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MTRO Metro Bank Holdings Plc

32.25
0.15 (0.47%)
28 Mar 2024 - Closed
Delayed by 15 minutes
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
  0.15 0.47% 32.25 31.85 32.65 33.00 30.85 30.85 926,296 16:35:09
Industry Sector Turnover Profit EPS - Basic PE Ratio Market Cap
0 0 N/A 0

Metro Bank PLC Results for Year ended 31 December 2019 (1365E)

26/02/2020 7:00am

UK Regulatory


Metro Bank (LSE:MTRO)
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From Mar 2019 to Mar 2024

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TIDMMTRO

RNS Number : 1365E

Metro Bank PLC

26 February 2020

Metro Bank PLC

Full year results

Trading Update 2019

26 February 2020

Metro Bank PLC (LSE: MTRO LN)

Results for Year ended 31 December 2019

   --     Financial performance reflects a challenging year 
   --     Balance sheet strength retained 
   --     Strong annual growth in customer accounts 
   --     Ambition to become the UK's best community bank 

Summary:

 
 --   Underlying loss before tax of GBP11.7 million (2018: GBP50.0 
       million profit) reflecting balance sheet strengthening actions, 
       IFRS 16 impact and debt interest expense. 
 --   Statutory loss before tax of GBP130.8 million (2018: GBP40.6 
       million profit) primarily reflecting a GBP68 million write-down 
       of intangible assets (no impact on regulatory capital). 
 --   21% growth in retail and SME core deposits to GBP10.2 billion 
       (2018: GBP8.4 billion). 
 --   Net fee and other income up 43%, driven by customer growth 
       and the launch of fee-earning services. 
 --   Strong capital position with Common Equity Tier 1 (CET1) 
       ratio of 15.6% (2018: 13.1%). 
 --   Surpassed 2.0 million customer accounts (2018: 1.6 million). 
 --   Rated no. 1 for service in stores and for online and mobile 
       banking (1) . 
 --   Strategic ambition to become the UK's best community bank. 
 --        Strategic plan revised to achieve statutory RoTE >8.5% by 
            2024: 
             *    Deliverable cost and revenue initiatives identified 
                  and being implemented, complemented by targeted 
                  investments, with returns further enhanced through 
                  balance sheet optimisation 
 

Key Financials:

 
                             31          31         Change         30       Change 
   GBP in millions         December    December      from       September     from 
                             2019        2018      full year      2019       Q3 19 
                                                      18 
 
 Assets                   GBP21,400   GBP21,647      (1%)      GBP21,002      2% 
 Loans                    GBP14,681   GBP14,235       3%       GBP14,891     (1%) 
 Deposits                 GBP14,477   GBP15,661      (8%)      GBP14,231      2% 
 Loan to deposit ratio      101%         91%         10pp         105%       (4pp) 
 
 CET 1 capital ratio        15.6%       13.1%       250bps       16.2%      (60bps) 
 Total capital ratio        18.3%       15.9%       240bps       18.9%      (60bps) 
 Liquidity coverage 
  ratio                     197%        139%         58pp          -           - 
                         ----------  ----------  -----------  -----------  -------- 
 
 
 GBP in millions              Year ended     Year ended    Change 
                              31 December    31 December 
                                 2019           2018 
 
 Total underlying revenue      GBP400.1       GBP404.1      (1%) 
 Underlying (loss)/profit 
  before tax(2)               (GBP11.7)       GBP50.0      (123%) 
 Statutory (loss)/profit 
  before tax                  (GBP130.8)      GBP40.6      (422%) 
 Net interest margin            1.51%          1.81%       (30bps) 
 
 Underlying EPS- basic         (10.8p)         39.4p       (127%) 
 Underlying EPS- diluted       (10.8p)         38.2p       (128%) 
                            -------------  -------------  -------- 
 
   1.     Results from the Competition and Market Authority's February 2020 Service Quality Survey. 

2. Underlying (loss)/profit before tax excludes Listing Share Awards, impairment of property, plant & equipment ("PPE") and intangible assets, net BCR costs, transformation costs and remediation costs. Statutory (loss)/profit after tax is included in the Profit and Loss Account.

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

"Our financial performance reflects a very challenging year for Metro Bank. External headwinds, internal challenges and actions we took to put the business on a more positive trajectory are reflected in the results. Despite this, Metro Bank's market-leading service proposition continued to deliver growth in customer accounts, and our balance sheet ended the year in a materially stronger position. We've fully evaluated our strategy, and have a clear plan which will return the bank to sustainable growth built around a community banking model. An enhanced focus on costs, improved productivity, and investment in our infrastructure will enable our deposit-led franchise to deliver profitable growth over the medium term. Thanks to the steadfast commitment of colleagues across the bank, I am confident we will successfully execute against these priorities to become the UK's best community bank."

A presentation for investors and analysts will be held at 08:30 GMT on 26 February 2020.

The presentation will be webcast on:

https://event.on24.com/wcc/r/2180103/0B87C516F118372B20DA70B3C08A88FC

For those wishing to dial-in:

From the UK dial: +44 3333 000 0804

From the US dial: +1 631 913 1422

Participant Pin: 49156297#

URL for other international dial in numbers:

http://events.arkadin.com/ev/docs/NE_W2_TF_Events_International_Access_List.pdf

Strategic update and outlook

 
    --   Following a challenging year, the bank has undertaken 
          a comprehensive review of its strategy. The refreshed strategy 
          to become the UK's best community bank is built on firm 
          foundations: robust capital and liquidity; strong asset 
          quality; simple balance sheet; sector leading customer 
          service underpinned by a strong culture and engaged colleagues; 
          and customer account growth momentum. We will deliver a 
          statutory RoTE of >8.5% by 2024. 
    --        Outstanding customer service and convenience across a 
               range of distribution channels will remain at the core 
               of Metro Bank's strategy. Being the UK's best community 
               bank means serving the local economy by focusing on the 
               requirements of individuals and small businesses. We will 
               focus on five straight forward pillars that will enable 
               us to deliver for stakeholders: 
 
               1. Tight cost control through back office efficiencies 
               and organisational simplification. Metro Bank's fixed costs 
               make up a significant portion of its cost base, primarily 
               due to the store network; this in time will deliver significant 
               operating leverage and drive revenue. In the meantime, 
               the bank has initiatives in place to ensure cost growth 
               continues to moderate. New stores will become more cost 
               efficient and flexible in size, fit-out and leasing terms. 
               The bank will also streamline its back-office operations 
               by relocating to cost effective locations, modernise contact-centre 
               technology, aim to digitise/automate services and reduce 
               organisational layers across the bank. 
 
               2. Improve capability and meet more customer needs through 
               better execution. Metro Bank intends to maintain and improve 
               its leading customer service to both deepen existing relationships 
               and attract new FANS with the aim of driving revenue and 
               NIM growth. The current product offering will be enhanced 
               and broadened, and the bank will invest in its colleagues 
               and technology to enhance accessibility for customers. 
               A limited number of new stores will be opened over the 
               next few years, allowing Metro Bank to be embedded in more 
               communities. Existing and new stores will benefit from 
               the new marketing campaign which will raise awareness of 
               Metro Bank's award-winning service. 
 
               3. Continued infrastructure investment to support the 
               transformation . Continued investment in Metro Bank's leading 
               customer proposition with the aim of bringing the physical 
               and digital world together, making life easier for FANS 
               and colleagues. This will be underpinned by further investment 
               in technology, finance and risk infrastructure. 
 
               4. Optimise our balance sheet. Metro Bank will optimise 
               its balance sheet and asset mix whilst focusing on risk 
               adjusted return on regulatory capital. In the short-term, 
               tactical asset disposals will be considered, and in the 
               longer term a number of funding diversification options 
               will be considered to deliver greater risk adjusted returns 
               on capital. The bank will seek a better yielding asset 
               book and improved returns on regulatory capital by rebalancing 
               its lending mix towards areas such as specialist mortgages, 
               SMEs and unsecured loans. 
 
               5. Clear and refreshed external and internal communications 
               strategy . Metro Bank's refreshed strategy will focus on 
               providing colleagues, shareholders and other stakeholders 
               with a clear message. Internally, the bank will ensure 
               colleagues have a clear understanding of its transformation 
               plan and their role within this. Externally, the bank is 
               re-evaluating guidance, KPIs, tone and frequency of reporting. 
 

Guidance and Targets

 
                                     FY2020                                                                                    FY 2024 
                                    Guidance                                                    Targets                                                     Guidance 
            --------------------------------------------------------  ----------------------------------------------------------  ------------------------------------------------------------- 
 Deposits 
               *    Mid-single digit growth                              *                                                            *    Cost of deposits to reduce over time as the mix of 
                                                                                                                                           current accounts increases 
 
                                                                         * 
            --------------------------------------------------------  ----------------------------------------------------------  ------------------------------------------------------------- 
 Revenue 
               *    NIM in line with Q4 2019                             *    NIM expansion vs FY 2019                                *    Target lending mix (75% mortgages, 20% SME and 5% 
                                                                                                                                           unsecured) 
 
                                                                         *    Fee and other income to increase as proportion of 
                                                                              revenue mix 
 
 
                                                                         *    15-30 bps cost of risk 
            --------------------------------------------------------  ----------------------------------------------------------  ------------------------------------------------------------- 
 Operating 
  Costs       *    Mid-high-single digit growth excluding investment    *    New investment spend GBP250-GBP300m opex (excluding      *    'Run the bank' cost low single digit CAGR 2020-2024 
                   opex                                                      depreciation and amortisation) and c.GBP100m capex 
                                                                       by 
                                                                             2024, front-end loaded 
 
 
                                                                        *    Cost income ratio 70-75% by 2024 (includes new 
                                                                             investment spend, amortisation and depreciation) 
            --------------------------------------------------------  ----------------------------------------------------------  ------------------------------------------------------------- 
 Capital 
                    *    CET1 ratio >12%                                *    Minimum 12% CET1 and >22.5% Total Capital plus MREL      *    Additional MREL issuance post Jan 2022 in line with 
                                                                                                                                           regulatory requirements 
 
                                                                        *    Up to GBP500m of MREL issuance before 1 Jan 2022 
            --------------------------------------------------------  ----------------------------------------------------------  ------------------------------------------------------------- 
 Returns 
                                                                         *    8.5% statutory RoTE by FY2024                          *    Conservative target prudently excludes impact of AIRB 
                                                                                                                                          approval 
            --------------------------------------------------------  ----------------------------------------------------------  ------------------------------------------------------------- 
 

BCR Capability & Innovation Fund Award

 
    --   Revised Business Case submitted to, and approved by, BCR 
          Ltd ("BCR") to align Metro Bank's Public Commitments with 
          its new strategy. Metro Bank will return GBP50 million 
          of the original GBP120 million funding it was awarded last 
          year. 
    --   Summary of key changes to the Public Commitments 
                o Metro Bank will continue to spend GBP2 of its own 
                 funds for every pound it receives from the Capability 
                 & Innovation Fund 
                 o Metro Bank will open a total of 15 rather than 30 stores 
                 in the North of England by 2025 
                 o Metro Bank will continue to build a range of game-changing 
                 digital capabilities to help SMEs thrive 
                o Metro Bank will step away from niche SME propositions 
                 that benefit a smaller group of SMEs, including secured 
                 lending transformation, virtual accounts and pooling; 
                 it will re-phase a further three initiatives to create 
                 near-term capacity for transformation. 
    --   These commitments continue to allow Metro Bank to bring 
          market-leading service and convenience to SME customers 
          with a targeted c.6% BCA market share by 2025, and deliver 
          on its new strategy. 
 

Financial performance for the year and quarter ended 31 December 2019

 
 GBP in millions              31 December2019    31 December2018      Change     30 September2019   Change 
                                                                     from full                       from 
                                                                      year 18                        Q3 19 
 
 Demand: current accounts         GBP4,278           GBP4,685          (9%)          GBP4,181         2% 
 Demand: savings accounts         GBP5,593           GBP6,924         (19%)          GBP5,700        (2%) 
 Fixed term: savings 
  accounts                        GBP4,606           GBP4,052          14%           GBP4,350         6% 
                             -----------------  -----------------  -----------  -----------------  ------- 
 Deposits from customers         GBP14,477          GBP15,661          (8%)         GBP14,231         2% 
                             -----------------  -----------------  -----------  -----------------  ------- 
 
 Deposits from customers includes: 
 Retail customers (excl. 
  retail partnerships)            GBP6,891           GBP5,190          33%           GBP6,351         9% 
 Retail partnerships              GBP1,839           GBP2,239         (18%)          GBP1,890        (3%) 
                             -----------------  -----------------  -----------  -----------------  ------- 
 Deposits from retail 
  customers                       GBP8,730           GBP7,429          18%           GBP8,241         6% 
                             -----------------  -----------------  -----------  -----------------  ------- 
 Commercial customers 
  (excluding SMEs(3) 
  )                               GBP2,486           GBP5,060         (51%)          GBP2,829       (12%) 
 SMEs                             GBP3,261           GBP3,172           3%           GBP3,161         3% 
                             -----------------  -----------------  -----------  -----------------  ------- 
 Deposits from business 
  and commercial customers        GBP5,747           GBP8,232         (30%)          GBP5,990        (4%) 
                             -----------------  -----------------  -----------  -----------------  ------- 
 
      3. 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 of less than EUR1 
       million. 
 

Deposits

 
 --   Strong customer account growth of 385, 000 in 2019 (2018: 
       403,000) to over 2 million. 
 --   Total deposits were GBP14,477 million as at 31 December 
       2019 . A net reduction in deposits in H1 was followed by 
       a 6% increase in the second half, supported by strong growth 
       in fixed term retail savings accounts and growth in SME 
       balance. 
 --   Deposits increased in the fourth quarter (GBP246 million), 
       as expected. Deposits from personal and small business customers 
       continued to demonstrate resilience throughout the year. 
 --   Cost of deposits was 78bps for the full year up from 61bps 
       in 2018 due to pricing actions taken during the year. 
 

Loans

 
 --                          Total net loans as at 31 December 2019 were GBP14,681 million, 
                              up from GBP14,235 million at 31 December 2018 , reflecting 
                              proactive management of lending growth. Loan balances contracted 
                              marginally in the fourth quarter (down 1%). 
 --                          Retail mortgages remained the largest component of the 
                              lending book at 71% of gross lending (31 December 2018: 
                              67%). 
 --                          Loan to deposit ratio at 101% is above the prior year (31 
                              December 2018: 91%), although below the 109% reported at 
                              H1, reflecting the bank's actions to reduce the loan to 
                              deposit ratio in a controlled way. 
 --                          Asset quality remains strong, with full year c ost of risk 
                              remaining low at 0.08% (31 December 2018: 0.07%). Non-performing 
                              loans remain low, although increased to 0.53% (31 December 
                              2018: 0.15%) reflecting seasoning of the loan portfolio 
                              and a single name commercial exposure, the loan portfolio 
                              remains highly collateralised. 
 GBP in millions                    31                31           Change           30           Change 
                                  December          December         from        September         from 
                                    2019              2018           full           2019          Q3 19 
                                                                     year 
                                                                      18 
 
 Gross Loans and advances 
  to customers                   GBP14,715         GBP14,269         3%          GBP14,922        (1%) 
 Less: allowance for 
  impairment                      (GBP34)           GBP(34)           -           (GBP31)          10% 
                             ----------------  ----------------  ----------  ----------------  ---------- 
 Net Loans and advances 
  to customers                   GBP14,681         GBP14,235         3%          GBP14,891        (1%) 
                             ----------------  ----------------  ----------  ----------------  ---------- 
 
 Gross loans and advances 
  to customers includes: 
                             ----------------  ----------------  ----------  ----------------  ---------- 
 Commercial loans                GBP4,052          GBP4,356         (7%)         GBP4,182         (3%) 
 Retail mortgages                GBP10,430         GBP9,625          8%          GBP10,495        (1%) 
 Consumer and other 
  loans and advances              GBP233            GBP288          (19%)         GBP245          (5%) 
                             ----------------  ----------------  ----------  ----------------  ---------- 
 
 

Profit and Loss Account

 
 --   Net interest margin of 1.51% compared to 1.81% in the prior 
       year , with the decline primarily reflecting actions taken 
       to maintain a resilient balance sheet, including a GBP521 
       million loan portfolio disposal, GBP1.5 billion of treasury 
       asset sales and higher deposit costs. The movement also 
       reflects the impact of IFRS 16 lease accounting as well 
       as continued pricing pressure in the mortgage market. The 
       issuance of MREL in October 2019 in order to comply with 
       interim MREL requirements contributed to a decline in the 
       margin. 
 --   Net interest income down 7% to GBP308.1 million (2018: 
       GBP 330.1 million) reflecting the movements in NIM described 
       above. These actions, including a moderation of loan growth, 
       reduced revenue by c.GBP12m in Q4 2019. 
 --   Net fee and other income was up 43% in the year driven 
       by customer growth, addressing fee leakage and the launch 
       of new fee earning services and products. 
 --   Underlying cost:income ratio increased to 100% year-on-year 
       from 86% in 2018 , largely reflecting net interest income 
       headwinds. The pace of cost growth slowed significantly 
       in the second half of 2019 compared to the rate of growth 
       in the second half of the previous year. 
 --   Underlying loss before tax for the year was GBP 11.7 million, 
       compared to a profit of GBP50.0 million in 2018 , reflecting 
       the income challenges and cost pressures outlined above. 
       Loss in the fourth quarter increased to GBP22.7 million. 
 -- 
              Statutory 
              loss 
              before 
              tax 
              of 
              GBP130.8 
              million 
              in 
              2019 
              (2018: 
              GBP40.6 
              million 
              profit) 
              including: 
               *    Write-down of intangible assets (GBP 68 million) : 
                    relating to the discontinuation of certain 
                    work-in-progress or older IT projects that do not 
                    form part of the bank's revised strategy. This does 
                    not impact the bank's capital position as intangible 
                    assets are excluded from regulatory capital. 
 
 
               *    Transformation costs (GBP11 million ): costs 
                    associated with the delivery of the cost 
                    transformation programme. 
 
 
               *    Remediation costs (GBP27 million): including work 
                    relating to the January 2019 risk weighted assets 
                    ("RWA") adjustment and associated regulatory 
                    investigations which are ongoing, as well as work 
                    undertaken in relation to a previously disclosed 
                    review of the bank's sanctions procedures. 
 --   Statutory loss after tax of GBP182.6 million in 2019 (2018: 
       GBP27.1 million profit) that includes a GBP 53 million derecognition 
       of the bank's deferred tax asset for unused tax losses. 
       This is an accounting non-cash item and does not impact 
       regulatory capital or liquidity. The derecognition reflects 
       the impact on the bank's short-term results of its investments 
       announced as part of its strategy update. 
 

Capital, Funding and Liquidity

 
 --    Strong liquidity and funding position maintained , reflecting 
        H2 2019 deposit growth of GBP774 million, a GBP521 million 
        loan portfolio disposal and GBP1.5 billion treasury asset 
        sales. As a result, the bank's Liquidity Coverage Ratio 
        was 197 % as of 31 December 2019 (2018: 139%), compared 
        to the bank's requirement of 100%. 
 --    T otal capital as a percentage of risk-weighted assets 
        was 18.3%. Following the GBP350 million senior non-preferred 
        debt issuance in October, total capital plus MREL resources 
        were GBP2,018 million with a total capital plus MREL ratio 
        of 22.1 % at 31 Decemb er 2019, above the 21.5% 1 January 
        2020 interim MREL plus buffers requirement. 
 --    CET1 capital of GBP1,427 million as at 31 December 2019 
        was 15.6 % of RWAs (2018: 13.1% and Q3 2019: 16.2%), compared 
        to the bank's Tier 1 regulatory minimum of 10.6%(4) . 
 --    RWAs as at 31 December 2019 were GBP9,147 million (2018: 
        GBP8,936 million and Q3 2019: GBP9,242 million) . 
 --    Regulatory leverage ratio of 6.6% (2018: 5.4%). 
            4. Based on current capital requirements, excluding any confidential 
             PRA buffer, if applicable 
 

Customer Experience

 
 --   Expanded coverage , opened a store in Manchester in the 
       fourth quarter and new stores in Wolverhampton, Cardiff 
       and Hammersmith in early 2020. Metro Bank now has 74 stores. 
 --   Enhanced digital offering , launched Business Insights 
       and MCash in the fourth quarter. These new services use 
       the latest technology to improve Metro Bank's attractive 
       product offering for SME customers. 
 

Board Changes

 
 --   Vernon Hill stepped down from his role as Chairman in October 
       and from the Board on 17 December 2019. Sir Michael Snyder 
       has been appointed as Interim Chairman, while the recruitment 
       process for a permanent Chair progresses. 
 --   Craig Donaldson stepped down at the end of the year as CEO 
       and will remain available to the Board as an advisor until 
       the end of 2020. 
 --   Dan Frumkin, who joined Metro Bank in September 2019 as 
       Chief Transformation Officer, was appointed to the Board 
       as Interim CEO from 1 January 2020 and confirmed as CEO 
       on 19 February 2020. 
 --   Monique Melis, who joined the Board in June 2017, has been 
       appointed as Interim Senior Independent Director with effect 
       from 1 December 2019, following the appointment of Sir Michael 
       Snyder as Interim Chairman. 
 --   After 10 years on the Board, Alastair 'Ben' Gunn, stepped 
       down as Deputy Chairman and Non-Executive Director with 
       effect from 31 December 2019. 
 --   Sally Clark joined the Board on 1 January 2020 as an independent 
       Non-Executive Director. Most recently, Sally was Chief Internal 
       Auditor at Barclays plc where she was responsible for driving 
       the vision and strategy for the internal audit function. 
 

Change of approach to quarterly reporting

Going forward, as the bank focusses on its new strategy and associated transformation plans, the bank will report full and half year results in line with UK practice, with short form trading updates at Q1 and Q3. These updates will include deposit and loan balances, together with a short commentary covering the performance of the business in the period.

Metro Bank PLC

Summary Balance Sheet and Profit & Loss Account

(Unaudited)

 
                                    Annual         2019          2018 
                                     Growth 
                                      Rate 
 Balance Sheet                                31-Dec   30-Sep   31-Dec 
                                               GBP'm    GBP'm    GBP'm 
 Assets 
 Loans and advances to customers      3%      14,681   14,891   14,235 
 Treasury assets(5)                            5,554    4,837    6,604 
 Other assets(6)                               1,165    1,274      808 
                                             -------  -------  ------- 
 Total assets                        (1%)     21,400   21,002   21,647 
                                             -------  -------  ------- 
 
 Liabilities 
 Deposits from customers             (8%)     14,477   14,231   15,661 
 Deposits from central banks                   3,801    3,801    3,801 
 Debt securities                                 591      249      249 
 Other liabilities                               948      959      533 
                                             -------  -------  ------- 
 Total liabilities                            19,817   19,240   20,244 
                                             -------  -------  ------- 
 Total shareholder's equity                    1,583    1,762    1,403 
                                             -------  -------  ------- 
 Total equity and liabilities                 21,400   21,002   21,647 
                                             -------  -------  ------- 
 
 

5. Comprises investment securities and cash & balances with central banks

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

 
                                          Annual     12 months to 31 December 
                                           Growth 
                                            Rate 
 Profit & Loss Account                                        2019        2018 
                                                             GBP'm       GBP'm 
 
 Net interest income                                         308.1       330.1 
 Net fee and other income                                     90.4        63.3 
 Net gains on sale of assets                                   1.6        10.7 
 Total underlying revenue                  (1%)              400.1       404.1 
 
 Operating costs                            16%            (400.1)     (346.1) 
 Expected credit loss expense                               (11.7)       (8.0) 
 
 Underlying (loss)/profit before 
  tax                                     (123%)            (11.7)        50.0 
 
 Underlying taxation                                         (4.3)      (13.4) 
 
 Underlying (loss)/profit after 
  tax                                     (144%)            (16.0)        36.6 
 
 Listing Share Awards                                        (0.6)       (0.9) 
 Impairment and write-down of property 
  plant & equipment and intangible 
  assets                                                    (75.8)       (4.8) 
 Net BCR costs(7)                                            (2.1)       (3.8) 
 Transformation costs                                        (9.3)           - 
 Remediation costs                                          (26.1)           - 
 Derecognition of deferred tax                              (52.7)           - 
  asset 
 Statutory (loss)/profit after 
  tax                                     (774%)           (182.6)        27.1 
                                                   ---------------  ---------- 
 
 Underlying earnings per share 
  - basic                                                  (10.8p)      39.4 p 
 Underlying earnings per share 
  - diluted                                                (10.8p)      38.2 p 
 Number of shares - undiluted                               147.4m      93.0 m 
 Number of shares - diluted                                 147.4m      95.9 m 
 Number of shares - at period end                           172.4m       97.4m 
 Net interest margin (NIM)                                   1.51%       1.81% 
 NIM + fees                                                  2.00%       2.15% 
 Cost of deposits                                            0.78%       0.61% 
 Cost of risk                                                0.08%       0.07% 
 Underlying cost:income ratio                                 100%         86% 
 
 

7. Net BCR costs includes amounts previously disclosed under costs relating to RBS alternative remedies package application, Capability & Innovation costs and Capability & Innovation funding

 
                                    Annual          2019          2018 
                                     Growth 
                                      Rate 
 Profit & Loss Account-Quarterly                   Q4       Q3       Q4 
                                                GBP'm    GBP'm    GBP'm 
 
 Net interest income                             65.3     76.6     88.9 
 Net fee and other income(8)                     18.7     25.3     18.3 
 Net (losses)/gains on sale of 
  assets                                            -    (2.5)      2.0 
 Total underlying revenue            (23%)       84.0     99.4    109.2 
 
 Operating costs(8)                           (101.5)   (99.7)   (96.0) 
 Expected credit loss expense                   (5.4)    (1.9)    (2.0) 
 
 Underlying (loss)/profit before 
  tax                               (304%)     (22.9)    (2.2)     11.2 
 
 Underlying taxation                            (1.6)      1.0    (4.2) 
 
 Underlying (loss)/profit after 
  tax                               (450%)     (24.5)    (1.2)      7.0 
 
 Listing Share Awards                           (0.1)    (0.1)    (0.2) 
 FSCS levy                                        0.4        -        - 
 Impairment and write-down of 
  property plant & equipment and 
  intangible assets                            (74.8)        -    (3.0) 
 Net BCR costs                                  (1.1)        -    (1.9) 
 Transformation costs                           (3.9)    (0.8)        - 
 Remediation costs                             (22.3)    (2.8)        - 
 Derecognition of deferred tax                 (52.7)        -        - 
  asset 
 Statutory (loss)/profit after 
  tax                                         (179.0)    (4.9)      1.9 
                                             --------  -------  ------- 
 
 Underlying earnings per share 
  - basic                                     (14.2p)   (0.7p)     7.2p 
 Underlying earnings per share 
  - diluted                                   (14.2p)   (0.7p)     7.1p 
 Number of shares - undiluted                    172m     172m   97.4 m 
 Number of shares - diluted                      172m     172m   99.8 m 
 Net interest margin (NIM)                      1.30%    1.50%    1.76% 
 NIM + fees                                     1.85%    1.99%    2.12% 
 Cost of deposits                               0.87%    0.84%    0.67% 
 Cost of risk                                   0.14%    0.05%    0.06% 
 Underlying cost:income ratio                    120%     100%      88% 
 
 

8 . In the fourth quarter GBP4.6m of fee and commission expenses relating to 2019 that were previously classified as operating costs were reclassified as net fee and other income to better reflect their nature.

For more information, please contact:

Metro Bank PLC Investor Relations

Jo Roberts

+44 (0) 20 3402 8900

jo.roberts@metrobank.plc.uk

Metro Bank PLC Media Relations

Tina Coates / Abigail Whittaker

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

pressoffice@metrobank.plc.uk

Teneo

Charles Armitstead / Haya Herbert Burns

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

Metrobank@teneo.com

S

About Metro Bank

Metro Bank is celebrated for its exceptional customer experience. Its mobile app and online service achieved the top spot in the Competition and Market Authority's Service Quality Survey among personal and business current account holders in February 2020; the bank also ranked in the top two for overall service and store service for personal and business customers. It was awarded 'Best All Round Personal Finance Provider' at the Moneynet Personal Finance Awards 2019.

Offering retail, business, commercial and private banking services, it prides itself on giving customers the choice to Bank however, whenever and wherever they choose. Whether that's through its network of stores open seven days a week, early until late, 362 days a year; on the phone through its UK-based 24/7 contact centres; or online through its internet banking or award-winning mobile app: the bank offers customers real choice.

The bank employs around 3,500 colleagues and is headquartered in Holborn, London.

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

CHIEF EXECUTIVE OFFICER'S STATEMENT

I was delighted to join Metro Bank in September 2019, initially as Chief Transformation Officer and now as Chief Executive Officer. I would like to begin by extending my deepest thanks to all the Metro Bank colleagues who have welcomed me and more importantly have kept the customer focus at the heart of all we do, even during a challenging year.

Building on our strengths

In many ways, the response to the challenges of 2019 has demonstrated the underlying resilience of Metro Bank. The core strength of Metro Bank has been, and will remain, an AMAZEING group of colleagues who are tirelessly focused on customer service. It is our colleagues who will ensure Metro Bank achieves its ambition to become the UK's best community bank.

The CMA results, where Metro Bank was rated number 1 for store service and number 1 for mobile and online banking is external validation of what I have learned over the last few months - Metro Bank is completely focused on its customers. The ratings also show the commitment of Metro Bank to providing full-service community banking, instore, online and over the phone.

The energy expended to surprise and delight customers has continued to create FANS, even during a difficult 2019. Customer accounts grew almost 25% with 385,000 new accounts opened at Metro Bank during the year, bringing total accounts to more than 2 million. In addition, retail customer deposit balances grew 33% in the year and SME customer balances were up 3%.

Proving our community banking philosophy and 'clicks and bricks' model, combined with an exceptional level of service resonates well with customers we continue to be successful in growing the number of personal and business current accounts. Also in our current heartland of London and the South East the number of SME business current account switchers choosing Metro Bank remained strong in 2019 at 15%.

We're absolutely committed to bringing market-leading service to SMEs and injecting more competition into the market, and we have already demonstrated our success in deploying Capability & Innovation funds to date. For example, in 2019, Metro Bank launched Business Insights - an in-app account insights tool for SMEs, MCash - an on-demand cash collection and delivery service, and opened its first store in the North, in Manchester. In February 2020, we agreed a revised business case with BCR whereby we have aligned Metro Bank's public commitments with our new strategy, and will return GBP50m of the original GBP120m we were awarded. Looking forward, with a reduced amount of GBP70m, alongside Metro Bank's own investment of c.GBP140m, the bank will continue to transform the SME experience - through its market-leading service proposition, 15 new stores opening in the North of England (reduced from 30), and continued investment in its digital capabilities. With BCR's agreement, we're pleased to have been able to forge a new plan which delivers for SMEs and aligns with our new strategy.

The way forward - 'Becoming the UK's best community bank'

Over the last six months, my management team and I have worked with the Board to evaluate a new strategy for Metro Bank to enable it to deliver acceptable returns for shareholders. The inherent strengths of Metro Bank - AMAZEING culture, AMAZEING colleagues, AMAZEING customer service and a history of generating meaningful retail and SME deposit growth - provide solid foundations for a straightforward strategy where execution is key.

We have developed a set of strategic priorities with the ambition of becoming 'the UK's best community bank'. Community banking means being embedded in the local communities that we serve, ensuring local decision-making, providing access to simple and straightforward retail, business banking and corporate services that best meet the needs of residents and businesses in the surrounding area.

However, to build a platform that delivers acceptable returns for our shareholders, we must reduce the rate at which costs are growing, continue to evolve our customer proposition, invest efficiently in our infrastructure and be more effective with how we use our balance sheet to generate returns.

Our new strategy has these principles at its core:

1) Cost saving initiatives

Cost growth has outstripped revenue growth and this cannot continue. Metro Bank has invested heavily in its store estate, creating a significant fixed, or quasi-fixed, cost base. We have performed a detailed store by store financial analysis to consider whether it made economic sense to close stores. It doesn't. Every store is still growing - all are more profitable tomorrow than today - and they provide a significant untapped potential as a distribution channel.

There are another group of costs that are driven by the operations of the business. These processing costs, including things like payment processing, credit card processing, etc. are mostly volume driven and bound by existing contracts. Another difficult area for reducing costs over the short-term.

The remaining costs, the addressable costs, are made up of non-store colleague costs, non-store lease costs and non-store operations.

To effectively control these expenses, plans are in place to revisit our non-store property leases, especially in central London. In addition, the infrastructure investment in the plan includes several initiatives that allows Metro Bank to scale more effectively. This includes new digital self-service functionality, more straight through processing and new call centre infrastructure.

We expect low single digit 'run the bank' cost growth CAGR 2020 to 2024, allowing the cost:income ratio to fall to 70-75% by 2024. To enable this objective, we will spend GBP250-GBP300 million of new opex investment (excluding depreciation and amortisation) and c.GBP100 million of capex, front end loaded.

We have started to show our ability to moderate costs with sequential reductions in the pace of cost growth through 2019, and our revised agreement with BCR will allow us to become more cost efficient quicker while continuing to deliver for SMEs. This gives me great confidence that we can deliver our clear initiatives within the stated timeframe.

While there are a number of initiatives to contain costs, improving shareholder returns is a revenue story. It is about creating scale through deposit and revenue growth while holding costs and investments.

2) Revenue initiatives

There is significant opportunity to grow revenue at Metro Bank, through building stronger relationships with our existing customers, continuing to attract more people to our stores, embedding ourselves in more communities in the UK, continuing to invest in our number 1 rated digital and online offering and to upgrade our telephony infrastructure. This is a bricks, clicks and phone strategy that will drive revenue.

We need to deepen relationships with our customers by improving the range of our products and their availability through new and existing channels. For example, we intend to meet more customer needs by offering a broader range of unsecured customer loans, SME lending products, business and personal credit cards and niche mortgages, all while maintaining our disciplined attitude towards underwriting. This is an area Metro Bank has not previously focused on, evidenced by the fact that we currently sell an average of 2 unsecured personal loans per store per month and only 3% of our Personal Current Account base hold our credit cards.

It also aligns perfectly with our customer service ethos, by meeting more customer needs, we create more FANS. We will also build on Metro Bank's great strength of winning new customers and I believe that there is a significant opportunity to enhance footfall conversion in stores. We will do this by developing more effective in-store processes and improving colleague training.

Whilst we have grown our deposits at a CAGR of 30% over the last five years, our strategy conservatively budgets significantly lower deposit growth numbers over the next five years. In addition, 2020 has the lowest deposit growth forecast of any year in the plan and is only 25% of our annual deposit growth in 2018, even though Metro bank has six more stores.

Revenue growth is predicated on doing more with what we already have. The growth does not rely on significant store growth, although the plan does allow us to open of a limited number of new stores. This includes six stores in 2020 and a further 18 between 2021-2024 including our revised C&I commitment. This will give us the opportunity to embed Metro Bank in more communities and bring our award-winning proposition closer to more people.

3) Infrastructure

We need to continue to build our number 1 service propositions in store and digital/online to ensure we continue to offer the best channel experience in an efficient way. To enable this, we need to continue to invest in our digital and physical infrastructure to deliver process improvements and enhance our core capabilities. We will continue to invest in stores, but in a more cost-efficient way - our new stores will be flexible in both size and design and we'll aim to streamline and improve in store processes. We'll also grow our digital service offering and build out customer self-service opportunities. By pivoting towards greater automation we will improve our speed to market and streamline back-office functions.

It's important that all of this is done whilst also enhancing our internal capabilities and resilience. This will be executed through investment in cyber resilience as well as investment in core risk systems such as financial crime infrastructure. We will of course continue investment in our core IT systems to ensure that we keep pace with the ever-changing regulatory agenda.

4) Balance sheet optimisation

Metro Bank has not focused on risk adjusted return on regulatory capital as much as is required to drive adequate returns to shareholders. Focusing on risk adjusted returns and growth in tangible book value will allow better planning decisions to be made going forward and deliver more value to shareholders.

Business lines, portfolios and investments will be reviewed based on the above discipline on an ongoing basis. We will sell assets, securitise portfolios and rethink investment spend as necessary to ensure we are maximising the return on the balance sheet.

The loan portfolio composition will shift over the life of the plan. Unsecured credit will be offered to SME and retail customers, applying risk based pricing. Niche mortgage lending will become a larger share of our mortgage operations and commercial lending to our valued customers will continue to grow.

5) Internal and external communications

I am pleased that we have launched our first marketing campaign - People-People Banking - which showcases our incredible colleagues and helps customers and potential customers to understand Metro Bank's differentiators. We will set realistic expectations of the future direction of Metro Bank and update on progress in a timely manner. For our colleagues we will continue to provide full transparency to help inform and equip them to fulfil their roles and maintain our already high levels of engagement.

A challenging 2019

Last year, we faced headwinds from industry-wide competitive pressures, an evolving regulatory landscape, continued low interest rates and political uncertainty from Brexit. While these external challenges have dampened returns across the broader sector, Metro Bank faced specific challenges that impacted growth and profitability. These have been well trailed in previous announcements, and management undertook prudent steps to manage our capital and liquidity positions in response. Although these actions have impacted on profitability in the short to medium term, we enter 2020 with a resilient balance sheet, loyal FANS and a committed colleague base.

In closing, it would be remiss not to thank Vernon Hill and Craig Donaldson for all they have done for Metro Bank since it opened the doors to its first store 10 years ago. I truly appreciate the AMAZEING colleagues they have recruited into the business. It is these colleagues that give me confidence in the future of Metro Bank.

Dan Frumkin

Chief Executive Officer

Financial review

The challenges we have faced this year are reflected in our trading performance for 2019. Our underlying loss before tax of GBP11.7 million is a decrease from the GBP50.0 million underlying profit we reported in 2018. This reduction reflects a difficult market backdrop driven by sustained mortgage market competition, low interest rates, the earnings impact of debt issuance, and the adoption o f IFRS 16 that changed how we account for our lease costs. We are also absorbing the financial impacts of management actions taken to maintain a strong capital and liquidity position following events of the first half of the year. The sale of GBP1.5 billion interest-bearing treasury assets, a GBP521 million loan portfolio disposal, adjustments to deposit pricing and a slower pace of loan growth have reduced revenue in the second half of the year. The statutory loss before tax of GBP130.8 million in 2019 reflects the impact of certain non-recurring items including the write-down of certain intangible assets as well as transformation and remediation costs.

Despite these challenges we have continued to deliver on key objectives. During 2019 we made good progress with our cost transformation programme, reducing the pace of cost growth in the second half of the year relative to prior periods, whilst continuing to expand our physical presence and product offering. We have also been successful in growing our customer base and deepening relationships with existing customers, driving higher underlying net fee and other income to GBP90.4 million, up 43% from GBP63.3 million in 2018. Asset quality has remained strong, with 2019 cost of risk at 0.08% compared to 0.07% in the prior year. Our strongly performing credit portfolios and a robust capital and liquidity position stands us in good stead as we enter 2020.

Deposits

Deposits from customers ended the year at GBP14.5 billion, with a reduction in the first half of the year driven by the intense speculation that preceded the GBP375 million equity capital raise in May 2019. Deposit withdrawals predominantly came from a limited number of our larger commercial customers with commercial deposit balances (excluding SMEs) reducing to GBP2.5 billion from GBP5.1 billion in 2018.

 
                                             2019          2018 
Customer deposits                     GBP'billion   GBP'billion  Change 
-----------------------------------  ------------  ------------  ------ 
Retail customers (excluding retail 
 partnerships)                                6.9           5.2     33% 
-----------------------------------  ------------  ------------  ------ 
Retail partnerships                           1.8           2.2   (18%) 
-----------------------------------  ------------  ------------  ------ 
Commercial customers (excluding 
 SMEs)                                        2.5           5.1   (51%) 
-----------------------------------  ------------  ------------  ------ 
SMEs                                          3.3           3.2      3% 
-----------------------------------  ------------  ------------  ------ 
Total customer deposits                      14.5          15.7    (8%) 
-----------------------------------  ------------  ------------  ------ 
 

Retail and SME deposits displayed significant resilience in 2019. Retail deposits (excluding retail partnerships) continued to grow through the year to GBP6.9 billion from GBP5.2 billion in 2018, supported in part by competitively priced fixed-term retail savings. We also reported a 3% improvement in the SME deposit base, which ended the year at GBP3.3 billion, compared to GBP3.2 billion in 2018, demonstrating the strength of our SME proposition. These stable and higher-liquidity value retail and SME deposits now represent 48% and 23% of our deposit base respectively, up from 33% and 20% as at 31 December 2018.

 
                                2019          2018 
                         GBP'million   GBP'million  Change 
----------------------  ------------  ------------  ------ 
Deposits                      14,477        15,661    (8%) 
----------------------  ------------  ------------  ------ 
Customer accounts (m)            2.0           1.6     25% 
----------------------  ------------  ------------  ------ 
% current accounts               29%           30%   (1pp) 
----------------------  ------------  ------------  ------ 
Cost of deposits               0.78%         0.61%   17bps 
----------------------  ------------  ------------  ------ 
 

Strong service recognition results, increasing brand awareness and new store openings as well as competitive pricing on our fixed-term retail savings products aided growth in the total number of customer accounts. 2019 was a strong year for customer acquisition, with the number of customer accounts growing to 2.0 million from 1.6 million at year-end 2018.

Deposit growth into 2020 and beyond, alongside excess liquidity and wholesale funding, will support the repayment of drawdowns under the bank of England's Term Funding Scheme ("TFS"). Our total borrowings under the scheme are GBP3.8 billion of which GBP543 million is repayable in the second half of 2020.

Assets

Total assets reduced marginally to GBP21.4 billion from GBP21.6 billion at the end of 2018, which primarily reflects a GBP1.1 billion reduction in treasury assets, partially offset by a GBP0.4 billion increase in net loans and advances to customers and a one-off GBP313 million increase in right-of-use lease assets following the adoption of IFRS 16. The reduction in treasury assets reflects the sale of non-LCR eligible assets to prudently manage the bank's liquidity position through the year.

 
                                          2019          2018 
                                   GBP'million   GBP'million  Change 
--------------------------------  ------------  ------------  ------ 
Loans and advances to customers         14,681        14,235      3% 
--------------------------------  ------------  ------------  ------ 
Total assets                            21,400        21,647    (1%) 
--------------------------------  ------------  ------------  ------ 
Loan to deposit ratio                     101%           91%    10pp 
--------------------------------  ------------  ------------  ------ 
Cost of risk                             0.08%         0.07%       - 
--------------------------------  ------------  ------------  ------ 
 

Despite the GBP521 million disposal of a previously acquired loan portfolio, net loans and advances increased by 3% to GBP14.7 billion (31 December 2018: GBP14.2 billion). The disposed portfolio was not considered a strategic asset, with its sale having no impact on our customer franchise given it was continually serviced by an external provider. Lending growth in the year was primarily driven by the ongoing support of our existing franchise and fulfilment of our committed pipeline at the end of 2018 flowing through during the first months of the year. As the year progressed, lending growth slowed as we proactively managed our loan to deposit ratio and looked to reduce our exposure to higher risk-density commercial lending following the RWA adjustment in January 2019. Commercial lending as a percentage of total lending reduced to 28% from 31% in 2018.

Our loan to deposit ratio increased during the first half of 2019 to 109% at 30 June 2019 from 91% at the end of 2018 following growth in customer loans. However, we made good progress in reducing the ratio in the second half of the year, supported by a return to deposit growth in the third and fourth quarters and management of lending volumes through upward adjustments to asset pricing.

Asset quality remained particularly robust in 2019 with cost of risk broadly remaining flat at 0.08% compared to 0.07% in the previous year. Non-performing loans increased to 0.53% from 0.15% in 2018 reflecting seasoning of the loan portfolio and a single name commercial exposure.

Income

Total underlying income decreased marginally year-on-year to GBP400.1 million from GBP404.1 million, reflecting a 3% reduction in interest earning assets to GBP20.3 billion and interest income pressure driven by sustained competition in the residential mortgage market, offset by a 43% increase in underlying net fee and other income. Interest expense increased to GBP188.1 million from GBP114.3 million and captures the full year expense of the GBP250 million subordinated Tier 2 notes issued in June 2018 and one quarter of interest on the GBP350 million senior non-preferred notes issued in October 2019. Cost of deposits has risen to an average of 78bps for full-year 2019, from 61bps in 2018 reflecting competitive pricing in retail fixed-term savings and absorption of the impact of the August 2018 Bank of England base rate rise.

The adoption of IFRS 16, the new leasing standard, also had an impact on net interest income through the recognition of an interest charge on the lease liability, partly offset by a reduction in lease expenses. The net effect was a c.GBP18 million reduction in revenue. Given growth in our store network and our relatively young lease portfolio, the impact is more pronounced for us compared with many of our peers.

The above trends resulted in a year-on-year reduction in our net interest margin ("NIM") to 1.51% from 1.81%.

 
NIM Reconciliation                  Reconciliation 
----------------------------------  -------------- 
2018 Full Year Net Interest Margin          181bps 
----------------------------------  -------------- 
IFRS 16 adoption                              7bps 
----------------------------------  -------------- 
Treasury assets (incl. disposal)              8bps 
----------------------------------  -------------- 
Lending yield                                 5bps 
----------------------------------  -------------- 
Cost of deposits                             12bps 
----------------------------------  -------------- 
Debt cost                                    11bps 
----------------------------------  -------------- 
Loan-to-deposit ratio and other              13bps 
----------------------------------  -------------- 
2019 Full Year Net Interest Margin          151bps 
----------------------------------  -------------- 
 

The income impact from the reduction in NIM was partly offset by the strong growth in fee and commission income, up 43% year-on-year to GBP90 million (2018: GBP63 million) on the statutory basis. Non-interest income growth has been an area of focus for the bank throughout 2019, with the increase driven by optimisation of fee structures, strong growth in customer accounts and the introduction of new value-added products and services. Net fee and other income (excluding net gains on sale of assets) as a percentage of total revenue has increased to 24% from 16% in 2018. Given our strong focus on customer service and further expansion of our product offering for SMEs, we expect non-interest income to continue to grow in 2020.

Operating expenses

 
                                        2019          2018 
                                 GBP'million   GBP'million  Change 
------------------------------  ------------  ------------  ------ 
Depreciation and amortisation           76.4          45.1     69% 
------------------------------  ------------  ------------  ------ 
Total operating expense                534.7         355.5     50% 
------------------------------  ------------  ------------  ------ 
Total underlying expenses              400.1         346.1     16% 
------------------------------  ------------  ------------  ------ 
Statutory cost:income ratio             129%          88 % 
------------------------------  ------------  ------------  ------ 
Underlying cost:income ratio            100%           86% 
------------------------------  ------------  ------------  ------ 
 

Underlying operating expenses grew by 16% during the year to GBP400.1 million. Given our focus on improving cost efficiency, the pace of cost growth slowed in the second half of 2019 to just 2% versus the first half. The increase in operating expenses primarily reflects the expansion of our store footprint driving higher people and occupancy costs and growth in regulation and technology costs.

Depreciation and amortisation grew to GBP76.4 million during 2019 (2018: GBP45.1 million) reflecting growth in the store network to 71 stores (2018: 65) and ongoing investment in IT and digital to support our integrated offering. The introduction of IFRS 16 lease accounting on 1 January 2019 also led to a depreciation charge on the right-of-use asset amounting to GBP16 million.

The underlying cost/income ratio increased to 100% in 2019 from 86% in 2018, driven by the income challenges outlined above. The bank-wide efficiency programme that is now embedded in the organisation will help to partially offset expected income pressure in 2020 by moderating the pace of operating expense growth.

The difference between underlying loss before tax of GBP11.7 million and statutory loss before tax of GBP130.8 million is driven by the write-down of certain intangible assets as well as costs relating to the bank-wide transformation programme and the remediation work undertaken following the RWA adjustment in January 2019 and work undertaken in relation a review of the bank's sanctions procedures. The RWA remediation programme is focused on improving risk-related internal systems, processes, controls and governance and is expected to be completed in 2020.

Stores

During 2019 we opened six stores, including the entry into new regions in the Midlands and the North. The opening in Manchester is the first to be delivered as part of our BCR commitments, and together with the new stores in the Birmingham area, represent an important phase of growth into SME hotspots outside of our existing geographical footprint.

At the year-end we had 71 stores and in early 2020 we opened in Wolverhampton, Cardiff and Hammersmith. Going forward we will maximise the existing estate and selectively expand in strategic locations. We will adapt the new store formats to fit the communities that we will be serving, often with smaller sites, yet retaining the exceptional levels of service our customers expect.

Taxation

During 2019 we made a total tax contribution of GBP123.1 million (2018: GBP120.3 million), which comprised GBP78.2 million (2018:GBP78.4 million) of taxes we paid and a further GBP44.9 million (2018: GBP41.9 million) of taxes we collected.

 
Taxes paid                          2019      2018 
------------------------------  --------  -------- 
Corporation tax                     1.6%      4.6% 
------------------------------  --------  -------- 
Business rates                     12.9%     11.5% 
------------------------------  --------  -------- 
Land transaction tax                3.3%      6.3% 
------------------------------  --------  -------- 
Employer NICs                      20.6%     18.7% 
------------------------------  --------  -------- 
Irrecoverable VAT and Customs 
 duty                              61.3%     58.8% 
------------------------------  --------  -------- 
Other                               0.3%      0.1% 
------------------------------  --------  -------- 
Total taxes paid                GBP78.2m  GBP78.4m 
------------------------------  --------  -------- 
 
 
Taxes collected on behalf of HMRC       2019      2018 
----------------------------------  --------  -------- 
Employee NICs                          23.6%     22.3% 
----------------------------------  --------  -------- 
PAYE                                   62.1%     61.2% 
----------------------------------  --------  -------- 
Net VAT                                14.3%     15.4% 
----------------------------------  --------  -------- 
Other                                      -      1.1% 
----------------------------------  --------  -------- 
Total taxes paid                    GBP44.9m  GBP41.9m 
----------------------------------  --------  -------- 
 

In 2019 our tax expense recognised in the income statement was GBP51.8 million (2018: GBP13.5 million). This

primarily relates to the derecognition of the deferred tax asset for unused tax losses. This is an accounting non-cash item and does not impact our regulatory capital or liquidity. The derecognition reflects the impact on our short-term results of the investment announced as part of our strategy. Our effective tax rate for the year was (39.5%) (2018: 33.2%).

Capital

We have maintained a robust capital position throughout 2019, supported by the GBP375 million equity capital raise in May 2019 and a slowdown in the pace of RWA growth, up 2% to GBP9.2 billion. Although the January 2019 adoption of IFRS 16 and RWA adjustment resulted in one-off capital impacts, our CET1 ratio remained above both our 12.0% minimum target and our 10.6% minimum regulatory requirement. Our 15.6% CET1 ratio and 18.3% total capital ratio demonstrate the strength of our capital position and provide headroom for controlled growth and the delivery of our strategy.

 
                                                    Reconciliation 
--------------------------------------------------  -------------- 
Total capital ratio at 31 December 2018                      15.9% 
--------------------------------------------------  -------------- 
IFRS16 Adoption (capital charge against new right 
 of use assets)                                             (0.5%) 
--------------------------------------------------  -------------- 
Annual operational risk increment                           (0.3%) 
--------------------------------------------------  -------------- 
Organic Lending Growth                                      (0.4%) 
--------------------------------------------------  -------------- 
Profit & Loss Account                                       (0.7%) 
--------------------------------------------------  -------------- 
Investment in Intangibles and other                         (0.6%) 
--------------------------------------------------  -------------- 
Asset Disposals                                               1.0% 
--------------------------------------------------  -------------- 
2019 Equity Raise                                             3.9% 
--------------------------------------------------  -------------- 
Total capital ratio at 31 December 2019                      18.3% 
--------------------------------------------------  -------------- 
Senior unsecured debt (issued October 2019)                   3.8% 
--------------------------------------------------  -------------- 
Total capital plus MREL ratio at 31 December 2019            22.1% 
--------------------------------------------------  -------------- 
 

The senior non-preferred debt issuance in October 2019 ensured compliance with our interim MREL requirement of 18% of RWAs plus 3.5% regulatory buffers, with the bank closing 2019 with a total capital plus MREL ratio of 22.1%.

Other regulatory developments include the announcement in December 2019 by the bank of England of a change in the countercyclical capital buffer ("CCyB") to 2.00% from 1.00% currently, which is binding from 16 December 2020. Reflecting the additional resilience associated with higher macroprudential buffers, the PRA has said that it will consult banks on the potential reduction on variable capital requirements in order to leave overall loss-absorbing capacity (capital plus bail-inable debt) requirements broadly unchanged.

 
                                   2019          2018 
                            GBP'million   GBP'million 
-------------------------  ------------  ------------ 
CET1 capital                      1,427         1,171 
-------------------------  ------------  ------------ 
Risk-weighted assets 
 ("RWAs")                         9,147         8,936 
-------------------------  ------------  ------------ 
CET1 ratio                        15.6%         13.1% 
-------------------------  ------------  ------------ 
Total regulatory capital 
 ratio                            18.3%         15.9% 
-------------------------  ------------  ------------ 
Total regulatory capital 
 plus MREL ratio                  22.1%           N/A 
-------------------------  ------------  ------------ 
Regulatory leverage 
 ratio                             6.6%          5.4% 
-------------------------  ------------  ------------ 
Leverage                           8.3%          6.4% 
-------------------------  ------------  ------------ 
 

Looking ahead

 
                                     FY2020                                                                                    FY 2024 
                                    Guidance                                                    Targets                                                     Guidance 
            --------------------------------------------------------  ----------------------------------------------------------  ------------------------------------------------------------- 
 Deposits 
               *    Mid-single digit growth                              *                                                            *    Cost of deposits to reduce over time as the mix of 
                                                                                                                                           current accounts increases 
 
                                                                         * 
            --------------------------------------------------------  ----------------------------------------------------------  ------------------------------------------------------------- 
 Revenue 
               *    NIM in line with Q4 2019                             *    NIM expansion vs FY 2019                                *    Target lending mix (75% mortgages, 20% SME and 5% 
                                                                                                                                           unsecured) 
 
                                                                         *    Fee and other income to increase as proportion of 
                                                                              revenue mix 
 
 
                                                                         *    15-30 bps cost of risk 
            --------------------------------------------------------  ----------------------------------------------------------  ------------------------------------------------------------- 
 Operating 
  Costs       *    Mid-high-single digit growth excluding investment    *    New investment spend GBP250-GBP300m opex (excluding      *    'Run the bank' cost low single digit CAGR 2020-2024 
                   opex                                                      depreciation and amortisation) and c.GBP100m capex 
                                                                       by 
                                                                             2024, front-end loaded 
 
 
                                                                        *    Cost income ratio 70-75% by 2024 (incl. new 
                                                                             investment spend, amortisation and depreciation) 
            --------------------------------------------------------  ----------------------------------------------------------  ------------------------------------------------------------- 
 Capital 
                    *    CET1 ratio >12%                                *    Minimum 12% CET1 and >22.5% Total Capital plus MREL      *    Additional MREL issuance post Jan 2022 in line with 
                                                                                                                                           regulatory requirements 
 
                                                                        *    Up to GBP500m of MREL issuance before 1 Jan 2022 
            --------------------------------------------------------  ----------------------------------------------------------  ------------------------------------------------------------- 
 Returns 
                                                                         *    8.5% statutory RoTE by FY2024                          *    Conservative target prudently excludes impact of AIRB 
                                                                                                                                          approval 
            --------------------------------------------------------  ----------------------------------------------------------  ------------------------------------------------------------- 
 

The statements above were authorised by the Board for issue on 26 February 2020.

CONSOLIDATED condensed STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEARED 31 DECEMBER 2019

 
                                                                Year ended    Year ended 
                                                               31 December   31 December 
                                                                      2019          2018 
                                                       Notes   GBP'million   GBP'million 
----------------------------------------------------  ------  ------------  ------------ 
Interest income                                            2         496.2         444.4 
Interest expense                                           2       (188.1)       (114.3) 
----------------------------------------------------  ------  ------------  ------------ 
Net interest income                                                  308.1         330.1 
Fee and commission income                                             67.4          42.5 
Fee and commission expense                                           (6.4)         (4.9) 
----------------------------------------------------  ------  ------------  ------------ 
Net fee and commission income                                         61.0          37.6 
Net gains on sale of assets                                            1.6          10.7 
Other income                                                          44.9          25.7 
----------------------------------------------------  ------  ------------  ------------ 
Total income                                                         415.6         404.1 
----------------------------------------------------  ------  ------------  ------------ 
General operating expenses                                         (380.6)       (305.6) 
                                                          8, 
Depreciation and amortisation                              9        (76.4)        (45.1) 
Impairment and write-off of property, plant,              8, 
 equipment and intangible assets                           9        (77.7)         (4.8) 
----------------------------------------------------  ------  ------------  ------------ 
Total operating expenses                                           (534.7)       (355.5) 
Expected credit loss expense                                        (11.7)         (8.0) 
----------------------------------------------------  ------  ------------  ------------ 
(Loss)/profit before tax                                           (130.8)          40.6 
----------------------------------------------------  ------  ------------  ------------ 
Taxation                                                   3        (51.8)        (13.5) 
----------------------------------------------------  ------  ------------  ------------ 
(Loss)/profit for the year                                         (182.6)          27.1 
----------------------------------------------------  ------  ------------  ------------ 
Other comprehensive expense for the year 
Items which will be reclassified subsequently 
 to profit or loss: 
Movement in respect of investment securities 
 held at fair value through other comprehensive 
 income (net of tax): 
 
  *    changes in fair value                                           2.7         (2.4) 
 
  *    fair value changes transferred to the income 
       statement on disposal                                         (2.4)         (1.5) 
----------------------------------------------------  ------  ------------  ------------ 
Total other comprehensive income/(expense)                             0.3         (3.9) 
----------------------------------------------------  ------  ------------  ------------ 
Total comprehensive (loss)/profit for the 
 year                                                              (182.3)          23.2 
----------------------------------------------------  ------  ------------  ------------ 
Earnings per share 
----------------------------------------------------  ------  ------------  ------------ 
Basic (pence)                                             13       (123.9)          29.1 
----------------------------------------------------  ------  ------------  ------------ 
Diluted (pence)                                           13       (123.9)          28.2 
----------------------------------------------------  ------  ------------  ------------ 
 

CONSOLIDATED condensed BALANCE SHEET

AS AT 31 DECEMBER 2019

 
                                                           31 December   31 December 
                                                                  2019          2018 
                                                   Notes   GBP'million   GBP'million 
-------------------------------------------------  -----  ------------  ------------ 
Assets 
Cash and balances with the bank of England             5         2,989         2,472 
Loans and advances to customers                        6        14,681        14,235 
Investment securities held at fair value through 
 other comprehensive income ("FVOCI")                  7           411           674 
Investment securities held at amortised cost           7         2,154         3,458 
Property, plant and equipment                          8           856           454 
Intangible assets                                      9           168           197 
Prepayments and accrued income                                      66            66 
Deferred tax asset                                     3             -            41 
Other assets                                                        75            50 
-------------------------------------------------  -----  ------------  ------------ 
Total assets                                                    21,400        21,647 
-------------------------------------------------  -----  ------------  ------------ 
Liabilities 
Deposits from customers                                         14,477        15,661 
Deposits from central banks                                      3,801         3,801 
Debt securities                                                    591           249 
Repurchase agreements                                              250           344 
Derivative financial liabilities                                     8             1 
Lease liabilities                                     14           341             - 
Deferred grant                                        10            50             - 
Provisions                                                          17             2 
Deferred tax liability                                 3            15             - 
Other liabilities                                                  267           186 
-------------------------------------------------  -----  ------------  ------------ 
Total liabilities                                               19,817        20,244 
-------------------------------------------------  -----  ------------  ------------ 
Equity 
Called-up share capital                               11             -             - 
Share premium                                         11         1,964         1,605 
Retained earnings                                                (392)         (209) 
Other reserves                                                      11             7 
-------------------------------------------------  -----  ------------  ------------ 
Total equity                                                     1,583         1,403 
-------------------------------------------------  -----  ------------  ------------ 
Total equity and liabilities                                    21,400        21,647 
-------------------------------------------------  -----  ------------  ------------ 
 

CONSOLIDATED condensed STATEMENT OF CHANGES IN EQUITY

FOR THE YEARED 31 DECEMBER 2019

 
                                     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 as at 1 January 2019                 -         1,605         (209)           (3)            10         1,403 
--------------------------------  ------------  ------------  ------------  ------------  ------------  ------------ 
Net loss for the year                        -             -         (183)             -             -         (183) 
Other comprehensive income 
(net of tax) relating to 
investment securities 
designated 
at fair value through other 
comprehensive income                         -             -             -             -             -             - 
-------------------------------   ------------  ------------  ------------  ------------  ------------  ------------ 
Total comprehensive loss                     -             -         (183)             -             -         (183) 
Shares issued                                -           375             -             -             -           375 
Cost of shares issued                        -          (16)             -             -             -          (16) 
Net share option movements                   -             -             -             -             4             4 
--------------------------------  ------------  ------------  ------------  ------------  ------------  ------------ 
Balance as at 31 December 
 2019                                        -         1,964         (392)           (3)            14         1,583 
--------------------------------  ------------  ------------  ------------  ------------  ------------  ------------ 
Balance as at 1 January 2018                 -         1,304         (236)             1            16         1,085 
--------------------------------  ------------  ------------  ------------  ------------  ------------  ------------ 
Net profit for the year                      -             -            27             -             -            27 
Other comprehensive expense 
 (net of tax) relating to 
 investment securities 
 designated 
 at fair value through other 
 comprehensive income                        -             -             -           (4)             -           (4) 
--------------------------------  ------------  ------------  ------------  ------------  ------------  ------------ 
Total comprehensive income                   -             -            27           (4)             -            23 
Shares issued                                -           304             -             -             -           304 
Cost of shares issued                        -           (3)             -             -             -           (3) 
Net share option movements                   -             -             -             -           (6)           (6) 
--------------------------------  ------------  ------------  ------------  ------------  ------------  ------------ 
Balance as at 31 December 
 2018                                        -         1,605         (209)           (3)            10         1,403 
--------------------------------  ------------  ------------  ------------  ------------  ------------  ------------ 
 
Notes                                       11            11 
--------------------------------  ------------  ------------  ------------  ------------  ------------  ------------ 
 

CONSOLIDATED condensed CASH FLOW STATEMENT

FOR THE YEARED 31 DECEMBER 2019

 
                                                                                  Year 
                                                              Year ended         ended 
                                                             31 December   31 December 
                                                                    2019          2018 
                                                     Notes   GBP'million   GBP'million 
---------------------------------------------------  -----  ------------  ------------ 
Reconciliation of (loss)/profit before tax 
 to net cash flows from operating activities: 
(Loss)/profit before tax                                           (131)            41 
Adjustments for: 
Impairment and write-off of property, plant, 
 equipment and intangible assets                      8, 9            78             5 
Interest on lease liabilities                                         18             - 
Depreciation and amortisation                         8, 9            76            45 
Share option charge                                                    4             5 
Grant income recognised in income statement                         (16)             - 
Amounts provided for                                                  12             - 
Gain on sale of assets and fair value gains 
 on derivatives                                                      (2)          (11) 
Accrued interest on and amortisation of investment 
 securities                                                          (8)           (7) 
Changes in operating assets and liabilities 
Changes in loans and advances to customers                         (445)       (4,615) 
Changes in deposits from customers                               (1,184)         3,992 
Changes 
 in other 
 operating 
 assets                                                             (26)          (36) 
Changes in other operating liabilities                              (31)           734 
---------------------------------------------------  -----  ------------  ------------ 
Net cash (outflows)/inflows from operating 
 activities                                                      (1,655)           153 
---------------------------------------------------  -----  ------------  ------------ 
Cash flows from investing activities 
Sales of investment securities                                     2,193         1,522 
Purchase of investment securities                                  (618)       (1,740) 
Purchase of property, plant and equipment                8         (120)         (150) 
Purchase and development of intangible assets            9          (79)          (75) 
---------------------------------------------------  -----  ------------  ------------ 
Net cash inflows/(outflows) from investing 
 activities                                                        1,376         (443) 
---------------------------------------------------  -----  ------------  ------------ 
Cash flows from financing activities 
Shares issued                                           11           375           304 
Cost of shares issued                                   11          (16)           (3) 
Debt securities issued                                               350           250 
Cost of debt securities issued                                       (8)           (1) 
Grant received                                                       120             - 
Repayment of capital element of leases                              (25)             - 
---------------------------------------------------  -----  ------------  ------------ 
Net cash inflows from financing activities                           796           550 
---------------------------------------------------  -----  ------------  ------------ 
Net increase in cash and cash equivalents                            517           260 
Cash and cash equivalents at start of year               5         2,472         2,212 
---------------------------------------------------  -----  ------------  ------------ 
Cash and cash equivalents at end of year                 5         2,989         2,472 
---------------------------------------------------  -----  ------------  ------------ 
 
 

NOTES

1. Basis of preparation and significant accounting policies

Basis of preparation

The Group's consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the EU, the IFRS Interpretations Committee ("IFRS IC") and the Companies Act 2006 applicable to companies reporting under IFRS.

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

Changes in accounting policy and disclosures

The accounting policies and methods of computation are consistent with those applied and disclosed in the Group's 2018 Annual Report and Accounts other than changes owing to the adoption of IFRS 16 'leases'. Where disclosures have been amended as a result of the adoption of IFRS 16, the updated policy has been included within these preliminary results.

IFRS 16 'leases'

On 1 January 2019 the Group adopted IFRS 16. IFRS 16 provides guidance on the classification, recognition and measurement of leases to help provide useful information to the users of financial statements. IFRS 16 replaces IAS 17 'leases' and provides a single lessee accounting model, requiring lessees to recognise right of use ("RoU") assets and lease liabilities for all applicable leases, with operating leases thus being brought onto the face of the balance sheet.

Transition approach

The Group adopted IFRS 16 on the modified retrospective basis and as such the comparators within these financial statements have not been restated and continue to be presented under IAS 17. The Group elected to adopt IFRS 16 using the modified retrospective basis as this prevents an opening adjustment to equity and as such maintained the Group's CET1 capital upon transition.

On adoption of the standard on 1 January 2019, the Group recognised lease liabilities for operating leases of GBP328 million. The Group elected the transitional option to set the RoU asset equal to the related lease liability for all leases as at 1 January 2019 and therefore there was no opening adjustment to retained earnings. The total amount of RoU asset recognised on 1 January was GBP313 million, this differs to the opening lease liability due to adjustments being made for the amounts accrued in respect of rent free periods and any prepaid rentals as at the point of transition.

Key estimates

The only key estimate made at the point of transition was the discount rate used to measure lease liabilities. Under IFRS 16 lease payments are discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group's incremental borrowing rate. Due to the interest rate implicit in the lease not being readily determinable for any leases at transition the Group's incremental cost of borrowing was used. The weighted average discount rate at transition was 5.5% and was determined by reference to the rate that the Group would be able to borrow in the market for similar assets on a similar basis (i.e. secured) and over a similar time period. The table below shows what the impact would have been on the opening lease liability had the discount rate been one per cent higher or lower.

 
                                          Decrease in        Increase in 
                                     weighted average   weighted average 
                                        discount rate      discount rate 
                                              to 4.5%            to 6.5% 
                                          GBP'million        GBP'million 
----------------------------------  -----------------  ----------------- 
Lease liability at 1 January 2019                 357                303 
----------------------------------  -----------------  ----------------- 
 

Key judgements

A key judgement was made in regards to whether the Group will exercise any breaks contained within its leases as this has a significant impact on the measurement of the lease liability. The majority of the Group's leases are around 25 years in length and a proportion of these have break clauses part way through. At transition it has been assumed all leases will be retained for their full term, unless there is a specific plan to vacate the site at an early break point in which case the lease term is deemed to be the period up until that point. This is consistent with the period of time over which leasehold improvements are depreciated over.

Practical expedients

The available practical expedients of exempting leases with a short life (less than 12 months) or low value (less than GBP5,000) on an ongoing basis has been applied. These leases will continue to be recognised on a straight line basis over the lease term and in total are immaterial to the Group. As a result, the key leases to which the full requirements of IFRS 16 have been applied are property leases of stores and head office sites. At transition there were no leases of 12 months or less (or any longer term leases in their final year) other than those that had a value of below GBP5,000. The total value of low lease assets at transition was immaterial.

Impact on the financial statements

Due to the Group's young age coupled with its store opening profile over recent years, the vast majority of leases remain in the first half of their terms, with an average remaining lease length of 20 years. The Group's current business model will also see it continue to open stores in the years ahead, albeit at a slower pace, leading to an expanding lease portfolio. These two factors led to higher charges recognised in the income statement in the near term when compared to IAS 17, reflecting a different profile of cost recognition under each standard. Charges under IFRS 16 are front loaded in the earlier years of a lease compared to IAS 17 which requires lease expenses to be recognised on a straight line basis.

Net interest margin ("NIM") is reduced by the adoption of IFRS 16 since the rental expense (part of operating expenses) under IAS 17 will be replaced by a depreciation and an interest expense charge. The interest expense is recognised within NIM, thus reducing it on an ongoing basis.

As stated above IFRS 16 has been adopted on a modified retrospective basis and as such there is no adjustment to equity upon transition. A new RoU asset and lease liability are included on the balance sheet. The addition of the RoU asset has had an impact on regulatory capital as this has a 100% risk weighting, compared to no risk weighting when these were held off balance sheet under IAS 17.

The table below reconciles the undiscounted lease commitments as at 31 December 2019 to the opening lease liability and RoU recognised under IFRS 16 on 1 January 2019.

 
                                                            GBP'million 
----------------------------------------------------------  ----------- 
Total undiscounted lease commitments at 31 December 
 2018 (See note 14)                                                 659 
----------------------------------------------------------  ----------- 
Exclusion of VAT from lease liability                             (116) 
Discounting at a weighted average rate of 5.5%                    (215) 
----------------------------------------------------------  ----------- 
Lease liability included in the statement of financial 
 position at 1 January 2019                                         328 
----------------------------------------------------------  ----------- 
Less amounts previously recognised in respect of prepaid 
 rentals and rent free periods                                     (15) 
----------------------------------------------------------  ----------- 
Right of use asset included in the statement of financial 
 position at 1 January 2019                                         313 
----------------------------------------------------------  ----------- 
 

Accounting policy

The updated accounting policy relating to leases can be found within note 14.

2. Net interest income

Interest income

 
                                                          2019          2018 
                                                   GBP'million   GBP'million 
------------------------------------------------  ------------  ------------ 
Cash and balances held with the bank of England           17.0          11.2 
Loans and advances to customers                          435.0         365.2 
Investment securities held at amortised cost              40.6          57.7 
Investment securities held at FVOCI                        3.6          10.3 
------------------------------------------------  ------------  ------------ 
Total interest income                                    496.2         444.4 
------------------------------------------------  ------------  ------------ 
 

Interest expense

 
                                      2019          2018 
                               GBP'million   GBP'million 
----------------------------  ------------  ------------ 
Deposits from customers              112.4          83.7 
Deposits from central banks           28.5          22.7 
Lease liabilities                     17.7             - 
Debt securities                       22.1           7.2 
Repurchase agreements                  7.4           0.7 
Total interest expense               188.1         114.3 
----------------------------  ------------  ------------ 
 

3. Taxation

Tax expense

The components of the tax expense for the year are:

 
                                                            2019          2018 
                                                     GBP'million   GBP'million 
--------------------------------------------------  ------------  ------------ 
Current tax 
Current tax                                                  3.5         (2.8) 
Adjustment in respect of prior years                       (0.3)         (0.7) 
--------------------------------------------------  ------------  ------------ 
Total current tax expense                                    3.2         (3.5) 
--------------------------------------------------  ------------  ------------ 
Deferred tax 
Origination and reversal of temporary differences         (52.0)         (9.8) 
Effect of changes in tax rates                             (2.8)         (0.7) 
Adjustment in respect of prior years                       (0.2)           0.5 
--------------------------------------------------  ------------  ------------ 
Total deferred tax expense                                (55.0)        (10.0) 
--------------------------------------------------  ------------  ------------ 
Total tax expense                                         (51.8)        (13.5) 
--------------------------------------------------  ------------  ------------ 
 

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 is as follows:

 
                                                          Effective                Effective 
                                                    2019   tax rate          2018   tax rate 
                                             GBP'million          %   GBP'million          % 
------------------------------------------  ------------  ---------  ------------  --------- 
Accounting (loss)/profit before tax              (130.8)                     40.6 
------------------------------------------  ------------  ---------  ------------  --------- 
Tax expense at statutory tax rate of 
 19% (2018: 19%)                                    24.9      19.0%         (7.7)      19.0% 
Tax effects of: 
Non-deductible expenses - depreciation 
 on non-qualifying fixed assets                    (3.0)     (2.3%)         (2.6)       6.4% 
Non-deductible expenses - investment 
 property impairment                               (1.1)     (0.9%)         (0.5)       1.2% 
Non-deductible expenses - remediation              (4.4)     (3.3%)             -          - 
Non-deductible expenses - other                    (0.7)     (0.5%)         (0.6)       1.4% 
Impact of intangible asset impairment 
 on R&D deferred tax liability                       1.8       1.4%             -          - 
Share based payments                               (1.9)     (1.5%)         (1.3)       3.1% 
Adjustment in respect of prior years               (0.5)     (0.3%)         (0.2)       0.5% 
Current year losses for which no deferred 
 tax asset has been recognised                    (11.4)     (8.7%)             -          - 
Derecognition of tax losses arising 
 in prior years                                   (52.7)    (40.2%)             -          - 
Effect of changes in tax rates                     (2.8)     (2.2%)         (0.6)       1.5% 
------------------------------------------  ------------  ---------  ------------  --------- 
Tax expense reported in the consolidated 
 income statement                                 (51.8)    (39.5%)        (13.5)      33.2% 
------------------------------------------  ------------  ---------  ------------  --------- 
 

The effective tax rate for the year is (39.5%) (2018: 33.2%). The main reasons for this, in addition to the reported accounting loss before tax for the year (2018: accounting profit before tax), are set out below:

Impact of Intangible Asset Impairment on R&D

During the year the Group impaired GBP68m of Intangible assets. This relates to the discontinuation of certain work-in-progress or older IT projects that do not form part of the Group's revised strategy. As some of these assets had previously qualified for R&D tax relief the R&D deferred tax liability has been adjusted to reflect this.

Share based payments

During the period the Group's share price fell from GBP16.94 to GBP2.02. This had the impact of reducing the deferred tax asset held for share options and contributed GBP1.2m to the deferred tax charge.

Derecognition of tax losses carried forward

The Group has derecognised the deferred tax asset arising in prior years due to the expected impact on its forecast short term results of the investment in cost, revenue and infrastructure transformation. The losses will remain available for offset in the future and recognition will be revaluated at future reporting periods.

Effect of changes in tax rates

This relate to the remeasurement of deferred tax due to rate changes.

Deferred tax

 
                                               Investment                     Property, 
                                 Unused        securities   Share-based           plant    Intangible 
                             tax losses   and impairments      payments   and equipment        assets         Total 
                            GBP'million       GBP'million   GBP'million     GBP'million   GBP'million   GBP'million 
-------------------------  ------------  ----------------  ------------  --------------  ------------  ------------ 
2019 
Deferred tax assets                   -                 6             -               -             -             6 
Deferred tax liabilities              -               (2)             -            (15)           (4)          (21) 
-------------------------  ------------  ----------------  ------------  --------------  ------------  ------------ 
Deferred tax liabilities 
 (net)                                -                 4             -            (15)           (4)          (15) 
-------------------------  ------------  ----------------  ------------  --------------  ------------  ------------ 
At 1 January 2019                    53                 5             1            (11)           (7)            41 
Income statement                   (53)               (1)           (1)             (4)             3          (56) 
At 31 
 December 
 2019                                 -                 4             -            (15)           (4)          (15) 
-------------------------  ------------  ----------------  ------------  --------------  ------------  ------------ 
 
 
                                               Investment                     Property, 
                                 Unused        securities   Share-based           plant    Intangible 
                             tax losses   and impairments      payments   and equipment        assets         Total 
                            GBP'million       GBP'million   GBP'million     GBP'million   GBP'million   GBP'million 
-------------------------  ------------  ----------------  ------------  --------------  ------------  ------------ 
2018 
Deferred tax assets                  53                 7             1               -             -            61 
Deferred tax liabilities              -               (2)             -            (11)           (7)          (20) 
-------------------------  ------------  ----------------  ------------  --------------  ------------  ------------ 
Deferred tax assets 
 (net)                               53                 5             1            (11)           (7)            41 
-------------------------  ------------  ----------------  ------------  --------------  ------------  ------------ 
At 1 January 2018                    57                 4            11             (8)           (6)            58 
Income statement                    (4)               (1)           (1)             (3)           (1)          (10) 
Other comprehensive 
 income                               -                 2             -               -             -             2 
Equity                                -                 -           (9)               -             -           (9) 
-------------------------  ------------  ----------------  ------------  --------------  ------------  ------------ 
At 31 December 2018                  53                 5             1            (11)           (7)            41 
-------------------------  ------------  ----------------  ------------  --------------  ------------  ------------ 
 

4. Financial instruments

The Group's financial instruments primarily comprise customer deposits, loans and advances to customers, cash and balances with the bank of England and investment securities, all of which arise as a result of normal operations.

The main financial risks arising from financial instruments are credit risk, liquidity risk and market risks (price and interest rate risk).

The financial instruments the Group holds are simple in nature and no significant judgments have been made relating to the classification of financial instruments under IFRS 9.

5. Cash and balances with the bank of England

 
                                         31 December    31 December 
                                                2019           2018 
                                         GBP'million    GBP'million 
--------------------------------------  ------------  ------------- 
Unrestricted balances with the bank 
 of England                                    2,751          2,242 
Cash and unrestricted balances with 
 other banks                                     178            230 
Money market placements                           60              - 
--------------------------------------  ------------  ------------- 
Total cash and balances with the bank 
 of England (9)                                2,989          2,472 
--------------------------------------  ------------  ------------- 
 

9. Balances held at other financial institutions have been reclassified during the year as cash, rather than as loans and advances to banks to better reflect the unrestricted nature of these balances.

6. Loans and advances to customers

 
                                                     31 December 2019 
                                        ------------------------------------------ 
                                        Gross carrying           ECL  Net carrying 
                                                amount     allowance        amount 
                                           GBP'million   GBP'million   GBP'million 
--------------------------------------  --------------  ------------  ------------ 
Consumer lending                                   233          (13)           220 
Retail mortgages                                10,430           (8)        10,422 
Commercial lending                               4,052          (13)         4,039 
--------------------------------------  --------------  ------------  ------------ 
Total loans and advances to customers           14,715          (34)        14,681 
--------------------------------------  --------------  ------------  ------------ 
 
 
                                                     31 December 2018 
                                        ------------------------------------------ 
                                        Gross carrying           ECL  Net carrying 
                                                amount     allowance        amount 
                                           GBP'million   GBP'million   GBP'million 
--------------------------------------  --------------  ------------  ------------ 
Consumer lending                                   288           (9)           279 
Retail mortgages                                 9,625          (11)         9,614 
Commercial lending                               4,356          (14)         4,342 
--------------------------------------  --------------  ------------  ------------ 
Total loans and advances to customers           14,269          (34)        14,235 
--------------------------------------  --------------  ------------  ------------ 
 

Further information on the movements in gross carrying amounts and ECL can be found in note 12. An analysis of the gross loans and advances by product category is set out below:

 
                                             31 December   31 December 
                                                    2019          2018 
                                             GBP'million   GBP'million 
------------------------------------------  ------------  ------------ 
Overdrafts                                            77            70 
Credit cards                                          11            11 
Term loans                                           145           207 
------------------------------------------  ------------  ------------ 
Total consumer lending                               233           288 
------------------------------------------  ------------  ------------ 
Residential owner occupied                         8,493         7,351 
Retail buy-to-let                                  1,937         2,274 
------------------------------------------  ------------  ------------ 
Total retail mortgages                            10,430         9,625 
------------------------------------------  ------------  ------------ 
Total retail lending                              10,663         9,913 
------------------------------------------  ------------  ------------ 
Term loans (exc. professional buy-to-let)          2,327         2,448 
Professional buy-to-let                            1,219         1,380 
------------------------------------------  ------------  ------------ 
Total commercial term lending                      3,546         3,828 
------------------------------------------  ------------  ------------ 
Overdrafts and revolving credit 
 facilities                                          202           226 
Credit cards                                           3             3 
Asset and invoice finance                            301           299 
------------------------------------------  ------------  ------------ 
Total commercial lending                           4,052         4,356 
------------------------------------------  ------------  ------------ 
Gross loans and advances to customers             14,715        14,269 
------------------------------------------  ------------  ------------ 
 

7. Investment securities

 
                                          31 December    31 December 
                                                 2019           2018 
                                          GBP'million    GBP'million 
---------------------------------------  ------------  ------------- 
Fair value through other comprehensive 
 income ("FVOCI")                                 411            674 
Amortised cost                                  2,154          3,458 
---------------------------------------  ------------  ------------- 
Total investment securities                     2,565          4,132 
---------------------------------------  ------------  ------------- 
 

Fair value through other comprehensive income

 
                                          31 December   31 December 
                                                 2019          2018 
                                          GBP'million   GBP'million 
---------------------------------------  ------------  ------------ 
Sovereign bonds                                   283           351 
Residential mortgage backed securities              -            64 
Covered bonds                                     128           104 
Corporate bonds                                     -           155 
---------------------------------------  ------------  ------------ 
Total investment securities 
 held at FVOCI                                    411           674 
---------------------------------------  ------------  ------------ 
 

Amortised cost

 
                               31 December   31 December 
                                      2019          2018 
                               GBP'million   GBP'million 
----------------------------  ------------  ------------ 
Sovereign bonds                         61            58 
Residential mortgage backed 
 securities                          1,752         2,997 
Covered bonds                          341           403 
Total investment securities 
 held at amortised cost              2,154         3,458 
----------------------------  ------------  ------------ 
 

8. Property, plant and equipment

 
Accounting  Policy applicable from 1 January 2019 
 policy 
             Property plant and equipment 
             The Group's property, plant and equipment primarily 
             consists of investments and improvements in its store 
             network and is stated at cost less accumulated depreciation 
             and any recognised impairment. 
 
             Property, plant and equipment is depreciated on a 
             straight-line basis to its residual value using the 
             following useful economic lives: 
            -------------------------------------------------------------- 
            Leasehold improvements    Lower of the remaining life of the 
                                       lease or the useful life of the 
                                       asset 
            Freehold land             Not depreciated 
            Buildings                 Up to 50 years 
            Fixtures, fittings        5 years 
             and equipment 
            IT hardware               3 to 5 years 
            ------------------------  ------------------------------------ 
            Depreciation rates, methods and the residual values 
             underlying the calculation of depreciation of items 
             of property, plant and equipment are kept under review 
             to take account of any change in circumstances. 
 
             All items of property, plant and equipment are reviewed 
             at least annually for indicators of impairment. 
 
             Right of use assets 
             Upon the recognition of a lease liability (see note 
             14 for further details) a corresponding right of 
             use ("RoU") asset is recognised. This is adjusted 
             for any initial direct costs incurred, lease incentives 
             paid or received and any restoration costs at the 
             end of the lease (where applicable). 
 
             The RoU asset is depreciated on a straight line basis 
             over the life of the lease. 
 
             All right of use assets are reviewed at least annually 
             for indicators of impairment. 
 
             Investment property 
             Investment property is also stated at cost less accumulated 
             depreciation and any recognised impairment. Depreciation 
             is calculated on a consistent basis with that applied 
             to land and buildings as disclosed in the table above. 
----------  -------------------------------------------------------------- 
 
 
                                                                                                   Right 
                                                                                                  of use 
                                                                                                  assets 
                                                                                                relating 
                                                    Freehold       Fixtures,                   to leased 
                   Investment      Leasehold            land        fittings                      stores 
                     property   improvements   and buildings   and equipment   IT hardware   and offices         Total 
                  GBP'million    GBP'million     GBP'million     GBP'million   GBP'million   GBP'million   GBP'million 
---------------  ------------  -------------  --------------  --------------  ------------  ------------  ------------ 
Cost 
31 December 
 2018                      10            275             199              33            39           n/a           556 
IFRS 16 
 transition 
 adjustment                 -              -               -               -             -           313           313 
---------------  ------------  -------------  --------------  --------------  ------------  ------------  ------------ 
1 January 2019             10            275             199              33            39           313           869 
Additions                   -             51              62               5             2            26           146 
Disposals                   -              -               -               -             -           (7)           (7) 
Write-offs                  -            (3)               -            (12)          (31)             -          (46) 
Transfers                   8            (9)               1               -             -             -             - 
---------------  ------------  -------------  --------------  --------------  ------------  ------------  ------------ 
31 December 
 2019                      18            314             262              26            10           332           962 
Accumulated 
depreciation 
31 December 
 2018                       3             39               9              18            33           n/a           102 
IFRS 16                     -              -               -               -             -             -             - 
transition 
adjustment 
---------------  ------------  -------------  --------------  --------------  ------------  ------------  ------------ 
1 January 2019              3             39               9              18            33             -           102 
Charge for the 
 year                       -             11               4               6             3            16            40 
Impairments                 7              -               -               -             -             -             7 
Write-offs                  -              -               -            (12)          (31)             -          (43) 
Transfers                   -            (1)               1               -             -             -             - 
---------------  ------------  -------------  --------------  --------------  ------------  ------------  ------------ 
31 December 
 2019                      10             49              14              12             5            16           106 
---------------  ------------  -------------  --------------  --------------  ------------  ------------  ------------ 
Net book value              8            265             248              14             5           316           856 
---------------  ------------  -------------  --------------  --------------  ------------  ------------  ------------ 
 

Investment property primarily consists of shops and offices which are located within the same buildings as some of the Group's stores, where it has acquired the freehold interest. In addition it consists of a store initially purchased for the Group's own use which is no longer felt suitable for a site in its current form and is currently being retained to generate rental income. At 31 December 2019 the Group's investment property had a fair value of GBP7 million (31 December 2018: GBP7 million). The fair value has been provided by a qualified independent valuer.

 
                                                              Freehold       Fixtures, 
                             Investment      Leasehold            land        fittings 
                               property   improvements   and buildings   and equipment   IT hardware         Total 
                            GBP'million    GBP'million     GBP'million     GBP'million   GBP'million   GBP'million 
-------------------------  ------------  -------------  --------------  --------------  ------------  ------------ 
Cost 
1 January 2018                       11            198             136              26            35           406 
Additions                             -             80              59               7             4           150 
Transfers                           (1)            (3)               4               -             -             - 
-------------------------  ------------  -------------  --------------  --------------  ------------  ------------ 
31 December 2018                     10            275             199              33            39           556 
Accumulated depreciation 
1 January 2018                        -             29               6              14            29            78 
Impairments                           3              1               -               -             -             4 
Charge for the year                   -             10               2               4             4            20 
Transfers                             -            (1)               1               -             -             - 
-------------------------  ------------  -------------  --------------  --------------  ------------  ------------ 
31 December 2018                      3             39               9              18            33           102 
-------------------------  ------------  -------------  --------------  --------------  ------------  ------------ 
Net book value                        7            236             190              15             6           454 
-------------------------  ------------  -------------  --------------  --------------  ------------  ------------ 
 

Write-offs

Write-offs in the year consisted of pipeline sites which were abandoned as part of the change in the Group's strategy; these sites were no longer felt to be in suitable locations or formats. In addition it included a number of fixtures, fittings and equipment and IT hardware with a nil book value which are no longer being used.

Transfers

Transfers represent costs associated with the improvements made to previously leased stores which have been purchased. These stores were purchased where there was a strong commercial rationale for doing so. Following the introduction of IFRS 16 the capital impact of such purchases is considerably less than previously under IAS 17 and gaining ownership provides greater flexibility over the site in the future.

Additionally, during the year an acquired freehold site was transferred from freehold land and buildings to investment property. The site was originally acquired with the intent of converting into a store, however the change in the Group's strategy has meant this course of action is no longer felt suitable. Given there is no intention in the short to medium term to convert this site into a store the decision was made to continue letting the property, and the property is considered an investment property.

9. Intangible assets

 
                                                 Customer 
                                   Goodwill     contracts      Software         Total 
                                GBP'million   GBP'million   GBP'million   GBP'million 
-----------------------------  ------------  ------------  ------------  ------------ 
Cost 
1 January 2019                            4             1           249           254 
Additions                                 -             -            79            79 
Write-offs                                -           (1)         (100)         (101) 
Deferred grant (see note 10)              -             -           (4)           (4) 
-----------------------------  ------------  ------------  ------------  ------------ 
31 December 2019                          4             -           224           228 
-----------------------------  ------------  ------------  ------------  ------------ 
Amortisation 
1 January 2019                            -             1            56            57 
Charge for the year                       -             -            36            36 
Write-offs                                -           (1)          (32)          (33) 
31 December 
 2019                                     -             -            60            60 
-----------------------------  ------------  ------------  ------------  ------------ 
Net book value                            4             -           164           168 
-----------------------------  ------------  ------------  ------------  ------------ 
 
 
                                        Customer 
                          Goodwill     contracts      Software         Total 
                       GBP'million   GBP'million   GBP'million   GBP'million 
--------------------  ------------  ------------  ------------  ------------ 
Cost 
1 January 2018                   4             1           174           179 
Additions                        -             -            75            75 
--------------------  ------------  ------------  ------------  ------------ 
31 December 2018                 4             1           249           254 
--------------------  ------------  ------------  ------------  ------------ 
Amortisation 
1 January 2018                   -             1            30            31 
Impairments                      -             -             1             1 
Charge for the year              -             -            25            25 
--------------------  ------------  ------------  ------------  ------------ 
31 December 2018                 -             1            56            57 
--------------------  ------------  ------------  ------------  ------------ 
Net book value                   4             -           193           197 
--------------------  ------------  ------------  ------------  ------------ 
 

Write-offs

The write-offs in year consisted primarily of software and applications that were work in progress that have been abandoned owing to the change in the Group's strategy.

Goodwill

Goodwill is tested for any impairment on an annual basis. All of the GBP4 million (31 December 2018: GBP4 million) goodwill has been allocated to the Group's asset and invoice finance business. This business was previously acquired and is considered a standalone cash-generating unit. The recoverable amount of the cash-generating unit, determined using the value-in-use basis, was found to be in excess of its carrying amount and as such no impairment to goodwill was required.

10. Deferred grants

 
Accounting  Grants are recognised where there is reasonable 
 policy      assurance that the Group will both receive the grant 
             and will be able to comply with all the attached 
             conditions. When the grant relates to an expense 
             item, it is recognised as income on a systematic 
             basis over the periods that the related costs, for 
             which it is intended to compensate, are expensed. 
             When the grant relates to an asset, it is recognised 
             directly against the cost of the asset. 
----------  ----------------------------------------------------- 
 
 
                                                          2019          2018 
                                                   GBP'million   GBP'million 
------------------------------------------------  ------------  ------------ 
1 January                                                    -             - 
Grants received                                            120             - 
Released to the income statement                          (16)             - 
Offset against capital expenditure (see note 9)            (4)             - 
Element of grant awaiting repayment                       (50)             - 
------------------------------------------------  ------------  ------------ 
31 December                                                 50             - 
------------------------------------------------  ------------  ------------ 
 

On 22 February 2019 the Group was awarded GBP120 million from the Capability & Innovation fund (part of the RBS alternative remedies package).

Following changes to the Group's strategy a revised business case was submitted to the BCR (the awarding body). The proposals put forward were accepted by BCR on 25 February 2020 as part of which the public commitments attached to the grant were amended. As part of this it was agreed that GBP50 million of the grant will be returned to BCR. As disclosed in note 17 the acceptance of the Group's proposal by BCR post year-end is considered an adjusting event and as such the GBP50 million to be repaid is classified as a liability as at 31 December 2019. All of the sums recognised to date, either in the income statement or offset against capital expenditure, are still components of the revised commitments and as such no adjustments to these amounts has been made.

11. Called-up share capital

The Group has a single class of shares. As at 31 December 2019 172.4 million ordinary shares of 0.0001p (31 December 2018: 97.4 million) were authorised and in issue.

In May 2019 the Group issued 75.0 million of ordinary shares for consideration of GBP375 million. Associated costs of GBP16 million have been offset against the amount raised.

Called-up ordinary share capital, issued and fully paid

The called-up share capital reserve is used to record the nominal share capital. At the 31 December 2019 the Group's called up share capital was GBP172.42 (31 December 2018: GBP97.40)

 
                     2019          2018 
              GBP'million   GBP'million 
-----------  ------------  ------------ 
1 January               -             - 
Issued                  -             - 
31 December             -             - 
-----------  ------------  ------------ 
 

Share premium

The share premium reserve is used to record the excess consideration of any shares issued over the nominal share value.

 
                                 2019          2018 
                          GBP'million   GBP'million 
-----------------------  ------------  ------------ 
1 January                       1,605         1,304 
Issued                            375           304 
Costs of shares issued           (16)           (3) 
-----------------------  ------------  ------------ 
31 December                     1,964         1,605 
-----------------------  ------------  ------------ 
 

12. Credit Risk

Retail mortgage lending

The table below stratifies credit exposures from retail mortgages by ranges of debt-to-value ("DTV") ratio. The average DTV of the retail mortgage loan book is 59% (2018: 61%).

 
                                31 December 2019                    31 December 2018 
                                   GBP'million                         GBP'million 
                       ----------------------------------  ---------------------------------- 
                          Retail                    Total     Retail                    Total 
                           owner       Retail      retail      owner       Retail      retail 
                        occupied   buy-to-let   mortgages   occupied   buy-to-let   mortgages 
---------------------  ---------  -----------  ----------  ---------  -----------  ---------- 
DTV ratio 
Less than 50%              2,647          464       3,111      2,124          458       2,582 
51-60%                     1,383          393       1,776      1,195          493       1,688 
61-70%                     1,422          505       1,927      1,374          553       1,927 
71-80%                     1,813          554       2,367      1,362          596       1,958 
81-90%                     1,201           13       1,214      1,205          129       1,334 
91-100%                       23            -          23         80           33         113 
More than 100%                 4            8          12         11           12          23 
---------------------  ---------  -----------  ----------  ---------  -----------  ---------- 
Total retail mortgage 
 lending                   8,493        1,937      10,430      7,351        2,274       9,625 
---------------------  ---------  -----------  ----------  ---------  -----------  ---------- 
 

A geographic analysis of the location of retail mortgage collateral is set out below:

 
                                     31 December 2019                            31 December 2018 
                                        GBP'million                                 GBP'million 
                        ------------------------------------------  ------------------------------------------ 
                                 Retail       Retail  Total retail           Retail       Retail  Total retail 
                         owner occupied   buy-to-let     mortgages   owner occupied   buy-to-let     mortgages 
----------------------  ---------------  -----------  ------------  ---------------  -----------  ------------ 
Region 
Greater London                    3,424        1,197         4,621            3,034        1,231         4,265 
South east                        2,094          337         2,431            1,797          383         2,180 
South west                          738           97           835              616          122           738 
East of England                     570           76           646              492           91           583 
North west                          482           66           548              405          138           543 
West Midlands                       340           62           402              293           81           374 
Yorkshire and the 
 Humber                             275           37           312              207           73           280 
East Midlands                       243           26           269              241           57           298 
Wales                               169           21           190              141           36           177 
North east                           93           11           104               83           31           114 
Northern Ireland                      -            -             -                4           27            31 
Scotland                             65            7            72               38            4            42 
----------------------  ---------------  -----------  ------------  ---------------  -----------  ------------ 
Total retail mortgage 
 lending                          8,493        1,937        10,430            7,351        2,274         9,625 
----------------------  ---------------  -----------  ------------  ---------------  -----------  ------------ 
 

An analysis of the retail mortgage book by repayment type is set out below:

 
                                 31 December 2019                    31 December 2018 
                                    GBP'million                         GBP'million 
                        ----------------------------------  ---------------------------------- 
                           Retail                    Total     Retail                    Total 
                            owner       Retail      retail      owner       Retail      retail 
                         occupied   buy-to-let   mortgages   occupied   buy-to-let   mortgages 
----------------------  ---------  -----------  ----------  ---------  -----------  ---------- 
Repayment 
Interest                    2,573        1,834       4,407      2,242        2,166       4,408 
Capital and interest        5,920          103       6,023      5,109          108       5,217 
----------------------  ---------  -----------  ----------  ---------  -----------  ---------- 
Total retail mortgage 
 lending                    8,493        1,937      10,430      7,351        2,274       9,625 
----------------------  ---------  -----------  ----------  ---------  -----------  ---------- 
 

Commercial lending

The table below stratifies credit exposures from commercial term loans by ranges of DTV. The average DTV of the commercial loan book is 60% (2018: 59%).

 
                                31 December   31 December 
                                       2019          2018 
                                GBP'million   GBP'million 
-----------------------------  ------------  ------------ 
DTV ratio 
Less than 50%                         1,274         1,277 
51-60%                                  818           936 
61-70%                                  747           791 
71-80%                                  221           249 
81-90%                                   41           100 
91-100%                                  49            51 
More than 100%                          396           424 
-----------------------------  ------------  ------------ 
Total commercial term lending         3,546         3,828 
-----------------------------  ------------  ------------ 
 

A geographic analysis by location of customers who hold commercial term loans is set out below:

 
                               31 December   31 December 
                                      2019          2018 
                               GBP'million   GBP'million 
----------------------------  ------------  ------------ 
Region 
Greater London                       2,264         2,465 
South east                             648           677 
South west                             208           229 
East of England                        139           151 
North west                             136           145 
West Midlands                           60            50 
Yorkshire and the Humber                37            26 
East Midlands                           17            33 
Wales                                   14            29 
North east                              13            16 
Northern Ireland                         6             3 
Scotland                                 4             4 
----------------------------  ------------  ------------ 
Total commercial term loans          3,546         3,828 
----------------------------  ------------  ------------ 
 

An analysis of the commercial term loan book by repayment type is set out below:

 
                               31 December   31 December 
                                      2019          2018 
                               GBP'million   GBP'million 
----------------------------  ------------  ------------ 
Repayment 
Interest                             1,483         1,592 
Capital and interest                 2,063         2,236 
----------------------------  ------------  ------------ 
Total commercial term loans          3,546         3,828 
----------------------------  ------------  ------------ 
 

A sector analysis of the commercial term loan book is set out below:

 
                                      31 December   31 December 
                                             2019          2018 
                                      GBP'million   GBP'million 
-----------------------------------  ------------  ------------ 
Industry sector 
Real estate (rent, buy and sell)            2,374         2,547 
Legal, accountancy and consultancy            236           384 
Health and social work                        263           217 
Hospitality                                   308           235 
Real estate (management of)                    11            72 
Retail                                        100            99 
Construction                                   35            60 
Investment and unit trusts                      8             1 
Recreation, cultural and sport                 51            19 
Real estate (development)                      62            52 
Education                                      30            15 
Other                                          68           127 
-----------------------------------  ------------  ------------ 
Total commercial term loans                 3,546         3,828 
-----------------------------------  ------------  ------------ 
 

Credit risk exposures

Retail mortgages

 
                                             31 December 2019 
                                               GBP' million 
----------------------  ---------------------------------------------------------- 
                              Stage 1        Stage 2        Stage 3           POCI 
                         12 month ECL   Lifetime ECL   Lifetime ECL   Lifetime ECL 
----------------------  -------------  -------------  -------------  ------------- 
Up to date                      9,873            449             16              - 
1 to 29 days past 
 due                                1             21              4              - 
30 to 89 days past 
 due                                -             32             10              - 
90+ days past due                   -              -             24              - 
----------------------  -------------  -------------  -------------  ------------- 
Gross carrying amount           9,874            502             54              - 
----------------------  -------------  -------------  -------------  ------------- 
 
 
                                             31 December 2018 
                                               GBP' million 
----------------------  ---------------------------------------------------------- 
                              Stage 1        Stage 2        Stage 3           POCI 
                         12 month ECL   Lifetime ECL   Lifetime ECL   Lifetime ECL 
----------------------  -------------  -------------  -------------  ------------- 
Up to date                      9,242            275             19              2 
1 to 29 days past 
 due                                3             14              4              1 
30 to 89 days past 
 due                                -             47              7              1 
90+ days past due                   -              -              9              1 
----------------------  -------------  -------------  -------------  ------------- 
Gross carrying amount           9,245            336             39              5 
----------------------  -------------  -------------  -------------  ------------- 
 

Consumer lending

 
                                             31 December 2019 
                                               GBP' million 
----------------------  ---------------------------------------------------------- 
                              Stage 1        Stage 2        Stage 3           POCI 
                         12 month ECL   Lifetime ECL   Lifetime ECL   Lifetime ECL 
----------------------  -------------  -------------  -------------  ------------- 
Up to date                        213              -              -              - 
1 to 29 days past 
 due                               10              -              -              - 
30 to 89 days past                  -              -              -              - 
 due 
90+ days past due                   -              -             10              - 
----------------------  -------------  -------------  -------------  ------------- 
Gross carrying amount             223              -             10              - 
----------------------  -------------  -------------  -------------  ------------- 
 
 
                                             31 December 2018 
                                               GBP' million 
----------------------  ---------------------------------------------------------- 
                              Stage 1        Stage 2        Stage 3           POCI 
                         12 month ECL   Lifetime ECL   Lifetime ECL   Lifetime ECL 
----------------------  -------------  -------------  -------------  ------------- 
Up to date                        272              -              -              - 
1 to 29 days past 
 due                                3              3              -              - 
30 to 89 days past 
 due                                -              5              -              - 
90+ days past due                   -              -              5              - 
----------------------  -------------  -------------  -------------  ------------- 
Gross carrying amount             275              8              5              - 
----------------------  -------------  -------------  -------------  ------------- 
 

Commercial lending

 
                                             31 December 2019 
                                               GBP' million 
----------------------  ---------------------------------------------------------- 
                              Stage 1        Stage 2        Stage 3           POCI 
                         12 month ECL   Lifetime ECL   Lifetime ECL   Lifetime ECL 
----------------------  -------------  -------------  -------------  ------------- 
Up to date                      3,900              -              7              - 
1 to 29 days past 
 due                               29             18              4              - 
30 to 89 days past 
 due                                -             54              9              - 
90+ days past due                   -              -             31              - 
----------------------  -------------  -------------  -------------  ------------- 
Gross carrying amount           3,929             72             51              - 
----------------------  -------------  -------------  -------------  ------------- 
 
 
                                             31 December 2018 
                                               GBP' million 
----------------------  ---------------------------------------------------------- 
                              Stage 1        Stage 2        Stage 3           POCI 
                         12 month ECL   Lifetime ECL   Lifetime ECL   Lifetime ECL 
----------------------  -------------  -------------  -------------  ------------- 
Up to date                      4,213              6              2              - 
1 to 29 days past 
 due                               52             44              -              - 
30 to 89 days past 
 due                                -             27              5              - 
90+ days past due                   -              -              7              - 
----------------------  -------------  -------------  -------------  ------------- 
Gross carrying amount           4,265             77             14              - 
----------------------  -------------  -------------  -------------  ------------- 
 

Loss allowance

The following tables explain the changes in both the gross carrying amount and loss allowances of the Group's loans and advances during the period. Significant changes in the gross carrying amounts which contributed to changes in the loss allowance are explained below. Other movements consist of changes to model assumptions and forward looking information.

 
Retail 
mortgages               Gross carrying amount                   Loss allowance                   Net carrying amount 
                 ------------------------------------  --------------------------------  ------------------------------------ 
                   Stage  Stage  Stage                 Stage  Stage  Stage                 Stage  Stage  Stage 
GBP'million            1      2      3  POCI    Total      1      2      3  POCI  Total        1      2      3  POCI    Total 
---------------  -------  -----  -----  ----  -------  -----  -----  -----  ----  -----  -------  -----  -----  ----  ------- 
1 January 
 2019              9,245    336     39     5    9,625      -    (5)    (4)   (2)   (11)    9,245    331     35     3    9,614 
Transfers 
 to/(from) 
 stage 1(1)          169  (162)    (7)     -        -    (1)      1      -     -      -      168  (161)    (7)     -        - 
Transfers 
 to/(from) 
 stage 2           (369)    370    (1)     -        -      -      -      -     -      -    (369)    370    (1)     -        - 
Transfers 
 to/(from) 
 stage 3            (22)   (16)     38     -        -      -      -      -     -      -     (22)   (16)     38     -        - 
Net 
 remeasurement 
 due to 
 transfers(2)          -      -      -     -        -      1    (1)    (2)     -    (2)        1    (1)    (2)     -      (2) 
New lending(3)     2,122     77      -     -    2,199      -      -      -     -      -    2,122     77      -     -    2,199 
Repayments, 
 additional 
 drawdowns 
 and interest 
 accrued           (244)    (9)    (3)     -    (256)      -      -      -     -      -    (244)    (9)    (3)     -    (256) 
Derecognitions   (1,027)   (94)   (12)   (5)  (1,138)      -      2      2     2      6  (1,027)   (92)   (10)   (3)  (1,132) 
Changes to 
 model 
 assumptions           -      -      -     -        -      -      -    (1)     -    (1)        -      -    (1)     -      (1) 
---------------  -------  -----  -----  ----  -------  -----  -----  -----  ----  -----  -------  -----  -----  ----  ------- 
31 December 
 2019              9,874    502     54     -   10,430      -    (3)    (5)     -    (8)    9,874    499     49     -   10,422 
---------------  -------  -----  -----  ----  -------  -----  -----  -----  ----  -----  -------  -----  -----  ----  ------- 
 
 
                       Gross carrying amount                 Loss allowance                 Net carrying amount 
                  --------------------------------  --------------------------------  -------------------------------- 
                  Stage  Stage  Stage               Stage  Stage  Stage               Stage  Stage  Stage 
GBP'million           1      2      3  POCI  Total      1      2      3  POCI  Total      1      2      3  POCI  Total 
----------------  -----  -----  -----  ----  -----  -----  -----  -----  ----  -----  -----  -----  -----  ----  ----- 
1 January 
 2018             6,065    129     33     4  6,231    (1)    (3)    (5)   (1)   (10)  6,064    126     28     3  6,221 
Transfers 
 to/(from) 
 stage 1(1)          60   (52)    (8)     -      -    (1)      1      -     -      -     59   (51)    (8)     -      - 
Transfers 
 to/(from) 
 stage 2          (222)    223    (1)     -      -      1    (1)      -     -      -  (221)    222    (1)     -      - 
Transfers 
 to/(from) 
 stage 3           (16)    (7)     23     -      -      -      1    (1)     -      -   (16)    (6)     22     -      - 
Net 
 remeasurement 
 due to 
 transfers(2)         -      -      -     -      -      1    (2)    (1)     -    (2)      1    (2)    (1)     -    (2) 
New lending(3)    3,933     76      3     2  4,014    (1)    (1)      -     -    (2)  3,932     75      3     2  4,012 
Repayments, 
 additional 
 drawdowns 
 and interest 
 accrued          (151)    (7)    (1)   (1)  (160)      -      -      -     -      -  (151)    (7)    (1)   (1)  (160) 
Derecognitions    (424)   (26)   (10)     -  (460)      1      -      1     -      2  (423)   (26)    (9)     -  (458) 
Changes to 
 model 
 assumptions          -      -      -     -      -      -      -      2   (1)      1      -      -      2   (1)      1 
----------------  -----  -----  -----  ----  -----  -----  -----  -----  ----  -----  -----  -----  -----  ----  ----- 
31 December 
 2018             9,245    336     39     5  9,625      -    (5)    (4)   (2)   (11)  9,245    331     35     3  9,614 
----------------  -----  -----  -----  ----  -----  -----  -----  -----  ----  -----  -----  -----  -----  ----  ----- 
 

1. Represents stage transfers prior to any ECL remeasurements

2. Represents the remeasurement between the twelve month and lifetime ECL due to stage transfer

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 the model assumptions, forward looking information and changes in the customers risk profile

Consumer lending

 
                       Gross carrying amount                 Loss allowance                 Net carrying amount 
                  --------------------------------  --------------------------------  -------------------------------- 
                  Stage  Stage  Stage               Stage  Stage  Stage               Stage  Stage  Stage 
GBP'million           1      2      3  POCI  Total      1      2      3  POCI  Total      1      2      3  POCI  Total 
----------------  -----  -----  -----  ----  -----  -----  -----  -----  ----  -----  -----  -----  -----  ----  ----- 
1 January 
 2019               275      8      5     -    288    (3)    (3)    (3)     -    (9)    272      5      2     -    279 
Transfers 
 to/(from) 
 stage 1              5    (5)      -     -      -      -      -      -     -      -      5    (5)      -     -      - 
Transfers 
 to/(from) 
 stage 2            (1)      1      -     -      -      -      -      -     -      -    (1)      1      -     -      - 
Transfers 
 to/(from) 
 stage 3            (3)    (3)      6     -      -      -      2    (2)     -      -    (3)    (1)      4     -      - 
Net 
 remeasurement 
 due to 
 transfers            -      -      -     -      -      -      -    (4)     -    (4)      -      -    (4)     -    (4) 
New lending          39      -      -     -     39      -      -      -     -      -     39      -      -     -     39 
Repayments, 
 additional 
 drawdowns 
 and interest 
 accrued           (37)      -    (1)     -   (38)      -      -      -     -      -   (37)      -    (1)     -   (38) 
Derecognitions     (55)    (1)      -     -   (56)      -      -      -     -      -   (55)    (1)      -     -   (56) 
Changes to            -      -      -     -      -      -      -      -     -      -      -      -      -     -      - 
model 
assumptions 
----------------  -----  -----  -----  ----  -----  -----  -----  -----  ----  -----  -----  -----  -----  ----  ----- 
31 December 
 2019               223      -     10     -    233    (3)    (1)    (9)     -   (13)    220    (1)      1     -    220 
----------------  -----  -----  -----  ----  -----  -----  -----  -----  ----  -----  -----  -----  -----  ----  ----- 
 
 
                       Gross carrying amount                 Loss allowance                 Net carrying amount 
                  --------------------------------  --------------------------------  -------------------------------- 
                  Stage  Stage  Stage               Stage  Stage  Stage               Stage  Stage  Stage 
GBP'million           1      2      3  POCI  Total      1      2      3  POCI  Total      1      2      3  POCI  Total 
----------------  -----  -----  -----  ----  -----  -----  -----  -----  ----  -----  -----  -----  -----  ----  ----- 
1 January 
 2018               191     20      6     -    217    (1)   (11)    (5)     -   (17)    190      9      1     -    200 
Transfers 
 to/(from) 
 stage 1              2    (2)      -     -      -      -      -      -     -      -      2    (2)      -     -      - 
Transfers 
 to/(from) 
 stage 2            (3)      3      -     -      -      -      -      -     -      -    (3)      3      -     -      - 
Transfers 
 to/(from) 
 stage 3            (1)    (1)      2     -      -      -      -      -     -      -    (1)    (1)      2     -      - 
Net 
 remeasurement 
 due to 
 transfers            -      -      -     -      -      -    (1)    (1)     -    (2)      -    (1)    (1)     -    (2) 
New lending         160      2      1     -    163    (2)    (1)      -     -    (3)    158      1      1     -    160 
Repayments, 
 additional 
 drawdowns 
 and interest 
 accrued           (27)    (1)      -     -   (28)      -      -      -     -      -   (27)    (1)      -     -   (28) 
Derecognitions     (47)   (13)    (4)     -   (64)      -     10      3     -     13   (47)    (3)    (1)     -   (51) 
Changes to            -      -      -     -      -      -      -      -     -      -      -      -      -     -      - 
model 
assumptions 
----------------  -----  -----  -----  ----  -----  -----  -----  -----  ----  -----  -----  -----  -----  ----  ----- 
31 December 
 2018               275      8      5     -    288    (3)    (3)    (3)     -    (9)    272      5      2     -    279 
----------------  -----  -----  -----  ----  -----  -----  -----  -----  ----  -----  -----  -----  -----  ----  ----- 
 

Commercial lending

 
                       Gross carrying amount                 Loss allowance                 Net carrying amount 
                  --------------------------------  --------------------------------  -------------------------------- 
                  Stage  Stage  Stage               Stage  Stage  Stage               Stage  Stage  Stage 
GBP'million           1      2      3  POCI  Total      1      2      3  POCI  Total      1      2      3  POCI  Total 
----------------  -----  -----  -----  ----  -----  -----  -----  -----  ----  -----  -----  -----  -----  ----  ----- 
1 January 
 2019             4,265     77     14     -  4,356    (6)    (3)    (5)     -   (14)  4,259     74      9     -  4,342 
Transfers 
 to/(from) 
 stage 1             43   (43)      -     -      -    (1)      1      -     -      -     42   (42)      -     -      - 
Transfers 
 to/(from) 
 stage 2           (64)     64      -     -      -      -      -      -     -      -   (64)     64      -     -      - 
Transfers 
 to/(from) 
 stage 3           (17)    (9)     26     -      -      -      1    (1)     -      -   (17)    (8)     25     -      - 
Net 
 remeasurement 
 due to 
 transfers            -      -      -     -      -      1    (1)    (2)     -    (2)      1    (1)    (2)     -    (2) 
New lending         513      2     15     -    530    (1)      -    (2)     -    (3)    512      2     13     -    527 
Repayments, 
 additional 
 drawdowns 
 and interest 
 accrued          (203)    (3)      6     -  (200)      -      -      -     -      -  (203)    (3)      6     -  (200) 
Derecognitions    (608)   (16)   (10)     -  (634)      -      -      3     -      3  (608)   (16)    (7)     -  (631) 
Changes to 
 model 
 assumptions          -      -      -     -      -      1      1      1     -      3      1      1      1     -      3 
----------------  -----  -----  -----  ----  -----  -----  -----  -----  ----  -----  -----  -----  -----  ----  ----- 
31 December 
 2019             3,929     72     51     -  4,052    (6)    (1)    (6)     -   (13)  3,923     71     45     -  4,039 
----------------  -----  -----  -----  ----  -----  -----  -----  -----  ----  -----  -----  -----  -----  ----  ----- 
 
 
                           Gross carrying amount                             Loss allowance                                   Net carrying amount 
                 -----------------------------------------  ------------------------------------------------  --------------------------------------------------- 
                  Stage  Stage         Stage                       Stage  Stage  Stage                         Stage  Stage  Stage 
GBP'million           1      2             3  POCI   Total             1      2      3  POCI           Total       1      2      3          POCI            Total 
---------------  ------  -----  ------------  ----  ------  ------------  -----  -----  ----  --------------  ------  -----  -----  ------------  --------------- 
1 January 
 2018             3,074     95            16     1   3,186           (5)    (1)    (3)     -             (9)   3,069     94     13             1            3,177 
Transfers 
 to/(from) 
 stage 1             50   (50)             -     -       -             -      -      -     -               -      50   (50)      -             -                - 
Transfers 
 to/(from) 
 stage 2           (53)     53             -     -       -             -      -      -     -               -    (53)     53      -             -                - 
Transfers 
 to/(from) 
 stage 3            (6)    (4)            10     -       -             -      -      -     -               -     (6)    (4)     10             -                - 
Net 
 remeasurement 
 due to 
 transfers            -      -             -     -       -             -    (2)    (2)     -             (4)       -    (2)    (2)             -              (4) 
New lending       1,654     10             1     -   1,665           (3)      -      -     -             (3)   1,651     10      1             -            1,662 
Repayments, 
 additional 
 drawdowns 
 and interest 
 accrued          (120)    (7)           (4)     -   (131)             -      -      -     -               -   (120)    (7)    (4)             -            (131) 
Derecognitions    (334)   (20)           (9)   (1)   (364)             -      -      1     -               1   (334)   (20)    (8)           (1)            (363) 
Changes to 
 model 
 assumptions          -      -             -     -       -             2      -    (1)     -               1       2      -    (1)             -                1 
---------------  ------  -----  ------------  ----  ------  ------------  -----  -----  ----  --------------  ------  -----  -----  ------------  --------------- 
31 December 
 2018             4,265     77            14     -   4,356           (6)    (3)    (5)     -            (14)   4,259     74      9             -            4,342 
---------------  ------  -----  ------------  ----  ------  ------------  -----  -----  ----  --------------  ------  -----  -----  ------------  --------------- 
 

Non-performing loans

Non-performing loans are loans which have more than three instalments unpaid (90+ days past due) or where there is doubt a borrower can keep up with their repayments. All non-performing loans are included within Stage 3.

 
                                                   31 December 
                                                       2019                      31 December 2018 
                                          ------------------------------  ------------------------------ 
                                                          Non-performing  Non-performing  Non-performing 
                                          Non-performing           loans           loans           loans 
                                             GBP'million           ratio     GBP'million           ratio 
----------------------------------------  --------------  --------------  --------------  -------------- 
Retail-residential mortgages                          25           0.24%               9           0.09% 
Retail-consumer and other                             10           4.30%               5           1.74% 
Commercial (including asset and invoice 
 finance)                                             42           1.12%               7           0.16% 
----------------------------------------  --------------  --------------  --------------  -------------- 
Total                                                 77           0.53%              21           0.15% 
----------------------------------------  --------------  --------------  --------------  -------------- 
 

Cost of risk

Cost of risk is credit impairment charges expressed as a percentage of average gross lending.

 
                                2019   2018 
-----------------------------  -----  ----- 
Retail-residential mortgages   0.00%  0.01% 
Retail-consumer and other      1.92%  1.54% 
Commercial lending             0.11%  0.10% 
-----------------------------  -----  ----- 
Average cost of risk           0.08%  0.07% 
-----------------------------  -----  ----- 
 

13. Earnings per share

Basic earnings per share is calculated by dividing the (loss)/profit attributable to ordinary equity holders of Metro Bank by the weighted average number of ordinary shares in issue during the year.

 
                                                   2019    2018 
----------------------------------------------  -------  ------ 
(Loss)/profit attributable to ordinary equity 
 holders of Metro Bank (GBP'million)            (182.6)    27.1 
Weighted average number of ordinary shares in 
 issue - basic ("000)                           147,420  92,964 
----------------------------------------------  -------  ------ 
Basic earnings per share (pence)                (123.9)    29.1 
----------------------------------------------  -------  ------ 
 

Diluted earnings per share has been calculated by dividing the (loss)/profit attributable to ordinary equity holders of Metro Bank 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 the Group made a loss during the year to 31 December 2019 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 earnings per share.

 
                                                   2019    2018 
----------------------------------------------  -------  ------ 
(Loss)/profit attributable to ordinary equity 
 holders of Metro Bank (GBP'million)            (182.6)    27.1 
Weighted average number of ordinary shares in 
 issue - diluted ("000)                         147,420  95,853 
----------------------------------------------  -------  ------ 
Diluted earnings per share (pence)              (123.9)    28.2 
----------------------------------------------  -------  ------ 
 

14. Leases

 
Accounting  Policy applicable from 1 January 2019 
 policy      At the inception of a contract it is assessed whether 
             the contract contains a lease. 
 
             At the commencement of a lease, a lease liability 
             and right of use asset is recognised (see note 8 
             for further details). The lease liability is initially 
             measured as the present value for the future lease 
             payments discounted at the rate implicit in the 
             lease (where available) or the Group's incremental 
             cost of borrowing. Generally the Group's uses its 
             incremental cost of borrowing as the discount rate. 
             Following initial recognition the lease liability 
             is measured using the effective interest method. 
 
             Where it is certain a break will be exercised in 
             the lease, only the lease payments up until the 
             date of the break are included. 
 
             The lease liability is remeasured when there is 
             a change to an index or rate used or when there 
             is a change in expectation that a purchase option 
             or break clause will be exercised or if the lease 
             term is extended. When such an adjustment is made 
             to the lease liability a corresponding adjustment 
             is made to the right of use asset. 
 
             Irrecoverable VAT on lease payments is excluded 
             from the lease liability and is taken to the income 
             statement over the period which is due. 
 
             The Group has elected not to recognise a lease liability 
             and right of use assets for any leases that have 
             a term of less than 12 months or are for an asset 
             which is deemed to be of low value (item is worth 
             less than GBP5,000). For these leases the lease 
             payments are recognised as an expense in the income 
             statement on a straight-line basis over the life 
             of the lease. 
----------  --------------------------------------------------------- 
 

As outlined in note 1 on 1 January 2019 the Group implemented IFRS 16 'leases'. IFRS 16 was adopted under the modified retrospective approach and as such no comparatives are shown for the tables below, as all of the Groups leases are operating leases and as such were held off-balance sheet under IAS 17.

Lease liabilities

 
 
                                         2019 
                                  GBP'million 
------------------------------  ------------- 
31 December 2018                            - 
Transition adjustment                     328 
------------------------------  ------------- 
1 January 2019                            328 
Additions and modifications                23 
Disposals                                 (3) 
Lease payments made                      (25) 
Interest on lease liabilities              18 
------------------------------  ------------- 
31 December 2019                          341 
------------------------------  ------------- 
 
Current                                    28 
Non-current                               313 
------------------------------  ------------- 
 

Discount rate

The weighted average discount rate as at 31 December 2019 was 5.7%. The increase in the discount rate from 5.5% at the point of transition reflects the increased incremental cost of borrowing during the year (the discount rate is not retrospectively adjusted for older leases).

Right of use assets

All disclosures relating to right of use assets, including the accounting policy can be found in note 8.

Lease commitments

At the balance sheet date, future minimum lease payments, inclusive of irrecoverable VAT at 20% (31 December 2018: 20%), were as follows:

 
                               31 December   31 December 
                                      2019          2018 
                               GBP'million   GBP'million 
----------------------------  ------------  ------------ 
Within one year                         34            31 
Due in one to five years               142           133 
Due in more than five years            516           495 
----------------------------  ------------  ------------ 
Total                                  692           659 
----------------------------  ------------  ------------ 
 

Low value and short leases

During the year to the ended 31 December 2019 GBP0.4 million was recognised in the income statement with respect to assets of low value under a lease or lease of less than 12 months.

Future income due under non-cancellable property leases

The Group leases out surplus space in some of its properties. The table below sets out the cash payments expected over the remaining non-cancellable term of each lease, exclusive of any VAT.

 
                               31 December   31 December 
                                      2019          2018 
                               GBP'million   GBP'million 
----------------------------  ------------  ------------ 
Within one year                          1             1 
Due in one to five years                 3             4 
Due in more than five years              7             9 
----------------------------  ------------  ------------ 
Total                                   11            14 
----------------------------  ------------  ------------ 
 

15. Legal and regulatory matters

As part of the normal course of business the Group is subject to legal and regulatory matters the majority of which are not considered to have a material impact on the business.

The contingent liabilities detailed below are those which could potentially have a material impact, although their inclusion does not constitute any admission of wrongdoing or legal liability. The outcome and timing of these matters is inherently uncertain. Based on the facts currently known, it is not possible at the moment to predict the outcome of any of these matters or reliably estimate any financial impact. As such at the reporting date no provision has been made for any of these cases within the financial statements.

PRA and FCA investigations

The Group is currently subject to enforcement investigations by both the Prudential Regulation Authority ("PRA") and Financial Conduct Authority ("FCA").

-- The PRA's investigation relates to potential breaches of the PRA's Fundamental Rules 2 and 6. The PRA is investigating whether there were failures to conduct regulatory reporting with due skill, care and diligence, to remedy an issue identified by the PRA in a timely fashion and/or to provide effective oversight and control to comply with its regulatory reporting obligations. These issues relate to the Group's assessment and reporting of its risk weighted assets. The Group is cooperating with the PRA's investigation. As yet, the PRA has given no indication of the likely timeframe for completing their investigation or of the action that might be taken as a result. As a result it is therefore not possible to identify the likely outcome of the investigation nor practicably quantify any potential liability for penalties or possible costs associated with the investigation .

-- The current scope of the FCA's investigation concerns potential breaches of articles 15 and 17 of the Market Abuse Regulation (EU 596/2014), Principle 11 of the FCA's Principles for Business, and Listing Principle 1, Premium Listing Principle 6 and Rule 1.3.3 of the Listing Rules, in the period between 1 June 2017 and 26 February 2019. The investigations relate to the announcements made on 23 January 2019 and 26 February 2019 in relation to risk weighted assets and AIRB accreditation respectively and the impact these announcements had on the Group's share price. The Group is cooperating with the FCA's investigation. As yet, the FCA has given no indication of the likely timeframe for completing their investigation or of any action that might be taken as a result. As a result it is therefore not possible to identify the likely outcome of the investigation nor practicably quantify any potential liability for penalties or possible costs associated with the investigation.

Sanctions related matters

In November 2017, on advice of external legal counsel the Group notified the Office of Foreign Assets Control ("OFAC") that it had discovered that a UK based entity with which it had a banking relationship was subject to US sanctions relating to Cuba. The Group ended its relationship with the relevant entity. In addition, in 2019, it was discovered that a payment made to a customer's account, which it had received from a UK based financial institution, had been routed to the UK based financial institution from Iran. A further notification was made to OFAC. The Group has initiated a review of the foregoing matters, together with a review of its sanctions compliance policies with the support of external advisors. At this stage it is not quantiftypracticable to identify the likely outcome or estimate the potential financial impact of these matters.

US class action

The Group is also defending civil claims brought against it in the State of California based on breaches of US Federal Securities laws arising from allegedly false and misleading statements in relation to its loan book between March 2018 and May 2019. The Group intends to vigorously defend these proceedings. They are at an early stage, and as such it is not possible to identify the likely outcome or nay potential financial impact.

16. Related parties

Key management personnel

The Group's key management personnel, and persons connected with them, are considered to be related parties. Key management personnel are defined as those persons having authority and responsibility for planning, directing and controlling the activities of the Group. The Directors and members of the Executive Leadership Team are considered to be the key management personnel for disclosure purposes.

Key management compensation

Total compensation cost for key management personnel for the year by category of benefit was as follows:

 
                                                          2019          2018 
                                                   GBP'million   GBP'million 
------------------------------------------------  ------------  ------------ 
Short-term benefits                                        5.8           6.0 
Share-based payment costs                                  1.7           3.1 
------------------------------------------------  ------------  ------------ 
Total compensation for key management personnel            7.5           9.1 
------------------------------------------------  ------------  ------------ 
 

Short-term employee benefits include salary, medical insurance, bonuses and cash allowances paid to key management personnel. The share-based payment cost represents the IFRS 2 charge for the year which includes awards granted in prior years that have not yet vested. The cost includes the in-year IFRS 2 costs for Listing Share Awards granted to selected key management personnel in recognition of their significant contribution to the private placement and admission of Metro Bank to the London Stock Exchange.

Banking transactions with key management personnel

The Group provides banking services to Directors and other key management personnel and persons connected to them. Loan transactions during the year and the balances outstanding at 31 December were as follows:

 
                                                                   2019          2018 
                                                            GBP'million   GBP'million 
---------------------------------------------------------  ------------  ------------ 
Loans outstanding at 1 January                                      3.8           3.0 
Loans relating to persons and companies newly considered 
 related parties                                                      -           0.1 
Loans relating to persons and companies no longer 
 considered related parties                                       (3.1)             - 
Loans issued during the year                                        0.2           0.8 
Loan repayments during the year                                   (0.2)         (0.1) 
---------------------------------------------------------  ------------  ------------ 
Loans outstanding as at 31 December                                 0.7           3.8 
---------------------------------------------------------  ------------  ------------ 
Interest expense on loans payable to the Group (GBP'000)             90            82 
---------------------------------------------------------  ------------  ------------ 
 

There were five (31 December 2018: ten) loans outstanding at 31 December 2019 totalling GBP0.7 million (31 December 2018: GBP3.8 million). Of these, three are residential mortgages secured on property, one is an asset finance loan one is an unsecured loan; all loans were provided on standard commercial terms.

In addition to the loans detailed above, the Group has issued credit cards and granted overdraft facilities on current accounts to Directors and key management personnel and persons connected to them. Credit card balances outstanding at 31 December were as follows:

 
                                                 2019      2018 
                                              GBP'000   GBP'000 
-------------------------------------------  --------  -------- 
Credit cards outstanding as at 31 December         16        34 
-------------------------------------------  --------  -------- 
 

Deposit balances outstanding at 31 December were as follows

 
                                                               2019          2018 
                                                        GBP'million   GBP'million 
----------------------------------------------------- 
Deposits held at 1 January                                      4.5           3.4 
Deposits relating to persons and companies newly 
 considered related parties                                     2.1           0.3 
Deposits relating to persons and companies no longer 
 considered related parties                                   (1.8)         (0.2) 
Net amounts (withdrawn)/deposited                             (1.5)           1.0 
Deposits outstanding as at 31 December                          3.3           4.5 
----------------------------------------------------- 
 

Other transactions with related parties

The following transactions were carried out with related parties:

 
                                                          2019      2018 
                                                       GBP'000   GBP'000 
Architectural design services                            4,885     4,084 
Creative and brand services                                428       498 
Total purchase of services with entities connected 
 to key management personnel                             5,313     4,582 
Amounts outstanding as at 31 December owed by Metro 
 Bank                                                       82        51 
 

Architecture, design, creative and brand services are provided by InterArch, Inc. ("InterArch"), a firm which is owned by Shirley Hill, the wife of Vernon W. Hill, II, who served as both Chairman and a non-executive director during the year, before stepping down from the Board on 17 December 2019.

Architectural design services

InterArch provided various architectural design services during the year, including pre-design, architectural design, interior design, construction management, landscape architectural, signage, security design and layout and procurement services. The fee structure for each project is based on a fixed percentage of final construction costs with certain additional services provided on an hourly basis.

Creative and brand services

InterArch also provided branding, marketing and advertising services.

In order to ensure that the terms of the InterArch arrangements are consistent with those that could be obtained from an independent third party, and in accordance with the Articles, the contractual arrangements with InterArch are subject to an annual review by the Audit Committee using benchmarking reviews conducted by independent third parties. For the architectural design contract, which covers the build and design of stores, a 'big four' professional services firms carries out the benchmarking review. For 2019 the Audit Committee has concluded that the contracts for services with InterArch are at arm's length and are at least as beneficial as those which could be obtained in the market from an alternative supplier.

The creative and brand services contract and architectural design service contract will end on 27 February 2020. In order to ensure the smooth transition to new providers, the Group will be entering into a short agreement with InterArch to support the transition until the end of June 2020.

17. Post balance sheet events

Following changes to the Group's strategy a revised business case was submitted to BCR in respect of the GBP120 million grant it previously awarded the Group as part of the Capability and Innovation fund (part of the RBS alternative remedies package). The proposal put forward was accepted by BCR on the 25 February 2020 as part of which the public commitments were amended. As part of this it was agreed that GBP50 million of the grant would be returned to BCR. The approval of the new proposal by the Board and its acceptance by BCR post year-end is considered an adjusting event and as such the GBP50 million to be repaid is classified within other liabilities as at 31 December 2019. All of the sums recognised to date, either in the income statement or offset against capital expenditure are still components of the revised commitments and as such no adjustments to these amounts has been made.

Key capital disclosures

The information set out within this section does not form part of the statutory accounts for the years ended 31 December 2019 or 31 December 2018.

Key Metrics

The table below summarises the key regulatory metrics.

 
                                           31 December   31 December 
                                                  2019          2018 
                                           GBP'million   GBP'million 
Available capital 
CET1 capital                                     1,427         1,171 
Tier 1 capital                                   1,427         1,171 
Total capital                                    1,676         1,420 
 
Risk weighted assets ("RWAs") 
Total risk weighted assets                       9,147         8,936 
 
Risk-based capital ratios as % 
 of RWAs 
CET1 ratio                                      15.6 %         13.1% 
Tier 1 ratio                                    15.6 %         13.1% 
Total capital ratio                             18.3 %         15.9% 
 
Additional CET1 buffer requirements 
 as % of RWAs 
Capital conservation buffer requirement          2.5 %        1.875% 
Countercyclical buffer requirement              0.99 %         0.98% 
Total of bank CET1 specific buffer 
 requirements                                   3.49 %        2.855% 
 
Leverage ratio 
Leverage ratio                                   6.6 %          5.4% 
 
Liquidity coverage ratio 
Liquidity coverage ratio ("LCR")                 197 %          139% 
 

Capital

Overall total capital resources have increased by GBP256 million in 2019 mainly due to GBP375 million of equity raised in May 2019, partially offset by current year losses of GBP183 million

RWA & CET1 ratio

The increase in RWAs during the year is mainly driven by the increase in Operational Risk RWAs.

CET1 ratio increased to 15.6% at the end of 2019 up from 13.1% in 2018.

Buffer

Total CET1 buffers requirement 3.49% have increased due to:

-- The Capital conservation buffer requirement increased to 2.5% on 1st January 2019. During 2018 this requirement was 1.875%.

-- The UK Countercyclical Buffer (CcyB) requirement has remained static at 1% during 2019. The 0.99% shown in the table above is the weighted average of CcyB's issued by various countries.

Leverage Ratio

The table below shows the bank's Tier 1 Capital and Total Leverage Exposure that are used to derive the Leverage Ratio. The leverage ratio is the ratio of Tier 1 Capital to Total Leverage exposure.

 
                                31 December   31 December 
                                       2019          2018 
                                GBP'million   GBP'million 
Common equity tier 1 capital          1,427         1,171 
Additional tier 1 capital                 -             - 
Tier 1 capital                        1,427         1,171 
 
CRD IV Leverage exposure             21,506        21,704 
 
Leverage ratio                        6.6 %          5.4% 
 

The leverage ratio is 6.6% which is in excess of the Basel Committee's minimum capital requirement of 3.0% and the bank's strategic target of maintaining a UK leverage ratio of greater than 4.0%.

Liquidity coverage ratio

The table below shows the bank's Total HQLA and total net cash outflow that are used to derive the liquidity coverage ratio.

 
                                    31 December   31 December 
                                           2019          2018 
                                    GBP'million   GBP'million 
Total HQLA                                3,356         3,489 
Total net cash outflow                    1,708         2,506 
Liquidity coverage ratio ("LCR")          197 %          139% 
 
   The LCR was 197% at 31(st) December 2019 which exceeds the Basel Committee's   minimum of 100%. 

The bank's liquidity requirement, based on the LCR calculation, has reduced reflecting the higher proportion of sticky retail deposits and SME deposits at December 2019 versus December 2018.

Overview of RWAs and capital requirements

The table below sets out the risk weighted assets and Pillar 1 capital requirements for Metro Bank. The bank has applied the standardised approach to measure credit risk and the basic indicator approach to measure operational risk. Under the approach the bank calculates its Pillar 1 capital requirement based on 8% of total RWAs. This covers credit risk, operational risk, market risk and counterparty credit risk.

 
                                                                                Pillar 1 
                                                                                 capital 
                                                                                required 
                                                 31 December   31 December   31 December 
                                                        2019          2018          2019 
                                                 GBP'million   GBP'million   GBP'million 
Credit risk (excluding counterparty 
 credit risk (CCR))                                    8,591         8,560           687 
            Of which the standardised 
             approach                                  8,591         8,560           687 
CCR                                                        4             2             - 
            Of which mark to market                        3             2             - 
            Of which CVA                                   1             -             - 
Market risk                                                6             3             - 
Operational risk                                         546           370            44 
            Of which basic indicator approach            546           370            44 
            Amounts below the thresholds                   -             -             - 
             for deduction (subject to 
             250% risk weight) 
Total                                                  9,147         8,936           731 
 

The increase of GBP211 million in the RWAs is mainly due to increase in Operational Risk RWAs resulting from Revenue growth over the three year period that the standard multiplier for the calculation is based on.

Credit risk exposures by exposure class 2019

The Pillar 1 capital requirement for Credit Risk is set out in the table below. The Pillar 1 requirement in respect of credit risk is based on 8% of the RWAs for each of the following standardised exposure classes.

 
                                                                           Capital 
Exposures subject to the standardised   Exposure Value           RWA      Required 
 approach                                  GBP'million   GBP'million   GBP'million 
Central governments or central 
 banks                                           3,200             -             - 
Institutions                                       212            42             3 
Corporates                                         764           683            55 
Retail                                             608           414            33 
Secured by mortgages on immovable 
 property                                       13,526         6,005           480 
Covered bonds                                      469            47             4 
Claims on institutions and                           -             -             - 
 corporates with a short-term 
 credit assessment 
Securitisation position                          1,580           316            25 
Exposure at default                                 93            95             8 
Items associated with particularly 
 high risk                                          18            27             2 
Other exposures                                    999           962            77 
Total                                           21,469         8,591           687 
 

Credit risk exposures by exposure class 2018

 
                                            Exposure                     Capital 
Exposures subject to the standardised          Value           RWA      Required 
 approach                                GBP'million   GBP'million   GBP'million 
Central governments or central 
 banks                                         2,652             -             - 
Institutions                                     188            38             3 
Corporates                                       633           574            46 
Retail                                           859           565            45 
Secured by mortgages on immovable 
 property                                     12,989         6,015           482 
Covered bonds                                    507            51             4 
Claims on institutions and 
 corporates with a short-term 
 credit assessment                               134            66             5 
Securitisation position                        3,061           595            48 
Exposure at default                               59            65             5 
Other exposures                                  622           591            47 
Total                                         21,704         8,560           685 
 

Total credit risk exposures at the end of 2019 have decreased by GBP235 million primarily driven by the sale of GBP1.5 billion of Treasury assets but this is partially offset by increases on lending secured on immovable property GBP574 million and increases in cash held with central banks GBP548 million.

Overall the RWAs have remained relatively flat. There was an increase in other assets due to the adoption of IFRS 16 lease accounting during 2019 but this was offset by the sale of Treasury Assets.

Capital Resources

The table below summarises the composition of regulatory capital.

 
                                    31 December   31 December 
                                           2019          2018 
                                    GBP'million   GBP'million 
Share capital and premium                 1,964         1,605 
Retained earnings                         (210)         (236) 
(Loss)/profit for the year(18)            (183)            27 
Available for sale reserve                  (2)           (3) 
Other reserves                               14            10 
Intangible assets                         (168)         (197) 
Net deferred tax assets/deferred 
 tax liabilities                              4          (47) 
Other regulatory adjustments                  8            12 
CET 1 capital                             1,427         1,171 
 
Tier 1 capital                            1,427         1,171 
Tier 2 capital                              249           249 
Total capital resources                   1,676         1,420 
 

The bank's capital adequacy was in excess of the minimum required by the regulators at all times.

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

END

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