METRO BANK PLC

Earnings Release • May 1, 2019

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RNS Number : 7977X

Metro Bank PLC

01 May 2019

Metro Bank PLC

Q1 Trading Update 2019

1 May 2019

METRO BANK REPORTS STRONG GROWTH IN CUSTOMER ACCOUNTS DESPITE CHALLENGING QUARTER

Metro Bank PLC (LSE: MTRO LN)

Q1 Summary
·	Customer account growth of 97,000 (Q1 2018: 88,000) to 1.7 million, including year-on-year personal current account growth of 24%, and business current account growth of 23%.
·	Year-on-year total deposit growth of £2.4b ($3.1b), up 19% to £15.1b ($19.6b). Deposit performance quarter-on-quarter impacted by adverse sentiment following January's trading update, leading to a small number of commercial and partnership customers withdrawing deposits in January and February, resulting in a modest 3.6% reduction. Momentum in the core franchise continued. Total deposits stabilised in March and returned to net growth in April.
·	Year-on-year loan growth of £4.2b ($5.5b), up 38% to £15.2b ($19.8b). Loan growth in the quarter up £0.9b ($1.2b).
·	Loan to deposit ratio increased to 100% (Q4 2018: 91%) as a result of servicing the committed lending pipeline originated during Q4 2018.
·	Underlying profit before tax1 at £6.9m (Q1 2018: £10.0m) and statutory profit before tax at £4.3m (Q1 2018: £8.6m). The year-on-year reduction reflects a £2.0m net effect of adopting IFRS 16 from 1 January 2019, and £3.5m quarterly interest expense on the Tier 2 debt issued in June 2018. Underlying earnings per share 5.1p (Q1 2018: 7.2p).
·	Profitability benefited from fee and other income growth of 22% in the quarter to £22.4m (Q4 2018: £18.3m), up 58% year-on-year, driven by the development of new services and optimising fee structures.
·	Strong asset quality with cost of risk at 6bps, a 3bps improvement from Q1 2018, reflecting our continued low-risk lending approach.
·	£120m Capability and Innovation funding received in full in April, with leases signed for new stores in Manchester and Liverpool in the North of England.
·	Best bank for overall quality of service for personal current account customers and second for business current account banking in the latest CMA survey.
·	Committed standby underwrite in place to raise c.£350m to fund strategic growth expected to launch in Q2.
·	2019 is a transitional year for Metro Bank as we evolve the strategy outlined at our preliminary results in February. We have made progress this quarter on implementing the strategic initiatives.

Note: All figures contained in this trading update are unaudited. All figures in US$ have been translated at a rate of $1.30 to the £.

Quarter ending £ in millions	31 Mar  2019	31 Dec  2018	Change in Quarter	31 Mar  2018	Change  in  Year
Assets	£22,194	£21,647	3%	£17,888	24%
Loans	£15,167	£14,235	7%	£10,974	38%
Deposits	£15,095	£15,661	(4)%	£12,702	19%
Loan to Deposit ratio	100%	91%		86%
Total Revenue	£107.5	£109.2	(2)%	£91.8	17%
Underlying Profit before tax1	£6.9	£11.2	(38)%	£10.0	(31)%
Statutory Profit before tax	£4.3	£6.1	(30)%	£8.6	(50)%
Customer net interest margin	2.20%	2.19%	1bps	2.24%	(4)bps
Customer net interest margin + fees	2.80%	2.67%	13bps	2.72%	8bps
Net interest margin	1.64%	1.76%	(12)bps	1.85%	(21)bps
Underlying Profit after tax per share - basic	5.1p	7.2p	(29)%	8.8p	(42)%
Underlying Profit after tax per share - diluted	5.1p	7.1p	(28)%	8.6p	(41)%

1 Underlying profit before tax excludes costs associated with listing and the Listing Share Awards, impairment of property, plant & equipment ("PPE") and intangible assets, costs relating to the RBS alternative remedies package and transformation and remediation costs.

Craig Donaldson, Chief Executive Officer at Metro Bank said:

"We are proud to have built a customer-centric business over the past nine years but this quarter has been challenging. Adverse sentiment following January's update impacted deposit growth in the quarter, with a small number of large commercial and partnership customers making withdrawals, but we are pleased to see a return to net inflows in April. The bank has remained resilient with a 6% increase in customer accounts on Q4 2018 and momentum in the rest of the business continuing. 2019 is a year of transition as we implement our evolved strategy, with the aim of optimising the balance of growth, profitability and capital efficiency."

Vernon Hill, Chairman and Founder at Metro Bank added:

"We've created the first major high street bank in over 100 years in Britain from scratch. Service and convenience are at the very heart of it and it was great to see this recognised in the latest CMA customer service survey as we took the top spot for personal current accounts and maintaining our number two position for business current accounts. This approach also helped us grow our customer accounts by 97,000 during the quarter to a total of 1.7 million. The £120m award from the Capability & Innovation Fund will help bring the banking revolution to SMEs across the country and we look forward to attracting even more FANS as we enter these new regions. We have faced challenges this quarter, but we firmly believe that our model offers a superior banking experience for our customers."

Financial highlights for the Quarter Ended 31 March 2019

Deposits

·	Strong customer account growth of 97,000 in the quarter (Q1 2018: 88,000) to 1.7 million, including year-on-year personal current account growth of 24%, and business current account growth of 23%.
·	As of 31 March total deposits were £15,095m, up 19% from £12,702m in the prior year. Impact of sentiment following January's trading update resulted in a modest 3.6% reduction in total deposits, principally across a small number of large commercial and partnership accounts in January and February. This resulted in a net deposit reduction per store per month of £2.9m, compared to £4.7m growth in Q4 2018.
·	Core deposits demonstrated resilience, reflecting the continued strength of the franchise with deposits from retail customers (excluding retail partnership deposits) increasing by £118m during Q1.  Deposits stabilised in March and returned to growth in April. We remain committed to our medium term guidance of 20% deposit growth per annum, however given the challenging first quarter, expect a slower rate of growth in 2019.

£ in millions		31 Mar 2019	31 Dec 2018	Change in Quarter	31 Mar 2018	Change in Year
Demand: current accounts		£4,532	£4,685	(3)%	£3,889	17%
Demand: savings accounts2		£6,665	£6,924	(4)%	£5,886	13%
Fixed term: savings accounts		£3,898	£4,052	(4)%	£2,927	33%
Deposits from customers		£15,095	£15,661	(4)%	£12,702	19%
Deposits from customers includes:
Deposits from retail customers		£7,233	£7,429	(3%)	£5,999	21%
Of which:
Retail customers (excl. Retail    partnerships)		£5,308	£5,190	2%	£4,042	31%
Retail partnerships		£1,925	£2,239	(14)%	£1,957	(2)%
Deposits from corporate customers		£7,862	£8,232	(4)%	£6,703	17%
2. Included within demand: savings accounts and notice accounts. These are repayable up to 100 days' notice.
	Cost of deposits during the quarter was 70bps, in line with expectations. The increase of 3bps from Q4 2018 and 9bps since Q3 2018 remains materially lower than the 25bps Bank of England base rate increase in August 2018. Our low-cost deposit model, supported by a high proportion of current accounts, has delivered total cost of deposits that remains below the current base rate of 75bps.
	Comparative store deposit growth (a "like for like" measure of deposit growth using deposit numbers from stores that have been operating for more than a full year) is 16% as of 30 March 2019.

Loans

·	Total net loans as of 31 March were £15,167m, up 38% from £10,974m in the prior year. Total net loans increased by £932m in the quarter, an increase of 7%. In line with our target to rebalance the lending mix towards more cost efficient and higher return on equity residential mortgages, loans to commercial customers reduced to 29% of total lending as of 31 March 2019, from 31% at Q4 2018 and 32% at Q1 2018. Growth in higher risk-density commercial real estate lending slowed during the quarter to 3% (Q4 2018: 5%), with continued strong growth of 9% in capital efficient residential mortgage lending (Q4 2018: 10%).
·	Loan to deposit ratio increased to 100% from 91% at year-end as a result of fulfilling our Q4 committed lending pipeline. Management of our lending growth through adjusting front-book pricing, and growth in deposits will ensure we sustainably progress towards our medium-term loan to deposit ratio guidance of 85%-90%.
·	Asset quality remains robust reflecting our continued low-risk lending. Cost of risk remained low at 6bps, down from 7bps for full year 2018. Non-performing loans were 0.18% of the portfolio (0.15% at Q4 2018). High quality growth in low risk assets remains a key focus, which management believes will preserve cost of risk in the long-term.

£ in millions	31 Mar 2019	31 Dec 2018	Change in Quarter	31 Mar 2018	Change in Year
Gross Loans and advances to customers	£15,201	£14,269	7%	£11,013	38%
Less: allowance for impairment	£(34)	£(34)	-	£(39)	(13)%
Net Loans and advances to customers	£15,167	£14,235	7%	£10,974	38%
Gross loans and advances to customers includes:
Commercial loans	£4,470	£4,356	3%	£3,471	29%
Residential mortgages	£10,449	£9,625	9%	£7,310	43%
Consumer and other loans and advances	£282	£288	(2)%	£232	22%

Profit and Loss Account

·	Underlying profit before tax of £6.9m compares to £10.0m in Q1 2018. Statutory profit before tax of £4.3m compares to £8.6m in Q1 2018. The reduction reflects a net £2.0m effect of adopting IFRS 16 (which recognises an interest charge on the lease liability which is partly offset by a reduction in lease expenses) from 1 January 2019, and £3.5m interest expense on the Tier 2 debt issued in June 2018. Operating expenses in the quarter were higher than the prior year reflecting growth in the number of stores and investment in regulation, people and technology.
·	Net interest margin reduced by 12bps quarter-on-quarter, reflecting an interest charge on the IFRS16 lease liability and the fulfilment of lower-yielding lending originated in Q4, particularly mortgages.
·	Customer net interest margin increased by 1 basis point to 2.20% (Q4 2018: 2.19%), demonstrating the continued resilient performance of the underlying business.
·	Customer net interest margin + fees increased for the second successive quarter to 2.80%, up 13 bps from Q4 2018. Fee and other income was £22.4m in Q1, up 22% from £18.3m in Q4 2018, and up 59% year-on-year from £14.1m in Q1 2018. The increase in fee income reflects deepening customer relationships, improving customer propositions, and optimising fee structures.
·	Underlying cost:income ratio increased to 92% from 88% in Q4 2018, reflecting ongoing investments in technology, stores and colleagues as we build the bank for the long-term, and continuing to keep pace with regulatory change. Income has been affected by lower yields in the mortgage market. Cost efficiency programme commenced during Q1, with a clear portfolio of actionable initiatives identified to reduce cost growth run rate. Our focus is on reducing cost to serve in stores, process automation in the back office, and cost optimisation to reflect lending mix shift and we have identified opportunities to reduce the cost growth run rate during 2019 to progress towards a cost:income ratio between 85%-90% during 2019 and down to 55-60% by 2023.

Capital

·	Common Equity Tier 1 Capital ("CET1") of £1,160m as at 31 March 2019 is 12.1% of risk-weighted assets, exceeding our Tier 1 regulatory minimum of 10.6%3. The Regulatory Leverage ratio is 5.2%. Our total capital as a percentage of risk weighted assets is 14.7%.
·	Risk-weighted assets at 31 March 2019 were £9,613m (£8,936m at 31 December 2018), with the increase principally reflecting lending growth and the adoption of IFRS 16, which as indicated at year-end, increased risk-weighted assets by £313m effective 1 January 2019.
·	Equity raise to support further growth anticipated in 2Q 2019 as previously announced, with committed standby underwrite in place with RBC Capital Markets, Jefferies and KBW. It remains our intention to target a minimum CET1 ratio of 12% and a regulatory leverage ratio above 4%.
·	We intend to issue up to £500m of MREL-eligible securities in 2H 2019 to meet our transitional MREL requirement by 1 January 2020.

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

Operational Update

·	Ranked first for personal current account holders for overall service quality in the latest Competition and Market Authority's ('CMA') Service Quality Survey. We also came second among business current account customers for overall service quality and were ranked in the top five for all qualifying business and personal services.
·	£120m Capability and Innovation funding received in April, with leases signed for new stores in Manchester and Liverpool in the North of England. The Incentivised Switching Scheme opened on 25 February and our dedicated team are onboarding new SME customers to Metro Bank.
	Attracted 15% of all business current account switchers in London & South East, for the year ending Q1 2019.4
·	Significant progress made to expand fee income through new value added services and optimising fee structures, supported by use of Capability & Innovation funding to broaden service offerings to deepen customer relationships with SMEs. On track to deliver Insights, our app-based artificial intelligence powered money management for business customers as well as a cash pick up and drop off service, and direct debit origination for SMEs in 2019.
·	Following the RWA adjustment announced on 23 January 2019 we continue to make progress implementing a remediation of internal systems, process and controls as well as recruiting additional expertise.

4. Source: MarketVue Business Banking from Savanta, Year Ending Q1 2019.  Base size: 66. Data weighted by region and turnover to be representative of businesses in Great Britain.

Metro Bank PLC

Balance Sheet and Profit & Loss Account

(Unaudited)

	Annual Growth Rate	2019	2018
Balance Sheet	31-Mar		31-Dec	31-Mar
		£'m		£'m	£'m
Assets
Loans and advances to customers	38%	15,167		14,235	10,974
Treasury assets1		5,920		6,604	6,269
Other assets2		1,107		808	645
Total assets	24%	22,194		21,647	17,888
Liabilities
Deposits from customers	19%	15,095		15,661	12,702
Deposits from banks		3,801		3,801	3,801
Debt securities		249		249	-
Other liabilities		1,643		533	300
Total liabilities		20,788		20,244	16,803
Total shareholders' equity		1,406		1,403	1,085
Total equity and liabilities		22,194		21,647	17,888

	Annual Growth Rate	2019	2018
Profit & Loss Account	Q1		Q4	Q1
		£'m		£'m	£'m
Net interest income		83.8		88.9	75.0
Fee and other income		22.4		18.3	14.1
Net gains on sale of assets		1.3		2.0	2.7
Total revenue	17%	107.5		109.2	91.8
Operating expenses	24%	(98.4)		(96.0)	(79.5)
Expected credit loss expense		(2.2)		(2.0)	(2.3)
Underlying profit before tax	(31)%	6.9		11.2	10.0
Underlying taxation		(1.9)		(4.2)	(2.2)
Underlying profit after tax	(36)%	5.0		7.0	7.8
Listing Share Awards		(0.2)		(0.2)	(0.3)
Impairment of property, plant & equipment and intangible assets		-		(3.0)	(0.5)
Costs relating to RBS alternative remedies package		(1.2)		(1.9)	(0.6)
Transformation and remediation costs		(1.1)		-	-
Statutory profit after tax	(61)%	2.5		1.9	6.4
Underlying earnings per share - basic		5.1p		7.2p	8.8p
Underlying earnings per share - diluted		5.1p		7.1p	8.6p
Net interest margin (NIM)		1.64%		1.76%	1.85%
Customer NIM		2.20%		2.19%	2.24%
Customer NIM + Fees		2.80%		2.67%	2.72%
Cost of deposits		0.70%		0.67%	0.56%
Cost of risk		0.06%		0.06%	0.09%
Underlying cost:income ratio		92%		88%	87%

1 Comprises investment securities, cash & balances with central banks, and loans and advances to banks

2 Comprises property, plant & equipment, intangible assets and other assets

APPENDIX

STATEMENT OF COMPREHENSIVE INCOME

FOR THE PERIOD ENDED 31 MARCH 2019

		Three months ended	Three months ended
		31 March	31 March
		2019	2018
		Unaudited	Unaudited
		£'million	£'million
Interest income		127.6	96.5
Interest expense		(43.8)	(21.5)
Net interest income		83.8	75.0
Fee and commission income		15.7	8.4
Net gains on sale of assets		1.3	2.7
Other income		6.7	5.7
Total income		107.5	91.8
Operating expenses		(83.3)	(70.5)
Depreciation & amortisation		(17.9)	(10.0)
Impairment of property plant and equipment		-	(0.4)
Changes in expected credit losses		(2.2)	(2.3)
Profit before tax		4.3	8.6
Taxation		(1.9)	(2.2)
Profit for the year		2.5	6.4

Other comprehensive (expense)/income for the period

Items which will be reclassified subsequently to profit or loss where specific conditions are met:
Changes in fair value of investment securities held at FVOCI		(1.4)	0.5
Fair value changes in investment securities held at FVOCI transferred to the income statement on disposal		1.0	-
Total other comprehensive (expense)/income		(0.4)	0.5
Total comprehensive income for the period		2.1	6.9
Earnings per share - basic (pence)		2.5	7.2
Earnings per share - diluted (pence)		2.5	7.1

BALANCE SHEET

AS AT 31 MARCH 2019

		31 March	31 December
		2019	2018
		Unaudited
		£'million	£'million
Assets
Cash and balances at central banks		2,370	2,286
Loans and advances to banks		211	186
Loans and advances to customers		15,167	14,235
Investment securities held at FVOCI		547	674
Investment securities held at amortised cost		2,792	3,458
Property, plant and equipment		752	454
Intangible assets		209	197
Prepayments and accrued income		63	66
Deferred tax asset		39	41
Other assets		44	50
Total assets		22,194	21,647
Liabilities
Deposits from customers		15,095	15,661
Deposits from central bank		3,801	3,801
Debt securities		249	249
Repurchase agreements		1,126	344
Other liabilities		517	189
Total liabilities		20,788	20,244
Equity
Called-up share capital		-	-
Share premium		1,605	1,605
Retained earnings		(207)	(209)
Other reserves		8	7
Total equity		1,406	1,403
Total equity and liabilities		22,194	21,647

CASH FLOW STATEMENT

FOR THE PERIOD ENDED 31 MARCH 2019

		Three months ended	Three months ended
		31 March	31 March
		2019	2018
		Unaudited	Unaudited
		£' million	£'million
Reconciliation of profit before tax to net cash flows from operating activities:
Profit before tax		4	9
Adjustments for:
Depreciation and amortisation of intangible and tangible assets		18	10
Share option charge		4	1
Gain on sale of assets		(1)	(3)
Changes in operating assets		(956)	(1,370)
Changes in operating liabilities		265	1,510
Net cash (outflows)/inflows from operating activities		(666)	157
Cash flows from investing activities
Net sale/(purchase) of investment securities		800	(544)
Purchase of property, plant and equipment		(5)	(22)
Purchase and development of intangible assets		(20)	(18)
Net cash inflows/(outflows) from investing activities		775	(584)
Cash flows from financing activities
Shares issued		-	1
Net cash inflows from financing activities		-	1
Net increase/(decrease) in cash and cash equivalents		109	(426)
Cash and cash equivalents at start of period		2,472	2,212
Cash and cash equivalents at end of period		2,581	1,786
Cash and cash equivalents comprises of:
Cash and balances at central banks		2,370	1,671
Loans and advances to banks		211	115

Analyst and investor call

An analyst and investor call will be held as follows:

Date: Wednesday 1 May 2019

Time: 5.30pm (UK)

From the UK dial: +44 333 300 0804

From the US dial: +1 631 913 1422

Participant Pin: 67152811#

URL for other international dial in numbers: http://events.arkadin.com/ev/docs/NE_W2_TF_Events_International_Access_List.pdf

An operator will assist you in joining the call.

A replay of the call will be available using the following details:

From the UK dial: +44 333 300 0819

From the US dial: +1 866 931 1566

Access code: 301286091#

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

Latika Shah/ Abigail Whittaker

+44 (0)7950 671 948/ +44 (0)7989 876136

pressoffice@metrobank.plc.uk 

Teneo

Haya Herbert-Burns/ Anthony Silverman

+44 (0) 207 420 3187

Metrobank@teneo.com

ENDS

About Metro Bank

Metro Bank is the revolution in British banking. It is celebrated for its exceptional customer experience and achieved the top spot in the Competition and Market Authority's Service Quality Survey among personal current account holders for its overall service and came second among business current account holders in February 2019. It was also awarded 'Best All Round Personal Finance Provider' at the Moneynet Personal Finance Awards 2019, as well as 'Most Trusted Financial Provider' at the Moneywise Customer Service Awards in 2016 and 2017 and 'Best Financial Provider' at the Evening Standard Business Awards 2017. It is recognised by Glassdoor in its 'Best Place to Work UK 2019' top 50 list.

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

The bank employs over 3,900 colleagues and is headquartered in Holborn, London. 

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

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

All Metro Bank products are subject to status and approval.

Metro Bank PLC 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.

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.

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