) - - - - - (39) (6) (1) - (46) Derecognitions (476) (64) (11) - (551) - - 1 - 1 (476) (64) (10) - (550) Changes to assumptions - - - - - 2 (4) - - (2) 2 (4) - - (2) ---------------- ------- ------- ------ ----- ------- ------ ------ ------ ----- ------ ------- ------- ------ ----- ------- Balance at 31 December 2021 5,546 1,063 114 - 6,723 (2) (12) (5) - (19) 5,544 1,051 109 - 6,704 ---------------- ------- ------- ------ ----- ------- ------ ------ ------ ----- ------ ------- ------- ------ ----- ------- Gross carrying amount Loss allowance Net carrying amount ---------------------------------------- ------------------------------------- ---------------------------------------- GBP'million Stage Stage Stage POCI Total Stage Stage Stage POCI Total Stage Stage Stage POCI Total 1 2 3 1 2 3 1 2 3 ---------------- ------- ------- ------ ----- ------- ------ ------ ------ ----- ------ ------- ------- ------ ----- ------- Balance at 1 January 2021 5,911 863 118 - 6,892 (5) (17) (4) - (26) 5,906 846 114 - 6,866 Transfers to/from stage
1 369 (352) (17) - - (7) 6 1 - - 362 (346) (16) - - Transfers to/from stage 2 (280) 288 (8) - - 1 (1) - - - (279) 287 (8) - - Transfers to/from stage 3 (9) (21) 30 - - - 1 (1) - - (9) (20) 29 - - Net remeasurement due to transfers - - - - - 6 - - - 6 6 - - - 6 New lending 545 77 - - 622 (1) (1) - - (2) 544 76 - - 620 Repayments, additional drawdowns and interest accrued (92) (11) (1) - (104) - - - - - (92) (11) (1) - (104) Derecognitions (526) (58) (11) - (595) 1 1 - - 2 (525) (57) (11) - (593) Changes to assumptions - - - - - 1 5 (1) - 5 1 5 (1) - 5 ---------------- ------- ------- ------ ----- ------- ------ ------ ------ ----- ------ ------- ------- ------ ----- ------- Balance at 30 June 2021 5,918 786 111 - 6,815 (4) (6) (5) - (15) 5,914 780 106 - 6,800 ---------------- ------- ------- ------ ----- ------- ------ ------ ------ ----- ------ ------- ------- ------ ----- -------
Consumer lending
Gross carrying amount Loss allowance Net carrying amount ------------------------------------- ------------------------------------- ------------------------------------- GBP'million Stage Stage Stage POCI Total Stage Stage Stage POCI Total Stage Stage Stage POCI Total 1 2 3 1 2 3 1 2 3 ---------------- ------ ------ ------ ----- ------ ------ ------ ------ ----- ------ ------ ------ ------ ----- ------ Balance at 1 January 2022 786 82 21 1 890 (18) (8) (16) - (42) 768 74 5 1 848 Transfers to/from stage 1 16 (16) - - - (2) 2 - - - 14 (14) - - - Transfers to/from stage 2 (108) 108 - - - 1 (1) - - - (107) 107 - - - Transfers to/from stage 3 (9) (4) 13 - - - 2 (2) - - (9) (2) 11 - - Net remeasurement due to transfers - - - - - 1 (5) (9) - (13) 1 (5) (9) - (13) New lending 583 10 2 - 595 (10) (1) (1) - (12) 573 9 1 - 583 Repayments, additional drawdowns and interest accrued (93) (26) (2) (1) (122) - - - - - (93) (26) (2) (1) (122) Derecognitions (83) (9) (2) - (94) 4 1 1 - 6 (79) (8) (1) - (88) Changes to assumptions - - - - - 4 1 - - 5 4 1 - - 5 ---------------- ------ ------ ------ ----- ------ ------ ------ ------ ----- ------ ------ ------ ------ ----- ------ Balance at 30 June 2022 1,092 145 32 - 1,269 (20) (9) (27) - (56) 1,072 136 5 - 1,213 ---------------- ------ ------ ------ ----- ------ ------ ------ ------ ----- ------ ------ ------ ------ ----- ------ Gross carrying amount Loss allowance Net carrying amount ------------------------------------- ------------------------------------- ------------------------------------- GBP'million Stage Stage Stage POCI Total Stage Stage Stage POCI Total Stage Stage Stage POCI Total 1 2 3 1 2 3 1 2 3 ---------------- ------ ------ ------ ----- ------ ------ ------ ------ ----- ------ ------ ------ ------ ----- ------ Balance at 1 July 2021 642 43 18 1 704 (20) (5) (17) - (42) 622 38 1 1 662 Transfers to/from stage 1 (6) 6 - - - 1 (1) - - - (5) 5 - - - Transfers to/from stage 2 (2) 2 - - - - - - - - (2) 2 - - - Transfers to/from stage 3 (1) (1) 2 - - - - - - - (1) (1) 2 - - Net remeasurement due to transfers - - - - - - - (1) - (1) - - (1) - (1) New lending 185 42 7 - 234 1 (4) (6) - (9) 186 38 1 - 225 Repayments, additional drawdowns and interest accrued (9) (3) - - (12) - - - - - (9) (3) - - (12) Derecognitions (23) (7) (6) - (36) 1 1 6 - 8 (22) (6) - - (28) Changes to assumptions - - - - - (1) 1 2 - 2 (1) 1 2 - 2 ---------------- ------ ------ ------ ----- ------ ------ ------ ------ ----- ------ ------ ------ ------ ----- ------ Balance at 31 December 2021 786 82 21 1 890 (18) (8) (16) - (42) 768 74 5 1 848 ---------------- ------ ------ ------ ----- ------ ------ ------ ------ ----- ------ ------ ------ ------ ----- ------ Gross carrying amount Loss allowance Net carrying amount ------------------------------------- ------------------------------------- ------------------------------------- GBP'million Stage Stage Stage POCI Total Stage Stage Stage POCI Total Stage Stage Stage POCI Total 1 2 3 1 2 3 1 2 3 ---------------- ------ ------ ------ ----- ------ ------ ------ ------ ----- ------ ------ ------ ------ ----- ------ Balance at 1 January 2021 149 43 12 - 204 (6) (9) (10) - (25) 143 34 2 - 179 Transfers to/from stage 1 14 (14) - - - (2) 2 - - - 12 (12) - - - Transfers to/from stage 2 (4) 4 - - - - - - - - (4) 4 - - - Transfers to/from stage 3 (1) (2) 3 - - - 2 (2) - - (1) - 1 - - Net remeasurement due to transfers - - - - - 1 - (1) - - 1 - (1) - - New lending 512 24 5 1 542 (17) (3) (3) - (23) 495 21 2 1 519 Repayments, additional drawdowns and interest accrued (11) (6) (1) - (18) - - - - - (11) (6) (1) - (18) Derecognitions (17) (6) (1) - (24) - 1 1 - 2 (17) (5) - - (22) Changes to assumptions - - - - - 4 2 (2) - 4 4 2 (2) - 4 ---------------- ------ ------ ------ ----- ------ ------ ------ ------ ----- ------ ------ ------ ------ ----- ------ Balance at 30 June 2021 642 43 18 1 704 (20) (5) (17) - (42) 622 38 1 1 662 ---------------- ------ ------ ------ ----- ------ ------ ------ ------ ----- ------ ------ ------ ------ ----- ------
Commercial lending
Gross carrying amount Loss allowance Net carrying amount ------------------------------------- ------------------------------------- ------------------------------------- GBP'million Stage Stage Stage POCI Total Stage Stage Stage POCI Total Stage Stage Stage POCI Total 1 2 3 1 2 3 1 2 3 ---------------- ------ ------ ------ ----- ------ ------ ------ ------ ----- ------ ------ ------ ------ ----- ------ Balance at 1 January 2022 3,739 780 327 - 4,846 (27) (29) (52) - (108) 3,712 751 275 - 4,738 Transfers to/from stage 1 164 (163) (1) - - (6) 6 - - - 158 (157) (1) - - Transfers to/from stage 2 (135) 137 (1) - 1 1 (1) - - - (134) 136 (1) - 1 Transfers to/from stage 3 (98) (108) 206 - - - 4 (4) - - (98) (104) 202 - - Net remeasurement due to transfers - - - - - 3 (4) - - (1) 3 (4) - - (1) New lending 427 54 2 - 483 (7) (2) (1) - (10) 420 52 1 - 473 Repayments, additional drawdowns and interest accrued (180) (25) (5) - (210) - - - - - (180) (25) (5) - (210) Derecognitions (263) (60) (316) - (639) 1 1 22 - 24 (262) (59) (294) - (615) Changes to assumptions - - - - - 2 (8) 4 - (2) 2 (8) 4 - (2) ---------------- ------ ------ ------ ----- ------ ------ ------ ------ ----- ------ ------ ------ ------ ----- ------ Balance at 30 June 2022 3,654 615 212 - 4,481 (33) (33) (31) - (97) 3,621 582 181 - 4,384 ---------------- ------ ------ ------ ----- ------ ------ ------ ------ ----- ------ ------ ------ ------ ----- ------ Gross carrying amount Loss allowance Net carrying amount ---------------------------------------- -------------------------------------- ---------------------------------------- GBP'million Stage Stage Stage POCI Total Stage Stage Stage POCI Total Stage Stage Stage POCI Total 1 2 3 1 2 3 1 2 3 ---------------- ------- ------- ------ ----- ------- ------ ------ ------ ----- ------- ------- ------- ------ ----- ------- Balance at 1 July 2021 3,986 800 186 - 4,972 (21) (37) (51) - (109) 3,965 764 134 - 4,863 Transfers to/from stage 1 63 (63) - - - (2) 2 - - - 61 (61) - - - Transfers to/from stage 2 (173) 174 (1) - - - - - - - (173) 174 (1) - - Transfers to/from stage 3 (163) (3) 166 - - - 1 (1) - - (163) (2) 165 - - Net remeasurement due to transfers - - - - - (1) (6) (6) - (13) (1) (6) (6) - (13) New lending 299 (1) 1 - 299 (3) 4 (1) - - 296 3 - - 299 Repayments, additional drawdowns and interest accrued (26) (22) - - (48) - - - - - (26) (22) - - (48) Derecognitions (247) (105) (25) - (377) 1 4 8 - 13 (246) (101) (17) - (364) Changes to assumptions - - - - - (1) 2 - - 1 (1) 2 - - 1 ---------------- ------- ------- ------ ----- ------- ------ ------ ------ ----- ------- ------- ------- ------ ----- ------- Balance at 31 December 2021 3,739 780 327 - 4,846 (27) (29) (52) - (108) 3,712 751 275 - 4,738 ---------------- ------- ------- ------ ----- ------- ------ ------ ------ ----- ------- ------- ------- ------ ----- ------- Gross carrying amount Loss allowance Net carrying amount ---------------------------------------- -------------------------------------- ---------------------------------------- GBP'million Stage Stage Stage POCI Total Stage Stage Stage POCI Total Stage Stage Stage POCI Total 1 2 3 1 2 3 1 2 3 ---------------- ------- ------- ------ ----- ------- ------ ------ ------ ----- ------- ------- ------- ------ ----- ------- Balance at 1 January 2021 4,115 906 127 - 5,148 (19) (44) (40) - (103) 4,096 863 86 - 5,045 Transfers to/from stage 1 126 (121) (5) - - (5) 5 - - - 121 (116) (5) - - Transfers to/from stage 2 (124) 130 (6) - - 1 (2) 1 - - (123) 128 (5) - - Transfers to/from stage 3 (18) (78) 96 - - - 2 (2) - - (18) (76) 94 - - Net remeasurement due to transfers - - - - - 4 (4) (11) - (11) 4 (4) (11) - (11) New lending 267 59 5 - 331 (3) (6) - - (9) 264 53 5 - 322 Repayments, additional drawdowns and interest accrued (141) (9) (13) - (163) - - - - - (141) (9) (13) - (163) Derecognitions (239) (87) (18) - (344) 2 4 4 - 10 (237) (83) (14) - (334) Changes to assumptions - - - - - (1) 8 (3) - 4 (1) 8 (3) - 4 ---------------- ------- ------- ------ ----- ------- ------ ------ ------ ----- ------- ------- ------- ------ ----- ------- Balance at 30 June 2021 3,986 800 186 - 4,972 (21) (37) (51) - (109) 3,965 764 134 - 4,863 ---------------- ------- ------- ------ ----- ------- ------ ------ ------ ----- ------- ------- ------- ------ ----- ------- 7. Property, plant and equipment Freehold Fixtures Right Investment Leasehold land & fittings of use property improvements buildings & equipment IT hardware assets Total GBP'million GBP'million GBP'million GBP'million GBP'million GBP'million GBP'million -------------- ------------ ------------- ------------- ------------- ------------- ------------- ------------- Cost 1 January 2022 18 280 341 24 1 295 959 Additions - - 1 - - - 1 Write-offs - (10) - (2) - - (12) 30 June 2022 18 270 342 22 1 295 948 -------------- ------------ ------------- ------------- ------------- ------------- ------------- ------------- Accumulated depreciation 1 January 2022 12 68 28 19 - 67 194 Charge for the period - 6 3 1 - 7 17 Write-offs - (10) - (2) - - (12) 30 June 2022 12 64 31 18 - 74 199 Net book value at 30 June 2022 6 206 311 4 1 221 749 Cost 1 July 2021 18 300 290 25 11 330 974 Additions - 4 37 - 1 (4) 38 Disposals - - - - - (29) (29) Write-offs - (10) - (1) (11) (2) (24)
Transfers - (14) 14 - - - - 31 December 2021 18 280 341 24 1 295 959 Accumulated depreciation 1 July 2021 13 72 23 18 8 54 188 Charge for the period (1) 8 2 1 1 11 22 Impairments - - - - - 6 6 Disposals - - - - - (4) (4) Write-offs - (9) - - (9) - (18) Transfers - (3) 3 - - - - 31 December 2021 12 68 28 19 - 67 194 Net book value at 31 December 2021 6 212 313 5 1 228 765 Cost 1 January 2021 18 292 298 25 11 330 974 Additions - 8 (8) - - - - 30 June 2021 18 300 290 25 11 330 974 Accumulated depreciation 1 January 2021 12 66 21 15 7 47 168 Charge for the period 1 6 2 3 1 7 20 30 June 2021 13 72 23 18 8 54 188 Net book value at 30 June 2021 5 228 267 7 3 276 786 8. Intangible assets Goodwill Brands Software Total GBP'million GBP'million GBP'million GBP'million Cost 1 January 2022 10 2 336 348 Additions - - 12 12 Write-offs - - (16) (16) 30 June 2022 10 2 332 344 Accumulated amortisation 1 January 2022 - - 105 105 Charge for the period - - 20 20 Write-offs - - (8) (8) 30 June 2022 - - 117 117 Net book value at 30 June 2022 10 2 215 227 Cost 1 July 2021 10 2 355 367 Additions - - 13 13 Write-offs - - (32) (32) 31 December 2021 10 2 336 348 Accumulated amortisation 1 July 2021 - - 114 114 Charge for the period - - 18 18 Impairment (1) (1) Write-offs - - (26) (26) 31 December 2021 - - 105 105 Net book value at 31 December 2021 10 2 231 243 Cost 1 January 2021 10 2 328 340 Additions - - 26 26 Deferred grant (see note 10) - - 1 1 30 June 2021 10 2 355 367 Accumulated amortisation 1 January 2021 - - 86 86 Charge for the period - - 20 20 Impairment - - 8 8 30 June 2021 - - 114 114 Net book value at 30 June 2021 10 2 241 253 9. Lease liabilities Half year Half year Half year to to to 30 June 31 December 30 June 2022 2021 2021 GBP'million GBP'million GBP'million At beginning of the period 269 310 327 Additions and modifications - (6) - Disposals - (29) (11) Lease payments made (13) (14) (15) Interest on lease liabilities 8 8 9 At the end of the period 264 269 310
10. Deferred grants
Half year Half year Half year to to to 30 June 31 December 30 June 2022 2021 2021 GBP'million GBP'million GBP'million At beginning of the period 19 22 28 Released to the income statement - (3) (7) Offset against capital expenditure (see note 8) - - 1 At the end of the period 19 19 22
Our only deferred grant relates to amounts awarded in relation to the Capability and Innovation Fund which formed part of the RBS alternative remedies programme. The programme was aimed to increase competition in the UK business banking marketplace.
As part of the grant we are subject to delivering a number of public commitments. These commitments can be found on BCR's (the awarding body) website. As at 30 June 2022 we are currently on track with the delivery of these commitments.
11. Share capital
As at 30 June 2022 we had 172.4 million ordinary shares of 0.0001 pence (31 December 2021: 172.4 million, 30 June 2021: 172.4 million) in issue.
Called up ordinary share capital (issued and fully paid)
Half year Half year Half year to to to 30 June 31 December 30 June 2022 2021 2021 GBP'million GBP'million GBP'million At beginning of the period - - - At end of the period - - -
Share premium
Half year Half year Half year to to to 30 June 31 December 30 June 2022 2021 2021 GBP'million GBP'million GBP'million At beginning of the period 1,964 1,964 1,964 At end of the period 1,964 1,964 1,964
12. Earnings per share
Basic earnings per share (EPS) is calculated by dividing the loss attributable to our ordinary equity holders by the weighted average number of ordinary shares in issue during the year.
Half year Half year Half year to to to 30 June 31 December 30 June 2022 2021 2021 (Loss) attributable to ordinary equity holders (GBP'million) (61.7) (107.1) (141.1) Weighted average number of ordinary shares in issue (thousands) 172,421 172,421 172,420 Basic earnings per share (pence) (35.8) (62.1) (81.8)
Diluted EPS has been calculated by dividing the loss attributable to our ordinary equity holders by the weighted average number of ordinary shares in issue during the year plus the weighted average number of ordinary shares that would be issued on the conversion to shares of options granted to colleagues. As we were loss making during the six month periods to 30 June 2022 31 December 2021 and 30 June 2021, the share options would be antidilutive, as they would reduce the loss per share. Therefore, all the outstanding options have been disregarded in the calculation of dilutive EPS.
Half year Half year Half year to to to 30 June 31 December 30 June 2022 2021 2021 (Loss)/profit attributable to ordinary equity holders (GBP'million) (61.7) (107.1) (141.1) Weighted average number of ordinary shares in issue (thousands) 172,421 172,421 172,420 Diluted earnings per share (pence) (35.8) (62.1) (81.8)
13. Fair value of financial instruments
Quoted Using With significant market observable unobservable price inputs inputs Carrying Level Level Level Total value 1 2 3 fair value GBP'million GBP'million GBP'million GBP'million GBP'million 30 June 2022 Assets Loan and advances to customers 12,364 - - 12,498 12,498 Investment securities held at FVOCI 781 743 38 - 781 Investment securities held at amortised cost 5,393 3,685 1,482 53 5,220 Financial assets held at FVTPL 2 - - 2 2 Liabilities Deposits from customers 16,514 - - 16,377 16,377 Deposits from central banks 3,800 - - 3,800 3,800 Debt securities 577 447 - - 447 Derivative financial liabilities 8 - - 8 8 Repurchase agreements 166 - - 166 166 31 December 2021 Assets Loan and advances to customers 12,290 - - 12,356 12,356 Investment securities held at FVOCI 798 760 38 - 798 Investment securities held at amortised cost 4,776 2,977 1,710 60 4,747 Financial assets held at FVTPL 3 - - 3 3 Liabilities Deposits from customers 16,448 - - 16,452 16,452 Deposits from central banks 3,800 - - 3,800 3,800 Debt securities 588 495 - - 495 Derivative financial liabilities 10 - 10 - 10 Repurchase agreements 169 - - 169 169 30 June 2021 Assets Loan and advances to customers 12,325 - - 12,287 12,287 Investment securities held at FVOCI 1,198 1,198 - - 1,198 Investment securities held at amortised cost 3,165 1,480 1,632 64 3,176 Financial assets held at FVTPL 5 - - 5 5 Liabilities Deposits from customers 16,620 - - 16,663 16,663 Deposits from central banks 3,800 - - 3,800 3,800 Debt securities 596 503 - - 503 Derivative financial liabilities 8 - - 8 8 Repurchase agreements 212 - - 212 212
Cash and balances with the Bank of England, trade and other receivables, trade and other payables, assets classified as held for sale and other assets and liabilities which meet the definition of financial instruments are not included in the tables. Their carrying amount is a reasonable approximation of fair value.
Information on how fair values are calculated are explained below:
Loans and advances to customers
Fair value is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the balance sheet date, adjusted for future credit losses and prepayments, if considered material.
Investment securities
The fair value of investment securities is based on either observed market prices for those securities that have an active trading market (fair value Level 1 assets), or using observable inputs (in the case of fair value Level 2 assets).
Financial assets and liabilities held at fair value through profit and loss
The financial assets at fair value through profit and loss relate to the loans and advances previously assumed by the RateSetter provision fund. Following the purchase of the RateSetter back book from peer-to-peer investors in April 2021 the provision fund ceased to have liability for further claims which resulted in a net release of GBP18 million of assets and liabilities held at fair value through profit and loss.
Deposits from customers
Fair values are estimated using discounted cash flows, applying current rates offered for deposits of similar remaining maturities. The fair value of a deposit repayable on demand is approximated by its carrying value.
Debt securities
Fair values are determined using the quoted market price at the balance sheet date.
Deposits from central banks/repurchase agreements
Fair values are estimated using discounted cash flows, applying current rates. Fair values approximate carrying amounts as their balances are generally short-dated.
Derivative financial liabilities
The fair values of derivatives are obtained from discounted cash flow models or option pricing models as appropriate.
14. Legal proceedings and regulatory matters
As part of the normal course of business we are subject to legal and regulatory matters, the majority of which are not considered to have a material impact on the business.
The only contingent liability which we have, which could potentially have a material impact, is the FCA's enquiries regarding our financial crime systems and controls. We continue to engage and co-operate fully with the FCA on these matters and their enquiries remain at a relatively early stage.
The inclusion of these enquiries does not constitute any admission of wrongdoing or legal liability. The outcome and timing of these matters is inherently uncertain and based on the facts currently known, it is not possible to predict the outcome or reliably estimate any financial impact. As such, at the reporting date no provision has been made within the financial statements.
15. Post balance sheet events
There have been no material post balance sheet events.
OF the condensed consolidated interim financial statementsRECONCILIATION OF STATUTORY TO UNDERLYING RESULTS (UNAUDITED)
Underlying loss represents an adjusted measure, excluding the effect of certain items that are considered to distort year-on-year comparisons, in order to provide readers with a better and more relevant understanding of the underlying trends in the business. Details of the item that are considered to be non-underlying and their reasons for exclusion can be found on page 225 of our 2021 Annual Report and Accounts.
A reconciliation from our statutory to underlying results for the period is set out below:
Impairment and write offs of PPE Net Statutory and intangible BCR Transformation Remediation Underlying Half year to 30 basis assets costs costs costs basis June 2022 GBP'million GBP'million GBP'million GBP'million GBP'million GBP'million Interest income 239.7 - - - - 239.7 Interest expense (58.9) - 0.1 - - (58.8) Net interest income 180.8 - 0.1 - - 180.9 Net fee and commission income 39.5 - - - - 39.5 Net gains on sale - - - - - - of assets Other income 16.2 - (0.4) - - 15.8 Total income 236.5 - (0.3) - - 236.2 General operating
expenses (233.2) - 0.3 1.0 3.0 (228.9) Depreciation and amortisation (37.4) - - - - (37.4) Impairment and write offs of property, plant & equipment and intangible assets (8.2) 8.2 - - - - Total operating expenses (278.8) 8.2 0.3 1.0 3.0 (266.3) Expected credit loss expense (17.9) (17.9) Loss before tax (60.2) 8.2 - 1.0 3.0 (48.0)
Details of our other alternative performance measures including the methodology used to calculating them can be found on page 224 of our 2021 Annual Report and Accounts.
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