Annual Report • Dec 31, 2018
Annual Report
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ANNUAL REPORT AND ACCOUNTS 2018 METRO BANK PLC
| 2014 | 2015 | 2016 | 2017 | 2018 | Year-on-year % increase |
|---|---|---|---|---|---|
| £3.7b | £6.1b | £10.1b | £16.4b | £21.6b | +32% |
| £2.9b | £5.1b | £8.0b | £11.7b | £15.7b | +34% |
| £4.9m | £5.3m | £5.7m | £6.3m | £5.9m | -6% |
| £1.6b | £3.5b | £5.9b | £9.6b | £14.2b | +48% |
| £(48.9)m | £(46.6)m | £(11.7)m | £20.8m | £50.0m | +140% |
| £(48.6)m | £(56.8)m | £(17.2)m | £18.7m | £40.6m | +117% |
£50.0m
Up 140% from £20.8 million in 2017
£40.6m
Up 117% from £18.7 million in 2017
Loan to deposit ratio
91%
Increased from 82% in 2017
Launch of 'Insights' on our app for personal customers – using artificial intelligence to help them better understand how they are using their money
Underlying profit/(loss) before tax excludes Listing Share Awards, costs associated with listing, impairment of property, plant and equipment and intangible assets and costs relating to RBS alternative remedies package application. We use this measure to better reflect the ongoing performance of the business. Further details are available on page 165
CMA results from February 2019
Metro Bank Plc Annual report and accounts 2018
Just eight short years after we opened the doors to our first store in central London, we have brought the Revolution to 66 communities, welcomed 1.6 million accounts and created 3,900 jobs. This is a phenomenal achievement from a standing start.
Our success has been built on:
Our relentless focus on delivering the absolute best in customer service across every channel has been at the heart of our success. Every day we are attracting new customers – FANS – to join our brand, experience our service and they recommend us to their friends.
This unique approach has benefited us again in 2018, and we have delivered another record year. We have delivered this record growth at a continued low cost of risk, which fell to 0.07% (2017: 0.11%).
As we continue to grow, we remain committed to improving and expanding our model and customer experience.
Customer deposits grew 34%to £15.7b
Creating a Revolution presents challenges and opportunities, each of which we embrace as our commitment to our FANS and communities remains our constant goal.
Many thanks to our FANS, colleagues and investors.
Founder and Chairman 10 April 2019
2018 was another successful year of strong growth for Metro Bank. Despite a challenging operating environment, especially in the fourth quarter, the model continued to go from strength to strength. We've delivered this growth while continuing to make substantial investment in our digital and physical infrastructure and maintaining our unique culture.
I am particularly proud that our achievements were recognised in the CMA customer satisfaction survey that was published in February 2019, with us coming top for personal and second for business banking for overall quality of service. Delivering this exceptional level of customer service while growing our balance sheet by 32% year-on-year is truly impressive.
Our success in securing the top award of £120 million from the Capability and Innovation ('C&I') Fund as part of the RBS Alternative Remedies Package is recognition of our commitment to the underserved small and medium enterprise ('SME') banking market. These funds will allow us to build on our plans to bring much needed competition to SME hotspots in the North of England, while also investing in our digital capabilities.
Although the business is performing well, the back half of the year, particularly the fourth quarter, saw us face headwinds from the wider macroeconomic environment and particularly in the form of net interest margin ('NIM') compression, as despite a further base rate rise, yields fell. This is primarily due to excess market liquidity following the introduction of ring fencing for our larger competitors.
Looking forward, we remain committed to our core strategy of creating FANS, attracting low-cost deposits and lending at low risk through our integrated customer experience of 'bricks and clicks' banking. However, we are conscious of the need to adapt to the challenging conditions in the wider economic, commercial and regulatory environment. To that end we are implementing a range of strategic initiatives to deliver the next
phase of our growth. Our key objective is to balance growth with profitability and capital efficiency, which means moderating our rate of growth in response to the prevailing margin environment. Furthermore, we will diversify our lending mix to access attractive segments and optimise our consumption of capital. Revenue growth will be accelerated by expanding our fee income through new value-added services, especially for SMEs supported by our C&I award. Finally, we must accelerate our cost efficiency by driving our operating leverage now we are achieving scale throughout the Bank.
Together these initiatives will place us in a better position to continue to deliver high growth in a capital efficient way, and I look forward to reporting on progress.
In January 2019 we announced that we had adjusted the risk weighting of certain commercial loans secured on commercial property and certain specialist buy-to-let loans that had the combined effect of increasing our RWAs by £900 million. Whilst the risk weightings have been adjusted, there is no deterioration in the credit quality of the affected assets. On 26 February 2019, we received notification that the PRA and FCA are investigating the circumstances and events that led to the RWA adjustment announced on 23 January 2019. We will cooperate fully will the PRA and FCA.
We are learning the lessons from this and will continue to improve our systems and controls around capital and risk-weighted assets.
Finally, I would like to thank everyone at Metro Bank including our customers, colleagues and shareholders, without whom building the revolution in British banking would not be possible.
Chief Executive Officer 10 April 2019
Our investment in an integrated approach continues, delivering the best in store, online and app customer experience
Our simple and secure online banking allows customers to manage cards and savings, browse transactions, open new accounts – all from the comfort of the sofa. Customers can even open current accounts online, irrespective of where in the UK they live. If they live near a store, they can also opt to pop in and have their card printed on the spot. Just one of many examples of how we are seamlessly integrating 'bricks and clicks'.
Best Digital Onboarding strategy Global Retail Banking Awards 2018
IN STORE
Our stores are open early until late, seven days a week, 362 days a year with friendly colleagues ready to help. They are built around the philosophy of delivering instant fulfilment to customers. Whether that be free coin counting for customers and non-customers alike through to the introduction in 2018 of a 'walk out trading' service to businesses, allowing them to leave our store with their account fully set up and the ability to instantly take electronic payments.
No.1 for 'service in branches' in the February 2019 CMA independent Service Quality Survey
Our award-winning mobile banking app allows customers to make payments and manage their accounts and cards on the go. This year we've introduced 'Insights'. By looking at a customer's account history, 'Insights' can identify patterns, trends and upcoming payments. It then creates personalised reports and breakdowns to show how a customer is using their money, providing them with more control over their finances.
Our call centres are based in the communities we serve and our friendly colleagues are available 24 hours a day, seven days a week, 365 days a year. We are focused on giving customers a choice of how they interact with us and not forcing them into digital-only channels. Being able to speak to a human day or night remains central to our approach.
Highly commended best current account provider for call centre service
The trend towards digital banking continues to accelerate, across all segments of the market. Our investment in simple, scalable technology is now a clear advantage as we offer a level of choice and service that others simply cannot match.
This is demonstrated by our online personal current account opening experience, launched at the beginning of 2018. With the help of 'selfie' ID verification, new customers can open a ready-to-use account in less than 10 minutes, with debit cards delivered the next day or available for immediate collection from any of our stores. This market-leading proposition extends our reach throughout the UK and to a significant proportion of customers that now choose to open new accounts online.
Our mobile app is the centrepiece of our digital strategy, now adding over 40,000 customers and exceeding 10 million logins a month. Over 50% of Instant Access Savings Accounts are now opened inside our app. 'Insights' – our AI powered mobile financial assistant – is a first among UK high street banks and helps to simplify customers' financial lives by providing a new level of visibility over their transactions.
Fintech is opening up a new world of opportunity, which we are already integrating into our proposition. Our investment in a developer portal, which supports our compliance with the second payment services directive ('PSD2'), makes it easier than ever for fintech start-ups and others to create innovative integrations that offer our customers new convenience and functionality. We expect small businesses to most benefit from the new Open Banking revolution and our investment in market-leading online banking and API platforms positions us extremely well.
Customers are increasingly voting with their feet and initiatives such as the current account switch guarantee scheme are encouraging competition and making it easier for customers to move banks. It has never been so easy for consumers to benefit from the wide variety of choice in the deposit and lending markets. This comes at a time when consumers are wanting more out of their bank. In an age of 'click and collect' seamlessly integrating the digital and physical worlds, people are demanding the same of their financial service needs.
Our integrated approach and capability are aligned to this trend. For example, when one of our FANS has lost their debit card they can block it on our mobile app and walk into store, seven days a week, to print a new one straight away. We are deploying technology in ways that delight customers and offer true instant fulfilment.
Traditional players within the industry continue their programme of branch closures. 2018 saw another series of branch closures announced.
Only ourselves and one other player have bucked this trend through additional openings. We are opening our stores in major centres and therefore even when our network is fully established we will still have a significantly more focused footprint than most of our high street competitors.
Due to our new technology stack we are uniquely able to combine physical and digital banking to unlock the value of our customers in a way other providers in the market cannot. 2018 saw us launch our 'walk out trading' proposition where SMEs can open a new bank account and leave the store with a connected merchant services terminal, allowing them to take card payments on the same day.
The UK retail banking space remains highly competitive and despite a further Bank of England base rate rise during 2018 lending yields reduced, driven largely by excess liquidity held by certain organisations.
Additionally, the entrance of a number of new players into the wider deposit market has driven deposit pricing higher. However, our strategy of attracting low-cost deposits, in the form of current accounts continues to give us a structural advantage. In addition our interest rates on savings accounts are less market sensitive as we aim to attract deposits on the basis of service and convenience, rather than price.
Capital markets towards the end of 2018 were subdued, largely driven by global economic uncertainty and quantitative tightening.
The current capital regime combined with our strong growth means at present we are not capital self-supportive. We successfully completed a £303 million capital raise and a £250 million debt issuance in 2018 to support our growth. Over the coming year we will need to raise further growth funding including up to c.£500 million of MREL qualifying debt.
In addition to raising external capital we are working on ensuring maximum capital efficiency, further details of which can be found in the Finance Review on page 27.
2018 saw increasing uncertainty around macroeconomic policies as well as downward revisions to growth estimates, both in the UK and globally. This was driven by several factors including China and US trade tensions, subdued growth in some key Eurozone economies and continued uncertainty surrounding Brexit.
Despite these uncertainties we have successfully delivered significant growth across the Bank. We have achieved this by leveraging the inherent strengths in our business model. A focus on providing unsurpassed levels of personal and business service has seen us capture an increasing percentage of the deposit market, enabling us to grow lending prudently despite increased levels of competition. Lending growth has in turn allowed us to make investments in automation and straight through processing in our back office functions in order to start to reduce the costs and increase the speed with which we are able to deliver new products, services and experiences to customers. It all adds up to a self-reinforcing model that puts creating FANS at the heart of what we do.
Structural changes in the economy combined with more flexible ways of working are leading SMEs to fast become the driving force of growth in the UK. Our unique SME proposition is benefiting from this trend. We have the fastest growing market share of business current accounts ('BCAs') in the UK. From a standing start in 2010, we have now captured 2.1% of the SME market, growing faster than any other bank in the UK at a 31% compound annual growth rate ('CAGR'). In the coming years we will likely be able to surpass 5% of market share threshold (the threshold at which the CMA define a bank as being a credible market competitor).
Our impact is greatest where we have established stores. Our market share in London is 3.2% and growing rapidly. For the 12 months to the end of Q3 2018, we attracted 4% of new BCAs nationally, 5% in the South East and 11% in London. Additionally we attracted 17% of all business based in London that chose to move their accounts. Some 88% of these switchers were from the largest five banks. Our growth is more than just BCAs. We have a 1.7% market share of total SME deposits and captured a 15% share of new SME deposits in 2018.
Find out about our SME offering on pages 18 and 19
86% brand recognition in London
2018 saw brand awareness at 86% in London and 54% nationally. This, for a company that has never spent a penny on large-scale advertising.
66 stores
At 66* stores and growing, if we aren't in your area, we will be soon. Our stores are integrated with the latest technology to ensure we are also evolving to meet our customers' needs.
*Including Moorgate which opened in January 2019
3,900 colleagues
We hire for attitude and train for skill. This approach ensures we have experienced and dedicated colleagues committed to helping us meet our customers' needs.
362 days a year our stores are open Our stores are open 362 days a year early 'til late and our AMAZE direct call centres and digital banking offerings never sleep. Accounts can be opened in minutes in store or online. Joining the revolution has never been so easy.
Our unique, integrated, disruptive
09
We create FANS by 'surprising and delighting' customers across every channel – through integrating physical and digital channels through our technology and AMAZEING colleagues.
Read more on page 12
We opened ten new stores in 2018, expanding our network to new communities including Southampton, Oxford and Bristol.
We've continued to launch game-changing new technological capability including Current Account Online which went live in January 2018. This allows accounts to be opened in a matter of minutes using 'selfie' identification and verification. It brings the era of 'click and collect' to banking with the option of collecting debit cards and cheque books straight away from any of our stores.
We also launched 'Walk Out Trading' for business customers; this allows instant trading including accepting debit and credit card payments, without having to wait weeks for a point-of-sale machine to arrive.
During the year we welcomed 800 new colleagues and celebrated 730 promotions as the business grew. We also ranked in the top 25 '2019 best places to work' by Glassdoor, the only bank recognised.
In October we also launched an MSc in digital banking in partnership with Cranfield University. This is the first partnership of its type in the UK and will ensure colleagues from across the organisation have the skills and confidence to be able to continue the banking revolution in the years ahead.
We grew our total deposits by 34% to £15.7 billion at 31 December 2018 (31 December 2017: £11.7 billion).
We continue to enjoy a diversified deposit base with 53% of deposits coming from commercial customers (2017: 53%).
Cost of deposits rose during the year to 0.61% up from a record low of 0.54% in 2017 following another base rate rise. The deposit market has become increasingly competitive following the arrival of new entrants into the marketplace. As 30% of our deposits are from current accounts (2017: 32%), the impact is limited such that our cost of deposits fell to below the Bank of England base rate in the year.
We offer simple lending products that meet the personal and business needs of our customers. Our customer-centric underwriting process aims to ensure a low-risk loan book, which is the foundation of long-term growth.
We grew our total loans by 48% to £14.2 billion at 31 December 2018 (31 December 2017: £9.6 billion). Lending growth continued to be primarily organic but was supplemented by the purchase of a seasoned UK mortgage portfolio in March 2018.
Cost of risk fell to 0.07% (2017: 0.11%) driven by a strong lending portfolio consisting of 67% retail mortgages and 27% well-secured commercial term loans. Our debt to value ('DTV') on retail mortgages is 61% (2017: 60%) and on commercial term loans is 59% (2017: 58%).
We once again delivered £1 billion in net lending to businesses, further supporting the UK economy.
create FANS in each of our communities.
deliver our unique value-added model and
We attract deposits through our integrated model and unique culture, which creates FANS.
Read more on page 13
Read more on page 13
| See more See more on page 31 on page 85 |
||
|---|---|---|
| Evolution of our strategy in 2019 | Risk Remuneration |
|
| • Open eight new stores including 1.6m our new store at Moorgate which (2017: 1.2m) opened in January number of customer accounts |
Customer A accounts (financial) |
|
| • Open two additional stores in the North as part of our successful C&I fund bid No.1 • Maintain investment in our digital (2017: n/a) |
Customers C |
|
| and physical infrastructure as well Overall quality of service for personal as integration between the two to accounts in latest (February 2019) ensure we are leading the market and delivering the needs of new and existing FANS |
||
| • Continue to develop colleagues 96% • Expand opportunities (2017: 96%) outside London of colleagues think Metro Bank is a great place to work in our annual voice of the • Build upon the success of our |
2 Operational People D 7 Conduct |
|
| colleague survey apprenticeship programme, including continuing our partnership with Cranfield University |
||
| • Continue to win business and £5.9m commercial customers from (2017: £6.3m) incumbent players. This includes deposits per store per month RBS, from which SMEs will be incentivised to switch from under |
Funding and Deposit 3 A liquidity (financial) 4 Market |
performance |
| the Alternative Remedies Package 0.61% • Continue to attract new deposits (2017: 0.54%) through new store openings |
Financial 5 crime |
|
| cost of deposits • Continue to build upon the success of Current Account Online as well as the continued performance of the existing network |
6 Regulatory | |
| • Deepen the relationships with our existing customers, servicing more of their financial service needs and attracting associated fees |
||
| • Continue to focus on low-risk 2.67% mortgages which are both cost (2017: 2.69%) efficient and deliver a higher return customer net interest margin plus fees on equity |
1 Credit Lending A (financial) 4 Market |
performance |
| • Use C&I funding to broaden 0.15% lending to SME and commercial trading businesses (2017: 0.27%) non-performing loans ratio |
Risk B 6 Regulatory 8 Model |
|
| • Grow unsecured lending business as the risk-reward 0.07% trade off improves (2017: 0.11%) |
cost of risk
11
We are a high-growth retailer delivering best-in-class banking. We do this by:
Over the course of 2018 we have continued to deliver progress in all of these areas, despite a challenging operating environment in the second half of the year. As well as delivering year-on-year balance sheet growth of 32% we have been rated first for overall quality of service for personal banking in the latest CMA survey and also awarded £120 million from the Capability and Innovation Fund of the RBS Alternative Remedies Package, which will accelerate our SME offering.
Read more about our strategy on pages 10 and 11.
2018 has seen us deliver record investment in both our digital and physical offerings, as well as the integration of the two, in order to make our customers' lives easier.
As well as the rollout of 'Current Account Online' opening for our retail customers we also launched our 'Walk Out Trading' service for business accounts. 'Walk Out Trading' is revolutionising SME banking, allowing businesses to receive a card terminal in store, so that they can accept debit and credit card payments as soon as they open their account.
We understand that running a business can be time pressured enough and, therefore, we aim to make our business banking services as convenient and streamlined as possible. Business Current Accounts can be set up on the spot in store without an appointment in a matter of hours, rather than days or weeks. It is services like this that are leading us to win 15% of business switchers in the London area.
During the year, we continued to expand our store network by opening ten new stores. This included the opening of a flagship store in Bristol. Alongside the banking hall, the site also houses a Metro Bank University site as well as space for a back office team to support our growth in the West Country and Wales in the years ahead.
In January, we opened our 66th store in Moorgate in London and have a further seven stores in build. We will open in new locations and markets including Enfield, Cardiff and the Midlands during 2019. The £120 million award from the Capability and Innovation Fund will accelerate the pace of our growth into the North of England.
Our digital capabilities also continue to expand at pace and in October we launched our artificial intelligence tool – 'Insights' – on our mobile app. 'Insights' can identify patterns, trends and upcoming payments in customers' accounts and then create personalised reports and analysis to allow them to better understand how they are using their money. The feedback we have received in the few months this has been live has been phenomenal. Looking ahead we have plenty more exciting projects under development to continue to improve our integrated customers' experience across 'bricks and clicks'.
Out of everything we do at Metro Bank, our culture is at our heart. Creating a truly differentiated approach to banking cannot be achieved without the right people and attitude.
During the year we welcomed over 800 new colleagues to the Bank. In addition, we continued to develop our colleagues, promoting more than 730 to roles with greater responsibility. In October, we launched an MSc in Retail and Digital Banking, designed in partnership with Cranfield University. By investing in our colleagues across the Bank through initiatives such as this, we are ensuring that we will continue to be a disruptive force in UK retail banking.
2018 also saw us expand the work we do within our communities. During the year we hosted 3,500 community and charity events in our stores as well as taking over 41,000 school children through our financial education programme, Money Zone. We also continued to support our two charity partners, Place2Be and Alzheimer's Society, and colleagues have raised over £140,000 for these important causes during the year.
In 2018 we created more FANS than ever before, who in turn each trust us to deliver exceptional service at every point of contact. Despite an increasingly competitive marketplace for savings, we grew our deposits by 34% to over £15 billion and continued to do so at low cost. This was assisted by the expansion of our network by another ten stores, with new markets including Southampton, Oxford and Bristol.
At the start of the year we launched 'Current Account Online', allowing people all over the country to join the revolution. This technology is truly game-changing, allowing retail customers to open an account in less than ten minutes, using 'selfie' identification technology. It also allows people who live near our network to order online and pick up their card straight away in store, finally bringing the era of 'click and collect' to banking.
The UK mortgage landscape remains challenging as despite a further base rate rise, mortgage yields remain broadly flat. In spite of this headwind our lending engines continued to deliver gains in market share, largely driven by organic lending growth.
For the second year running we met our pledge to provide £1 billion of net lending to businesses. Given our own entrepreneurial beginnings, we understand the important role that access to finance plays for all organisations. Delivering this pledge has allowed thousands of businesses to grow, recruit and innovate, benefiting their communities and contributing to the success of the UK economy.
We continue to have local business managers in store and on the phone whenever customers need them and remain committed to offering simple and fair products to our customers.
Our balance sheet continues to be underpinned by our strong capital position, supported by a further equity capital raise of £303 million in July 2018.
We also completed our first-ever Tier 2 debt issuance, to support our growth. We are grateful to our investors, both existing and new, who believe in our model and supported these transactions.
Looking forward, maintaining a strong capital position while having the resources to support further capital efficient growth remains a key focus for us. We plan to raise equity of c.£350 million in 2019 and have a committed standby underwrite to support the transaction. The Chairman and Executive Directors also intend to participate in this fund raise.
It remains our intention to maintain a minimum Common Equity Tier 1 ('CET1') ratio of 12% and a regulatory leverage ratio above 4%. Our capital planning also includes the issuance of up to c.£500 million of MREL-eligible securities in 2019 to meet our transitional MREL requirement by 1 January 2020.
2018 saw our work recognised across the board, including being named as one of the UK's 25 best companies to work for by Glassdoor.
We were also ranked top for overall service quality in personal banking in the second Competition and Market Authority's ('CMA') Service Quality Survey released in February 2019. We also came second among business account holders. We were the only bank to achieve a top five spot for all qualifying business and personal services.
Our integrated customer experience model is working well and we remain committed to our core strategy of creating FANS, attracting low-cost sticky deposits and lending at low risk. However, we are conscious of the need to adapt to the conditions in the wider economic, commercial and regulatory environment. To that end we are implementing four strategic initiatives to deliver the next phase of our growth: i) balancing growth with profitability and capital efficiency; ii) rebalancing the lending mix to optimise capital allocation and returns; iii) expanding our range of services to create new sources of income; and iv) improving cost efficiency. Each of the initiatives is set out in greater detail below.
In order to balance growth and profitability we will moderate deposit growth to the c.20% per annum range, with a concentration on relationship current accounts and variable accounts, while reducing the proportion of higher-cost term deposits. We will also manage our loan to deposit ratio to the 85-90% range over time, thereby balancing loan growth to optimise capital efficiency and profitability. The expansion of our physical store network and digital footprint to deliver an integrated customer experience will remain at the core of our model.
Our lending will be built around low-risk mortgages, which are both cost-efficient and deliver a higher return on equity. In addition, we will use the C&I funding to broaden business services, creating opportunities for further SME and commercial trading business lending, whilst reducing the proportion of lower return on equity ('ROE') commercial real estate loans. As the risk-reward trade-off in consumer unsecured lending improves, we will also grow in unsecured lending and credit cards.
We will drive expansion in fee income through launching new value-added services, especially for SMEs. The initiatives we expect to launch include developing our digital offering, particularly in relation to online business accounts. We will partner with companies that can work with our customers to make running their business more convenient across a range of issues from tax to payroll.
Part of ensuring the model is in the right shape for the broader environment will mean reducing our cost base. We recognise that the pace of improving operating leverage has been too slow and requires back-office transformation to scale appropriately with our growth. We have therefore identified a programme of initiatives that will enable us to achieve a 55-60% cost:income ratio in the medium term. These cost actions will enable us to scale more efficiently with our pace of growth, with digitisation and automation improving efficiency across our operations.
Finally, our application with the Prudential Regulation Authority ('PRA') regarding Advanced Internal Ratings-Based ('AIRB') migration for residential mortgages is ongoing but accreditation is not expected before 2021.
| Medium-term guidance | |
|---|---|
| Deposits growth | c.20% per annum, c.2% share of the market by 2023 |
| Store growth | c.8 new stores a year plus C&I funded store growth (2 stores in 2019) |
| Average deposits per store per month |
>£4 million |
| Loan to deposit ratio | 85% – 90% |
| Cost of risk | 15bps – 30bps through the cycle |
| Cost:income ratio | 55%-60% by 2023 |
| Capital | 12% minimum CET1 ratio and leverage ratio >4% |
| Return on equity | Low double digit ROE by 2023 |
2018 has seen us pass another set of incredible milestones. We have expanded our reach further than ever before, enabling more people to save for their future, buy their own home or support the growth of their business with us.
We have been rewarded in these endeavours by a 140% increase in underlying profitability to £50.0 million. Our statutory profitability increased by 117% to £40.6 million.
2019 will see us continue to focus relentlessly on creating FANS. We will also continue to invest in all areas of our business whilst balancing growth, profit and cost efficiency.
"It's really important for me to have a bank that supports my busy lifestyle. Metro Bank makes everything simple, convenient and quick. I was particularly impressed at how easy it was to open my current account online, which took less than ten minutes."
Holly's busy work schedule and active social life mean that she is constantly on the go. She wanted a new bank that gave her flexibility in when and how she managed her finances, and technology to help her keep on top of her income and outgoings. She was attracted to Metro Bank by our opening hours and the 'Insights' feature on our mobile app. Using cutting-edge 'selfie' identification and verification, Holly was able to open her new account at home in less than ten minutes. She then had the option of collecting her new card immediately in her local Metro Bank store or having it posted to her the next day.
"We put creating FANS at the heart of everything we do, which drives us to create innovative services to help them with all their banking needs."
Chinwe – Head of Technical Analysis and Design, Banking Solutions
Chinwe's role is focused on delivering game-changing new services that our customers really love, such as Current Account Online. She works with our Technology, Products and Business teams to design and deliver innovative, resilient and secure banking solutions. Her team provide support for all customer-facing channels, as well as back office operations teams to continue surprising and delighting our FANS.
Our Current Account Online is a great example of our integrated physical and digital customer experience. It combines the strengths of our flexible technology architecture with our growing store network. We give customers a choice of how they open and operate their accounts, truly bringing 'bricks and clicks' to UK banking.
Best Digital Onboarding Strategy Global Retail Banking Awards 2018
Best All Round Personal Finance Provider Moneynet Personal Finance Awards 2018
"We are not just a number to Metro Bank and that matters a lot! They are always friendly, welcoming and even know us by name. Anything which takes a month to get done elsewhere, Metro Bank does in just a few hours or days. Without them we would not be where we are today, and that is a fact."
Sapna Caterers
Muhammed's family-run business, Sapna Caterers, has grown to become one of the top Asian food caterers in London. Muhammed attended one of the regular business networking events hosted by Metro Bank at his local store in Slough. He was impressed by the unique customer service he experienced and chose to open a business current account with us. Our local business manager met with Muhammed the following day – and he's not looked back since. What he loves most about Metro Bank is the service he receives, 24/7, 365 days a year.
"Our physical network and digital footprint deliver an integrated customer experience, which supports our business banking customers in a way that suits them best."
Sanjeev – Local Director, Ealing
We believe SMEs are one of the most underserved communities in the UK. In Sanjeev's role as a Local Director, he acts as a personal contact point for the business customers we serve, focusing on providing relationship banking. Combined with our expanding digital capabilities in business banking, our focus on having a local presence supports our growing store network across the UK, as we work towards becoming the community bank of choice. It's all about making banking easy, straightforward and hassle free. That's why 15% of SME switchers in London join Metro Bank.
Best Business Account British Small Business Awards 2018
19
"Metro Bank's unique culture and quality customer service is what sets them apart from other banks. They demonstrate a pragmatic, down-to-earth and can-do approach in fulfilling our business requirements."
Slicker Recycling
Slicker Recycling is a market-leading specialist in the collection and recycling of waste oils and hazardous workshop waste. They were introduced to Metro Bank as part of their search for a long-term partnership bank that would add value and be flexible enough to support their growth aspirations. Metro Bank's entrepreneurial approach to understanding their business and financing requirements was a great match for Slicker's philosophy and culture.
"We find AMAZEING individuals to come and join the revolution in British banking; people who are as passionate about delivering great customer service and creating FANS as we are."
Carly – Head of Recruitment
Culture is at the heart of our business and begins on day one for new colleagues joining Metro Bank. We recruit, train and lead our colleagues to deliver great customer service as part of our unique business model. At Metro Bank, we believe in hiring for attitude and training for skill.
Carly's role is crucial in ensuring that we hire great people. Her team oversee the end-toend recruitment process and take an inclusive approach that attracts fantastic, diverse people who are aligned to our purpose and culture.
Finalist British Bank Awards 2018
"Metro Bank has been very helpful and easy to work with. I like that the team are really on the ball. They understand my needs well and act efficiently to provide the right solutions. Nothing is ever too much trouble for them."
Simon
Simon is a successful entrepreneur who is highly relationship driven. Unhappy with the level of service at his previous bank, he decided to make the switch to Metro Bank for the "high touch", personalised service that our Private Banking teams offer. He loves that his dedicated Private Banker is easily accessible at all times and also understands the needs of his business interests, including Future Energy Solutions, a global provider of lighting as a service.
Etiksha – Lead Private Banking Director, Private Banking – Professionals and Seniors
We're here to deliver a seamless 24/7 service. Our customers appreciate the continuity of service offered by their dedicated contact in our Private Banking teams, such as Etiksha. We combine quality, around-the-clock personal service with award-winning technology to make banking simple for our customers.
We take time to understand our customers' requirements, supporting both their business and personal banking needs. Our Private Banking model offers simple products that are transparent and easy to understand, supported by a bespoke service model. We focus on traditional banking and lending, rather than offering investment management products and our customers appreciate this straightforward approach.
Best All Round Personal Finance Provider Moneynet Personal Finance Awards 2018
David Arden, Chief Financial Officer
Since joining Metro Bank in the spring of 2018 I have been particularly impressed by the passion and dedication everyone at Metro Bank has towards our shared purpose of delivering a revolution in UK banking.
2018 has been another year of double-digit volume growth and we delivered a strong financial performance. The continued expansion of our store footprint to ten new locations, integrated with market-leading technology, is helping to strengthen our unique offering and in turn drive customer acquisition. During the year we added over 400,000 customer accounts which underpinned our 34% deposit growth, 48% lending growth and a statutory profit before tax increasing by 117% to £40.6 million.
Despite the strong year, we faced some headwinds in the second half of the year, as despite a further base rate rise, lending yields, particularly within the mortgage market, fell leading to income compression.
In January 2019, we announced that we had adjusted the risk weighting of certain commercial loans that had the combined effect of increasing our RWAs by £900 million. This doesn't impact the operational performance of the business and overall we remain well capitalised with a CET1 ratio as at 31 December 2018 of 13.1%.
To help our capital efficiency in 2019 we will be seeking to raise c.£350 million of equity, which will support our growth and provide continued certainty over our capital robustness. Our future growth will be at a slower rate than historically and we will focus on balancing profitability and capital efficiency to ensure we grow in the most optimal manner.
| 2018 £'million |
2017 £'million |
Growth | |
|---|---|---|---|
| Deposits | 15,661 | 11,669 | 34% |
| Customer accounts | 1,620,000 | 1,217,000 | 33% |
| % current accounts | 30% | 32% | |
| Commercial:retail deposit split |
53%:47% | 53%:47% | |
| Cost of deposits | 0.61% | 0.54% | 7bps |
During the year deposits from customers increased by 34% to £15.7 billion (2017: £11.7 billion).
Growth was primarily driven through customer acquisition, with the number of accounts growing from 1,217,000 to 1,620,000 at year end. This was supported by our new store openings, the launch of Current Account Online as well as the continued strong performance of our existing network.
Cost of deposits rose during the year to 61bps owing to combination of a further base rate rise, combined with a competitive deposit market. Our broad deposit mix which is made up of 30% current accounts helped cushion the impact of these factors and should continue to provide an advantage if and when base rates rise further.
We remain focused on being a deposit-funded bank and made our final drawdown from the Bank of England's Term Funding Scheme ('TFS') before it closed in February 2018. Our total borrowings under the scheme are £3.8 billion (2017: £3.3 billion), due for repayment from 2021.
| 2018 £'million |
2017 £'million |
Growth | |
|---|---|---|---|
| Loans and advances to customers |
14,235 | 9,620 | 48% |
| Total assets | 21,647 | 16,355 | 32% |
| Commercial:retail lending split |
31%:69% | 33%:67% | |
| Loan to deposit ratio | 91% | 82% | 9pps |
| Cost of risk | 0.07% | 0.11% | (4)bps |
Net loans and advances increased by 48% to £14.2 billion (2017: £9.6 billion).
This was driven primarily through organic growth in mortgages and commercial loans and was supplemented by the purchase of a portfolio of UK mortgages. The portfolio has a weighted average seasoning of c.13 years and has a similar credit risk and profile to our current mortgage book.
Although volumes have increased, the pricing of mortgages continues to be very competitive. The impact on income from this was slightly mitigated by the loan to deposit ratio increasing to 91% at the year end (2017: 82%). Pressure on mortgage yields looks set to continue into 2019 as excess market liquidity persists. Despite these challenges we remain well placed to capitalise on the opportunities ahead. We expect rates to normalise in due course.
2018 saw the introduction of IFRS 9 which, among other changes, impacted the level of credit impairment provision we recognise, which rose £22.7 million upon transition.
Despite the introduction of IFRS 9 cost of risk remains low at 0.07%, a 4bps decrease from 2017. Overall, the credit quality of the book remains strong, with average debt-to-values on residential mortgages and commercial term lending of 61% and 59% respectively (31 December 2017: 60% and 58% respectively). Consumer lending continues to remain a small part of our business, at 4% of gross lending. Looking ahead, well collateralised, low-risk SME and residential lending will continue to be our focus with an increasing presence in unsecured lending as the market normalises.
| 2018 £'million |
2017 £'million |
Growth | |
|---|---|---|---|
| Net interest income Other income |
330.1 74.0 |
241.0 52.8 |
37% 40% |
| Total income | 404.1 | 293.8 | 38% |
| Net interest margin ('NIM') |
1.81% | 1.93% | (12)bps |
| Customer NIM | 2.21% | 2.19% | 2bps |
Our income grew 38% year-on-year to £404.1 million, driven by increasing lending volumes and a higher loan to deposit ratio. NIM fell by 12bps year-on-year due to yield compression, primarily due to front book lending pricing, driven by excess market liquidity caused by the introduction of ring fencing. NIM was also impacted by £7.2 million of interest costs related to our tier 2 debt, which we issued in June. Customer NIM, which strips out the costs of tier 2 debt interest as well as the effect of the Bank of England Term Funding and Funding for Lending schemes rose by 2bps.
Other income, which consists primarily of fees and commissions, rose 39%, reflecting both the growth in volumes as well as the continued development and deepening of our relationships with customers. Looking forward, these additional sources of revenue represent an opportunity to increase income as our relationships with our customers deepen and we launch a broader ranges of services.
| 2018 £'million |
2017 £'million |
Growth | |
|---|---|---|---|
| Depreciation and amortisation |
45.1 | 33.4 | 35% |
| Total operating expense |
355.5 | 266.9 | 33% |
| Cost:income ratio | 88% | 91% |
Operating expenses grew by 33% during the year to £355.5 million, reflecting the continued growth of the business and network expansion. We continue to experience positive operating jaws helping drive the cost:income ratio down to 88% (2017: 91%), although we recognise there is more work to do.
We are currently working on streamlining our operations to ensure we continue to grow in a cost-efficient manner.
Depreciation and amortisation grew at a faster rate compared to overall cost, up 35% year-on-year. This reflects our ongoing investment in our integrated offering and spending on projects to maintain our cyber resilience.
As we continue to grow we need to ensure our cost base is optimal and our processes are scalable to gain maximum efficiencies as volumes increase. Over the course of 2019 we will be looking to transform and re-engineer many of our functions to ensure this is the case.
For our next stage of growth we will use targeted initiatives to move towards our cost:income target, including making our back office functions more efficient. This will be done through a process of streamlining and automating processes combined with moving some of our support functions to shared service locations outside of London as we further increase our presence outside of the South East.
In 2018, we opened a further 10 stores taking our total footprint to 65 locations. At the end of the year, 56 sites were making a positive contribution including all stores open 12 months or more.
Going forward, we will be putting a greater emphasis on optimising our store roll out to ensure this appropriately balances capital, growth and efficiency.
In February 2019 it was announced we had been successful in securing £120 million of Capability and Innovation funding as part of our RBS Alternatives Remedies Package application. This funding will be used to accelerate our expansion into markets in the North of England. We will open our first stores utilising these funds later in 2019.
We recognise the benefits to society that arise from full participation in the tax system. As with everything we do, we are committed to acting with integrity and honesty as set out by the tax strategy, policies and practices we adopt. We made a total tax contribution in 2018 of £120.3 million, which comprised £78.4 million of taxes we paid and a further £41.9 million of taxes we collected.
Our net deferred tax asset fell from £54 million as at 31 December 2017 to £40 million as at 31 December 2018. This was primarily driven by the utilisation of brought forward tax losses of £4 million and the required release of £9 million of our share-based payment deferred tax asset due to a fall in the Metro Bank share price over the reporting period.
In 2018 our tax expense recognised in the income statement was £13.5 million (2017: £7.9 million). Our effective tax rate for the year was 33.2% (2017: 42.2%).
26
We are committed to maintaining a strong capital base in excess of regulatory minimums. As a fast-growing bank our profits are not yet sufficient to support the level of growth in qualifying regulatory capital we require. During 2018 we raised an additional £303 million equity via an accelerated book build. The raise was supported by both existing and new shareholders alike and completed at full market price.
Our capital position was further supported by a £250 million inaugural Tier 2 debt raise. This was a significant event for the Bank as we prepare to start raising minimum requirement for own funds and eligible liabilities ('MREL') debt in 2019. The MREL framework outlined by the Bank of England determines the minimum amount of loss absorbing resources banks require. The transitional MREL requirements will apply from 1 January 2020 and will see us need to raise c.£500 million of MREL during 2019.
| 2018 £'million |
2017 £'million |
Growth | |
|---|---|---|---|
| CET1 capital | 1,171 | 897 | 31% |
| Risk-weighted assets ('RWAs') |
8,936 | 5,882 | 52% |
| CET1 ratio | 13.1% | 15.3% | (220)bps |
| Total regulatory capital ratio |
15.9% | 15.3% | 60bps |
| Regulatory leverage ratio |
5.4% | 5.5% | (10)bps |
| Leverage | 6.4% | 6.7% | (30)bps |
The introduction of the new leasing standard, IFRS 16, will bring £313 million of additional RWAs onto our balance sheet. We will be adopting IFRS 16 in the most capital efficient manner; however, as a growth organisation with a young lease portfolio the impact will be more pronounced for us compared to many of our peers.
Over the medium term we expect to achieve greater capital efficiency from AIRB migration for residential mortgages. Our application with the PRA is ongoing but accreditation is not expected before 2021.
In January 2019, we announced that we had adjusted the risk weighting of certain commercial loans secured on commercial property and certain specialist buy-to-let loans that had the combined effect of increasing our RWAs by £900 million. RWAs are calculated by applying an appropriate percentage of the value of a loan or other asset, according to the type of asset and some risk factors. There are two principle changes we have made in this process: to change the weighting placed on certain commercial loans secured by commercial property from 50% to 100%, and to change the weighting on certain PBTL assets from 35% to 100%, either where the underlying security is complex or part of a larger portfolio. While this adjustment had an impact on the capital surplus we hold, we remain well capitalised and hold surpluses to both regulatory requirements and management appetite.
We are learning the lessons from this and will continue to improve our systems and controls around capital and risk-weighted assets.
2018 has been a strong year for us, despite the increasing headwinds in its latter half; however, I am excited for the growth to come in 2019. Although we will continue to face significant headwinds we will continue to focus on delivering our strategy and maximising the beneficial effects of our network. 2019 should also provide clarity around key macroeconomic uncertainties including Brexit.
We will also utilise the money from our successful bid for Capability and Innovation funding to help deliver continued support of SME businesses. This will include the opening of our first stores in the North. Alongside this we will continue to grow the rest of the business and move closer towards our targets.
Chief Financial Officer 10 April 2019
Aileen Gillan, Chief Risk Officer
Our unique culture aligns our people, processes and systems to the way we manage the risks inherent in our business activities. This ensures that our operations are carried out in a safe and compliant way, balanced with the superior customer service that enables us to create FANS.
Our approach to risk management consists of:
We believe a culture that truly focuses on creating FANS by exceeding customers' expectations will deliver consistently great outcomes.
All colleagues are responsible for managing risk as part of their day-to-day role. Customer-facing colleagues are at the forefront of risk management, along with their line managers. The Risk team oversees risk management activities. It also supports other colleagues in their risk management work, for example, by providing centralised 'bump-up' support contacts for more complex requirements, freeing up customer-facing colleagues to focus on creating FANS.
The risk and control framework is designed to ensure that: all principal and emerging risks are identified, assessed,
mitigated, monitored and reported; risk appetite is clearly articulated and policies aligned to it; appropriate processes, systems and controls are in place to support all colleagues in performance of their roles within risk appetite; and ongoing analysis of the environment in which we operate takes place to ensure we identify emerging risks and regulatory requirements.
Our unique, pervasive culture supports risk awareness by encouraging every colleague to think about the relationship between their role and our goal of creating FANS whilst growing safely and sustainably; and to be comfortable asking questions when they are not clear about policy to ensure their actions do not result in financial loss, reputational damage or customer detriment.
In January 2019, we announced that we had adjusted the risk weighting of certain commercial loans secured on commercial property and certain specialist buy-to-let loans that had the combined effect of increasing our RWAs by £900 million. Whilst the risk weightings have been adjusted, there is no deterioration in the credit quality of the affected assets. Asset quality remains strong overall, consistent with our prudent approach to lending, and reflected in our low cost of risk and non-performing loans ratio. We have now completed a review of the commercial loan book as at 31 December 2018 supported by a major professional services firm and we are satisfied that the risk weightings have been assigned appropriately. We are continuing to work on further enhancements to our systems.
The Board is responsible for setting strategy, corporate objectives and risk appetite. The strategy and risk appetite considers the interests of our customers, shareholders and other stakeholders. On the advice of the Risk Oversight Committee ('ROC'), the Board approves the level of risk acceptable under each principal risk category, whilst providing oversight to ensure there is an adequate framework in place for reporting and managing those risks. The Board has delegated responsibility for reviewing the effectiveness of this framework to the ROC.
It is also responsible for maintaining an appropriate control environment to manage risk effectively, and for ensuring that the capital, liquidity, and other resources are adequate to achieve our objectives within our risk appetite.
The Board has delegated responsibility for reviewing the effectiveness of internal controls to the Audit Committee. This committee monitors and considers the internal control environment, internal and external audits and risk assurance, and is assisted in its oversight role by our Internal Audit function. Internal Audit carries out both regular and ad-hoc reviews of risk management controls and procedures and reports the results to the Audit Committee. Internal Audit and the Audit Committee will review the commercial RWA controls enhancement programme in 2019. The Director of Internal Audit's reporting line is to the Chairman of the Audit Committee, with a dotted line to the CEO, and therefore supports the function's independence.
Board role: Setting risk appetite, approval of risk management framework and risk principles.
Executive leadership committees: Oversight of risk management consistent with appetite, recommendations of risk strategy changes to Board.
Policy framework and three lines of defence: Policies which are aligned with risk and robust
Procedures and processes are aligned to risk and colleagues are trained and highly aware in terms of risk categories, controls and mitigation responsibilities.
Our Chief Risk Officer ('CRO') leads the Risk function, which is independent from operational and commercial functions. She is responsible for ensuring that appropriate risk management processes, policies and controls are in place, that they are sufficiently robust, that key risks are identified, assessed, monitored and mitigated, and that we are operating within our risk appetite.
The Risk team provides specialist knowledge and support to colleagues, acting as a reference point for advisory queries, whilst also overseeing colleagues and the risk management and controls in place. It operates themed, targeted and ad-hoc reviews to provide assurance to the leadership team, and ultimately to the Board, that risks are properly managed, controls are effective, and that we are not exceeding our risk appetite.
We've established our risk management policies to identify and analyse the risks we face, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. The Risk team regularly reviews these policies and controls to verify compliance and to reflect changes in market conditions and our activities. We use training and management standards and procedures to develop a robust and effective control environment – one where all colleagues understand their roles and obligations.
Our approach to risk appetite is to set relevant quantitative and qualitative measures against which risk management performance can be reviewed for each of our principal risks. Risk appetite is set by the Board, based on the recommendation of the ROC, and implemented by the Executive Risk Committee. Our risk appetite has been developed in line with our business plan, strategy and vision, and is underpinned by a culture in which all colleagues embed risk considerations in decision-making and are rewarded accordingly.
The ROC assists the Board in providing leadership, direction and oversight with regard to risk governance and management, and also assists the Board in fostering a culture that emphasises and demonstrates the benefits of a risk-based approach to risk management and internal controls when creating FANS. It works closely with the Audit Committee. It is chaired by a Non-Executive Director and meets at least quarterly. Its responsibilities include:
The CEO, supported by the Executive Leadership Team, is responsible for executing the strategy and managing risk exposures and making decisions and recommendations to the Board, as appropriate, via the following executive risk committees:
This graphic illustrates the key committees of the Bank with risk responsibility – to keep it simple, not all are shown.
The first line of defence is operational management, who manage risk by maintaining appropriate systems and controls that are operated and effective on a daily basis. The second line of defence comprises the risk management function, providing advice and oversight through specialist support teams and the risk committees. The third line of defence is Internal Audit, providing independent assurance through internal reviews and reporting the results to the Audit Committee.
Our principal risks represent defined groupings that we use to help consistently identify, assess, manage, monitor and report risks. Using consistent risk categories enables risks to be aggregated to determine their overall impact to the organisation. The principal risks are designed to be both comprehensive and mutually exclusive.
Our principal risks are detailed below. In addition to the eight risks listed we also have ninth principal risk in the form of strategic risk. Strategic risk is a manifestation of material instances, or a combination of the other eight principal risks. As such strategic risk is assessed in line with those principal risks.
These are detailed further on pages 32 to 40
31
Credit risk is the risk of financial loss due to a borrowers failure to meet the terms of any contract or otherwise fail to perform as agreed.
For more information on our strategy please see pages 10 to 11
The credit risk appetite and policy is owned and approved by the Board annually. Portfolio-level policies and credit risk appetite are recommended by the Executive to the Board via the Credit Risk, Policy and Appetite Committee ('CRPAC') and the Risk Oversight Committee ('ROC'). The credit risk appetite is specified as a set of key performance indicators ('KPIs'), concentration measures, capital and impairment components. Policy and appetite are based on sound credit risk principles.
Our foremost exposure to credit risk is through the loans and advances we make to our customers. We primarily mitigate credit risk through holding collateral against our residential mortgage and commercial term loan portfolios. Collateral is usually held in the form of real estate, guarantees and other liens that we can call upon in the event of the borrower defaulting. All real estate assets taken as security are supported by an external valuation with a first fixed charge registered at the land registry. At 31 December 2018 94% of our loans consisted of retail mortgages and commercial term loans secured on collateral with average debt-to-value of 61% (2017: 60%) and 59% (2017: 58%) respectively.
Our exposure to loans of greater than 100% remains low at less than 1% of retail mortgage lending (31 December 2017: 1%) and 11% of commercial term lending (31 December 2017: 12%). On the retail mortgage lending portfolio, these loans have principally been part of portfolios we have acquired. On the commercial term lending, additionally forms of collateral (such as debentures, unsupported guarantees providing recourse to our customers) are excluded from these debt-to-value ('DTV') figures, so the true credit risk exposure on these loans is lower and is underwritten on the strength of all types of collateral.
The approval for consumer lending and retail mortgages is automated and underpinned by scorecard and policy rules. The end-to-end process is overseen by our colleagues in the first line and approved in accordance with agreed delegated lending authorities.
We have additional limited credit exposure to committed and undrawn amounts, such as unused overdraft limits and facilities. At 31 December 2018 we had £242 million (31 December 2017: £138 million) of undrawn credit card and overdraft facilities. We mitigate credit risk in respect of these undrawn balances by regular customer monitoring to allow undrawn limits to be removed if we observe credit quality deterioration.
We have exposure to refinance risk. This is the risk from loans to customers who are subject to a bullet or balloon payment at contractual maturity but who find themselves unable to refinance or otherwise make this payment. This risk arises principally in the mortgage book where the exposure to interest-only loans stands at £4.4 billion. There is further exposure to refinance risk in the Commercial Book of £1.6 billion from interest-only loans and a portion of non-fully amortising term loans.
We manage this risk by ensuring the borrower has an appropriate repayment plan in place or would be able to refinance the lending at the end of the term. Also by ensuring these loans are appropriately collateralised (see lending and collateral section above) we would have first charge in the event of default by the borrower.
We manage the level of credit risk concentration based on individual borrowing entities, deal type and sector. We have specialist sector lending teams including in healthcare, hospitality, property and not for profit.
We also manage our lending exposure by region. Our current residential mortgage and commercial term lending is concentrated within London and the South East, which is representative of our current customer base and store footprint. As we expand our footprint over time we envisage our geographical exposure of lending will change. All of our current loans exposures are secured on UK based collateral.
As well as our loans and advances, the other main area where we are exposed to credit risk is within our Treasury portfolio. At 31 December 2018 we held £4.1 billion of investment securities which are used for balance sheet and liquidity management purposes, of which £3.4 billion is eligible as collateral at the Bank of England,
We have a robust securities trading and investment policy which requires us to invest in high-quality liquid debt instruments. At the 31 December 2018 81% of our investment securities were rated as AAA (31 December 2017: 79%) with a further 15% (31 December 2017: 13%) rated AA- or higher with minimal use of derivatives for hedging purposes.
Additionally we hold £2.5 billion (31 December 2017: £2.2 billion) in cash balances, which is either held by ourselves or at the Bank of England, where there is minimal credit exposure.
Understand more about our credit risk exposure on pages 136 to 149
We measure credit quality for impairment purposes using a suite of IFRS 9 models. We have a strong suite of credit risk models and have invested heavily in credit risk model development in support of enhancing our IFRS 9 calculation, stress testing capability and IRB programme.
Our IFRS 9 models incorporate the impact of a range of possible future economic scenarios we have placed a higher probability on our Downside scenario (a worsening economic outcome), largely to reflect a greater likelihood of a worse outcome for the UK economy due to exiting the European Union. The models used are subject to the internal model governance, are validated by an independent team, regularly monitored and annually reviewed.
Key Performance Indicators ('KPIs') are defined, reported against and escalated through to the Risk Oversight Committee. KPIs on portfolio concentrations are included in the monitoring reviewed by the Executive and Board Committee as part of our risk appetite.
We monitor lending policy exceptions and their subsequent performance.
Our stress testing capability has been enhanced significantly over the last 12 months in order to account for the introduction of the IFRS 9 models.
Credit risk quality assurance reviews are performed regularly and cover portfolios and sector exposure. The reviews cover top exposures, portfolio trends, concentration and key risk areas.
As of 31 December 2018 all exposures are measured under the standardised approach for credit risk for regulatory capital, we are parallel running the IRB rating system for residential mortgages and a slotting solution for commercial real estate will be implemented during 2019.
Credit risk is overseen by the Chief Risk Office ('CRO'), Credit Risk, Policy and Appetite Committee ('CRPAC') and the Risk Oversight Committee ('ROC').
Three functions support the management of credit risk and report to the CRO:
Operational risk is the risk of direct or indirect loss from failed or inadequate processes, people or systems, or exposure to external events.
For more information on our strategy please see pages 10 to 11
Change since 2017: No change
Link to strategy: Unique culture
We aim to maintain robust operational systems and controls and seek a low level of operational risk. We have detailed policies, procedures and controls in place which are designed to evaluate, monitor and report these risks as well as, where appropriate, develop mitigation plans to minimise the impact of losses suffered in the normal course of business (expected losses) and to avoid or reduce the likelihood of suffering a large extreme (or unexpected) loss.
We continue to invest in the ongoing maintenance and development of our key controls, which combine system and process measures to mitigate risk or to minimise any impact on us or our customers.
The pace of our growth has the potential to increase the execution risks associated with delivery of consistently AMAZEING service to our customers. Therefore, in 2018, we continued to invest heavily in our systems. This included ongoing development of our end-to-end technology infrastructure to provide a single customer view, enabling better customer service. Where possible, we have invested in fully or semi-automated controls to support us in managing within risk appetite, while freeing up colleagues to focus on our customers.
We continue to grow our omnichannel presence, offering customers a choice in how they interact with us to suit their needs. This increases our digital risk, in an environment where online and mobile technologies are changing the way banks interact with customers. To mitigate this risk we are investing even more in our digital platforms to build resilient and secure technologies. The current era of evolving technology requires us to maintain a secure digital infrastructure. This is central to our vision of creating FANS, by protecting their data.
As we continue our growth journey, we do so safely through continued investment in our colleagues and training so that we can continue to support them in delivering consistently AMAZEING service to our customers, whilst maintaining a safe, reliable and resilient banking operation.
Operational resilience has been a central part of our risk management activity throughout 2018. This includes assessing a number of top operational risks, including: business continuity; technology; cyber; information security; payments; and third-party suppliers and ensuring we continue to appropriately mitigate these.
We measure operating risk using a number of quantitative and qualitative metrics. These KPIs are defined, reported against and escalated to the ROC.
We continuously develop and embed our approach to the management of operational risks with the aim of maintaining robust operational processes, systems and controls. In 2018 we enhanced our risk and control framework through the further development of our tools and processes for identifying, assessing, managing, monitoring and reporting operational risks. Key developments included: operational (including IT) resilience; the deployment of new automated controls to mitigate the fraud risk experienced widely by the industry; operational disruption event response planning; and, enhanced operational risk scenario analysis, particularly as part of the our Internal Capital Adequacy Assessment Process ('ICAAP').
Liquidity risk is the risk that future financial obligations are not met or future asset growth cannot occur because of an inability to obtain funds at a reasonable price within a reasonable time.
For more information on our strategy please see pages 10 to 11
The purpose of our liquidity policy is to ensure that we maintain liquidity resources which are sufficient, both as to amount and quality; to ensure that liabilities can be met as they fall due; and to ensure that we maintain a prudent funding profile, appropriately diversified within the context of a deposit-led bank. Our approach is to ensure that we can both meet payments as they fall due and support asset growth in line with plan, in both normal conditions and in the event of a liquidity stress, and that we can survive a severe liquidity stress event and continue as a going concern.
Our mid-term guidance as set out on page 15 underlines our approach of having a long-term loan-to-deposit ratio of 85-90%. Our deposit-led approach means we do not have reliance on wholesale funding to enable our ongoing lending.
Our deposits are diverse and are generally low cost. This means they are less sensitive to competition within the deposit market, especially in a rising base rate environment. At 31 December 2018 53% of our deposit came from commercial customers (31 December 2017: 53%) with the remaining 47% (31 December: 47%) coming from retail customers. Additionally 30% of deposits at year end (31 December 2017: 32%) were in the form of current accounts, with the remainder split between a combination of instant access and fixed-term savings products. In 2018 our cost of deposits was 0.61% (2017: 0.54%) below the current Bank of England base rate of 0.75%.
We aim to hold a prudent level of liquidity to cover unexpected outflows, ensuring that we are able to meet financial commitments for an extended period. We recognise the potential difficulties in monetising certain assets, so set higher-quality targets for liquid assets for the earlier part of a stress period. We have assessed the level of liquidity necessary to cover both systemic and idiosyncratic risks and maintain an appropriate liquidity buffer at all times. Our Liquidity Coverage Ratio ('LCR') ensures that we comply with our own risk appetite as well as regulatory requirements.
Our liquidity portfolio consists of cash and balances at the Bank of England as well as high-quality liquid assets ('HQLAs') that are available to be sold to raise funding in the event of stress. We are conscious of the cost implications of holding high levels of liquid assets and seek to avoid holding a "buffer over a buffer".
The Contingency Funding Plan ('CFP') details a series of indicators which would tend to suggest a liquidity stress event may be in train. It assigns responsibilities and actions to key individuals, specifies time frames, and establishes the Contingency Funding Committee ('CFC') chaired by the CFO which sits as required in the event of a liquidity stress.
Understand more about our liquidity risk exposure on pages 149 to 151
Change since 2017: No change Link to strategy:
Diversified low-cost deposits
Our asset and liability management ('ALM') model is used to capture all positions across the Bank and evaluate their liquidity. We calculate our LCR and perform stress testing of our liquidity daily. Forward-looking short-range forecasts are produced at least monthly.
Early warning indicators ('EWIs') are set out in the Liquidity Policy. Colleagues monitor these and bump up any triggers. A cost of funds model is used help colleagues account for liquidity, capital and interest rate risk in pricing.
We perform an Internal Liquidity Adequacy Assessment Process ('ILAAP') every year for the identification, measurement, management and monitoring of liquidity, having due regard for the PRA Rulebook section 'Internal Liquidity Adequacy Assessment'. Treasury seeks ILAAP input from a range of teams including Finance and Products.
The conclusions of the ILAAP are reviewed and approved by the Board, assisting in:
For liquidity risk, we assess against internal and external requirements. The chief external requirement is the LCR, and a series of internal requirements are set and maintained through our ILAAP.
Treasury risk has responsibility for our compliance with liquidity policy and strategy. The Regulatory Reporting team monitors compliance with LCR. The ALCO is responsible for liquidity and funding risk. Liquidity and funding cannot be considered in isolation, and we have regard to liquidity risk, profitability, and capital optimisation when considering funding sources. We issued subordinated debt for the first time in 2018, primarily as a capital management measure.
Our liquidity mismatch chart is in note 24 to the financial accounts. Our liquidity position has remained stable over the year with our LCR remaining strong at 139% (2017: 141%).
Market risk is the risk that earnings or the economic value of equity will underperform due to changes in interest rates, foreign exchange rates, or other financial market asset prices. Our ability to manage market risks contributes to our overall capital management.
For more information on our strategy please see pages 10 to 11
Change since 2017: Risk increased
Link to strategy: Low-risk diversified lending
As maturity transformation is one of the primary roles of a bank, we are exposed to interest rate risk by many of our activities. Our Market Risk Policy is set with a view to ensuring that our funding resources are invested in assets that satisfy our earnings risk and economic value risk appetites.
We benefit from natural offsetting between certain assets and liabilities, which may be based on both contractual and behavioural characteristics of these positions. Where natural hedging is insufficient we hedge net interest rate risk exposures appropriately, including, where necessary, with the use of interest rate derivatives. We enter into derivatives only for hedging purposes and not as part of customer transactions or for speculative purposes.
Our Treasury and Treasury Risk teams work closely together and ensure that risks are managed appropriately – and that we're well positioned to avoid losses outside our appetite, in the event of unexpected market moves.
We have very limited exposure to foreign exchange risk. Foreign exchange assets and liabilities are matched off closely in each of the currencies we operate and less than 5% of our assets and liabilities are in currencies other than pounds sterling. We do not have any operations outside the United Kingdom. We offer currency accounts and foreign exchange facilities to facilitate customer requirements but do not perform speculative trading activities.
We have hedge accounting solutions in place to reduce the volatility in the income statement arising from these hedging activities.
We are mindful of upcoming regulatory changes, such as ring-fencing, as we shape the investment portfolio in 2019 and beyond – and are working to reduce the proportion of our assets that are ineligible for a ring-fenced entity. As our loan to deposit ratio approaches its long-term target, natural roll-off of ineligible assets is expected to continue, and we will cease to acquire assets which a ring-fenced entity may not hold.
Understand more about our market risk exposure on pages 151 to 152
We measure interest rate risk exposure using:
The frequency of calculating and reporting each measure varies from daily to quarterly appropriate to each risk type.
We use an integrated Asset and Liability Management ('ALM') system which consolidates all our positions and enables the measurement and management of interest rate repricing profiles for the entire Bank. The model takes into account behavioural assumptions as specified in our Market Risk Policy. Material assumptions can be updated more frequently at the request of business areas, in response to changing market conditions or customer behaviours.
We measure and monitor our exposures to foreign exchange risk daily and do not maintain net exposures overnight in any currency other than pounds, beyond de minimis amounts.
Interest rate risk measures have limits set against them through the Market Risk Policy, and these are monitored on a regular basis by the Treasury Risk team. Measures close to the limits are escalated to Treasury in order to enable prompt action, and limit excesses are escalated to the ALCO. A digest of interest rate risk measures and details of any excesses are presented monthly at the ALCO.
Financial crime risk is the risk of financial loss or reputational damage due to regulatory fines or penalties, restriction or suspension of business, or cost of mandatory corrective action as a result of failing to comply with prevailing legal and regulatory requirements relating to financial crime (which we define to include internal or external fraud, anti-money laundering/counter terrorist financing, bribery and corruption and sanctions compliance).
The Risk team define our risk appetite and recommend this to the Board for approval. In order to monitor the effectiveness of our control framework and the alignment with our risk appetite, KPIs are defined, reported against and escalated to the ROC.
We invest in and refine our financial crime technology such as customer screening, payment profiling and customer authentication systems where we have evolved the effectiveness of these technology capabilities to reflect our risk appetite. We have also invested in enhancing our data analytics capabilities to further enhance our fraud prevention, detection and investigation controls.
In 2018 we saw fraudsters taking advantage of external operational disruption events impacting customers and financial institutions. We continue to invest in our operational resilience capabilities to ensure that we are proactively avoiding, responding, recovering and learning from internal and external operational incidents to minimise the impact on our customers.
We launched our "Be Your Own Hero" campaign designed to provide our customers with new fraud trends as well as hints and tips to enable them to protect themselves from becoming a victim of fraud.
We anticipate that in 2019 we will continue to see an increase in more sophisticated social engineering cases impacting our customers, with fraudsters adapting and very closely mimicking the Bank. This is making it harder for customers to identify targeted fraud attempts and protect against them even with targeted customer fraud awareness communications and campaigns. There is an interaction with our cyber security, data privacy and cyber risk awareness in this area.
A key focus of 2018 was strengthening our dedicated financial crime specialist resource and equipping this resource and our colleagues across the Bank with specific training. We increased our headcount across both lines of defence and invested substantially in equipping a number of our colleagues with industry recognised financial crime qualifications. We rolled out further training and education to key colleagues in our stores.
We actively conduct horizon scanning activity to identify emerging trends and typologies as well as to identify and prepare for new legislation and regulation. As required, we will update our control framework to ensure alignment with these risks.
Change since 2017: No change
Link to strategy: Diversified low-cost deposits
The Financial Crime Risk team own our control framework with accountability for execution owned by our colleagues across the first line. The Risk team define our risk appetite and recommend this to the Board for approval. In order to monitor the effectiveness of our control framework and the alignment with our risk appetite, Key Performance Indicators are defined, reported against and escalated through to the Risk Oversight Committee. We report monthly on our Bank wide account opening pass rates, fraud volumes and associated operational losses through this process.
Our policy framework also sets out key requirements which must be complied with consistently to manage our risk.
We have risk-based audit and assurance plans to monitor the effectiveness of our controls. Dedicated and skilled resources are in place to complete these reviews with findings and recommendations tracked through our financial crime governance structure.
We maintain policies and minimum standards, aligned to our legal and regulatory obligations which also articulate our risk appetite.
Each year we complete a financial crime risk assessment to ensure that our financial crime control framework is commensurate and robust to manage our inherent business risks across each of the four areas.
We participate in external industry forums including being an active member of the Cyber Defence Alliance and liaise with government bodies such as the Home Office, HMRC, Financial Conduct Authority ('FCA') and law enforcement to support our identification of new and evolving risks.
Regulatory risk is the risk of financial loss or reputational damage due to regulatory fines or penalties, restriction or suspension of business, or cost of mandatory corrective action as a result of failing to adhere to applicable laws, regulations and supervisory guidance.
For more information on our strategy please see pages 10 to 11
Risk increased Link to strategy:
Change since 2017:
Low-risk diversified lending Diversified low-cost deposits
We have no appetite for regulatory risk. We aim to comply with the relevant rules, regulations and sourcebooks. We have policies and procedures in place to ensure compliance with the regulatory obligations, and robust oversight and monitoring to evidence compliance. Alongside this we regularly engage with the PRA, the FCA, and other industry bodies to proactively manage this risk.
Our mitigation strategy favours risk avoidance through ensuring compliance with our relevant rules and requirements. We seek to achieve this through the allocation of appropriate resources for regulatory compliance advisory and oversight activities. In instances which challenge our ability to comply or remain compliant with a particular rule, we seek to collaborate and engage early with our regulatory supervisors to reduce the risk to an acceptable level.
Our Board, ROC and Executive Leadership Team (via the Executive Risk Committee) continue to monitor and oversee our focus on maintaining regulatory compliance. This includes periodic reporting on regulatory themes, regulatory changes on the horizon and the regulatory environment, alongside supporting key risk measures and Boardapproved policies and standards.
We have policies, procedures and standards in place to ensure compliance with our regulatory obligations. This is supported through our Enterprise Risk Management Framework by oversight and monitoring activity to evidence compliance.
As part of our ongoing supervision by the PRA, the PRA helped us identify potential inconsistencies in our regulatory reporting. Following this, we conducted an internal review of our risk-weighting of certain commercial loans, supported by one of the big four professional service firms. This work identified that some adjustments were required to our RWAs. On 26 February 2019, we received notification that the PRA and FCA is investigating the circumstances and events that led to the RWA adjustment. We are satisfied that the risk weightings have now been assigned properly. We are continuing to work on further enhancements to our systems and controls.
As an industry we are increasing regulatory obligations including minimum requirements for own funds and eligible liabilities ('MREL'), IFRS 16, IFRS 9, the second Payment Services Directive ('PSD II'), Open Banking and General Data Protection Regulation ('GDPR'). The Board and Senior Management are focused on responding in a timely and effective way to these changes including ensuring we are appropriately resourced and have sufficient capability in these areas.
Conduct risk is the risk of treating customers unfairly, and delivering inappropriate outcomes that lead to customer detriment.
For more information on our strategy please see pages 10 to 11
Change since 2017: No change
Link to strategy: Unique culture
We have no appetite for conduct risk. We provide customers with simple, fairly priced products delivered with unparalleled levels of service and convenience and we are committed to avoiding materially unfair outcomes for our customers.
Our simple, transparent product range and activities continue to help ensure that customer outcomes are fair. Our colleagues are fully trained in all relevant products and services and these are delivered to our customers through all channels, with openness and transparency. We believe in looking after our existing customers and will never offer teaser rates or better rates for new customers that aren't also available to our existing customers. Our products are reviewed regularly to ensure they continue to meet customer needs and operate as expected. We do not undertake any financial promotions or marketing and are committed to ensuring that our communications are clear, fair and not misleading. Sales incentives in stores neither exist nor are perceived by colleagues to exist.
Our service-led business model and absence of legacy issues give us an inherent advantage. We are committed to doing the right thing for our customers and to making every wrong right.
We measure and monitor conduct risk through product governance activity, compliance monitoring, analysis of expressions of dissatisfaction, root cause analysis and reporting through customer treatment fora. We also use our 'Voice of the Customer' surveys to inform continuous improvement activity. Key performance Indicators are also defined, reported against and escalated to the ROC.
The simplicity of our offering drives a low level of reportable complaints, below the industry average. As well as monitoring the trends in the metrics outlined above we constantly analyse the root cause of complaints and any underlying trends, to identify opportunities to improve service provision while delivering consistently fair outcomes for customers.
Model risk is the potential for negative outcomes from random or systematic errors in model development, input, calculation or use of outputs. Models are always approximations and never perfect and there are therefore risks associated with using them. These risks range from their theoretical basis, the data and methods used in their construction, the economic conditions under which they are developed, and their use.
For more information on our strategy please see pages 10 to 11
There is a low appetite for model risk. This is defined as part of our overall risk appetite and is regularly monitored by the CRPAC and ROC. All models are evaluated on the basis of our model governance framework and detailed procedures and target operating models are in place to manage the risk.
CRPAC is the designated committee for the management of model risk. The Model Governance Committee ('MGC') is the technical committee overseeing the model risk lifecycle. Any material model is presented to the CRPAC for approval ahead of implementation or model changes.
The CRPAC defines and approves the policies and procedures relevant to model risk and approves the model risk appetite on an annual basis. The MGC owns the minimum standards and target operating models to mitigate model risk and also defined roles and responsibilities, with clear ownership and accountability.
The model governance function maintains a model inventory which records key features of models including ownership and review schedules. The model governance function also tracks model risk and actions.
An independent model validation function is part of the Enterprise Risk Function. This team is independent from the Model Development team and is responsible for reviewing the model development submissions and maintains a model validation action log to track model risk mitigation plans. Models are also subject to internal and external audit.
Change since 2017:
Link to strategy: Diversified low-cost deposits
A set of KPIs are regularly reported and discussed at the MGC, CRPAC, ROC and Board. On a monthly basis the CRPAC reviews any material validation actions and tracks their completion.
A dedicated Model Monitoring team are responsible for assessing the ongoing performance of models against pre-specified tolerances approved by the CRPAC as part of the model monitoring standards. Model monitoring is regularly performed and results are discussed at the MGC and CRPAC where actions are agreed and tracked for completion.
The credit cycle is the expansion and contraction of access to credit over time. Credit cycle risk is the risk of our customers not being able to access credit in adequate quantities when required, causing pressure on their cash flow and ability to meet credit obligations when due.
Cycle risk is systemic, affecting a number of providers of finance, but also idiosyncratic, affecting specific individuals, businesses and sectors. It typically does not have a tangible measure.
Credit cycles tend to drive the economic cycle which, over a period of time, has four distinct stages.
Cyber risk management continues to be an area of key focus. We aim to maintain robust cyber security systems and control measures, and seek a low level of risk in both of these areas.
To mitigate the risk we combine traditional information security controls with a cyber intelligence capability, and a proactive partnership with law
Recent disruptive events across the financial services industry, and beyond, evidence the importance of safe, resilient operations. Increasing external complexities compound the risk exposure across the industry. In response we are committed to investing in the continued enhancement of resilience controls and capabilities, so that we can continue to deliver consistently excellent service to our customers.
It is widely accepted in the absence of a more direct measure that the impact of credit cycle risk is instead reflected in the value of real estate assets.
Management and mitigation are achieved through our robust lending policies ensuring appropriate customer gearing levels are maintained throughout the credit cycle. Additionally, the performance of individual exposures and the quality of supporting real estate assets and other tangible assets are monitored regularly.
Portfolio monitoring and analysis are governed by a set of credit risk appetite metrics measuring key areas such as performance and sector concentrations. Portfolio monitoring reports are provided monthly for review and challenge at senior management and Board level.
enforcement. We continue to develop and embed our approach to managing cyber risk across the Bank, learning from intelligence sources and industry peers to identify new and emerging cyber risks. We use a combination of automated tooling metrics with intelligence-led insight to manage our cyber risk profile, enabling us to stay ahead of the continuously evolving threat of cyber threats in order to protect our customers and the Bank.
These areas of resilience are likely to remain high on the regulatory agenda, alongside changes in the macroeconomic environment. The FCA has highlighted to retail banking firms its view of the need to focus on increased technology-related resilience risks, while the PRA requirements on Operational Continuity in Resolution came into effect on 1 January 2019. We expect that this will lead to additional regulatory supervision activity in 2019 and beyond.
A culture that truly focuses on creating FANS and exceeding customer expectations will deliver great outcomes for customers. This focus on exceeding customers' and colleagues' expectations by delivering unparalleled service creates an emotional attachment to our brand… it creates FANS! Several years of successful growth, market-leading net promoter scores and fantastic customer retention demonstrate how our culture sits at the heart of our business model.
We are one team aligned to a single purpose: creating FANS. Embedding our culture, and reinforcing the behaviours that support it, is what sets us apart. Our culture is the fabric of who we are, and it is why we are different. A group of people creating FANS by doing the right thing for customers.
41
The UK economy continues to face uncertainty resulting from the UK decision to leave the EU ('Brexit'). Brexit poses a risk to the UK economy in the short, medium and long term. It includes the risks of withdrawal from the EU, negotiating new trade agreements and foreign investment.
Underlying economic performance across the UK has, since the referendum, been better than initially projected. In 2018 employment levels have improved and wage growth has outpaced inflation. There have been some property price decreases in London and the South East and we expect house prices to remain subdued with low turnover. The overall picture supports a view that conditions for lending in the consumer markets are stable, albeit with head winds for reduced growth.
Business investment continues to wane and there are continuing structural changes to the retail sector and some healthcare sectors. We continue to monitor external projections. Our impairment provision outlook includes an additional scenario and higher weighting that reflects a worsening outlook for the economy. Using these and more severe outlooks we have stressed the lending portfolios to provide a view on how the business may perform and thus ensure sufficient levels of capital and liquidity.
Direct operational impacts on us from EU exit are limited but we are aware of indirect effects on our colleagues and customers. We believe the UK's continued provision of innovation and high-value services, the weaker pound and the relatively flexible labour market should enable the UK to prosper longer term.
UK exit from the EU creates a largely binary economic outlook. Our assumptions on credit losses attempt to reflect this on a probability basis. Whilst there is a risk of greater volatility in the first two quarters of 2019, we expect a lingering drag on the UK economy for some time.
The range and complexity of regulations with which the Bank is required to comply has increased, and this continues into 2019.
During 2018, several key initiatives to implement regulatory changes were significantly progressed or completed. Notably, these included GDPR, PSD2 and the implementation of new measures required by the Competition and Markets Authority ('CMA'), including the CMA inaugural service quality results. Our culture, built on transparency, fairness and customer focus, sits at the heart of how we deliver our vision and strategy, and this is implicit in our approach to delivering regulatory change. It is the essence of who we are, and it helps us to meet our legal and regulatory commitments.
We continue to evolve our ability to deliver superior service to our customers through our integrated technology stack. Continuous improvement of our technology infrastructure is essential to our effective management of the risks associated with our rapid growth and the expansion of our physical and digital footprint.
In 2018, we have invested heavily in our continued relationships with key technology partners alongside our investment in our mobile and digital capability, which we also use to support our colleagues to exceed customer expectations in our Stores. In recognition of this, we delivered significant enhancement to our vendor management tooling and capability, with a particular focus on automating our risk-based approach to managing key controls for core operational activities, such as onboarding, contracts and security.
We are uniquely positioned by combining a streamlined approach to the number of systems we operate, and our lack of legacy technology. Looking to the future, our agility will be further increased with investments in upgrades to our core banking platform and a single Operational Data Store ('ODS'). This accompanies the delivery of in-flight work to build new architecture aligned with our customer journeys and touch points.
GDPR came into force on 25 May 2018 and introduced new requirements on data protection and privacy to transform the way in which personal data is collected, shared and used.
Our GDPR programme was established in 2016, with the clear objective of achieving compliance through the delivery of a series of proportionate risk-based changes. Our policies now include data privacy principles; we have invested in systems to store our records of processing activities, manage our
supplier risk and enhance our information security capabilities; we have invested in building capability in our people and created the key colleague roles to fulfil our obligations; and enhanced colleague training and expert support on data privacy embeds in our philosophy to protect our customers, as we continue to service our FANS by ensuring we keep their personal data safe and secure.
The Bank of England ('BOE') promulgated MREL in 2016. UK firms will become subject to interim MREL requirements from 1 January 2020 prior to the final requirements coming into force in 2022.
Holding MREL is a requirement placed on larger firms to ensure that in the event of their failing and requiring resolution by the BOE, their customers continue to have access to their funds, and the operation of their accounts will not be affected.
Risk to delivery of Metro Bank's strategic objectives is influenced by a number of competing external factors. These include: the need to deliver performance consistent with stakeholder expectations against a backdrop of significant regulatory change, which drives increased cost and operational burden; ongoing regulatory and macroeconomic uncertainty that requires regular review of planning assumptions; and a disruptive market environment characterised by significant technological change that requires ongoing investment in digital platforms to enable us to fulfil customer expectations across all channels. To manage these influences, we seek to identify any linkages and overlaps between each of our principal risk categories and the relevant emerging risks; and then develop appropriate action plans to ensure we deliver and sustain:
This requirement will mean that our MREL requirement will be above its regulatory capital requirement and the Bank is therefore working to ensure it will be compliant in good time.
We have a well-established annual planning process. The annual business plan is developed in the context of a seven-year plan that sets out the longer-term growth trajectory of the Bank. Both documents are presented to the Board for discussion and approval. Execution against the annual plan is frequently monitored by management and the Board to assess performance against the stretching targets we set ourselves. Additional oversight is provided by the Risk Oversight Committee, which considers the Bank's growth and strategic delivery plans within the context of our risk appetite statement, and the resulting risk profile. Our strategic goals are described on pages 10 and 11.
In accordance with provision C.2.2 of the revised UK Corporate Governance Code, the Board has assessed the prospects of the Group and Parent Company over a longer period than the 12 months that has in practice been the focus of the 'going concern' provision.
While the Bank prepares a forecast spanning a seven-year period, the Directors concluded that a four-year period was appropriate for the assessment, as it is the period over which the financial forecasts have greatest certainty. These forecasts are updated annually and reflect the Group's established strategy of creating FANS through our unique culture and integrated model of stores and technology, in order to raise low-cost deposits and low-risk diversified lending.
Key assumptions included in the model include store, deposit and lending growth, as well as remaining appropriately capitalised. Over the forecast period, we expect to raise capital and qualifying debt to fund our anticipated growth and to meet regulatory requirements. The raising of qualifying debt to meet regulatory minimum requirements for own funds and eligible liabilities ("MREL") will require some changes to the organisational structure of the group, as well as various regulatory approvals in the medium term.
Forecasts were subject to appropriate downside stress and sensitivity analysis over the assessment period, taking account of the Group's current position, the Group's experience of managing change and the impact of a number of severe yet plausible scenarios, based on the principal risks outlined in the risk factors and management section of this report.
Based on the results of this analysis, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment.
Creating and maintaining FANS is at the heart of everything we do, so our approach to environmental, social and governance ('ESG') policy at Metro Bank is simply about doing the right thing. We focus on putting FANS first, making Metro Bank a great place to work, supporting our communities and managing other impacts such as on the environment. Our AMAZEING culture is aligned to this and of course we are open and transparent about our responsible business activities.
44
In 2017 we worked with Deloitte to assess our material ESG priorities to inform our reporting on responsible business, and to highlight potential risks and opportunities that might inform the decisions we make. The priorities for this year remain unchanged:
| Priorities | Description | More info |
|---|---|---|
| 1 Our FANS | Providing excellent service each and every time |
p.46 |
| 2 Our colleagues |
Creating FANS by providing excellent service to each and every customer |
p.47-48 |
| 3 Our communities |
Engaging with the communities we proudly serve |
p.49 |
| 4 Data privacy and security |
Protecting our customers' data just as we do their money |
p.50 |
| 5 Our planet | Being aware of our impact on the environment |
p.50 |
| 6 Our suppliers | Working with suppliers whose values and behaviours are aligned to ours |
p.51 |
Relevance to Metro Bank
The ESG landscape is evolving rapidly and we will need to adapt proactively in order to remain a sustainable business.
Oversight of ESG is at a Board and Executive team level, who approve the policies and procedures by which we operate. In addition, the Board is responsible for setting the Bank's strategic direction, which has a major impact on our ESG priorities and how we manage them.
Ultimately, our AMAZEING behaviours underpin our belief that we should act with integrity, putting our customers and stakeholders first, whilst being the most professional bankers. We know that by living by our AMAZEING behaviours, we will continue to do the right thing by our stakeholders every single day.
Our long-term success depends on creating value for our customers and wider stakeholders. Knowing what matters to stakeholders helps us to evolve our vision and approach, keeping them at the heart of what we do. In light of incoming statutory reporting requirements and the revised UK Corporate Governance Code, during 2019 we will review the stakeholder engagement activities we undertake, how we use this information in Board decision-making and our reporting on stakeholder engagement.
| Stakeholder group | Why they are important to us | How we have engaged with them during 2018 |
|---|---|---|
| Customers and the communities we serve |
Our business model depends upon attracting customers and turning them into FANS. Our reputation and creating FANS is at the core of our values. |
• 'Voice of the customer' surveys • Expressions of dissatisfaction responses and analytics • New store grand openings • Money Zone, our educational programme • Networking and community events • Days to AMAZE volunteering |
| Colleagues | As a fast-growing business we constantly need to attract new talent. We also want to ensure our existing colleagues are happy and engaged. |
• 'Voice of the colleague' surveys • Have your say café, colleague meetings with leaders • Online Q&A with leadership (Yam Jams) • Internal news (Revolution Updates) • Metro Bank University |
| Investors | Our equity and fixed-income investors are fundamental to our growth. They continue to support the Bank, helping us bring the revolution to more and more FANS. |
• Annual General Meeting • Quarterly results meetings • Investor roadshows and conferences • Proxy adviser and institutional investors meetings • Governance breakfasts • Annual Report |
| Regulators | Following our Regulators' Principles, Rules and Guidance helps us to make sure we put customer outcomes at the heart of everything we do. |
• Meetings with the Prudential Regulation Authority, Financial Conduct Authority, Payment Systems Regulator and Bank of England |
| Suppliers | We pride ourselves on doing the right thing and maintaining the highest values in everything we do and this extends to the suppliers we work with. |
• Procurement • Meeting with suppliers • Site visits |
At Metro Bank we are committed to customer service and creating and maintaining FANS is at the heart of everything we do. We offer simple products that meet the personal and business needs of our customers.
Our business is built on our FANS recommending us to their friends, family and colleagues, so it's really important to us that we provide great service every day. This year Metro Bank was proud to achieve the top spot in the Competition and Market Authority's ('CMA') Service Quality Survey among personal current account holders for its overall service. 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.
We monitor our customer service through our 'Voice of the Customer' survey and analytics programme to make sure we are surprising and delighting all our FANS and delivering the best customer service every single day.
We want all our customers to be FANS and we recognise and value our diverse customer base. We support our vulnerable customers and we work hard to train our colleagues to make sure they give the best advice and support, with customers at the heart of everything we do.
Our culture and our AMAZEING behaviours are at the heart of our business. It is so important that it's the first thing our colleagues learn about when they join the Bank in our two-day cultural immersion programme, Visions.
We want Metro Bank to be a place where everyone can be at their best, and our inclusive approach celebrates diversity. Our colleagues represent the communities we serve and the locations where we're based. This year we are proud that Glassdoor announced that we were the best bank to work for in the UK and that we ranked in the top 25 of all UK businesses. Glassdoor also named Craig Donaldson as one of its top 10 UK CEOs of 2018, as part of its 'Employees' Choice Awards'.
Our colleague networks, include Women on Work ('WOW'), Mpride for our LGBT+ colleagues and Mbrace for our Black, Asian and Minority Ethnic ('BAME') colleagues. All groups are open to all colleagues, regardless of race, gender or sexual orientation and all have the aim of helping everyone be their very best.
The networks hold a variety of internal and external events that provide support to network members and raise awareness across our business. For example: MPride held an event on 'LGBT+ Myth Busting'; MBrace held one on 'Why is diversity in the workplace important?'; and WOW held a number of 'Confidence in the Workplace' events.
Each network is supported by an Executive Sponsor, providing a link between the inclusion networks and senior management. Our Inclusion Committee oversees the activities of our three inclusion networks and facilitates an intersectional approach to our diversity and inclusion activities.
Through the work of MPride, we've received a number of awards and nominations. Most recently we have been:
| Asian British | 24.5% | Mixed Other | 2.3% |
|---|---|---|---|
| Asian Other | 7.1% | White British | 41.0% |
| Black British | 8.1% | White Irish | 0.7% |
| Black Other | 2.2% | White Other | 8.6% |
| Mixed British | 2.4% | Undisclosed | 3.1% |
| Directors | Senior managers |
All colleagues |
|---|---|---|
| 2 (17%) | 3 (38%) | 1,790 (46%) |
| 10 (83%) | 5 (62%) | 2,109 (54%) |
All figures are as at 31 December 2018. Senior managers consists of colleagues who have responsibility for planning, directing or controlling Metro Bank or a strategically significant part of it. We define this to be members of the Executive Leadership Team excluding Executive Directors (who are included within the Director figure).
We are a signatory of the Women in Finance Charter and are working towards achieving a target for 35% of our senior management population to be female by 31 December 2020, in line with the Hampton-Alexander review. Variable remuneration at Metro Bank features incentives linked to the diversity of our senior management population.
During 2018 we published our gender pay gap figures for the first time, in line with the Equality Act 2010 (Gender Pay Gap Information) Regulations 2017. Further information on our gender pay gap figures can be found in the Directors' Remuneration Report on pages 81 to 97.
We have a range of initiatives focused on supporting women into leadership roles. As well as our Women on Work network (see above), we run mentoring programmes and leadership training and provide diverse candidate lists to hiring managers. We also offer flexible working arrangements and 14 weeks' parental leave for all new parents, regardless of gender.
Our latest Gender Pay Gap Report can be found at metrobankonline.co.uk
We work hard to understand how our colleagues feel about Metro Bank as an employer, as a place to work and as a provider of banking services. Every year we run a 'Voice of the Colleague' engagement survey. In our 2018 survey, over 90% of colleagues took the time to share their views. We use the results to help us to continuously improve our colleagues' experiences.
We partner with a text analytics company to give us deep insight around the free text questions we ask every colleague as part of the survey.
Headlines from this year's survey:
We also hold regular 'Have your say Café' sessions to allow colleagues the chance to raise any concerns they have with senior members of the Bank. During 2019, we intend to review our workforce engagement activities to ensure we are engaging with the workforce, and using colleague feedback in a manner consistent with the relevant principles and provisions of the revised UK Corporate Governance Code.
During the year, we created over 800 new jobs and promoted more than 730 colleagues. We're committed to supporting colleagues and investing in their careers, and over the past 12 months have helped 90 new leaders 'Learn to Lead', supported over 280 colleagues on fast-track schemes and specialist studies, and enabled 445 colleagues to gain professional banking qualifications.
Also in 2018, we partnered with leading business school Cranfield University, to launch an MSc in Retail and Digital Banking, which provides the Chartered Banker Diploma on completion. We are thrilled to be supporting over 30 colleagues from across the Bank to complete this qualification as well as continuing to support the apprenticeship programme already on offer at Metro Bank. This programme has seen over 70 apprentice cashiers join since we became an accredited Employer Provider at the end of 2017.
By empowering colleagues and creating the conditions for them to exceed customers' expectations, we allow them to thrive.
We know that our colleagues are integral to growing our business. Our reward principles, which reflect this and apply to all colleagues, are designed to reward our colleagues for high performance and retain the talent upon which our business depends:
All colleagues benefit from health and safety training when they join Metro Bank. Colleagues are encouraged to participate in mental health awareness training and also have access to Employee Assistance and the independent and confidential Bank Workers Charity contact line that provides information, advice and expert support services.
Our Health and Safety policy protects our customers and colleagues and ensures we are compliant with our statutory duties and responsibilities.
The Board's Nomination and Remuneration Committees set policy and monitor implementation relating to their areas of responsibility.
Our Whistleblowing Policy ensures that all colleagues are encouraged to raise any concerns they may have about the conduct of others in the business or the way in which the business is run in good faith and without fear of unfair treatment. This protects our colleagues and customers both of whom are integral to the continued success of the Bank.
We are proud to be an integral part of the communities we serve. Stores are key to our unique model and we strive to make a positive difference: through the local colleagues we employ, the local businesses we lend to and the causes we support. By helping our communities thrive we believe our business will do too.
This year Metro Bank has opened 10 new stores, contributing to the revitalisation of high streets and their local communities in the UK and giving customers access to face-to-face banking, while our competitors are progressively closing their branch networks. Metro Bank opens each new store with a grand opening, where we invite the local community to come and see our new store and meet our colleagues. We believe that Kids Rock! and Dogs Rule! and we want to make sure everyone can come and visit us in store, so we have customer toilets with baby changing facilities in every store as well as dog treats and water bowls for our canine FANS.
We are passionate about working with the kids in our communities. As well as hosting free Halloween, Easter and Christmas craft events, we also engage with kids through our free financial education programme, Money Zone. Money Zone introduces pupils to financial skills, helping them understand how money, saving and banking work. Our sessions are incorporated into the school curriculum, and are linked to the wider government curriculum guidelines. In 2018 over 41,000 young people have been through the scheme.
Metro Bank's official charity partners for 2018 are Alzheimer's Society and Place2Be. Our colleagues have taken part in various fundraising events through the year, raising over £140,000, and our customers have helped us support these charities through donations via our Magic Money Machines.
We also clocked up hundreds of hours of volunteering in our 'Days to Amaze', where our colleagues give time out of their working day to support the causes close to their hearts.
Protecting our customers' data, just as we do their money, is central to building the trust of our customers and creating FANS. Our business is built on our FANS recommending us to their friends, family and colleagues and we know how important trust is to them.
We do everything we can to keep our customers' details safe and to reduce the risk of financial crime, both against us and our customers. This includes using market-leading technology, which gives us confidence we are speaking to a genuine customer.
We worked hard to make sure we were ready for the implementation of the General Data Protection Regulation on 25 May 2018 and this included a full review of the Metro Bank Data Policy.
At Metro Bank we take the protection of our customers, their money and the bank extremely seriously. We apply a multilayered approach to fraud controls in the majority of areas. An example of this is where we have invested heavily in leading technology to allow the risk assessment of sessions for our Remote Channels, providing strong protection.
To raise fraud awareness with our FANs we've undertaken a number of campaigns to share how they may be targeted by fraudsters and the actions they can take to protect themselves. We continue to support the Take 5 industry-wide fraud campaign.
We know that climate change will bring unprecedented change for our FANS and the global economy. That's why we want to make sure that we make it easy and convenient for our FANS to reduce their environmental impact and minimise our own impact on the planet as we bring the revolution in British banking to more and more FANS.
As we've increased our network of stores and more FANS have joined us, we've seen a 2.7% increase in absolute GHG scope 1 and 2 emissions in 2018 from the baseline year, 2016 (see below). But this hides the improvements we've made on carbon intensity: our emissions have reduced by 34.7% per full-time equivalent employee over the same period.
We're continually looking for ways to reduce our energy consumption as we open new stores. Some of our initiatives include:
We also have a number of initiatives seeking to reduce levels of waste and water usage, including:
As outlined on pages 8 and 9, enabling our FANS to manage their finances online, on our app and over the phone, is integral to our business model. The development of these services has not only reduced excess waste by enabling paperless banking, but also has reduced the need to come into stores to access our services, thus helping to reduce the carbon footprint of our FANS.
We believe our straight-forward business model increases our resilience to climate-related risk. Our focus on supporting small and medium-size enterprises, exclusively based in the UK, helps to mitigate our exposure to material international environmental risks. We consider a variety of issues when working with new customers, including exposure to high-risk industries. Such industries include mineral extraction, where for example, any decision regarding the account would require further investigation and escalation to management.
We nonetheless recognise that the transitional risks posed by climate change will impact our FANS and the markets we operate in. We are committed to undertaking further work to understand the risks and opportunities for Metro Bank arising from climate change.
We've reported on our emissions in line with the requirements of the Companies' Act 2006 (Strategic and Directors' Reports) Regulations 2013.
50 Metro Bank Plc Annual report and accounts 2018
| GHG emissions | 2018 (CO2e) |
2017 (CO2e) |
2016 (CO2e) baseline year |
|---|---|---|---|
| Scope 1 emissions | 2,306 | 1,312 | 1,160 |
| Scope 2 emissions | 4,064 | 4,668 | 5,044 |
| Total Scope 1 and 2 emissions | 6,369 | 5,980 | 6,204 |
| Full-time employees (FTE) | 3,803 | 3,002 | 2,417 |
| Total Scope 1 and 2 emissions per FTE | 1.67 | 1.99 | 2.57 |
The assessment period is aligned with our financial year – 1 January 2018 to 31 December 2018.
Details of the reporting criteria can be found in our separate ESG document which is available at metrobankonline.co.uk
We selected operational control as our consolidation approach, and our boundary includes all entities and facilities either owned or under our control.
The table above includes restated figures for our total annual emissions for 2016 (baseline year). These figures were published correctly in the 2016 Annual Report and Accounts, but then restated in 2017 Annual Report and Accounts using 2017 emissions factors. The figures published last year in relation to 2017 are unaffected. We have restated these figures here to accurately reflect our emissions in each period.
Our business model is built on creating FANS, and actions by our suppliers that are not in keeping with our values expose us to reputational damage and risk through association. We manage this by reviewing the controls put in place by our suppliers to prevent and detect bribery, corruption, modern slavery, child trafficking, unfair wages, unacceptable working conditions and labour rights abuse.
Metro Bank is committed to introducing responsible business practices that make it easier for our suppliers to do business with us. We are a member of the Financial Services Supplier Qualification System ('FSQS'), a collaboration between UK financial institutions (buyers) to provide a standard and simplified process for suppliers to give detail about the control environment they operate. FSQS helps our suppliers by reducing duplication of effort in responding to buyer due diligence requests, and benefits us by sharing resource and best practice with other buyers.
We are committed to maintaining the highest standards of ethics and integrity. Any act of bribery or corruption is unacceptable and we take the same approach with our suppliers.
We use FSQS to conduct due diligence on our suppliers before contracting, on a risk basis, as appropriate.
We also protect our customers and the Bank by setting out and regularly training our colleagues on our Anti-Bribery and Corruption Policy. This helps us to make sure all our colleagues are conducting business in an honest and ethical manner, which reflects our zero-tolerance approach to bribery and corruption.
Our philosophy is to conduct all business in an appropriate manner. Slavery, servitude, forced labour and human trafficking (modern slavery) is a crime and violation of fundamental human rights. We have zero tolerance of modern slavery and continue to be committed to acting professionally, fairly and with integrity in all our business dealings and relationships wherever we operate, including enforcing appropriate systems and controls to ensure, on a risk basis, that modern slavery is not taking place in our business or supply chains.
During 2018 we continued to follow and progress our processes to support our Modern Slavery Policy, including:
Our Modern Slavery Statement is available at metrobankonline.co.uk
| Policy | Description | ESG Priorities |
|---|---|---|
| Treating Customers Fairly | The policy reflects our goal to create FANS through the delivery of consistently AMAZEING outcomes. This philosophy is embedded in our culture and is an integral part of our business model and strategy. Our zero tolerance for unfair customer outcomes is underpinned by our Conduct Risk framework which was approved by the Board. |
1 2 |
| Lending Policies (including residential mortgage, retail unsecured finance, private banking credit, commercial, arrears management) |
The policies make sure that we're lending in the right way. | 1 |
| Anti-Money Laundering/ Counter Terrorist Financing |
The policy sets out the systems and controls to identify, assess, monitor and manage financial crime risks and the procedures in place to assess their effectiveness. |
1 2 |
| Diversity and Inclusion The policy means that we treat our colleagues fairly. It sets out our commitment to having a diverse workforce which reflects our customer base and to employment policies which follow best practice, based on equal opportunities for all colleagues. |
2 3 |
|
| Recruitment and Selection The policy relates to all recruitment-related activities and is relevant for all colleagues and any third-party recruitment partners. The policy outlines responsibilities for hiring aligned to our Company objectives/ethos and in accordance with the relevant legislation and regulation. |
2 | |
| Board Diversity The policy sets out our commitment to diversity and inclusion for the Board. Which is based on our knowledge that a diverse Board, appointed on merit, with a broad range of skills, backgrounds, knowledge and experience, will be a more effective and responsible Board. |
2 | |
| Health and Safety The policy protects our customers and colleagues. It recognises our statutory duties and responsibilities under the relevant Health and Safety and Welfare legislation. |
2 | |
| Whistleblowing The policy encourages colleagues to disclose information, in good faith and without fear of unfair treatment, when they suspect any illegal or unethical conduct or wrongdoing affecting the Bank. |
2 | |
| Anti-bribery and Corruption | The policy outlines our approach to managing the risk of bribery and corruption and to ensure we conduct business in an honest and ethical way, with a zero-tolerance approach to bribery and corruption. |
2 |
| Conflicts of Interest | The policy provides consistent practical guidance to all relevant parties in relation to the identification, recording and maintenance of actual and perceived conflicts of interest. |
2 |
| Business Continuity The policy makes sure we are able to continue delivering services to our customers at acceptable levels if something unexpected were to happen. It addresses impacts to the continuity of critical business activities in the case of man made disasters, natural disasters or other material events. |
1 2 3 4 6 |
|
| Data | The policy sets out our objectives and expectations in managing data and data governance practices. It makes sure that data is managed, governed, accessed, protected, utilised and disclosed appropriately. It also focuses on the quality of key data elements and their ongoing maintenance. |
1 2 4 |
| Procurement & Supplier Management |
The policy ensures that when we rely on a on external supplier for key processes and activities, we take the reasonable steps to identify, monitor and mitigate the external supplier risks. |
1 6 |
| Modern Slavery | The policy describes our approach towards preventing slavery, servitude, forced and compulsory labour and human trafficking in any of our operations or at any of our suppliers and, through them, our supply chains. |
3 6 |
Learn more about our policies in our separate ESG document, which is available at metrobankonline.co.uk
This is our Non-Financial Information Statement, prepared in order to comply with sections 414CA and 414CB of the Companies Act 2006. We explain here where you can find further information on how we make sure we do the right thing in relation to wider society and the environment and how we seek to do the right thing in terms of our impacts.
A description of our business model and strategy, as well as the non-financial Key Performance Indicators ('KPIs') relevant to our business can be found on pages 8 to 11. Additional KPIs in relation to each of the matters listed in the table below have been disclosed in the corresponding section of the Environmental and Social Summary, where we believe this will assist in demonstrating the outcomes of our policies and activities during 2018.
| Reporting requirement | Where to find further information necessary for an understanding of our business and our impacts, including outcomes of our activities |
Relevant policies (please see page 52 for a description of each policy) |
|---|---|---|
| Environmental matters |
Our Planet, page 50 | Our comprehensive risk management processes and ESG materiality assessment (see below) have not identified environmental matters or climate change as a principal risk for the business. So, at present, we do not have a bespoke environmental policy. We do, however, recognise the need to minimise our impact on the environment and manage any material impacts from climate change on our business. As disclosed in the Our Planet section of this summary, we have successfully driven progress in our environmental performance to date without the need for a bespoke policy. We will continue to review the appropriateness of this approach. |
| Employees | Our Colleagues, page 47 The Chief Executive Officer's statement (page 3) and the description of our business model (page 8), articulate how our colleagues are an essential component of our success. |
• Diversity and Inclusion • Recruitment and Selection • Health and Safety • Whistleblowing • Conflicts of Interest and Related Parties |
| Society and Communities |
Our Communities, page 49 | As outlined in the communities section of this report, we are proud to be an integral part of the communities we serve. At present, we do not pursue a bespoke policy regarding our activities with the wider communities but stores are key to our unique model and we strive to make a positive difference: through the local colleagues we employ, the local businesses we lend to and through the causes we support. By helping our communities thrive we believe our business will do too. |
| Respect for Human Rights |
Our Suppliers, page 51 | • Modern Slavery • Outsourcing |
| Anti-Bribery and Corruption |
Our Suppliers, page 51 | • Anti-bribery and Corruption |
We manage risk through a comprehensive governance and control framework, as described in our Risk Report on pages 28 to 43. The Risk Report also describes the principal risks to our business. Our risk management policies and controls are reviewed regularly to reflect changes in market conditions, regulations and our activities. Through regular training and additional standards, guidance and procedures, we aim to develop a robust and effective control environment in which all our colleagues understand their roles and obligations. The policies disclosed on page 52 form part of our wider risk management approach. All colleagues are responsible for managing risk as part of their day-to-day role and our AMAZEING culture is all about our colleagues doing the right thing for our FANS and the business. As such, everyone at Metro Bank plays a role in risk management.
Management exercises an appropriate level of due diligence over the policies and activities referenced in the Environment and Social Summary and this Non-Financial Information Statement. Our reporting on environmental and social matters is subject to the oversight of the Audit Committee.
This Strategic Report was approved by the Board and was signed on its behalf by:
Craig Donaldson Chief Executive Officer 10 April 2019
53
David Arden, Company Secretary and Chief Financial Officer
I set out Metro Bank's Corporate Governance Statement, and my first report since being appointed in March 2018. It's been a busy and rewarding year for Metro Bank, although not without its challenges. I'm pleased with the progress we are making as we mature as a listed company.
Metro Bank has a premium listing on the London Stock Exchange and is required to comply with the 2016 UK Corporate Governance Code (the 'Code') or to explain any areas of non-compliance. I am pleased to report that during the period under review, we fully complied with the Code.
Looking forward, we welcome the implementation of the new 2018 Code (the 'New Code'). At Metro Bank we are, and always have been, a purpose-driven organisation. Our purpose is to create FANS. We put the customer at the heart of everything we do and our pervasive culture and AMAZEING values permeate every area of our business. This has naturally put us ahead of the curve on some areas of the New Code. We have spent significant time this year analysing the New Code and preparing for its implementation.
Progressively refreshing our Board to ensure that it has the right mix of skills, independence, experience and diversity to provide oversight of the Bank as it continues to grow in an evolving and challenging environment is our top governance priority.
We have made significant headway in refreshing the Board during the year. We appointed two new independent Non-Executive Directors ('NEDs'), Catherine Brown, on 1 October 2018, and Paul Thandi on 1 January 2019. Their unique knowledge and skills complement and refresh our already strong and experienced Board. For both Paul and Catherine, we created tailored and detailed induction programmes to fully integrate them into our business and enable them to contribute effectively at Board meetings. We will continue to seek high-calibre independent Board members as part of our ongoing succession plans.
Following nine years of service, Lord Howard Flight retired from the Board on 1 April 2019 and Keith Carby will retire from the Board on 30 April 2019. They therefore will not be standing for re-election at the 2019 AGM. The Board would like to thank Howard and Keith for their significant contributions to Metro Bank during that time.
As a relatively young organisation, a number of our NEDs reached nine years' tenure in March 2019 and we no longer treat those NEDs as independent. The appointment of two new Non-Executive Directors gave us the opportunity to refresh the membership and chairs of our Committees and our Committees are in compliance with the UK Corporate Governance Code's provisions from 1 April 2019. Our Committee Chairs are available to shareholders upon request for any questions they have.
We fully support the recommendations of the Code for independence on Boards. While our balance of Independent NEDs is currently slightly below the 50% minimum, this will be short lived as Keith Carby retires from the Board on 30 April 2019.
From 1 May 2019, the Board (excluding the Chairman) will be made up of 10 Directors of which five (50%), are independent NEDs, in line with the requirements of the New Code. The Board continues its proactive search for additional independent NED candidates and we expect to make another appointment this year.
More detail on the makeup of our Board, Committees and individual Directors can be found in the Nomination Committee report on page 79.
As we reported last year, we carried out an externally facilitated Board evaluation in late 2017. During 2018, the Board reviewed the recommendations from the external evaluation and implemented an action plan to address these. In addition, we also carried out an internal evaluation during 2018 to ensure our Board and its Committees continue to operate at maximum effectiveness. More details on the Board evaluation process can be found on page 65.
I am pleased to report that at the 2018 AGM all resolutions were passed by a majority of 93% or above. Proactively engaging with our investors and stakeholders is very important to us. We met with investors and proxy advisers during the year and we welcomed their feedback as we prepared for the year ahead. Our Committee Chairs are also available to shareholders upon request for any questions they have.
In 2019 and beyond, Metro Bank will continue to grow and increase its digital and geographic footprint. As always, our focus is on bringing the revolution in British banking through our exceptional customer service. Our corporate governance framework will continue to provide prudent oversight of the Bank on this journey.
Company Secretary 10 April 2019
These references are to Committee memberships during 2018. Details of Board roles and committee memberships as of 1 April 2019 can be found on page 79.
Vernon was the founder and Chairman of Commerce Bancorp, a start-up bank established in 1973 and sold to Toronto-Dominion Bank in 2007 for US\$8.5 billion, with US\$50 billion in assets and 440 branches. Vernon is involved in banking and non-banking related businesses and voluntary ventures in the US. He is a graduate of the Wharton School of the University of Pennsylvania. Vernon is Chairman of Republic First Bancorp, Inc.
Craig was previously Managing Director, Retail Products and Direct Channels, of RBS UK. He was also Chairman of the Retail Asset and Liabilities Committee and Retail Product Board and a member of the Retail Board, Retail Risk Committee and RBS UK Asset and Liabilities Committee. He serves on the Board of Directors at TheCityUK as Chairman of the Audit and Risk Committee.
Prior to joining Metro Bank, David was CFO at Sainsbury's Bank and interim MD of Argos Financial Services, following the successful acquisition of Home Retail Group by J Sainsbury plc in September 2016. David joined Sainsbury's Bank from Shop Direct Financial Services, where he was CFO. In his 28-year career, he has held a number of senior positions including MD of RBS/NatWest credit cards and Finance and Risk Director for Tesco Bank.
Appointed to the Board 5 March 2010
Stuart has specialised in financial services for over 40 years, including 13 years as a main Board Director of Nationwide Building Society. He was Chairman and CEO of Chelsea Building Society and has chaired the Council of Mortgage
Lenders and the Financial Services Sector Skills Council. He was Special Adviser to the Treasury Select Committee from 2013 to 2015.
Catherine holds various non-executive roles including: Non-Executive Board Member at the Cabinet Office, Non-Executive Director of FNZ (UK) Limited, and Chairman and Non-Executive Director of Additive Flow Limited and The Plastic Economy Limited. She is a Trustee of Cancer Research UK, one of the UK's largest charities. Catherine has extensive experience in organisational transformation in financial services and a wide range of experience in leadership and operations. Her previous appointments include: Group Strategy Director at Lloyds Banking Group, Executive Director of Human Resources at the Bank of England and Chief Operating Officer at Apax Partners.
Keith was formerly Founder and CEO of the Caerus Capital Group. He is Co-Founder and Non-Executive Chairman of both Censeo Ltd and Mill Capital Investment Partners (Dubai), and also Joint Founder and Chairman of AdAlpha Solutions Ltd. Keith was Joint Founder and Managing Director of J. Rothschild Assurance (now St. James's Place). He also co-founded the Financial Services Forum.
Roger is Chairman of Tiffany & Co. He is a former Executive Vice Chairman of Ralph Lauren Corporation, also its President and Chief Operating Officer. Roger was previously Chairman and CEO of Footlocker, President and Chief Operating Officer of Macy's, Chairman and CEO of Federated Merchandising Services, and Chairman and CEO of Rich's Department Stores. Roger is a Director of Aetna and The Progressive Corporation.
Key to Committees A Audit R Remuneration N Nomination O Risk Oversight
Non-Executive Director R , N Appointed to the Board 5 March 2010
Howard was Conservative MP for Arundel and South Downs, West Sussex, from 1997 to 2005, when he held Shadow posts, including Shadow Chief Secretary to the Treasury. He was a member of the Shadow Cabinet from 2002 to 2004. He was appointed to the House of Lords in 2011. He co-founded Guinness Flight Global Asset Management, and is Chairman of Aurora Investment Trust, Downing Four VCT, and Flight and Partners, a Director of Investec Asset Management and Edge Performance VCT, a Commissioner of the Guernsey Financial Services Commission and Chairman of the EIS Association.
Appointed to the Board 5 March 2010 Ben was Chief Executive and then Chairman of Friends Provident Life and Pensions Ltd as well as a Director of Friends Provident. As Chief Executive, he was responsible for all aspects of the Friends Provident Group's life and pensions activities worldwide. More recently, he was the Senior Independent Director at Aviva UK and Chairman of the Audit Committee at Avelo.
Gene is Chairman and Managing Partner at MissionOG, a venture capital firm with significant operational and investment experience across the financial services and payments industries. Previously, he was a Special Adviser at General Atlantic and a Venture Partner at Oak Investment Partners. Prior to that, he was President of the Global Retail Bank at Bank of America, President & CEO at Mastercard International, and CEO at Midland Bank plc. He has been on the boards of many banking institutions including Midland Group Holdings, First Republic Bank, Bank America Corp., Mastercard International, and APACS, amongst others. Gene has also been the Chairman of the Board of CHAPS and Director of SWIFT.
Monique is a Managing Director and the Global Head of Regulatory Consulting at Duff & Phelps and is a member of Duff and Phelps' Luxembourg Management Company Board. With extensive financial services and regulatory experience across established and growth markets, her appointments have included Executive Board member at Kinetic Partners and roles at the Cayman Islands Regulator and Stock Exchange ('CSX'), the Financial Services Authority and the Securities and Futures Authority.
Michael was Senior Partner of Kingston Smith between 1979 and 2016, and is now a consultant to the firm. He has advised the government over many years, including chairing the National Business Angels Network, and as a member of the Small Business Council and Small Business Investment Taskforce. He was also founder Co-Chairman of the government's Professional and Business Services Council and chaired the Association of Practising Accountants. He is Senior Partner of Bramdean Consultants LLP and an elected member of the City of London Corporation, which he led for five years as Chairman of the Policy and Resources Committee.
Paul is CEO of the NEC Group in Birmingham where he has overseen the growth of one of the world's top venue management companies. He is an experienced CEO, Chair and Non-Executive Director with diverse international media and service-led experience with an emphasis on people, innovation, data and culture. Paul has over 20 years' experience in the media industry, including as executive director at CMP Information ('CMPi'). He is also Deputy Lieutenant of West Midlands Lieutenancy, representing the Queen in the region.
More details on the skills and experience of our Directors can be found in the skills matrix on page 61.
57
The Directors of the Company who were in office during the year and up to the date of signing the financial statements1 (and summaries of their key skills and experience) are set out on pages 56 to 57.
The Directors have pleasure in presenting their Annual Report for the year ended 31 December 2018. As set out more fully in the Summary of significant accounting policies within note 1 to the financial statements, this report for the consolidated Group has been prepared in accordance with International Financial Reporting Standards ('IFRS') as adopted by the EU and includes the Corporate Governance Report set out on pages 61 to 67.
The Directors consider the Annual Report for the year ended 31 December 2018, taken as a whole, is fair, balanced and understandable, and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.
Our principal activities during 2018 were the provision of banking and related services. Metro Bank is a deposit-taking and lending institution with a focus on retail and small and medium-size commercial customers, offering consistent fair pricing and excellent customer service. We're authorised to accept deposits under the Financial Services and Markets Act 2000, have a Consumer Credit Act licence and are members of the Financial Services Compensation Scheme.
The results for the year are set out in the consolidated statement of comprehensive income on page 105.
No dividend was declared or paid during 2018 (2017: £nil). The Directors do not anticipate declaring a dividend in the near future.
Further to the authority granted by shareholders at the 2018 AGM, on 25 July 2018 a further 8,851,304 new ordinary shares of an aggregate nominal value of £8.51 were issued at £34.22 per share. The issue followed the completion of a non pre-emptive cash placing of new ordinary shares, for gross consideration of £303 million. The new shares were admitted for trading on the London Stock Exchange on 27 July 2018.
During the year we also successfully completed a debt issuance which raised £250 million of Tier 2 capital and acquired a portfolio of seasoned UK mortgages for £523 million.
The Articles of Association can be found on our website: metrobankonline.co.uk.
Our called-up share capital, together with details of shares allotted during the year, is shown in note 19 to the financial statements on page 132.
There are no restrictions on the transfer of the Company's share capital and there are no shares or stock which carry specific rights with regards to control of the Company. The Directors seek annual authority from shareholders to allot new ordinary shares and to disapply pre-emption rights of existing shareholders in accordance with the Investment Association Share Management Guidelines.
Details of the Directors' beneficial interests are set out in the Annual Report on Remuneration on page 94.
Details regarding deeds of indemnity and Directors' and officers' liability insurance are set out in the Corporate Governance Report on page 67.
Information provided to the Group by substantial shareholders pursuant to the Disclosure and Transparency Rules ('DTR') is published via a Regulatory Information Service.
As at 31 December 2018 and up to the last practical date before publication of this report, the Group has been notified under DTR 5 of the interests in its issued share capital, and these are set out in the table below. All such shareholders have the right to vote in all circumstances at general meetings.
| As at 31 December 2018 | Ordinary shares held |
% of total ordinary shares |
Direct/ indirect interest |
|---|---|---|---|
| Cohen Private Ventures | 7,912,848 | 9.85 | Indirect |
| Fidelity Management and Research |
7,412,558 | 7.60 | Indirect |
| Ruane, Cunniff & Goldfarb L.P. |
5,020,755 | 5.15 | Direct |
| The Spruce House Partnership |
4,925,000 | 5.06 | Direct |
| Hound Partners | 4,915,285 | 5.05 | Indirect |
| Wellington Management Group LLP |
3,641,556 | 4.53 | Indirect |
Our energy consumption and associated greenhouse gas emissions during 2018 are set out in the Strategic Report on page 51.
We encourage employee involvement in the Bank. Increasing employee awareness of the financial and economic factors that affect us plays a major role in maintaining our customer focus. All employees are eligible to participate in our share option and/or share buy and share pool schemes. More information on our colleagues can be found on page 47 of the Strategic Report.
Our Diversity and Inclusion policy outlines our commitment to employment policies which follow best practice, based on equal opportunities for all employees. We aim for our workforce to reflect the diverse communities in which we operate and recognise that diversity is not only a key part of a responsible business strategy, but also supports a strong customer experience. We give full and fair consideration to all applications for employment.
During the year, we published our Board Diversity Policy, which sets out our commitment to diversity and inclusion for the Board. At Metro Bank we believe that a diverse Board, appointed on merit, with a broad range of skills, backgrounds, knowledge and experience, will be a more effective and responsible Board. The policy can be found on our website at www.metrobankonline.co.uk/investor-relations. Going forward, we will report annually against the objectives in the policy.
Applications for employment by disabled persons are always fully considered, bearing in mind the abilities of the applicant concerned. In the event of employees becoming disabled, we make every effort to ensure that their employment continues and that we provide appropriate training and support. Our policy is that the training, career development and promotion of disabled persons should, as far as possible, be identical to that of other employees.
We are committed to supporting the communities in which we operate in order to enable them to develop both socially and economically. Our policy is to conduct all business in an appropriate manner and we have zero tolerance for modern slavery. We continue to be committed to acting professionally and fairly in all our business dealings and relationships wherever we operate, including enforcing appropriate systems and controls to ensure, on a risk basis, that modern slavery is not taking place in our business or supply chains.
The initiatives and how we have developed them through during 2018 can be found on page 51. We have also appointed a member of the Board as our Modern Slavery Champion who with the CEO will monitor ongoing compliance with the Modern Slavery Policy.
Our Modern Slavery Statement is available at metrobankonline.co.uk
The Directors confirm that they have undertaken a robust assessment of the principal risks facing the Group. We seek to manage all risks that arise from our activities. Details of risk management systems and the processes in place in relation to financial reporting, and details of risk management objectives and policies, are shown in the Risk Report on pages 28 to 43. As a result of normal business activities, we are exposed to a variety of risks – and the principal risks and uncertainties that we face are shown in the Risk Factors and Management Report.
The financial statements are prepared on a going concern basis, as the Directors are satisfied that the Group and Parent Company have the resources to continue in business for the foreseeable future.
Our Viability Statement is set out on page 43.
During 2018 we carried out an extensive audit tender process. Following completion of a detailed and robust tender process, it was agreed that PwC would be invited to continue to provide external audit services to Metro Bank. PwC has indicated its willingness to continue in office and a resolution seeking to reappoint it will be proposed at the 2019 Annual General Meeting. More details regarding the tender process can be found on pages 71 to 72.
We made no political donations in the year ending 31 December 2018 (2017: £nil).
We have an ongoing commitment to make banking more convenient for customers, and in 2018 we continued to invest in systems, procedures, products and services. As a result, we have capitalised £70 million of intangible assets.
A summary of the key post balance sheet events is set out in note 32 to the financial statements on page 159.
Details of this year's AGM can be found in the Shareholder Information section on page 166.
Our business and future plans are reviewed in the Operating Review.
For the purposes of LR 9.8.4CR, the information required to be disclosed by LR 9.8.4R can be found in the following sections of the report:
| Item | Location, where applicable |
|---|---|
| Detail of long-term incentive schemes |
Remuneration Report, to the financial statements note 20 |
| Contracts of significance | Any contracts of significance or related party transactions can be found in note 28 to the financial statements |
The Corporate Governance Report on pages 61 to 67 in accordance with Rule 7.2 of the Disclosure and Transparency Rules and Rule 9.8.6 (5) and (6) of the Listing Rules forms part of this Directors' Report.
Our Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. The Directors have prepared the Group and Parent Company financial statements in accordance with IFRS as adopted by the European Union and applicable law and have elected to prepare the Parent Company financial statements on the same basis.
Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that period. In preparing these financial statements, the Directors are required to:
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain our transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group, and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding our assets and taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the information included on our website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Each of the Directors, whose names and functions are listed on pages 56 and 571, confirm that, to the best of their knowledge:
Each Director in office at the date of this report, and whose name is listed on pages 56 and 571, confirms that to the best of their knowledge:
The confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006.
The Directors' Report comprising pages 58 to 60 has been approved by the Board of Directors and signed on its behalf by
Chief Financial Officer and Company Secretary 10 April 2019
The Board has a coherent corporate governance structure with clearly defined responsibilities and accountabilities. These have been designed to safeguard and enhance long-term shareholder value and provide a robust framework in which to deliver our strategy.
The Board is responsible to our shareholders and sets our strategy for achieving long-term success. It is also ultimately responsible for the management, governance, controls, risk management, direction and performance of the Bank.
As at the date of this Report, the Board consists of the Non-Executive Chairman, two Executive Directors (the CEO and CFO) and nine Non-Executive Directors. Howard Flight stepped down from the Board on 1 April 2019.
| Skills | ||||||||
|---|---|---|---|---|---|---|---|---|
| Role | Retail financial services |
Credit risk |
Financial crime investigation |
Governance | Regulatory | Retailing experience |
Accounting/ financial incl. audit |
Leadership |
| Vernon W. Hill, II Non-Executive Chairman |
||||||||
| Craig Donaldson Chief Executive Officer |
||||||||
| David Arden Chief Financial Officer and Company Secretary |
||||||||
| Non-Executive Directors | ||||||||
| Stuart Bernau Non-Executive Director |
||||||||
| Catherine Brown Non-Executive Director |
||||||||
| Keith Carby¹ Non-Executive Director |
||||||||
| Roger Farah Non-Executive Director |
||||||||
| Lord Flight¹ Non-Executive Director |
||||||||
| Alastair (Ben) Gunn Senior Independent Director |
||||||||
| Gene Lockhart Non-Executive Director |
||||||||
| Anna (Monique) Melis Non-Executive Director |
||||||||
| Sir Michael Snyder Non-Executive Director |
||||||||
| Paul Thandi² Non-Executive Director |
Howard Flight retired from the Board on 1 April 2019. Keith Carby will retire from the Board on 30 April 2019.
Paul Thandi was appointed on 1 January 2019.
61
The Board has formally documented the separate roles and responsibilities of the Chairman and Chief Executive Officer and more detail on this can be found on the Company's website at metrobankonline.co.uk/investor-relations.
Each Director has committed to dedicate as much time as is necessary to the Company and the Non-Executive Directors' letters of appointment set out that they should be prepared to dedicate at least 20 days per year to the Company.
Directors are expected to attend all meetings of the Board, and the Committees on which they sit, and to devote sufficient time to the Company's affairs to enable them to fulfil their duties. If Directors are unable to attend a meeting, their comments on papers to be considered at the meeting will be discussed in advance with the Chairman or Company Secretary so that their contribution can be included in the wider Board discussion.
| Responsibility |
|---|
| The Chairman leads the Board and is responsible for its effectiveness and governance. He sets the tone for the Company, including overseeing the development of the Bank's business culture and standards in relation to the conduct of business and the behaviour of employees. He is responsible for ensuring that there are strong links between the Board and management and between the Board and shareholders. He sets the Board agenda and ensures that sufficient time is allocated to important matters, in particular those relating to our strategic direction. He reports to the Board and is responsible for the leadership and overall effectiveness of the Board. |
| A new role of Deputy Chairman was created with effect from 1 April 2019. The role of the Deputy Chairman is to deputise for and support the Chairman in carrying out his responsibilities as leader of the Bank's Board. The Deputy Chairman will act as an ambassador for Metro Bank, particularly in terms of developing and maintaining relationships with our stakeholders, including regulators, and industry representatives. The Deputy Chairman will support the Chairman as required, in carrying out the following responsibilities: • managing the business of the Board and ensuring that the Board operates effectively; • keeping under review, with the Board, the general progress and long term development of the Bank; • representing the Bank and the collective views of the Board externally; and • performing any additional task as agreed with the Chairman. |
| The Chief Executive Officer ('CEO') is responsible for the day-to-day management of our operations, for recommending our strategic direction to the Board and for implementing the strategic direction agreed by the Board. He is supported in decision making by the Executive Leadership Team. Craig reports to the Chairman and to the Board directly and is responsible for all executive management matters of the Bank. |
| The Chief Financial Officer ('CFO') has responsibility for planning, implementing, managing and controlling all financial-related activities of the Company, both day to day and for the long term. He is responsible for managing the Bank's financial position including allocation and maintenance of capital, funding and liquidity. The CFO also has oversight of the Treasury, Legal, Procurement and Investor Relations functions, and is also responsible for producing and ensuring the integrity of the Bank's financial information and regulatory reporting. As Company Secretary, David is responsible for advising and supporting the Chairman and the Board on good corporate governance and best boardroom practice. He leads the Bank's Company Secretariat function. |
| The Senior Independent Directors ('SID') role is to act as a sounding board for the Chairman and to serve as an intermediary for Directors when necessary. |
| The SID is also available to shareholders if they have concerns that have not been resolved through the normal channels of Chairman, Deputy Chairman, CEO or CFO. The SID will attend meetings with, and listen to the views of, major shareholders to help to develop a balanced understanding of their issues and concerns if contact with the Chairman, Deputy Chairman, CEO or CFO is inappropriate. The SID also acts as the conduit, as required, for the views of other Non-Executive Directors on the performance of the Chairman and conducts the Chairman's annual performance evaluation. |
| The role of the Non-Executive Director is to constructively challenge proposals on strategic direction. Each Non-Executive Director brings specific experience and knowledge to the Board and its Committees. The Non-Executive Directors as a whole have a broad and complementary set of technical skills, educational and professional experience, personalities, cultures and perspectives. A skills matrix for the Board can be found on page 61. Their contributions provide independent views on matters of strategy, performance, risk, conduct and culture. The Non-Executive Directors were appointed for an initial two-year term but are re-elected on an annual basis. |
The Board is satisfied that, as at 31 December 2018, all of the Non-Executive Directors were independent. Howard Flight retired from the Board on 1 April 2019 and Keith Carby will retire from the Board on 30 April 2019. They will therefore not seek re-election at the next AGM. The Board is hugely grateful to Howard and Keith for their significant contribution to the Bank, during their tenure.
Ben Gunn, Gene Lockhart and Stuart Bernau have been in place since the Bank was granted its banking licence in March 2010 and have overseen the Company's significant growth during that time, including the milestone of its listing on the London Stock Exchange in March 2016. Their unique skills, retail banking, risk management and regulatory experience, continues to be instrumental to the growth of the Bank. However, we recognise the UK Corporate Governance Code's recommendations in relation to tenure and independence, and therefore from March 2019 we will no longer treat those Non-Executive Directors as independent.
During 2018, the Board and the Nomination Committee spent a significant amount of time on the Board's long-term succession plan, including the balance of independence, diversity, skills and experience on the Board and have made significant headway in refreshing the Board. We appointed two new independent Non-Executive Directors, Catherine Brown on 1 October 2018 and Paul Thandi on 1 January 2019. We are actively seeking new independent Non-Executive Director candidates and expect to make another appointment within 12 months.
The Chairman is committed to ensuring that at least half of the Board (excluding the Chair) comprises independent Non-Executive Directors who objectively challenge management. While our balance of Independent Directors is currently slightly below the 50% minimum, this will be short lived as Keith Carby retires on 30 April 2019. Therefore from 1 May the Board, excluding the Chairman, will be made up of 10 Directors of which five (50%) are independent Non-Executive Directors, three are non-independent NEDs and two are Executive Directors.
More information on the makeup of our Board, Committees and succession planning can be found in the Nomination Committee report on page 79.
The Board remains mindful of the need for suitable succession, and therefore maintains a clear record of the time each Director has served the Company and the skill-set that they provide. The Directors' skills and experience span a wide range of sectors and specialisms; a skills matrix is shown on page 61.
Vernon W. Hill, II was appointed to the Board in 2008 and as Chairman in 2013. The Board fully recognises its duty to select and support the best Chairman to lead the Bank in the interests of all stakeholders. As the founder of the Bank, Vernon has a unique role. The Board firmly believes Vernon to be the best qualified individual to take the Bank forward and implement the Bank's unique business model as Chairman. The Board fully supports the principle of an independent Chairman, in line with the Code, and will continue to keep under review the role and performance of the Chairman as part of its regular Board evaluation and succession planning processes.
| Meetings attended 2018 | ||
|---|---|---|
| Attended | Maximum possible |
|
| Vernon W. Hill, II (Non-Executive Chairman) | 10 | 10 |
| Craig Donaldson (Chief Executive Officer) | 10 | 10 |
| David Arden (Chief Financial Officer and Company Secretary) | 10 | 10 |
| Alastair (Ben) Gunn (Senior Independent Director) | 10 | 10 |
| Stuart Bernau (Non-Executive Director) | 10 | 10 |
| Catherine Brown1 (Non-Executive Director) | 2 | 2 |
| Keith Carby (Non-Executive Director) | 10 | 10 |
| Roger Farah (Non-Executive Director) | 10 | 10 |
| Lord Flight (Non-Executive Director) | 10 | 10 |
| Gene Lockhart (Non-Executive Director) | 10 | 10 |
| Anna (Monique) Melis (Non-Executive Director) | 10 | 10 |
| Sir Michael Snyder (Non-Executive Director) | 10 | 10 |
| Paul Thandi2 (Non-Executive Director) | n/a | n/a |
Appointed 1 October 2018
Appointed 1 January 2019
63
The Board is responsible for setting and managing our strategic direction. The operation of the Board is documented in a formal schedule of matters reserved for its approval, which is reviewed annually. These include matters relating to the decisions concerning our strategic aims and long-term objectives, the structure and capital of the Group, financial reporting and controls, risk management and various statutory and regulatory matters. The Board is also responsible for effective communication with shareholders, any changes to Board or Committee membership or structure, and has authority to recommend the Directors' Remuneration Policy to shareholders. The Board delegates responsibility for day-to-day management of the business to the Chief Executive Officer and sets out the basis for delegation of authorities from the Board to its Committees.
The Board has a schedule of regular business, financial and operational matters, and each Board Committee has a schedule of reserved matters to ensure that all areas for which the Board has responsibility are addressed and reviewed during the year.
The Chairman, assisted by the Company Secretary, is responsible for ensuring that the Directors receive accurate and timely information. The Company Secretary compiles the Board and Committee papers, which are circulated to Directors in advance of meetings. The Company Secretary also ensures that any feedback or suggestions for improvement on Board papers is fed back to management. The Company Secretary provides minutes of each meeting and every Director is aware of the right to have any concerns minuted.
During 2018, the key areas the Board focused on included:
Reports from the CEO, CFO and Chief Risk Officer ("CRO") are standing items on every agenda. The Company Secretary reports on legal, regulatory and governance matters and updates the Board on any changes to their statutory duties or the regulatory environment. The Chairman of each Committee reports on the proceedings of the previous Committee meeting at the next Board meeting.
Senior management and advisers are invited to attend Board and Committee meetings, where appropriate, to present, contribute to the discussion and advise members of the Board or its Committees on particular matters. The involvement of senior management at Board and Committee discussions strengthens the relationship between the Board and senior management and helps to provide the Board with a greater understanding of operations and strategic direction.
The Board has delegated specific responsibilities to each of the Audit, Risk Oversight, Nomination and Remuneration Committees, and reports for each are set out on pages 68 to 97. Each Committee has written Terms of Reference setting out its duties, authority and reporting responsibilities.
We keep the Terms of Reference of each Committee under continuous review to ensure they remain appropriate and reflect any changes in legislation, regulation or best practice. They are also reviewed formally every year by the relevant Committee and the Board. More information on the makeup of our Committees can be found on page 79. Any future changes to the Committees will be made after the review and recommendation of the Nomination Committee.
The skills and experience of Board members are set out on pages 56 and 57. The experience and knowledge of each of the Directors gives them the ability to constructively challenge strategy and to scrutinise performance.
During 2018 and early 2019 we welcomed Catherine Brown and Paul Thandi to the Board. All of our new Directors undergo a formal, robust and tailored induction programme upon appointment which is coordinated by the Deputy Company Secretary. Non-Executive Directors meet the Chairman and the CEO as part of the Nomination Committee's selection process and then again on appointment for a thorough briefing on all relevant aspects of the Company. They also meet the Company Secretary, senior management and our advisers for briefings on their responsibilities as Directors and on our business, finances, risks, strategy, procedures and the markets where we operate.
Prior to appointment, all Directors were advised of the time required to fulfil the role and confirmed they could make the necessary commitment. This requirement is also included in their letters of appointment. The Board is satisfied that the Chairman and each of the Non-Executive Directors is able to devote sufficient time to the Company's business. There has been no change in the Chairman's other time commitments during the year.
Every year, the Board undertakes an evaluation of its performance, as well as that of its Committees and individual Directors.
As we reported last year, in accordance with the UK Corporate Governance Code, the Board conducted an externally facilitated evaluation in 2017. This evaluation was carried out by Deloitte LLP. Deloitte LLP provides certain tax and consulting services to Metro Bank. The Board evaluation was conducted by an independent team and the Board is satisfied that the advice received was challenging, objective and independent.
Deloitte LLP observed a number of strengths and identified some areas for improvement. The Board agreed an action plan to address these areas and reviewed progress against the plan during 2018. The actions from the 2017 evaluation are now largely complete. The key action was to continue to review the Board's long-term succession plan, including the levels of independence on the Board. More details on succession planning can be found in the Nomination Committee report on page 79 and more details on independence on the Board can be found on pages 62 and 63.
In line with the Code, during 2018 the Board conducted an annual internal performance evaluation. This internal review gave us further opportunity to reflect on the effectiveness of the Board's activities, the quality of discussion, decisionmaking and individual performance and contribution.
Focused one-to-one discussions were held with each Director and the Chairman. The Chairman's evaluation was carried out by the SID. The following topics were discussed:
Each of the Board Committees also carried out reviews of their performance.
We are satisfied that the Board and each of the Committees continue to operate effectively.
The Company Secretary ensures that all Directors are kept abreast of changes in relevant legislation and regulations. This year the Board received an externally facilitated training session on the new 2018 Corporate Governance Code and a regulatory and accounting update including IFRS 16 was provided to the Audit Committee by PwC. Non-Executive Directors attend seminars and briefings in areas considered to be appropriate for their own professional development, including governance and issues relevant to the Committees on which they sit.
Executive Directors take part in our appraisal procedure. This sets tangible targets against which performance is measured. Non-Executive Directors are appraised as part of the overall Board Evaluation process referred to above.
The Board believes that effective risk management is crucial to the Bank's strategic objectives and long-term success. The Board has overall responsibility for ensuring risk is effectively managed.
Our approach to risk is further detailed on pages 28 to 54. The Risk Oversight Committee reviews the effectiveness of the risk management process on the Board's behalf, and its approach to this can be found in the Risk Oversight Committee report on pages 74 to 77.
In appropriate circumstances, the Board may authorise Executive Directors to take non-executive positions in other companies and organisations. Such appointments should broaden their experience, provided the time commitment does not conflict with the Director's duties to the Company. The appointment to such positions is subject to the prior approval of the Board.
During the year ended 31 December 2018, none of the Bank's Executive Directors held directorships in any other quoted company.
At each meeting the Board considers Directors' conflicts of interest. The Company's Articles of Association provide for the Board to authorise any actual or potential conflicts of interest.
The Company has a commercial relationship with InterArch, Inc. ('InterArch'), a firm which is owned by Shirley Hill, the wife of Vernon W. Hill, II. The Audit Committee has considered this relationship and concluded that the arrangements with InterArch are on terms which are at least as beneficial to the Bank as those which could be obtained from an independent third party. Further details are set out in the Audit Committee Report on page 70 and in note 28 to the financial statements.
Directors have access to independent professional advice at the Company's expense. In addition, they have access to the advice and services of the Company Secretary and his team, who are responsible for advice on corporate governance matters to the Board.
We provide Directors and Officers with appropriate insurance, which is reviewed annually. In addition, Directors and Officers have received an indemnity from the Bank against: (a) any liability incurred by or attaching to the Director or Officer in connection with any negligence, default, breach of duty, or breach of trust by them in relation to the Bank or any associated company; and (b) any other liability incurred by or attaching to the Director or Officer in the actual or purported execution and/or discharge of their duties and/or the exercise or purported exercise of their powers and/or otherwise in relation to/or in connection with their duties, powers or office other than certain excluded liabilities, including to the extent that such an indemnity is not permitted by law.
The Board may appoint Directors to the Board. Newly appointed Directors must stand for election by shareholders at the AGM following their appointment. In accordance with the provisions of the Code, all continuing Directors of the Company will offer themselves for annual re-election at the 2019 Annual General Meeting. Catherine Brown and Paul Thandi will stand for election by shareholders at the 2019 AGM, this being the first Annual General Meeting following their appointments. Lord Howard Flight retired from the Board on 1 April 2019 and Keith Carby will step down from the Board on 30 April 2019. They will therefore not seek re-election at the 2019 AGM. The Board continues to actively seek new independent Non-Executive Director candidates who, based on merit, will add value to the Board. Under the Articles of Association, shareholders may remove a Director before the end of their term by passing an ordinary resolution at a general meeting.
The Board continues to place great importance on regular two-way engagement with investors. We welcome engagement and dialogue throughout the year as part of an ongoing process. We connect with our investors on an ongoing basis through a variety of channels including face-to-face meetings, presentations, webcasts and online content.
Investor meetings are undertaken by the founder and Chairman, Vernon W. Hill, II, the CEO, Craig Donaldson, and the CFO, David Arden, supported by the Director of Investor Relations. During 2018, the team participated in over 300 individual and group meetings in the US, UK and Europe and presented at various investor conferences. Institutional investors have the opportunity to meet with the Chairman, Deputy Chairman and/or other Non-Executive Directors to discuss any areas of concern.
During November 2018 we held engagement sessions with stakeholders, as we prepared for our upcoming annual reporting and we also held a governance breakfast with the Audit Committee Chairman and the SID in January 2019.
The Investor Relations function reports to the Board on a regular basis on matters including share price performance, changes in the shareholder register, analyst and investor feedback and significant market updates, with the assistance of the Bank's corporate brokers. The Investor Relations team is responsible for ongoing communication with shareholders, analysts and investors. All financial and regulatory announcements, as well as other important business announcements, are published in the Investor Relations section of our website and stakeholders can subscribe to receive news updates by email by registering online on the website: metrobankonline.co.uk/investorrelations/. Contact details for the Investor Relations and Company Secretariat are available on the website for any shareholders, analysts or investors who wish to ask a question.
Stuart Bernau, Chairman of the Audit Committee and Chit Ghee Yeoh, Director of Internal Audit
As at 31 December 2018, the Audit Committee comprised the following independent Non-Executive Directors:
| Meetings attended 2018 | ||
|---|---|---|
| Attended | Max possible | |
| Stuart Bernau (Chairman) | 9 | 9 |
| Gene Lockhart1 | 8 | 9 |
| Keith Carby2 | 9 | 9 |
| Sir Michael Snyder | 9 | 9 |
Gene Lockhart was unable to attend one meeting for personal reasons
Keith Carby will retire from the Board on 30 April 2019.
I am pleased to present the Audit Committee report for the year ended 31 December 2018.
The Audit Committee has focused on delivering robust scrutiny and evaluation of the Bank's control environment so that it works and develops alongside the growth model. We continue to be forward as well as backward looking to ensure the Committee fulfils its assurance role and understands, assesses and monitors risks facing the business.
It has been a busy year for the Audit Committee. During the summer, the Committee led the tender process for the Bank's external audit. The ultimate goal of the process was to identify and appoint the audit firm that would provide the highest quality, most effective and efficient audit to the Bank. Following a thorough and robust tender process, I am pleased to report that PwC LLP has been reappointed as external auditor subject to reappointment by shareholders at the 2019 AGM. More detail on the tender process can be found later in this report.
In January 2019, we announced that we had adjusted the risk-weighting of certain commercial loans secured on commercial property and certain specialist buy-to-let loans that had the combined effect of increasing our RWA by £900 million. Whilst the risk weightings have been adjusted, there is no deterioration in the credit quality of the affected assets. We are learning the lessons from this and will continue to improve our systems and controls around capital and RWAs. The Committee will oversee the Internal Audit reviews of RWA controls enhancements in 2019. This is the programme to enhance Metro Bank's systems and controls for risk-weighting and capital.
The Committee has monitored the delivery of the 2018 Internal Audit Plan. We have reviewed the outcomes of the work performed and the reports issued, ensuring recommendations for improvement are actioned where appropriate. In developing the Internal Audit Plan for 2019, we have ensured inclusion of those areas which bear the greatest risk to the Bank, those which are most impacted by continued growth and areas of regulatory focus. We monitor the resource available to the Internal Audit team to ensure it has sufficient resource to fulfil its responsibilities.
The 2019 Internal Audit Plan was approved by the Board in January 2019 following discussion at the Committee and it also approved the level of risk assurance contained within the plan. I am therefore comfortable that the key risks to Metro Bank's unique business model have been identified and are being monitored.
The Committee continues to arrange for periodic independent evaluation of the contracts for services with InterArch, Inc. ('InterArch'). This includes oversight of the reviews carried out by authoritative independent third parties, the details of which can be found on page 70. The standard of service and the product InterArch provides is of a very high quality; however, management has decided to expand the suppliers we use for architectural design services.
As part of my role as Chairman of the Audit Committee, I hold regular meetings with colleagues from the Bank including, the Director of Internal Audit, Chief Risk Officer, Chief Financial Officer and senior members of his team, and the Deputy Company Secretary who acts as Secretary to the Committee. I also sit on the Risk Oversight Committee and work closely with Gene Lockhart, its Chairman.
I am available to meet with the Company's shareholders on request. This year, the Senior Independent Director and I met with investors at the Bank's offices in Holborn during the summer and we also hosted an investor breakfast in January 2019.
The Audit Committee met nine times in 2018. Following each meeting, I provided a verbal update to the Board on key issues and, where necessary, outlined the actions being taken by management to address any issues raised. The minutes are also included in the next Board pack. Before each Audit Committee meeting I also meet with the external audit partner, and the Committee members have a session with the external auditor at the end of each meeting without the presence of management.
The Committee keeps itself up to date on industry and regulatory matters. In 2018 we had technical briefing sessions delivered by PwC, as well as a corporate governance update provided by the Deputy Company Secretary. I also attend regular seminars run by professional services firms on current key issues, which this year have included cyber security, social media and digital tools and building trust in financial services.
It has been a pleasure to chair the Audit Committee since the Bank obtained its banking licence in April 2010. This is my last report as Chair. Subject to regulatory approval, Sir Michael Snyder will take over as Independent Audit Chairman from 1 April 2019. Sir Michael has extensive audit experience, having been a partner of an audit firm for over 40 years. He has been a member of the Committee since 2016 and is well aware of the challenges facing the Bank as it continues on its growth journey. I am pleased to pass on responsibility to Sir Michael and wish him well in his role as Chairman.
Audit Committee Chairman 10 April 2019
The Audit Committee's key role is to review the integrity of the financial reporting for the Bank and to oversee the effectiveness of the internal control systems and the work of the internal and external auditors.
As of 31 December 2018, the four members of the Audit Committee were all independent Non-Executive Directors with a range of relevant business experience. For further details of their skills and experience, please refer to their biographies on pages 56 and 57. At least one of the members of the Committee has recent and relevant financial experience and the Committee as a whole has competence in the banking sector. Regular attendees at the Audit Committee include the CEO, CFO, CRO, Director of Internal Audit, Group Finance Director, Financial Controller, Deputy Company Secretary and representatives from the external auditor, PwC.
In accordance with the provisions of the UK Corporate Governance Code ('the Code'), two independent NEDs, Stuart Bernau (Chair of the Audit Committee) and Keith Carby (member of the Audit Committee), stood down from the Committee on 31 March 2019. They had both served on the Board for nine years and in accordance with the Code, they were no longer deemed independent. Whilst there was a brief transition period between 5 March 2019 (being the nine year anniversary of their original appointment to the Board) and the 1 April 2019, when they were no longer independent, there were no meetings of the Committee. From 1 April 2019 the Committee's membership is in compliance with the Code. More information on this can be found in the Nomination Committee report on page 79.
| Area | Key topics |
|---|---|
| Policy • |
Whistleblowing Policy |
| • | Anti-bribery and corruption |
| • | Conflicts of interest and related parties |
| • | Non-Audit Services Policy |
| • | Review of Terms of Reference and recommendation to Board for approval |
| • | Committee performance evaluation |
| Financial • |
Review of Q1 results |
| reporting • |
2018 half year results, including an update of critical accounting judgements and estimates |
| • | Review of Q3 results |
| • | 2017 full year results, Annual Report and Accounts, including assessment of the key judgements and estimates, going concern and viability report |
| • | Review of 2017 external Auditor's reports and findings |
| • | Tax strategy |
| • | IFRS 9 key accounting judgements |
| • | Deferred tax asset review |
| Area | Key topics |
|---|---|
| Internal Audit | • Review of internal audits carried out in 2018 |
| • Review and approval of the Internal Audit Charter |
|
| • Review of the 2018 Internal Audit Reports |
|
| • Review of the 2019 Internal Audit Plan |
|
| External audit | • 2017 external Auditor's Report and full year findings |
| • 2018 External Audit Plan, engagement terms and fees |
|
| • Terms of engagement for the half year review |
|
| • External auditors' half year review findings |
|
| • 2017 full year external Auditors' Report and findings |
|
| • Overseeing the external audit tender process and making a recommendation to the Board on the re-appointment of the external auditor |
|
| Related party review |
• Independent review of the InterArch Architectural design services and branding, marketing and advertising contracts |
| Information | • IT resilience review |
| Technology | • Management IT Resilience Reports |
| Regulatory | • Regulatory and accounting update including IFRS 16 |
| • IFRS 9 implementation progress updates |
|
| • Modern Slavery Statement |
|
| • UK Corporate Governance Code Update |
In addition to the key areas above, the Committee reviewed the progress against the Internal Audit Plan and reviewed the detailed reports where appropriate. At each meeting, we also receive an update on horizon scanning for future regulatory changes which may affect the Bank.
Architectural design services and branding, and marketing and advertising services are provided to the Bank by InterArch – a firm owned by Shirley Hill, wife of Vernon W. Hill, II, Chairman.
In order to ensure that the contracts for services with InterArch are materially consistent with those that could be obtained from an independent third party, the contractual arrangements are subject to an independent annual review arranged by the Audit Committee. As part of this review detailed benchmarking is conducted by authoritative independent third parties. For the architectural design contract, which covers the build and design of our stores, a Big Four professional services firm carries out the benchmarking review. The marketing services contract,
which covers marketing, branding and advertising services, is reviewed by the largest independent global marketing audit firm. To provide assurance that the contracts remain on arm's length terms, the InterArch fee rates and structures are compared against market comparators and commentary is provided on how the services provided to the Bank by InterArch align with these. The Committee discussed the benchmarking reviews conducted by independent third parties and evaluated the Bank's response to the feedback reported. Following consideration, the Committee remains satisfied 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 quality and effectiveness of the service provided by InterArch continue to provide value for the Bank. In order to expand the suppliers used, management intends to run a competitive tender in 2019 to identify an additional alternative supplier of architecture services.
In line with the Code, the Committee also considers the disclosures that the Bank makes in the financial statements regarding the relationship with InterArch to ensure they are appropriate and in line with relevant reporting standards. Following feedback from stakeholders, the Committee has included further information on the benchmarking review this year, as above.
The annual review of the InterArch contracts completed in 2018. Following this, new annual contracts were negotiated and became effective from 28 February 2019. The Committee has evaluated the steps taken by management to ensure that the contracts continue to be at arm's length as part of the renegotiation process.
In line with the Code, the Committee considered whether the 2018 Annual Report is 'fair, balanced and understandable and should provide the information necessary for shareholders to assess the Group's position, performance, business model and strategy'. The Committee is satisfied that the 2018 Annual Report meets this requirement and, in particular, that appropriate disclosure has been included for both positive and negative developments in the year. The process supporting this goal included:
The Group's Internal Audit function plays a key role in providing independent assessment and challenging governance, risk and control. The Audit Committee approved the Internal Audit Plan and considered the results of its work. We also:
The Committee was satisfied that Internal Audit had adequate resources available this year.
Details of the Bank's risk management framework are provided on pages 28 to 54. In considering the effectiveness of internal controls, the Audit Committee received and discussed reports from Internal Audit and the external auditor. In addition, executive management was invited to discuss the more significant issues raised by Internal Audit. Management action plans to resolve the issues raised are monitored by the Audit Committee.
Recommendations for improvements to internal controls by the external auditor are monitored by Internal Audit, with progress reported to the Audit Committee.
The Audit Committee reviews and makes recommendations to the Board with regard to the appointment of the external auditor, its remuneration and terms of engagement.
The Audit Committee is also responsible for the oversight of the relationship with PwC and the effectiveness of the audit process. To satisfy ourselves of the effectiveness of the external audit, during the year we:
At the end of each Audit Committee meeting, members met the external auditor without management present to discuss any relevant issues.
The Company confirms that it has complied with the provisions of the Competition and Markets Authority's Order for the financial year under review.
PwC LLP, the Bank's external auditor, has been in situ since 2009. The Bank is required under law to put its audit out to tender at least every 10 years and to change its auditor at least every 20 years. As disclosed last year, the Audit Committee commenced a tendering process in 2018 which is set out below. The Audit Committee recommended to the Board that PwC be reappointed as the Bank's auditor. A resolution to reappoint PwC will be put to shareholders at the AGM in 2019.
The tender process and the Committee's involvement in that process is outlined below:
Tender participants: PwC, KPMG, Ernst & Young, Grant Thornton and BDO were all invited to participate in the tender process. Consideration was also given to other firms. It was agreed that there were adequate choices available such that Deloitte would not be invited to tender in light of the non-audit services it provides to the Bank.
Tender documentation: Request For Proposal documentation and a data pack was issued to all participants which provided detailed information to support the submission of quality and accurate bids.
Carousel day: Each participant that had confirmed its interest in tendering had the opportunity to spend time with stakeholders from across the business to obtain a more detailed understanding of the Bank and the existing management processes and challenges to better inform their tender submission. These meetings included time with senior colleagues from Finance and Tax, Internal Audit, Risk, Company Secretarial, Operations and IT.
Tender document scoring: We asked each participant to provide us with responses to questions on the following key areas:
Each firm was scored in each area, with scoring most heavily weighted towards questions on the audit process and approach, and the team calibre and fit. Scores were provided by the Chairman of the Audit Committee, Finance Director and Financial Controller.
First-round presentation: Each participant was invited to provide a first-round presentation. Each presentation was attended by the Chairman of the Audit Committee, the Finance Director, the Financial Controller, the Deputy Company Secretary and the Director of Procurement. Presentations were not formally scored, but verbal feedback was debated internally. Feedback was aligned to tender proposal document scores. The two best scored participants were shortlisted and invited to formally present to the Audit Committee.
Outcome: The final presentations were closely run and both participants gave detailed and authoritative presentations, displaying expertise in their fields. The Audit Committee recommended PwC as the preferred participant among the final candidates given the team presented the most competently on relevant areas of focus. These included industry knowledge, audit quality, use of technology and the provision of industry insight.
The Bank and PwC have safeguards in place to protect the independence and objectivity of the external auditor.
The Bank has a policy for the provision of non-audit services by the external auditor. In line with the policy, all non-audit services provided to the Bank by the external auditor, where the fee is expected to exceed a de minimis limit, must be pre-approved by the Audit Committee subject to the guidelines and thresholds detailed in the policy. Preapproval by the Committee must be obtained in advance of any work being carried out. Pre-approval must be performed by the Committee; it cannot be delegated to a member of management. The Committee must be provided with a detailed explanation of each particular service to be provided to allow it to make an appropriate assessment of the impact of the service on the external auditor's independence. The policy further formalises within the Bank the restriction on the provision of non-audit services by the external auditor which the FRC considers to be prohibited. In accordance with the FRC's Ethical Standard, the services considered prohibited include:
No significant engagements for non-audit services were carried out by the external auditor during the year. Where they did occur, they were in respect of audit or assurancerelated matters consistent with the principles of independent assurance provision. Details of the fees paid to the external auditor during the year can be found in note 7 to the financial statements on page 119.
In respect of financial reporting, the Audit Committee considered the key judgements and estimates in relation to the 2018 Annual Report and Accounts.
| Key judgements and estimates in financial reporting | Audit Committee review and conclusions |
|---|---|
| Impairment of loans and advances The Bank adopted IFRS 9 in the period, having estimated and disclosed the potential impact. Determining the |
The Committee also specifically considered the key accounting judgements and disclosures for the transition to IFRS 9 and is satisfied that they are reasonable. |
| appropriateness of loan loss provision is inherently judgemental and requires management to make a number of assumptions. |
The Committee received and challenged reports from management explaining the approach taken to provisioning and the resulting changes in the provision levels during |
| Individual impairment losses on secured loans and advances are calculated based on an individual valuation |
the period. |
| of the underlying asset. Expected impairment losses on stage 1 and 2 loans and advances are calculated using a statistical model. |
The Committee considered key assumptions used in the Bank's expected credit loss model, being the point at which a loan is considered to have experienced a significant increase in risk, probability of default, the probability of this |
| The key areas of judgement and estimation consist of: • the measurement of the expected credit loss allowance; • what we consider to be a significant increase in credit risk; and |
default resulting in possession and/or write-off, the loss given default (the subsequent loss incurred) and the economic scenarios. |
| • the multiple forward-looking economic scenarios used in the modelling. |
The Committee is satisfied that the approach taken and judgements applied were reasonable. |
As at 31 December 2018, the Risk Oversight Committee ('ROC') comprised the following independent Non-Executive Directors: Meetings attended 2018
| Members | Attended | Max possible | |
|---|---|---|---|
| Gene Lockhart (Chairman) | 5 | 5 | |
| Stuart Bernau | 5 | 5 | |
| Alastair (Ben) Gunn1 | 4 | 5 | |
| Sir Michael Snyder | 5 | 5 | |
| Anna (Monique) Melis2 | 4 | 4 |
Ben Gunn was unable to attend one meeting for personal reasons
Monique Melis joined the Committee in March 2018
I set out below the report of the Risk Oversight Committee for 2018.
The ROC provides oversight of risk and advises the Board, as appropriate, on the risk posed to the Bank from its continuing business activities and future risk strategy. The areas of risk include:
Whilst 2018 was a busy and rewarding year for the Bank, it was not without its challenges, however, our unique business model goes from strength to strength, and we have continued to win market share. This growth is driven by winning customers, who bring their low-cost, long duration deposits and then lending that out to high-quality, lower-risk opportunities. We expect that the UK residential mortgage lending market will continue to be challenging in 2019. Our lending will continue to be underpinned by our conservative approach.
From a credit risk standpoint, the Bank remained very strong during 2018. Adherence to our conservative lending policies has resulted in consumer, mortgage and commercial loans that have prudent risk qualities and remain within our risk appetite.
As part of our oversight role, the Committee's job is to constructively challenge and support the Management team as we build the Bank for the long term. In January 2019, we announced that we had adjusted the risk-weighting of certain commercial loans secured on commercial property and certain specialist buy-to-let loans that had the combined effect of increasing our RWAs by £900 million.
Whilst the risk weightings have been adjusted, there is no deterioration in the credit quality of the affected assets. We are learning the lessons from this and will continue to improve our systems and controls around capital and risk-weighted assets. Management presented to the Committee regarding the identification of the issue and its plans to enhance Metro Bank's systems and controls in this area. The Audit Committee will provide oversight of the Internal Audit reviews of the RWA controls enhancements.
We submitted our application for an AIRB approach to credit risk to the regulator at the start of 2018. Work towards AIRB accreditation will include ongoing engagement with the PRA on what is an iterative and detailed project. The potential capital efficiencies AIRB will bring are significant and this therefore remains one of our top priorities. However, the Bank does not now expect to receive AIRB accreditation prior to 2021.
As part of its oversight role, the Committee has spent time reviewing and challenging the Bank's ICAAP and associated documents, including stress testing and assumptions, prior to the submission to the PRA.
The pace of regulatory change shows no sign of abating. As it grows, the Bank must continue to evolve and mature to ensure that it keeps pace in the environment of change and challenge in which it operates. On the horizon, the implementation of ring-fenced banking legislation and the minimum requirement on own funds and eligible liabilities ('MREL') and the new leasing standard IFRS 16 present a challenge but also a potential opportunity for smaller banks with significantly less complex businesses than their peers. During the year, the Committee has spent time working with the Executive Leadership Team to review their plans to implement these regulations.
Keeping our customers safe is incredibly important to us. To this end, during 2018 the Committee spent significant time reviewing and providing oversight of the Bank's IT and operational resilience and infrastructure through a number of 'deep dive' reviews. Our reviews have focused on Metro Bank's ability to proactively avoid, respond, recover and learn from operational and IT-related disruptions. A number of key components make up the Bank's resilience capabilities including fraud and cyber security, business continuity and crisis management, IT service management and change management. Metro Bank continues to invest heavily in technology and capability to further improve its operational resilience. This will be an ongoing focus during 2019.
As is usual, we have also spent significant time during the year reviewing a number of the Bank's policies, documents and transactions, and discharged other advisory and oversight responsibilities. ROC members and other colleagues also met the PRA on a number of occasions during the year, including the Bank's periodic summary meeting. I provide a verbal update to the Board after every Committee meeting and the ROC minutes are included in the next Board pack.
During the year, we received regular updates on financial crime risk and we continue to keep a watching brief on this ever evolving area of risk.
I am pleased to report that following her appointment to the Board in June 2017, Monique Melis became a member of the Committee in March 2018. Monique's extensive financial services and regulatory experience is an excellent addition to the Committee's membership and we welcome her contribution.
The following sections explain the role and activities of the ROC, and how it has discharged these responsibilities, as well as setting out several key areas of activity during 2018.
Risk Oversight Committee Chairman 10 April 2019
The ROC is a sub-Committee of the Board. Its specific responsibilities are set out in its Terms of Reference.
Accountable to the Board, the ROC provides leadership, oversight and direction regarding the Bank's risk governance and management. We are charged with helping the Board to create an appropriate culture across the Bank, which emphasises and demonstrates the benefits of a risk-based approach to risk management and internal controls. We are responsible for reviewing, challenging and recommending to the Board the Bank's risk appetite, ICAAP document, ILAAP document and risk policies. We also provide oversight of the credit risk model programme. The ROC oversees risk management procedures and reviews risk reports on key business areas. In addition, we advise the Audit Committee on reviews of effectiveness of the Bank's risk controls, and the Nomination and Remuneration Committees on the weighting to be applied to risk for the remuneration calculations for the Executive Leadership Team.
The ROC receives regular management information ('MI') and reports concerning the Bank's performance against risk appetite and the measures set by it and by the Board. We receive regular updates on regulatory developments, and consider how these will affect plans, processes, systems and controls.
The Committee reviews and formally notes the minutes of the Executive Risk Committee ('ERC') the Asset and Liability Committee ('ALCO') and the Credit Risk Policy and Appetite Committee ('CRPAC').
As a key part of the Bank's governance framework, the ROC ensures that the CRO has unfettered access to it and its Chairman.
At each scheduled meeting the ROC considered the following standing items:
This includes an executive summary from the CRO setting out items of note and assessing the Bank's performance against its risk appetite and risk metrics. It also includes specific reports on the following areas:
– Credit risk
Execution of our strategy requires prudent and controlled management of credit risk. To support this, one of the roles of the ROC is to oversee credit underwriting and ensure that the Bank has effective processes and controls to monitor and manage credit risk, including where the risk position associated with a particular customer or loan has deteriorated. This ensures that lending remains within risk appetite and monitors policy exceptions.
We receive reports concerning risk and control selfassessments, information security, business continuity management and incidents. While a number of incidents were raised during 2018, our view is that the management of these incidents and the actions taken in response were proportionate and appropriate to the size and scale of the incidents. We also note that post-incident reviews were held for material incidents to capture learnings and ways to prevent or mitigate any potential recurrences. We continued to focus on cyber and fraud risk during 2018, in response to the increased prevalence of attempted attacks against financial services firms and others. We also increased our focus on operational resilience, having regard to increased regulatory focus on firms' ability to respond to major events causing operational disruption.
Given the level of risk posed by financial crime to all banks, our report includes management information on matters including: performance against the Bank's financial crime key risk indicators; compliance with customer identification and verification requirements for all new accounts; oversight and risk assessment of high-risk customers. Our report also covers payments and customer screening, as well as updates on items of note from the Financial Crime Steering Group.
While the primary venue for in-depth discussions on Treasury is the ALCO, the Treasurer's commentary is tabled at each ROC meeting – and the Treasurer is invited to attend meetings to discuss this. The ROC also reviews Treasury policies and notes the minutes of the ALCO. Our report includes high-level MI on liquidity and interest rate risk, while we also receive specific reports on Treasury risk. In addition, the Treasurer's report includes updates on relevant regulatory matters.
We note the report from the Bank's Legal team regarding any material litigation cases.
• Deep dives and in-depth reviews We receive in-depth reviews on areas of emerging risk and regulatory interest throughout the year. Topics covered during 2018 included cyber security, commercial lending, IT resilience and infrastructure, and operational resilience.
Monique Melis joined the Committee in March 2018; while all other members held office throughout 2018. Non-Executive Directors who are not ROC members may attend meetings. New Directors attend meetings as part of their induction programme. The CFO, CRO and CEO have standing invitations to attend as guests, unless the Chairman of the Committee asks them to excuse themselves from a particular meeting or discussion.
Other Directors and colleagues attend as guests by invitation of the Chairman to present and report on relevant topics, with the Deputy Company Secretary acting as Secretary to the Committee.
The appointments of two new Non-Executive Directors during the year gave us the opportunity to refresh the membership of the Committee, with effect from 1 April 2019. More information on this can be found in the Nomination Committee report on page 79.
The ROC's Terms of Reference are reviewed annually and are available on our website.
During 2018, we received items of business including the following:
| Area | Discussion |
|---|---|
| Policy | Policies approved by the ROC: |
| • Arrears Management Policy |
|
| • Impairment Policy |
|
| • Data Policy |
|
| • Model Governance Policy |
|
| • Recruitment and Selection Policy |
|
| • Impairment Policy |
|
| • Supplier Management Policy |
|
| • Meta Policy |
|
| • Treasury Dealing Policy |
|
| • Information Security Policy |
|
| • Model Policy |
|
| Policies reviewed and recommended to the Board: |
|
| • Anti-Money Laundering and Counter Terrorism Financing Policy |
|
| Regulatory | • MREL |
| • GDPR process and post-implementation review |
|
| • FCA culture essay response |
|
| AIRB application |
• AIRB approach to calculating credit risk application updates |
| Treasury | • Review and approval of Market Risk Policy |
| IT resilience | • IT systems resilience review |
| • Operational risk review |
|
| • Cyber security update |
|
| Capital and liquidity |
• ILAAP document incorporating Treasury Policy and Contingency Funding Plan |
| • ICAAP document including interest rate risk in the banking book |
|
| Deep dives | • ICAAP |
| • Fraud |
|
| • IT resilience |
|
| • Consumer lending portfolio |
|
| • Commercial lending |
As at 31 December 2018, the Nomination Committee comprised the following independent Non-Executive Directors and the Chairman, Vernon W. Hill, II:
| Meetings attended 2018 | |||
|---|---|---|---|
| Attended | Max possible | ||
| Lord Flight (Chairman) | 5 | 5 | |
| Vernon W. Hill, II | 5 | 5 | |
| Keith Carby² | 5 | 5 | |
| Roger Farah | 5 | 5 |
I am pleased to share my report of the Nomination Committee for 2018.
We have put a great deal of energy into meeting with potential Board candidates during the year and have a refreshed Nomination Committee in place from 1 April 2019, chaired by Roger Farah¹.
As announced in last year's Annual Report we welcomed our new Chief Financial Officer, David Arden, on March 2018 following Mike Brierley's retirement.
Following a rigorous process for her appointment and working with our search partner Audeliss, Catherine Brown joined the Board as a Non-Executive Director on 1 October 2018. Catherine has extensive experience in organisational transformation in financial services, leadership and operations.
Additionally Paul Thandi, CEO of the NEC, joined the Board as a Non-Executive Director from 1 January 2019 following a brief period on our Advisory Board. Paul brings a relentless focus on customers from his experience as a leader in media and service businesses.
It is great to be able to welcome new talent to the Board and the team.
The above changes in Committee Chair and Senior Independent Director roles are subject to regulatory approval.
Keith Carby retires from the Board on 30 April 2019.
We reviewed the skills, experience, independence and knowledge of the Board during 2018 to understand which areas to focus on when recruiting future Board members and the future composition of our Board and Committees.
We recognise the UK Corporate Governance Code's recommendations in relation to tenure and independence. The Committee is satisfied that, as at 31 December 2018, all of the Non-Executive Directors were independent. As a relatively young organisation, a number of our NEDs reached nine years' tenure in March 2019 and we no longer treat those Non-Executive Directors as independent.
We have made good progress on Board succession and expect to make at least another appointment within 12 months. The appointment of two new Non-Executive Directors gave us the opportunity to refresh the membership and chairs of our Committees and our Committees are in compliance with the UK Corporate Governance Code's provisions from 1 April. While there was a brief transitional period between 5 March and 1 April there were no meetings for the Audit, Nomination and Remuneration Committees during March 2019.
The Board carried out an evaluation during 2018. More details are on page 65.
| Roles | Names | Comments |
|---|---|---|
| Board roles | ||
| Chairman | Vernon W. Hill, II | While our balance of independent Directors is currently slightly below the 50% minimum this will be short-lived as Keith Carby retires on |
| Deputy Chairman | Ben Gunn (non-independent) |
30 April 2019, after nine years on the board. |
| Senior Independent Director | Sir Michael Snyder | From 1 May the Board (excluding the Chairman) will be made up of 10 Directors of which five (50%) are independent Non-Executive Directors (NEDs), three are non-independent NEDs and the remaining |
| Designated NED for Workforce Engagement |
Stuart Bernau (non-independent) |
two are Executive Directors. |
| Independent NEDs | Catherine Brown Roger Farah |
The Board continues its proactive search for additional independent NEDs and we expect to make at least one appointment this year. |
| Monique Melis Paul Thandi |
All our UK Corporate Governance Code Committees are majority or totally independent. |
|
| NEDs (non-independent) | Keith Carby² Gene Lockhart |
|
| Executive Directors | ||
| CEO CFO |
Craig Donaldson David Arden |
|
| Audit Committee | ||
| Chairman Members |
Sir Michael Snyder Roger Farah Monique Melis |
The Audit Committee will be comprised entirely of independent NEDs. |
| Nomination Committee | ||
| Chairman Members |
Roger Farah Catherine Brown Keith Carby² Vernon W. Hill, II Paul Thandi |
The Nomination Committee will have a majority of independent NEDs as members until Keith Carby retires on 30 April 2019. From 1 May 2019 it will be comprised entirely of independent NEDs. |
| Remuneration Committee | ||
| Chairman Members |
Roger Farah Catherine Brown Paul Thandi |
The Remuneration Committee will be comprised entirely of independent NEDs. |
| Risk Oversight Committee | ||
| Chairman Members |
Gene Lockhart Stuart Bernau Catherine Brown Monique Melis |
The Risk Oversight Committee membership will be 50% independent and 50% non-independent. Gene Lockhart will transition out of the role of Chairman of the Committee during 2020. This enables us to retain his banking experience, as Committee Chairman, while we continue to refresh the Board. |
The above changes in Committee Chair and Senior Independent Director roles are subject to regulatory approval.
Keith Carby retires from the Board on 30 April 2019.
79
We understand the merits of a diverse organisation and Board. We have retained Audeliss, a search firm, to support us in sourcing candidates for Non-Executive Director roles. Diversity is central to Audeliss's approach and it is a signatory to the Women on Boards Voluntary Code of Conduct for Executive Search Firms. Audeliss has no connection to Metro Bank.
We do not have any specific targets in relation to Board diversity and any appointments are made on merit as we seek individuals who will add significant value. However, we are committed to building a strong Board which is diverse in many ways, including gender, as per our Board Diversity Policy which is on our website.
Roger Farah took over as Chairman of the Nomination Committee on 1 April 2019¹ and I wish him well in his new role. Having served as a Non-Executive Director for nine years I stepped down from the Board on 1 April 2019.
Nomination Committee Chairman for the financial year ended 31 December 2018 10 April 2019
The Nomination Committee leads the process for identifying and making nomination recommendations to the Board. Its duties include:
The Nomination Committee Terms of Reference can be found on our website: metrobankonline.co.uk
In addition to the members set out on page 78, Craig Donaldson, Chief Executive Officer, attends meetings by invitation. The Chief People Officer, Danielle Harmer, acts as Secretary to the Committee and provides support to the Committee Chairman and Committee as needed.
Following each meeting the Chairman provides a verbal update to the Board. The Committee minutes are also included in future Board papers.
| Area | Topics |
|---|---|
| Board appointments |
• The appointment of David Arden as the new Chief Financial Officer • The appointment of Catherine Brown as a new Non-Executive Director • The appointment of Paul Thandi as a new Non-Executive Director |
| Board Succession |
• The Board succession plan – progressively refreshing our Board • Putting the Board succession plan into action and Board independence • Review of proposed Non-Executive Director candidates • Committee Chairs and membership and independence • Agreement of Committee memberships for Monique Melis • Designated Non-Executive Director for Workforce Engagement |
| Other areas for review |
• 2018 Hampton-Alexander data/report • Approval of Nomination Committee report • Annual review of the Nomination Committee Terms of Reference • Proxy Adviser feedback on 2017 Annual Report and new Corporate Governance Code requirements • Nomination Committee annual effectiveness review |
Lord Flight, former Chairman of the Remuneration Committee and Danielle Harmer, Chief People Officer
As at 31 December 2018, the members of the Committee were all independent Non-Executive Directors:
| Meetings attended 2018 | |||
|---|---|---|---|
| Attended | Max possible | ||
| Lord Flight (Chairman) | 5 | 5 | |
| Keith Carby1 | 5 | 5 | |
| Roger Farah | 5 | 5 |
On behalf of the Board, and as former Chairman of the Remuneration Committee, I am pleased to present the Remuneration Committee Report and the Directors' Remuneration Report ('the Report') for the year ending 31 December 2018. I would like to thank our investors for their support during my time as Chairman. I stepped down from the Board and Roger Farah took over as Chairman of the Remuneration Committee from 1 April 2019¹. I wish him well in his role.
Our Directors' Remuneration Policy was approved at the Annual General Meeting ('AGM') on 25 April 2017, and is due for review in 2020. We have included a summary of the current policy within our Remuneration Report for ease of reference and the full policy can be found on our website.
We have again enhanced the level of disclosure in the Report this year in response to feedback from investors and are providing greater transparency with regard to variable remuneration outcomes for 2018.
In January 2019, we announced that we had adjusted the risk weighting of certain commercial loans secured on commercial property and certain specialist buy-to-let loans that had the combined effect of increasing our risk weighted assets ('RWA') by £900 million. In light of this Craig Donaldson has asked that the Committee does not consider him for variable reward for 2018. In addition, the Committee has decided to freeze vestings of share options and awards for Executive Directors and the Executive team, including share options for 2018, pending further internal analysis and any external investigations into the RWA adjustment.
We believe oversight of the remuneration and benefits across the Bank for all colleagues, not just Directors, is an important part of our role. Our approach to remuneration for Executive Directors is consistent with that taken for all colleagues. It comprises a salary, reasonable benefits and pension provisions and variable reward which is delivered primarily through share options. We do not operate additional Long-Term Incentive Plans or 'LTIPs'.
Variable reward for all eligible colleagues, including Directors, is based on personal behaviours and delivery and also how the Bank has performed during the year. All share options are awarded at the market share price with no discount and are subject to deferral over up to five years. This aligns all colleagues with both investors and other stakeholders in line with our customer-focused growth model and long-term vision. Our customer-focused model is also the reason why we weight a greater proportion of our variable reward outcomes on customer service metrics.
All variable reward is subject to malus and clawback.
82
We are pleased that we have a narrower pay gap this year. The 2018 median gender pay gap is 9.8% (13.5% in 2017) and the mean gender pay gap is 21% (22.4% in 2017). There are proportionately more women carrying out jobs in the top pay quartile than in the previous year and the gaps in the top and bottom quartiles have narrowed.
| Year | Median pay gap |
Mean pay gap |
Median bonus gap |
Mean bonus gap |
Median bonus gap excluding share options sales/gains |
Mean bonus gap excluding share options sales/gains |
|---|---|---|---|---|---|---|
| 2018 | 9.8% | 21.0% | 29.0% | 35.7% | 27.9% | 30.0% |
| 2017 | 13.5% | 22.4% | 24.0% | 38.7% | 23.5% | 27.1% |
We take fairness and transparency very seriously so we examined salaries for all roles with more than 10 colleagues in them. This confirmed that we pay colleagues doing the same roles equitably, regardless of gender. Nonetheless, we continue to focus on reducing the gap by supporting all colleagues to develop in their careers and progress towards more stretching jobs that typically command a higher salary. All of our talent development programmes are inclusive and we support leaders by providing them with diverse candidate lists for vacancies.
In 2018 variable reward was balanced with 72% of females receiving a bonus, versus 73% of males.
The median bonus gap was 29% and the mean bonus gap was 35.7%. However, if gains made on the sale of share options or shares are excluded, the median bonus gap reduces to 27.9% and the mean bonus gap reduces to 30%. The bonus gap is driven by the greater proportion of men in the top quartile where variable reward tends to be higher.
Full details can be found on our website: metrobankonline.co.uk
Variable reward outcomes for 2018 were based on key financial, risk, customer and people objectives balanced with the personal behaviours, and delivery of individual Executive Directors. This is the same approach that we take with every colleague in Metro Bank. We apply the same Company multiplier for all employees who are eligible for variable reward at the discretion of the Remuneration Committee.
We again set exceptionally stretching targets for 2018 and we had made a provisional proposal of total variable reward of 47% of salary, for the CEO; and total variable reward of 72% of salary for our new CFO, David Arden. The maximum allowed is 200% of salary. Following our announcement of 23 January 2019 regarding the RWA adjustment, Craig Donaldson asked that the Committee did not consider him for variable reward for 2018, such that he instead received an award of zero. In addition, the Committee decided to freeze vestings of share options and awards for the Executive Directors and Executive team, including share options for 2018, pending further internal analysis and any external investigations into the RWA adjustment.
Page 88 details the scorecard measures, targets and outcomes relating to 2018 (and 2017) as well as the total variable reward awarded. Following shareholder feedback we have also included enhanced disclosure on our performance.
David Arden was appointed as CFO on 19 March 2018 on a salary of £400,000 and with pension and variable reward arrangements in line with those for the CEO. On joining Metro Bank David was also made a compensatory award of share options and cash in line with our Remuneration Policy. Details are on page 86 and are included in the single figure on page 87.
Mike Brierley, our former CFO, retired on 31 March 2018. Mike did not receive any variable remuneration for the portion of 2018 during which he remained in the role. We agreed, in line with our Directors' Remuneration Policy, that Mike's share options and awards would continue and vest at the normal time subject to their terms and conditions.
We had a pay pot of 2.2% for 2019. The 'on-target' pay increase for inflationary and behavioural/performancerelated salary increases was 1.4%. For growth and market data realignment increases, the average pay rise was 4.3% and the maximum was 21.6%. In total, 2,043 or 52.2% of all colleagues received a salary increase above the standard inflationary and behavioural/performance-related pay rise. This includes all our Cashiers, Customer Service Representatives and AMAZE Direct Representatives where our entry-level salaries have increased by between 2.78% and 5.51%.
We have also reviewed our Executive Directors' salaries. Our CEO, Craig Donaldson's salary will remain flat in 2019 at £750,000.
The salary of our new CFO, David Arden, who joined on 19 March 2018 increased by 1.25% (below the standard 'on-target' inflationary pay rise) from £400,000 to £405,000 from 1 April 2019.
The annual fees for the Chairman, Vernon W. Hill, II, remain unchanged at £385,000. The £120,000 gross annual allowance, paid in monthly instalments via PAYE as a contribution towards the Chairman's travel to/from the UK and accommodation and subsistence while here, also remains unchanged. No other expenses are payable in relation to this.
The fees for our Non-Executive Directors remain unchanged at £52,500 per annum.
The Committee will again agree an appropriate balanced scorecard to inform the Company variable reward multiplier for 2019, based on financial, risk, customer and people objectives. We will disclose targets and measures in the Remuneration section of the Annual Report for 2019. This disclosure will include information relating to performance against those targets except where we believe it is commercially sensitive – in which case it will be disclosed once it is deemed not to be sensitive.
The majority of variable pay for Executive Directors will continue to be awarded as share options. From 2019 variable reward for PRA-designated Senior Managers (including the Executive Directors) will vest over seven years with a 12-month holding period in line with our move to a proportionality level 2 firm.
Our simple approach to variable reward, applied across the organisation, focuses executive leaders and employees on growth and the long-term, sustainable success of the business.
We do not offer LTIPs or operate any other long-term variable reward schemes.
We believe that the overall remuneration structure continues to be appropriate. There is significant alignment between the interests of Executive Directors and shareholders, and we take the same approach with all employees as part of our ethos to make every colleague feel like an owner. Additionally the Remuneration Committee has complete discretion to challenge the formulaic variable reward outcome where it believes it is not appropriate.
The Remuneration Policy will be reviewed in 2020 and as part of that process we will check that our structures continue to be effective, competitive and aligned with the Company's objectives. We will remain mindful of the external and regulatory environment and evolving debate on executive remuneration. All changes to the policy will be subject to shareholder approval.
Specifically we are intending to review the following aspects of executive remuneration based on investor feedback and recent regulatory and corporate governance changes:
We engage with relevant organisations concerning our approach to remuneration and welcome feedback from investors and stakeholders.
We incurred professional fees of £40,900 plus VAT for remuneration advisory services from Deloitte LLP.
On behalf of the Committee, thank you for your support and I wish Roger well in his new role as Chairman¹.
Remuneration Committee Chairman for the financial year ending 31 December 2018 10 April 2019
Our primary objective is to design a remuneration framework that promotes the growth and long-term success of Metro Bank while supporting the unique culture and model to deliver outstanding customer service.
This framework promotes sound and effective risk management and does not encourage risk-taking that exceeds the risk appetite agreed by the Board.
In line with our business strategy and objectives, the framework strongly emphasises long-term growth and share options as the major source of reward – so that everyone is focused and rewarded for long-term, sustainable success.
Because of the way we measure behaviours and performance for individuals, and how we capture and act upon customer insight across the organisation, the framework is also actively aligned to the delivery of outstanding customer service.
Our approach rewards success and is attractive to talented individuals. In particular, it strikes a balance between short-term rewards and the long-term performance of the business. The framework also complies with the FCA remuneration principles. Full details are on our website: metrobankonline.co.uk.
In addition to the members set out on page 81, Craig Donaldson (CEO) and Vernon W. Hill, II (Chairman) attend meetings by invitation to assist the Committee in its deliberations, although not in relation to their own remuneration. The Committee receives assistance from the Chief People Officer, Danielle Harmer, who acts as the Secretary to the Committee.
Following each meeting, the Chairman provides a verbal update to the Board. The Committee minutes are also included in future Board papers. Areas of discussion are outlined here.
| Area | Topics |
|---|---|
| Policy and reporting |
• Approval of Directors' Remuneration Report, including letter from Remuneration Committee Chairman and Remuneration Policy • Gender pay and approach to reporting 2018 data • New Remuneration Committee Terms of Reference • Feedback on 2017 Annual Report |
| Reward | • 2018 Annual Reward Review for all colleagues – including multiplier for variable reward, awards (for 2017 performance year), pay outcomes and CEO summary • Remuneration for Executive Directors, members of the Executive Leadership Team and Director of Internal Audit • Fees for Chairman and Non-Executive Directors • Share options – number available for granting, dilution policy, approval of exchange value and VWAP to apply to the 2019 grant (for 2018 performance year) • Discretionary decisions regarding retention of share options by former employees • Accelerated vesting of share options for two Non-Executive Directors (Roger Farah and Sir Michael Snyder) • Review of Metro Bank Group Personal Pension Plan (Governance Report) |
| Regulation | • Regulation guidelines on remuneration and move to a proportionality level 2 firm • Remuneration Code Annual Disclosure for 2018 • Ex-post checks for October and November 2018 share option vests • CRO review of FCA remuneration guidelines, including ex-ante checks • Director of Internal Audit sign-off of 2018 Reward Review • Annual review of Remuneration Committee Terms of Reference • New Corporate Governance Code requirements and changes to Remuneration Report legislation • Remuneration Committee Annual Effectiveness Review |
Variable reward for all employees
| Weighting | Weighted performance outcome |
|
|---|---|---|
| A Financial – see detail below1 | 30% | 14.5% |
| B Risk | 20% | 18.3% |
| C Customer | 35% | 25.4% |
| D People | 15% | 13.8% |
| Total | 100% | 72.0% |
• Each Executive Director is eligible for an on-target variable reward opportunity of 100% of salary • For each of the individual Company performance metrics the multiplier range is 80%–120% • For each performance metric, there will be no payment at all until performance for that metric has reached gateway performance • At gateway performance 80% of the multiplier will apply and at maximum performance 120% of the multiplier will apply • The range of the individual multiplier is 0%–200% • If the Company multiplier doesn't exceed expected performance, the maximum individual multiplier that will be applied is 150% • The multiplier is applied by reference to each colleague's individual behaviours and performance in the year CAP APPLIED 200% OF SALARY • Variable remuneration will not exceed 200% of salary for Executive Directors On-target variable reward Company multiplier Individual behaviours and delivery multiplier X X = Total variable reward Application to Executive Directors
| 1Financial measures |
Weighted multiplier |
|---|---|
| Deposit performance |
4.50% |
| Lending performance |
4.50% |
| Customer accounts |
5.50% |
| Underlying profit |
0.00% |
2 2018 Remuneration outcome for David Arden excludes the compensatory buyout award of share options and cash made to him on joining. See page 86
Variable pay Fixed pay
The table below sets out the key features of our Remuneration Policy, and how it will be implemented in 2019. The Policy was approved by shareholders at our AGM on 25 April 2017. Full details of the approved Policy can be found on the Company website. The Policy will next be reviewed in 2020.
| Key elements of remuneration |
Key features of the Policy | Implementation for 2019 |
|---|---|---|
| Salary | • Reviewed annually and increases will normally be in line with increases awarded to other colleagues • There may be instances where a higher amount is agreed at the discretion of the Remuneration Committee, where the size and scope of a particular role is increasing as the organisation grows |
• Craig Donaldson CEO: £750,000 (unchanged) • David Arden CFO: £405,000 (1.25% increase from £400,000) |
| Benefits | Core benefits include: • Life assurance of 4x salary • Private medical insurance for the Executive Director, their partner and children • Additional benefits may be provided in certain circumstances such as on relocation • Income protection is in place for the CEO as a legacy scheme • Executive Directors will be eligible to participate in any all-employee Share Incentive Plan ('SIP') |
• Benefits are provided in line with the approved Policy |
| Pension | • Executive Directors are automatically enrolled into our Group Personal Pension Plan ('GPPP') when they join the Bank. If they have exceeded the Life Time Allowance or the annual pension tax-free contribution limit, they may elect to take cash in lieu of pension for all or some of the benefit • The maximum employer contribution (including cash in lieu) is 10% of salary |
None of the Executive Directors has a prospective right to a defined benefit pension Company contributions: • Craig Donaldson: 10% of salary • David Arden: 10% of salary |
| Variable remuneration |
• Discretionary variable reward scheme in which all eligible colleagues participate, based on behaviours and performance over the year, paid in the form of cash and share awards for all colleagues • For Executive Directors at least 50% is deferred into long-term share awards, normally in the form of share options, and a further 25% is deferred into one-year vesting share awards, again normally share options. The remaining 25% is paid as cash • Total variable remuneration, including the fair value of share awards, for each Executive Director for any year, will not exceed 200% of their base pay at the time of award • The variable reward pool for any year is based on the overall performance of the Bank in terms of culture and delivery in line with the balanced scorecard • Malus and clawback apply to all deferred variable remuneration • Variable remuneration is subject to a risk adjustment process and input from the Chief Risk Officer • The Company has the flexibility to make compensatory awards to new Executive Directors, to compensate them for benefits they may lose as a result of joining Metro Bank. The 200% limit on variable remuneration will not apply to these compensatory awards |
• The total variable reward opportunity, expressed as a percentage of salary, will be 100% for on-target performance, and 200% at maximum performance • The weightings of the performance measures that will make up the balanced scorecard for 2019 will be as follows: – Financial 30% – Risk 20% – Customer 35% – People 15% • Mike Brierley retired on 31 March 2018 and was not awarded any variable remuneration for his employment during 2018 • David Arden (new CFO) joined the Company on 19 March 2018. Share options to the value of £300,000 have been granted to compensate David for the lapsing of deferred awards that were made to him by his former employer under its annual and long-term incentive plans, if he had not resigned, with no performance conditions other than continued service. The share options will vest pro-rata over five years. To recognise the loss of payments that would have been made to him by his former employer, a one-off payment of £160,000 was also made. In determining the level of compensatory awards, the Company has taken account of the value of the awards forfeited, the time horizons of the awards and the performance hurdles attached to them in line with our policy |
| Non-Executive Directors |
• All Non-Executive Directors receive a basic annual fee for fulfilling their duties as a Board member • Additional fees are paid for added responsibilities such as chairmanship and membership of Committees, or acting as the Senior Independent Director • The basic and additional fees are reviewed periodically, drawing on external market information for comparable financial services groups and companies • The Chairman receives a monthly allowance, in addition to fees, as a contribution towards travel to and from the US and towards living expenses while he is in the UK |
• Our Non-Executive Directors are paid in line with the approved Policy • The basic annual fee paid to all Non-Executive Directors remains unchanged at £52,500 • The annual fees for the Chairman remain unchanged at £385,000 as does his allowance for travel and subsistence of £120,000 gross per annum. No other expenses are payable in relation to this |
This section sets out how the Remuneration Policy for our Executive and Non-Executive Directors was implemented during the financial year ending 31 December 2018, and how it will be implemented in 2019. This section will, together with the annual statement by the Chairman of the Remuneration Committee, be put to shareholders for an advisory vote at the 2019 AGM.
The following sets out the remuneration for the current Executive Directors.
| Craig Donaldson | David Arden joined on 19 March 2018 |
|||
|---|---|---|---|---|
| 2018 | 2017 | 2018 | 2017 | |
| Salary | £725,000 | £650,000 | £315,152 | – |
| Taxable benefits1 | £1,027 | £1,067 | £274 | – |
| Variable pay, including deferred element2 | £0 | £800,000 | £288,000⁵ | – |
| Pension benefits3 | £72,500 | £65,000 | £31,515 | – |
| Other4 | £2,417 | £2,826 | £650 | – |
| Buyouts | – | – | £460,0006 | – |
| Total remuneration | £800,944 | £1,518,893 | £1.095,591 | – |
| Mike Brierley | |
|---|---|
| 2018 | 2017 |
| £93,750 | £368,750 |
| £205 | £1,067 |
| £0 | £400,000 |
| £9,375 | £36,875 |
| £2,044 | £7,214 |
| £105,374 | £813,906 |
Notes:
| Salary as at 1 January 2018 |
Salary as at 1 April 2018 |
Total salary paid in 2018 |
|
|---|---|---|---|
| Craig Donaldson | £650,000 | £750,000 | £725,000 |
| Mike Brierley left 31 March 2018 | £375,000 | n/a | £93,750 |
| David Arden joined 19 March 2018 | n/a | £400,000 | £315,152 |
As set out in the Remuneration Policy approved by shareholders at the AGM on 25 April 2017, the Executive Directors' variable reward in relation to performance during 2018 was based on a balanced scorecard of performance measures and objectives, weighted between financial (30%), risk (20%), customer (35%) and people (15%). Amounts shown reflect the total awards under the variable reward scheme paid in 2019, based on performance in the financial year ending 31 December 2018, including the value of any deferred element.
In addition to the Company multiplier, a further multiplier based on individual behaviours and performance was also applied to the balanced scorecard remuneration outcome. The tables below illustrate performance against each of the balanced scorecard measures. As set out on page 91, this approach and multiplier are consistent with that applied for all colleagues across the Bank.
87
| Performance measure | Weighted performance outcome at gateway1 |
Gateway (threshold) performance |
Weighted performance outcome at target2 |
2018 target performance |
Weighted performance outcome at maximum3 |
Maximum performance |
Weighted performance outcome |
Actual performance outcome |
|---|---|---|---|---|---|---|---|---|
| Deposit performance £m | 4.0% | 14,783 | 5.0% | 16,426 | 6.0% | 18,069 | 4.5% | 15,661 |
| Lending performance £m | 4.0% | 13,286 | 5.0% | 14,763 | 6.0% | 16,239 | 4.5% | 14,234 |
| Customer accounts no. m | 4.0% | 1.38 | 5.0% | 1.54 | 6.0% | 1.69 | 5.5% | 1.62 |
| Underlying profit % | 12.0% | 90% | 15.0% | 100% | 18.0% | 110% | 0% | 69% |
| Total for financial measures | 24.0% | 30.0% | 36.0% | 14.5% |
80% of weighting is applied for gateway performance i.e. at 90% of target. There is a step progression of 5% in the multiplier of the weighted performance outcome from 80% to 120% for every 2.5% in performance from 90% to 110%
100% of weighting is awarded for on-target performance
Maximum multiplier is 120% of weighting which is applied for performance of 110% or more
| 2018 | ||||
|---|---|---|---|---|
| Objectives | Key achievements in 2018 | Weighting | Weighted performance outcome |
|
| Risk | Key measures relating to Internal Audit, credit quality – arrears¹ and anti-money laundering controls |
Credit quality is good and has been capped at 100%. The majority of our audits had good outcomes where controls evaluated were adequate and effective. Our first line anti-money laundering controls operated above threshold. The weighted performance outcome does not take into account the impact of the RWA adjustment as this was not an objective under the 2018 scorecard. As mentioned above, the Committee has decided to freeze vestings of share options and awards for the Executive Directors and Executive team, including share options for 2018, pending further internal analysis and any external investigations into the RWA adjustment. |
20% | 18.3% |
| Customer | Key measures relating to Net Promoter Scores, call centre service, customer complaints, and magic (mystery) shopping |
With our customer-focused model, we set stretching goals in this area and it represents 35% of total Company weighting. Our Net Promoter Score was over target. The Company Mystery Shopping programme was above threshold. Call centre service via AMAZE Direct was at target and we were below threshold for our responsiveness on complaints. The new measure for CMA service quality results, where we performed strongly, was not included in the scorecard for 2018. |
35% | 25.4% |
| People | Key measures relating to voluntary attrition², diversity, compliance training and being a 'good place to work' |
In our annual colleague survey 96% of people agreed that Metro Bank is a good place to work. Voluntary attrition has improved during the year to an all-time low (capped at 100%) and we consistently see our people doing their regulatory training on time. We also have a new measure for inclusion, tracking gender and ethnic diversity in our senior leaders. |
15% | 13.8% |
Credit quality for arrears was capped at 100%
Voluntary attrition was capped at 100%
Note: As above for financial measures, 80% of weighting is applied for gateway performance – i.e. at 90% of target. There is a step progression of 5% in the multiplier of the weighted performance outcome from 80% to 120% for every 2.5% in performance from 90% to 110%. 100% of weighting is awarded for on-target performance. Maximum multiplier is 120% of weighting which is applied for performance of 110% or more
| Weighting | Weighted performance outcome |
|
|---|---|---|
| A Financial |
30% | 14.5% |
| B Risk |
20% | 18.3% |
| C Customer |
35% | 25.4% |
| D People |
15% | 13.8% |
| Total | 100% | 72.0% |
See how our balanced scorecard measures link to our strategy on page 11
Based on the assessment of performance against the balanced scorecard outcomes outlined above, we applied a Company performance weighting of 72% for 2018. This weighting was applied for all eligible colleagues across the Bank, including the Executive Directors.
Following our announcement in January 2019 regarding the RWA adjustment, the Committee decided to freeze vestings of share options and awards for the Executive Directors and Executive team, including share options for 2018, pending further internal analysis and any external investigations into the RWA adjustment.
A discretionary multiplier was applied to variable reward for all eligible colleagues, by reference to each colleague's individual behaviours and performance for the year. Below, we set out details of the individual multipliers, in respect of our Executive Directors for 2018, which were determined by the Remuneration Committee. Following our announcement on 23 January 2019 regarding the RWA adjustment, Craig Donaldson asked that the Committee did not consider him for variable reward for 2018.
| Executive Director | Key achievements in 2018 | Individual behaviours and performance multiplier |
|---|---|---|
| Craig Donaldson | Craig led the Company through another year of significant growth and delivery with profits up to £50 million, loans up 48% and a £4 billion increase in deposits, all against stretching targets. This was balanced with a Common Equity Tier 1 ('CET1') ratio of 13.1% and a high-quality loan book. The Company continued to invest in its physical, people and digital capabilities and in 2018 opened a further 10 stores, giving customers more choice about how, when and where they bank with Metro Bank. |
65%¹ |
| Customer data from internal measures and also the Competition and Markets Authority rankings were very strong. Craig was recognised as one of the highest-rated CEOs on Glassdoor, and the Company was ranked among Glassdoor's best places to work evidencing the customer-focused leadership he provides to colleagues and the Company. |
||
| Narrow margins and higher than anticipated costs meant profits were lower than budgeted and we adjusted the risk weighting of certain commercial loans secured on commercial property and certain specialist buy-to-let loans that had the combined effect of increasing our RWAs by £900 million, as announced in January 2019. The Remuneration Committee had provisionally determined a personal multiplier of 65%¹ for Craig Donaldson in recognition of these issues (134% for 2017). However, as referenced above Craig asked that the Committee did not consider him for variable reward for 2018 so he received zero variable reward for 2018. |
||
| David Arden | David has made a strong start in his role as CFO. He oversaw significant growth in profitability during another year of exceptional investment in growth and customer experience. |
100%1 |
| David's team manage capital, costs and revenue aligned to the Company's short, medium and long-term goals. Asset and liability management remain conservative. |
||
| The financial control environment is strong as attested by both internal and external review. In addition, the Finance, Treasury, Legal and Company Secretarial, Procurement and Investor Relations teams that David is accountable for delivered high levels of service to their internal customers and external stakeholders. |
As set out in the 2017 Directors' Remuneration Report, each Director was eligible for an on-target variable reward opportunity of 100% of salary in respect of the financial year ending 31 December 2018. Mike Brierley (the former CFO who left on 29 March 2018) was not awarded any variable reward for 2018.
| Executive Director | On-target variable reward |
Company performance multiplier |
Individual behaviours and performance multiplier |
Total variable reward |
|---|---|---|---|---|
| Craig Donaldson | £750,000 | 72% | 65% | = £0¹ |
| David Arden | £400,000 | 72% | 100% | = £288,000 |
In line with the Policy approved by shareholders at the AGM on 25 April 2017, at least 50% of all variable reward for Executive Directors must be deferred into long-term share awards, and a further 25% is deferred into one-year vesting share awards. The remaining 25% is paid in cash. As mentioned above, following our announcement in January 2019 regarding the RWA adjustment Craig Donaldson asked that the Committee did not consider him for variable reward for 2018.
Share awards in respect of the year ending 31 December 2018 were deferred into market price share options, the fair value of which was informed by the Black-Scholes methodology. Market price share options are implicitly performance related, as they will not accrue any value unless Metro Bank's share price increases over the long term. Our approach to deferring into market price share options is operated for all colleagues – it supports our reward principle to make everyone an owner, and aligns all colleagues with the Bank's long-term vision.
| Executive Director |
Total 2018 | variable reward Element of variable reward | Quantum | Method of delivery1 |
|---|---|---|---|---|
| David Arden £288,000 | Cash (25%) | £72,000 | Paid immediately in cash. In line with the approved Policy. | |
| One-year share £72,000 options (25%)¹ |
9,600 one-year options vesting fully a year after grant. | |||
| Long-term share options (50%)¹ |
£144,000 | 19,200 five-year options with the first vesting a year after grant and in equal annual instalments thereafter. |
Notes: All share option awards rounded to nearest option and all cash rounded to nearest £5
As previously committed we are now providing further disclosure on the financial metrics, targets and performance for the 2017 financial year.
| Performance measure | Weighting | 2017 Target | Actual | % of target | Multiplier | Weighted performance³ |
|---|---|---|---|---|---|---|
| Deposit performance (£'billion) | 5% | 11.3 | 11.7 | 104% | 104% | 5% |
| Lending performance (£'billion) | 5% | 9.4 | 9.6 | 102% | 102% | 5% |
| Capital adequacy %¹ | 5% | 100% | 100% | 100% | 100% | 5% |
| Customer accounts | 5% | 1,216,000 | 1,216,624 | 100% | 100% | 5% |
| Profitability %2 | 10% | 100% | 95% | 95% | 95% | 9% |
| Total for financial measures | 30%3 |
Notes:
the Remuneration Committee will consider applying performance adjustment to these amounts 2. Profitability for 2017 is a blended measure of profit before tax, revenue and costs versus budget
| Weighting | Weighted performance¹ |
|
|---|---|---|
| Financial | 30% | 30% |
| Risk | 20% | 18% |
| Customer | 35% | 29% |
| People | 15% | 15% |
| Total | 100% | 92% |
Our approach to remuneration is consistent for all colleagues including our Executive Directors. The focus is on simplicity, rewarding the right behaviours and outcomes for customers and the business, focusing on long-term growth and discouraging unnecessary risk-taking.
Our Directors' Remuneration Policy, as approved by shareholders at the AGM on 25 April 2017, was developed by reference to our reward principles, which apply to all colleagues:
| Salary | Benefits | Pension | Variable remuneration |
|---|---|---|---|
| • We have a 'normal' inflationary and performance-related pay pot of 2.2% • The quantum of salary increases are primarily driven by individual behaviours • We also review salaries for roles that we deem are growing rapidly in scale and/or complexity and are critical to the business and for those colleagues which market data suggests are falling behind the market rates for their roles |
• All colleagues are eligible for private medical insurance funded at different rates of cover depending on their level of seniority • All colleagues, including the Executive Directors, receive a benefit of death in service life cover of four times their base salary |
• The table below shows the minimum and maximum employer pension contributions payable by Metro Bank year-on-year |
• All employees are eligible for share options or an equivalent, in line with our strong ethos of employee buy-in and ownership • We apply the same Company performance multiplier to all colleagues • For all colleagues whose personal behaviours and delivery are as expected or better we apply a multiplier up to a maximum of 200% |
| 2018 | 2017 | % increase | ||||
|---|---|---|---|---|---|---|
| Employer contribution as a % of salary | Minimum | Maximum | Minimum | Maximum | Minimum | Maximum |
| CEO | 10% | 10% | 10% | 10% | 0% | 0% |
| Executive Directors & Executive Leadership Team | 10% | 10% | 10% | 10% | 0% | 0% |
| Senior leaders and experts | 9% | 10% | 8% | 10% | 11.1% | 0% |
| Managers and specialists | 8% | 8% | 7% | 8% | 12.5% | 0% |
| Entry-level roles | 6% | 6% | 6% | 6% | 0% | 0% |
The table below sets out the percentage change between the 2017 and 2018 years in salary and variable reward.
| Employee group | Median | |||
|---|---|---|---|---|
| FTE salary | FTE⁴ variable reward |
FTE salary | FTE variable reward |
|
| All employees¹ | 9.9% | 4.2% | 8.1% | -25.5% |
| CEO2 | 15.4% | -100% | 15.4% | -100% |
| Executive Leadership Team³ | 1.8% | -37.5% | 8.4% | -54.1% |
Due to the significant growth at Metro Bank, data has been calculated using the same colleagues over the two-year period. This only includes colleagues who were employed by Metro Bank on or before 1 January 2017 and still employed on or after 31 December 2018. Any colleagues who joined or left the Bank within this period have been excluded from the analysis. Salary is taken as at 31 December 2017 and 31 December 2018
As mentioned above, following our announcement in January 2019 regarding the RWA adjustment, Craig Donaldson asked that the Committee did not consider him for variable reward for 2018. The CEO received a 15.4% pay increase in 2018 but did not receive a pay increase this year
The CFO is not included in this figure as neither David Arden nor Mike Brierley were employed across the entire same store period – i.e. between 1 January 2017 and 31 December 2018 4. FTE: full-time equivalent
| Year | Calculation methodology |
25th percentile pay ratio |
Median pay ratio |
75th percentile pay ratio |
CEO salary |
25th percentile salary |
Median salary |
75th percentile salary |
CEO total pay |
25th percentile total pay |
Median total pay |
75th percentile total pay |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2018 | A | 36:1 | 28:1 | 16:1 | £725,000 | £19,300 | £25,100 | £40,500 | £801,000 | £22,200 | £28,400 | £49,300 |
| 2017 | A | 69:1 | 54:1 | 30:1 | £650,000 | £19,200 | £24,800 | £40,000 | £1,518,900 | £22,000 | £28,100 | £50,300 |
Salary and total pay figures have been rounded to the nearest £100
The lower, median and upper-quartile colleagues were determined using the 'single figure' approach (Option A) to calculating total remuneration for all colleagues employed on 31 December 2018. This methodology was chosen as it is the purest approach.
Three colleagues were identified whose full-time equivalent total remuneration places them at the 25th, 50th and 75th percentiles. Colleague total remuneration includes salary, allowances, employer pension contributions, Company-funded health and risk benefits, referral bonuses as well as total variable reward awarded in 2019 in respect of the 2018 performance year. All elements were calculated on a full-time equivalent basis. We are confident that the colleagues identified are representative of the lower, median and upper quartiles and the median pay ratio is consistent with the Company's wider policies on colleague pay, reward and progression.
As this is the first year using the revised reporting requirements, we have provided the CEO pay ratio for 2017 as a comparison. The Committee recognises that the CEO pay ratio will be volatile. The ratio has decreased in 2018 partly as a result of Craig Donaldson asking the Committee to not consider him for variable reward for 2018.
The table below shows total remuneration of all employees for 2018 compared to 2017. This data is taken from the people costs on page 119 and excludes social security costs.
| 2018 | 2017 | % | |
|---|---|---|---|
| £'million | £'million | change | |
| Employee costs | 128.0 | 102.0 | 25.5 |
The costs have increased as a result of the growth in the average number of employees from 2017 to 2018.
We made no distributions by way of dividend or share buy-back during the preceding year, or made any other significant distributions. We therefore consider that at this time there is no information or data which would assist shareholders in understanding the relative importance of spend on pay.
The chart shows our total shareholder return ('TSR') relative to the FTSE 250, FTSE 100 and the FTSE 350 banks (which is the capitalisation-weighted index of all bank stocks in the FTSE 100 and FTSE 250). These indices have been chosen as they represent a cross-section of UK companies and banks.
This chart shows the total return to Metro Bank investors since our listing on the London Stock Exchange in March 2016, compared with the total return on an investment made in the FTSE 250, FTSE 100 or FTSE 350 banks over the same period, assuming an initial investment of £100.
| Craig Donaldson | |||||||
|---|---|---|---|---|---|---|---|
| 2018 | 2017 | 2016 | 2015 | 2014 | 2013 | 2012 | |
| Total remuneration (including any Listing awards) |
£800,944¹ | £1,518,893 | £1,304,919 | £2,661,474² | £749,443 | £1,294,100 | £543,947 |
| Variable reward outcome as a percentage of the maximum that could have been paid³ |
0% | 62% | 52% | n/a⁴ | n/a⁴ | n/a⁴ | n/a⁴ |
awards will be frozen pending further internal analysis and any external investigations into the RWA adjustment 3. Our Directors' Remuneration Policy containing a maximum variable reward outcome was first approved by shareholders at the AGM on 25 April 2017. Under our Remuneration Policy, approved by shareholders in 2017, variable reward is capped at 200% of salary
The fees for the Chairman remain unchanged at £385,000.
The Non-Executive Directors are paid a basic fee, with further fees payable to reflect Board Committee memberships and chairmanships and/or additional responsibilities such as Senior Independent Director. Fees are reviewed annually. The fees are benchmarked against financial services and other FTSE 250 companies.
The basic fee for Non-Executive Directors, which was last increased in April 2018, remains unchanged at £52,500. The latest fees are shown below including the fee attracted by the new Deputy Chairman role and also the Designated NED for Workforce Engagement:
| Role | Annual fee (£'000) |
|---|---|
| Non-Executive Director – basic fee | 52.5 |
| Senior Independent Director or Deputy Chairman | 30.0 |
| Chairman of Audit or Risk Committee or Designated NED for Workforce Engagement | 20.0 |
| Chairman of Nomination or Remuneration¹ Committee | 10.0 |
| Member of Audit, Risk or Remuneration Committee | 10.0 |
| Member of Nomination Committee | 5.0 |
| Vernon W. Hill, II² | Stuart Bernau | Catherine Brown3 | Keith Carby | Roger Farah⁴ | ||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |
| Fees Taxable benefits |
£385,000 £120,000 |
£376,667 £120,000 |
£90,625 £0 |
£85,000 £0 |
£13,125 £0 |
n/a n/a |
£75,625 £0 |
£68,750 £0 |
£65,625 £5,190 |
£58,750 £0 |
| Total | £505,000 | £496,667 | £90,625 | £85,000 | £13,125 | n/a | £75,625 | £68,750 | £70,815 | £58,750 |
| Howard Flight | Alastair (Ben) Gunn | Gene Lockhart⁴ | Anna (Monique) Melis5 | Sir Michael Snyder | ||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |
| Fees | £85,625 | £78,750 | £90,625 | £85,000 | £90,625 | £85,000 | £58,958 | £22,500 | £70,625 | £65,000 |
| Taxable benefits | £0 | £0 | £0 | £0 | £8,568 | £0 | £0 | £0 | £0 | £0 |
| Total | £85,625 | £78,750 | £90,625 | £85,000 | £99,193 | £85,000 | £58,958 | £22,500 | £70,625 | £65,000 |
Notes:
These figures include all fees paid to the Senior Independent Director and to Non-Executive Directors for Board Committee memberships and Committee chairmanships
A gross allowance is paid to the Chairman monthly via PAYE as a contribution towards his travel to/from the UK and accommodation and subsistence while here. He does not claim any expenses in relation to this
Appointed 1 October 2018
For our US-resident Non-Executive Directors all travel is covered by a PAYE Settlement Agreement ('PSA'). Food and lodging are put through payroll and taxed accordingly, rounded up to the nearest £
Appointed 1 July 2017
There were no payments made to past Directors in 2018 other than Mike Brierley in the course of his normal employment as detailed above.
There were no payments for loss of office made to Directors in 2018, including Mike Brierley.
The rules of the Metro Bank PLC Deferred Variable Reward Plan contain limits on the dilution of capital. These limits are monitored to ensure that we do not exceed 10% of the issued share capital in any rolling 10-year period.
We will be proposing a resolution to shareholders in respect of the Annual Report on Remuneration at the 2019 AGM.
The table below shows the voting outcomes on the Annual Report on Remuneration at the last AGM on 24 April 2018 and the Directors' Remuneration Policy at the AGM held 25 April 2017.
| Item | For % | For no. | Against % | Against no. | Votes withheld |
|---|---|---|---|---|---|
| Remuneration Policy | 95.4% | 41,582,506 | 4.6% | 1,989,312 | 343,211 |
| 2017 Remuneration Report | 93.5% | 66,447,203 | 6.5% | 4,620,794 | 255,885 |
These are the total shareholdings as at 31 December 2018 for each of the Non-Executive Directors and Executive Directors¹ and any related connected persons. Outstanding share awards, including share options, are summarised on pages 95 to 97.
| Director | No. of shares | Percentage of issued share capital |
|---|---|---|
| Vernon W. Hill, II | 5,080,344 | 5.21% |
| Craig Donaldson² | 170,342 | 0.18% |
| David Arden | 3,400 | 0.00% |
| Stuart Bernau | 50,154 | 0.05% |
| Catherine Brown | 100 | 0.00% |
| Keith Carby | 38,320 | 0.04% |
| Roger Farah | 685,023 | 0.70% |
| Lord Flight | 29,116 | 0.03% |
| Alastair (Ben) Gunn | 49,864 | 0.05% |
| Gene Lockhart | 34,989 | 0.04% |
| Anna (Monique) Melis | 700 | 0.00% |
| Sir Michael Snyder | 28,300 | 0.03% |
| Total | 6,170,652 | 6.33% |
Mike Brierley also held 91,165 shares when he retired on 31 March 2018. This figure is not included in the table above
26,622 of Craig Donaldson's shares which were awarded in connection with the Listing have not yet vested and are conditional in line with the rules of the long-term deferred variable reward plan
This table includes vested shares where the Director has beneficial ownership, shares independently acquired in the market and those held by a spouse or civil partner or dependant child under the age of 18 years.
Since the year end and up to 31 March 2019, the Company was notified of the following transactions in shares by Directors and their connected persons:
Executive Directors are required to build up a holding of shares equivalent to 200% of their annual salary and this will be formalised in our revised Remuneration Policy in 2020 subject to shareholder approval. We will allow any new Executive Director a reasonable amount of time to build up their shareholding.
Craig Donaldson has met the shareholding requirement of 200% of his annual salary. David Arden has purchased 3,400 shares and as he only joined the Company on 19 March 2018 we are allowing him time to build up his shareholding.
Options have an exercise price that is equal to market value at the date of grant; share options from CSOP 2016 onwards are based on the Volume Weighted Average Share Price ('VWAP') for MTRO on a date determined by the Remuneration Committee.
We have not awarded share options to Non-Executive Directors since 2015 (relating to the 2014 performance year). No dividends or dividend equivalents are payable on any share options or on any unvested share awards held.
The tables below show, for each Executive Director and Non-Executive Director as at 31 December 2018:
| Scheme name | Share options granted |
Award date |
Award price |
First vesting date |
Last vesting date |
No. of share options vested |
No. of share awards exercised |
|---|---|---|---|---|---|---|---|
| CSOP2015 | 15,000 | 04/11/15 | £16.00 | 31/10/16 | 31/10/20 | 9,000 | 0 |
| CSOP2014 | 60,000 | 31/10/14 | £13.50 | 31/10/15 | 31/10/19 | 48,000 | 0 |
| CSOP2013 | 5,000 | 11/11/13 | £12.00 | 11/11/16 | 11/11/18 | 5,000 | 0 |
| CSOP2012 | 2,000 | 31/10/12 | £10.00 | 31/10/13 | 31/10/15 | 2,000 | 0 |
| CSOP2011 | 4,000 | 07/10/11 | £9.00 | 07/10/12 | 07/10/14 | 4,000 | 0 |
| Total | 86,000 | 68,000 | 0 |
| Scheme name | Share options granted |
Shares awarded |
Award date |
Award price |
First vesting date |
Last vesting date |
No. of share options vested |
No. of shares vested |
No. of share awards exercised |
|---|---|---|---|---|---|---|---|---|---|
| CSOP2018 Deferred Cash 1 yr | 20,000 | 31/03/18 | £35.36 | 30/04/19 | 30/04/19 | 0 | 0 | ||
| CSSOP2018 Bonus Exchange | 20,000 | 31/03/18 | £35.36 | 31/03/18 | 31/03/18 | 20,000 | 0 | ||
| CSOP2018 | 40,000 | 31/03/18 | £35.36 | 30/04/19 | 30/04/23 | 0 | 0 | ||
| CSOP2017 | 33,637 | 31/03/17 | £32.73 | 30/04/18 | 30/04/22 | 6,727 | 0 | ||
| CSOP2017 Deferred Cash 1 yr | 16,819 | 31/03/17 | £32.73 | 30/04/18 | 30/04/18 | 16,819 | 0 | ||
| CSOP2017 Bonus Exchange | 16,819 | 31/03/17 | £32.73 | 31/03/17 | 31/03/17 | 16,819 | 0 | ||
| CSOP2016 Pension Exchange | 4,541 | 04/03/16 | £20.00 | 21/03/16 | 21/03/16 | 4,541 | 0 | ||
| CSOP2015 | 30,000 | 04/11/15 | £16.00 | 31/10/16 | 31/10/20 | 18,000 | 0 | ||
| CSOP2015 Bonus Exchange | 20,000 | 20/03/15 | £14.00 | 20/03/15 | 20/03/15 | 20,000 | 0 | ||
| CSOP2014 | 130,000 | 31/10/14 | £13.50 | 31/10/15 | 31/10/19 | 104,000 | 0 | ||
| CSOP2014 Bonus Exchange | 13,077 | 21/03/14 | £13.00 | 21/03/14 | 21/03/14 | 13,077 | 0 | ||
| CSOP2013 | 30,000 | 11/11/13 | £12.00 | 11/11/16 | 11/11/18 | 30,000 | 0 | ||
| CSOP2012 | 50,000 | 31/10/12 | £10.00 | 31/10/13 | 31/10/15 | 50,000 | 0 | ||
| CSOP2011 | 11,000 | 07/10/11 | £9.00 | 07/10/12 | 07/10/14 | 11,000 | 3,333¹ | ||
| Listing awards | 55,459 | 04/03/16 | 28,837 | 0 | |||||
| Total | 435,893 | 55,459 | 310,983 | 28,837 | 3,333 |
| Scheme name | Share options granted |
Shares awarded |
Award date |
First vesting date |
Award price |
Last vesting date |
No. of share options vested |
No. of shares vested |
No. of share awards exercised |
|---|---|---|---|---|---|---|---|---|---|
| CSOP2018 | 30,000 | 31/03/18 | 30/04/19 | £35.36 | 30/04/23 | 0 | 0 | 0 | |
| Total | 30,000 | 0 | 0 | 0 |
| Scheme name | Share options granted |
Shares awarded |
Award date |
Award price |
First vesting date |
Last vesting date |
No. of share options vested |
No. of shares vested |
No. of share awards exercised |
|---|---|---|---|---|---|---|---|---|---|
| CSOP2018 Deferred Cash 1 yr | 10,000 | 31/03/18 | £35.36 | 30/04/19 | 30/04/19 | 0 | 0 | ||
| CSSOP2018 Bonus Exchange | 10,000 | 31/03/18 | £35.36 | 31/03/18 | 31/03/18 | 10,000 | 0 | ||
| CSOP2018 | 20,000 | 31/03/18 | £35.36 | 30/04/19 | 30/04/23 | 0 | 0 | ||
| CSOP2017 | 15,750 | 31/03/17 | £32.73 | 30/04/18 | 30/04/22 | 3,150 | 0 | ||
| CSOP2017 Deferred Cash 1 yr | 7,875 | 31/03/17 | £32.73 | 30/04/18 | 30/04/18 | 7,875 | 0 | ||
| CSOP2017 Bonus Exchange | 7,875 | 31/03/17 | £32.73 | 31/03/17 | 31/03/17 | 7,875 | 0 | ||
| CSOP2015 | 15,000 | 04/11/15 | £16.00 | 31/10/16 | 31/10/20 | 9,000 | 0 | ||
| CSOP2015 Bonus Exchange | 12,637 | 20/03/15 | £14.00 | 20/03/15 | 20/03/15 | 12,637 | 0 | ||
| CSOP2014 | 32,500 | 31/10/14 | £13.50 | 31/10/15 | 31/10/19 | 26,000 | 0 | ||
| CSOP2013 | 14,000 | 11/11/13 | £12.00 | 11/11/16 | 11/11/18 | 14,000 | 0 | ||
| CSOP2012 | 10,000 | 31/10/12 | £10.00 | 31/10/13 | 31/10/15 | 10,000 | 0 | ||
| CSOP2011 | 5,000 | 07/10/11 | £9.00 | 07/10/12 | 07/10/14 | 5,000 | 3,333¹ | ||
| Listing awards | 32,054 | 04/03/16 | 16,666 | 0 | |||||
| Total | 160,637 | 32,054 | 105,537 | 16,666 | 3,333 |
| Scheme name | Share options granted |
Award date |
Award price |
First vesting date |
Last vesting date |
No. of share options vested |
No. of share awards exercised |
|---|---|---|---|---|---|---|---|
| CSOP2015 | 7,500 | 04/11/15 | £16.00 | 31/10/16 | 31/10/20 | 4,500 | 0 |
| CSOP2014 | 15,000 | 31/10/14 | £13.50 | 31/10/15 | 31/10/19 | 12,000 | 0 |
| CSOP2013 | 5,000 | 11/11/13 | £12.00 | 11/11/16 | 11/11/18 | 5,000 | 0 |
| CSOP2012 | 2,000 | 31/10/12 | £10.00 | 31/10/13 | 31/10/15 | 2,000 | 2,000¹ |
| CSOP2011 | 4,000 | 07/10/11 | £9.00 | 07/10/12 | 07/10/14 | 4,000 | 4,000² |
| Total | 33,500 | 27,500 | 6,000 | ||||
| 1. Share price on date of exercise 16 August 2016: £23.25. Gain £26,500 |
| Scheme name | Share options granted |
Award date |
Award price |
First vesting date |
Last vesting date |
No. of share options vested |
No. of share awards exercised |
|---|---|---|---|---|---|---|---|
| CSOP2015 | 7,500 | 04/11/15 | £16.00 | 31/10/16 | 31/10/20 | 4,500 | 0 |
| CSOP2014 | 15,000 | 31/10/14 | £13.50 | 31/10/15 | 31/10/19 | 12,000 | 0 |
| CSOP2013 | 5,000 | 11/11/13 | £12.00 | 11/11/16 | 11/11/18 | 5,000 | 0 |
| CSOP2012 | 2,000 | 31/10/12 | £10.00 | 31/10/13 | 31/10/15 | 2,000 | 0 |
| CSOP2011 | 4,000 | 07/10/11 | £9.00 | 07/10/12 | 07/10/14 | 4,000 | 0 |
| Total | 33,500 | 27,500 | 0 |
| Scheme name | Share options granted |
Award date |
Award price |
First vesting date |
Last vesting date |
No. of share options vested |
No. of share awards exercised |
|---|---|---|---|---|---|---|---|
| CSOP2015 | 7,500 | 04/11/15 | £16.00 | 31/10/16 | 31/10/20 | 7,500 | 7,500¹ |
| Total | 7,500 | 7,500 | 7,500 | ||||
GOVERNANCE
FINANCIAL STATEMENTS
| Scheme name | Share options granted |
Award date |
Award price |
First vesting date |
Last vesting date |
No. of share options vested |
No. of share awards exercised |
|---|---|---|---|---|---|---|---|
| CSOP2015 | 7,500 | 04/11/15 | £16.00 | 31/10/16 | 31/10/20 | 4,500 | 0 |
| CSOP2014 | 15,000 | 31/10/14 | £13.50 | 31/10/15 | 31/10/19 | 12,000 | 0 |
| CSOP2013 | 5,000 | 11/11/13 | £12.00 | 11/11/16 | 11/11/18 | 5,000 | 0 |
| CSOP2012 | 2,000 | 31/10/12 | £10.00 | 31/10/13 | 31/10/15 | 2,000 | 0 |
| CSOP2011 | 4,000 | 07/10/11 | £9.00 | 07/10/12 | 07/10/14 | 4,000 | 0 |
| Total | 33,500 | 27,500 | 0 |
| Total | 33,500 | 27,500 | 6,000 | ||||
|---|---|---|---|---|---|---|---|
| CSOP2011 | 4,000 | 07/10/11 | £9.00 | 07/10/12 | 07/10/14 | 4,000 | 4,000¹ |
| CSOP2012 | 2,000 | 31/10/12 | £10.00 | 31/10/13 | 31/10/15 | 2,000 | 2,000¹ |
| CSOP2013 | 5,000 | 11/11/13 | £12.00 | 11/11/16 | 11/11/18 | 5,000 | 0 |
| CSOP2014 | 15,000 | 31/10/14 | £13.50 | 31/10/15 | 31/10/19 | 12,000 | 0 |
| CSOP2015 | 7,500 | 04/11/15 | £16.00 | 31/10/16 | 31/10/20 | 4,500 | 0 |
| Scheme name | Share options granted |
Award date |
Award price |
First vesting date |
Last vesting date |
No. of share options vested |
No. of share awards exercised |
| Scheme name | Share options granted |
Award date |
Award price |
First vesting date |
Last vesting date |
No. of share options vested |
No. of share awards exercised |
|---|---|---|---|---|---|---|---|
| CSOP2015 | 7,500 | 04/11/15 | £16.00 | 31/10/16 | 31/10/20 | 4,500 | 0 |
| CSOP2014 | 15,000 | 31/10/14 | £13.50 | 31/10/15 | 31/10/19 | 12,000 | 0 |
| CSOP2013 | 5,000 | 11/11/13 | £12.00 | 11/11/16 | 11/11/18 | 5,000 | 0 |
| CSOP2012 | 2,000 | 31/10/12 | £10.00 | 31/10/13 | 31/10/15 | 2,000 | 0 |
| CSOP2011 | 4,000 | 07/10/11 | £9.00 | 07/10/12 | 07/10/14 | 4,000 | 0 |
| Total | 33,500 | 27,500 | 0 |
| Scheme name | Share options granted |
Award date |
Award price |
First vesting date |
Last vesting date |
No. of share options vested |
No. of share awards exercised |
|---|---|---|---|---|---|---|---|
| CSOP2015 | 5,000 | 04/11/15 | £16.00 | 31/10/16 | 31/10/20 | 5,000 | 5,000¹ |
| Total | 5,000 | 5,000 | 5,000 |
The following share option awards were made in 2019 in respect of the 2018 performance year and are already included in the single figure table for 2018 variable pay on page 87. They reflect that, following our announcement regarding the RWA adjustment, the CEO asked that the Committee did not consider him for variable reward for 2018.
| Vesting period | Craig Donaldson |
David Arden |
|---|---|---|
| After one year After five years |
0 0 |
9,6001 19,2001 |
| Total | 0 | 28,800 |
In our opinion, Metro Bank PLC's group financial statements and parent company financial statements (the 'financial statements'):
We have audited the financial statements, included within the Annual Report and Accounts (the 'Annual Report'), which comprise: the group and parent company balance sheets as at 31 December 2018; the group statement of comprehensive income, the group and parent company cash flow statements, and the group and parent company statements of changes in equity for the year then ended; and the notes to the financial statements, which include a description of the significant accounting policies.
Our opinion is consistent with our reporting to the Audit Committee.
We conducted our audit in accordance with International Standards on Auditing (UK) ('ISAs (UK)') and applicable law. Our responsibilities under ISAs (UK) are further described in the Auditors' responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
We remained independent of the group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, which includes the FRC's Ethical Standard, as applicable to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements.
To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC's Ethical Standard were not provided to the group or the parent company.
Other than those disclosed in note 7 to the financial statements, we have provided no non-audit services to the group or the parent company in the period from 1 January 2018 to 31 December 2018.
The areas of focus for our audit which involved the greatest allocation of our resources and effort were:
These items were discussed with the Audit Committee as part of our audit plan communicated in September 2018 and updated in November 2018. These were the key audit matters for discussion at the conclusion of our audit.
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain.
Based on our understanding of the group and the industry, we identified that the principal risks of non-compliance with laws and regulations related to breaches of banking regulations such as, but not limited to, the Consumer Credit Act and unethical and prohibited business practices, and we considered the extent to which non-compliance might have a material effect on the financial statements. We also considered those laws and regulations that have a direct impact on the financial statements such as the Companies Act 2006. We evaluated management's incentives and opportunities for fraudulent manipulation of the financial statements (including the risk of override of controls), and determined that the principal risks were related to posting inappropriate journal entries to increase revenue or reduce expenditure, and management bias in accounting estimates. Audit procedures performed by the engagement team included:
CONTINUED
There are inherent limitations in the audit procedures described above and the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we would become aware of it. Also, the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion.
Key audit matters are those matters that, in the auditors' professional judgement, were of most significance in the audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. This is not a complete list of all risks identified by our audit.
IFRS 9 was adopted on 1 January 2018 and introduced significant changes to the estimation of impairment as losses are now recognised on an expected, forward looking basis, reflecting the group's view of potential future economic events. As a result, a new methodology encompassing new assumptions and judgements was required to determine impairment provisions under IFRS 9, and there are new disclosure requirements.
The assumptions and judgements of most significance included the following:
(Group and parent)
We assessed and tested the design and operating effectiveness of the controls directly associated with the impairment calculation.
The procedures we performed in reaching our conclusions included:
We determined that these controls were designed, implemented and operated effectively and therefore we determined that we could place reliance on them for the purposes of our audit.
Based on our procedures we found the assumptions and judgements used by management in their impairment estimate to be reasonable, and the new financial statements disclosures to be materially in line with the requirements of IFRS 9.
| Key audit matter | How our audit addressed the key audit matter |
|---|---|
| We evaluated the circumstances surrounding the RWA adjustment announced in January 2019, and considered the impact on our audit work. Whilst RWAs and the related adjustment do not form part of the financial statements, we made enquiries of management and the Board, and the Prudential Regulation Authority, reviewed correspondence with the Bank's regulators, as well as reading reports issued by advisers engaged to support the Bank in its review of this area. We performed additional testing in respect of the recording of loan and collateral information used for financial statement reporting purposes, to the extent that this information was relevant to management's assessment of impairment of loans and advances. We also considered whether there is any evidence from the procedures performed as to the integrity of financial statement reporting in respect of loans and advances, or the related control environment. No material issues were noted. |
|
| Recognition of revenue on loans and advances The Group recognises interest income using the effective interest rate method which spreads interest and directly attributable cash flows, the most significant of which relate to loan arrangement fees and upfront costs of new lending, over the loans' expected lives. |
We assessed and tested the design and operating effectiveness of the controls directly associated with the calculation and reporting of interest income on loans to customers. These controls included: • accurate input of loan data into core financial reporting systems; • appropriate authorisation of amendments to data; and • determination and approval of the assumptions used in the effective interest rate calculations. |
| The expected life assumptions utilise repayment profiles to represent how customers are expected to repay. The Group has limited historical experience to support these profiles and therefore management must apply judgement, in addition to any historical information available. (Group and parent) |
We determined that these controls were designed, implemented and operated effectively and therefore we determined that we could place reliance on them for the purposes of our audit. We assessed management's effective interest rate calculations through stressing the assumptions applied and utilising internal benchmarks to evaluate the appropriateness of the key assumptions used. We found no exceptions. |
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the group and the parent company, the accounting processes and controls, and the industry in which they operate.
The group is comprised of three operating entities: Metro Bank PLC, SME Invoice Finance Limited and SME Asset Finance Limited. The scope of our audit and the nature, timing and extent of audit procedures performed were determined by our risk assessment and other qualitative factors (including history of misstatement through fraud or error). We performed audit procedures over business components considered financially significant in the context of the group (full scope audit) or in the context of individual primary statement account balances (audit of specific account balances), using the materiality levels set out above. We also performed other audit procedures including testing information technology general controls and controls over key outsourced functions related to financial reporting, to mitigate the risk of material misstatement.
This approach gave us coverage of over 99% of the group's total assets. Audit coverage on account balances in the consolidated income statement ranges between 85% and 100%. For the remaining balances within business components which were not individually financially significant, the risk of material misstatement was mitigated through audit procedures including testing of entity level controls
CONTINUED
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the financial statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
| Group financial statements | Parent company financial statements | |
|---|---|---|
| Overall materiality | £1.8m (2017: £1.9m). | £1.9m (2017: £2.0m). |
| How we determined it | 5% of the average consolidated profit or loss before tax of the last 5 years. |
5% of the average profit or loss before tax of the last 5 years. |
| Rationale for benchmark applied |
Based on the benchmarks used in the Annual Report, profit or loss before tax is a key measure used by the shareholders in assessing the performance of the Group, and is a generally accepted auditing benchmark. |
Based on the benchmarks used in the Annual Report, profit or loss before tax is a key measure used by the shareholders in assessing the performance of the company, and is a generally accepted auditing benchmark. |
For our group audit, we identified one financially significant component, which is the parent company. We allocated a materiality of £1.7m to the parent company, which is less than our overall group materiality. As the allocated materiality for the parent company is below the statutory materiality, we have audited the parent company using this lower component materiality.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £91,000 (group audit) (2017: £92,000) and £93,000 (parent company audit) (2017: £99,000) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons.
In accordance with ISAs (UK) we report as follows:
| Reporting obligation | Outcome |
|---|---|
| We are required to report if we have anything material to add or draw attention to in respect of the directors' |
We have nothing material to add or to draw attention to. |
| statement in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements and the directors' identification of any material uncertainties to the group's and the parent company's ability to continue as a going concern over a period of at least twelve months from the date of approval of the financial statements. |
However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the company's ability to continue as a going concern. For example, the terms on which the United Kingdom may withdraw from the European Union are not clear, and it is difficult to evaluate all of the potential implications on the group and parent company's trade, customers, suppliers and the wider economy. |
| We are required to report if the directors' statement relating to Going Concern in accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit. |
We have nothing to report. |
The other information comprises all of the information in the Annual Report other than the financial statements and our auditors' report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities.
With respect to the Strategic Report and Directors' Report, we also considered whether the disclosures required by the UK Companies Act 2006 have been included.
Based on the responsibilities described above and our work undertaken in the course of the audit, the Companies Act 2006 , ISAs (UK) and the Listing Rules of the Financial Conduct Authority (FCA) require us also to report certain opinions and matters as described below (required by ISAs (UK) unless otherwise stated).
In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and Directors' Report for the year ended 31 December 2018 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements.
In light of the knowledge and understanding of the group and parent company and their environment obtained in the course of the audit, we did not identify any material misstatements in the Strategic Report and Directors' Report.
We have nothing material to add or draw attention to regarding:
We have nothing to report having performed a review of the directors' statement that they have carried out a robust assessment of the principal risks facing the group and statement in relation to the longer-term viability of the group. Our review was substantially less in scope than an audit and only consisted of making inquiries and considering the directors' process supporting their statements; checking that the statements are in alignment with the relevant provisions of the UK Corporate Governance Code (the 'Code'); and considering whether the statements are consistent with the knowledge and understanding of the group and parent company and their environment obtained in the course of the audit. (Listing Rules).
We have nothing to report in respect of our responsibility to report when:
In our opinion, the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006.
103
CONTINUED
As explained more fully in the Statement of Directors' responsibilities set out on page 60, the directors are responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the group's and the parent company's ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so.
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the FRC's website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors' report.
This report, including the opinions, has been prepared for and only for the parent company's members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
Under the Companies Act 2006 we are required to report to you if, in our opinion:
We have no exceptions to report arising from this responsibility.
Following the recommendation of the Audit Committee, we were appointed by the directors on 29 July 2009 to audit the financial statements for the period ended 31 December 2010 and subsequent financial periods. During 2018 the directors carried out an audit tender and we were subsequently invited to continue to perform the audit of the financial statements, pending formal reappointment at the 2019 Annual General Meeting. The period of total uninterrupted engagement is 9 years, covering the years ended 31 December 2010 to 31 December 2018.
Darren Meek (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 10 April 2019
FOR THE YEAR ENDED 31 DECEMBER 2018
| Year ended 31 December 2018 |
Year ended 31 December 2017 |
|
|---|---|---|
| Notes | £'million | £'million |
| Interest income 2 Interest expense 2 |
444.4 (114.3) |
302.0 (61.0) |
| Net interest income Fee and commission income 3 Net gains on sale of assets Other income 4 |
330.1 37.6 10.7 25.7 |
241.0 29.7 3.7 19.4 |
| Total income | 404.1 | 293.8 |
| General operating expenses 5 Depreciation and amortisation 12,13 Impairment of property, plant and equipment and intangible assets 12,13 |
(305.6) (45.1) (4.8) |
(232.9) (33.4) (0.6) |
| Total operating expenses Credit impairment charges¹ 23 Expected credit loss expense¹ |
(355.5) n/a (8.0) |
(266.9) (8.2) n/a |
| Profit before tax² | 40.6 | 18.7 |
| Taxation 8 |
(13.5) | (7.9) |
| Profit for the year | 27.1 | 10.8 |
| Other comprehensive expense for the year Items which will be reclassified subsequently to profit or loss: Movements in respect of investment securities held at available-for-sale (net of tax): – changes in fair value |
n/a | 2.7 |
| – fair value changes transferred to the income statement on disposal Movement in respect of investment securities held at fair value through other comprehensive income (net of tax): – changes in fair value – fair value changes transferred to the income statement on disposal |
n/a (2.4) (1.5) |
(3.7) n/a n/a |
| Total other comprehensive expense | (3.9) | (1.0) |
| Total comprehensive profit for the year | 23.2 | 9.8 |
| Earnings per share | ||
| Basic (pence) 30 |
29.1 | 12.8 |
| Diluted (pence) 30 |
28.2 | 12.6 |
On 1 January 2018 we adopted IFRS 9 which replaced IAS 39. Under IAS 39, credit impairment charges were recognised on loans and advances to customers when there was objective evidence of impairment. Losses which may have arisen from future events were not recognised. Charges were recognised in the income statement under line item "Credit impairment charges". Under IFRS 9, we recognise expected credit losses ('ECL') on all financial assets. All reasonable and supportable information, including information about past events, current conditions and reasonable and supportable forecasts of economic conditions at the reporting date is used in measuring ECL. Charges are recognised in the income statement under line item "Expected credit loss expense". Further details about our transition to IFRS 9 can be found in note 1.4.
A reconciliation between our statutory profit before tax of £40.6 million and our underlying profit before tax of £50.0 million can be found on page 165.
105
AS AT 31 DECEMBER 2018
| 31 December | 31 December | |
|---|---|---|
| Notes | 2018 £'million |
2017 £'million |
| Assets | ||
| Cash and balances with the Bank of England | 2,286 | 2,112 |
| Loans and advances to banks | 186 | 100 |
| Loans and advances to customers | 14,235 10 |
9,620 |
| Available-for-sale investment securities¹ | n/a 11 |
361 |
| Held to maturity investment securities¹ | n/a 11 |
3,554 |
| Investment securities held at fair value through other comprehensive income ('FVOCI')¹ | 674 11 |
n/a |
| Investment securities held at amortised cost¹ | 3,458 11 |
n/a |
| Property, plant and equipment | 454 12 |
328 |
| Intangible assets | 197 13 |
148 |
| Prepayments and accrued income | 66 14 |
52 |
| Deferred tax asset | 41 8 |
54 |
| Other assets | 50 15 |
26 |
| Total assets | 21,647 | 16,355 |
| Liabilities | ||
| Deposits from customers | 15,661 16 |
11,669 |
| Deposits from central banks2 | 3,801 | 3,321 |
| Debt securities | 249 17 |
– |
| Repurchase agreements | 344 | 121 |
| Other liabilities | 189 18 |
147 |
| Total liabilities | 20,244 | 15,258 |
| Equity | ||
| Called-up share capital | – 19 |
– |
| Share premium | 1,605 19 |
1,304 |
| Retained earnings | (209) 21 |
(219) |
| Other reserves | 7 | 12 |
| Total equity | 1,403 | 1,097 |
| Total equity and liabilities | 21,647 | 16,355 |
The accounting policies, notes and information on pages 112 to 159 form part of the financial statements.
The financial statements on pages 105 to 159 were approved by the Board of Directors on 10 April 2019 and signed on its behalf by:
Vernon W. Hill, II Chairman
Craig Donaldson Chief Executive Officer
David Arden Chief Financial Officer
FOR THE YEAR ENDED 31 DECEMBER 2018
| Notes | Called-up share capital £'million |
Share premium £'million |
Retained earnings £'million |
Available for-sale reserve £'million1 |
FVOCI reserve £'million1 |
Share option reserve £'million |
Total equity £'million |
|
|---|---|---|---|---|---|---|---|---|
| Balance as at 31 December 2017 IFRS 9 transition adjustment (net of tax) Balance as at 1 January 2018 |
1.4 | – – – |
1,304 – 1,304 |
(219) (17) (236) |
(4) 4 – |
n/a 1 1 |
16 – 16 |
1,097 (12) 1,085 |
| Net profit for the year Other comprehensive expense (net of tax) relating to investment securities designated at fair value through other comprehensive income |
– – |
– – |
27 – |
n/a n/a |
– (4) |
– – |
27 (4) |
|
| Total comprehensive income Shares issued Cost of shares issued Net share option movements |
– – – – |
– 304 (3) – |
27 – – – |
n/a n/a n/a n/a |
(4) – – – |
– – – (6) |
23 304 (3) (6) |
|
| Balance as at 31 December 2018 | – | 1,605 | (209) | n/a | (3) | 10 | 1,403 | |
| Balance as at 1 January 2017 | – | 1,028 | (230) | (3) | n/a | 10 | 805 | |
| Net profit for the year Other comprehensive income (net of tax) relating |
– | – | 11 | – | n/a | – | 11 | |
| to available-for-sale investments | – | – | – | (1) | n/a | – | (1) | |
| Total comprehensive income Shares issued |
– – |
– 279 |
11 – |
(1) – |
n/a n/a |
– – |
10 279 |
|
| Cost of shares issued Net share option movements |
– – |
(3) – |
– – |
– – |
n/a n/a |
– 6 |
(3) 6 |
|
| Balance as at 31 December 2017 | – | 1,304 | (219) | (4) | n/a | 16 | 1,097 | |
| Notes | 19 | 19 | 21 |
FOR THE YEAR ENDED 31 DECEMBER 2018
| Year ended 31 December 2018 |
Year ended 31 December 2017 |
||
|---|---|---|---|
| Notes | £'million | £'million | |
| Reconciliation of profit before tax to net cash flows from operating activities: Profit before tax Adjustments for: |
41 | 19 | |
| Impairment and write-offs of property, plant and equipment and intangible assets | 5 | 1 | |
| Depreciation and amortisation | 12, 13 | 45 | 33 |
| Share option charge | 5 | 3 | |
| Gain on sale of assets and fair value gains on derivatives Accrued interest on and amortisation of investment securities |
(11) (7) |
(4) (2) |
|
| Changes in operating assets | (4,651) | (3,751) | |
| Changes in operating liabilities | 4,726 | 5,994 | |
| Net cash inflows from operating activities | 153 | 2,293 | |
| Cash flows from investing activities | |||
| Sales of investment securities | 1,522 | 309 | |
| Purchase of investment securities | (1,740) | (997) | |
| Purchase of property, plant and equipment | 12 | (150) | (99) |
| Purchase and development of intangible assets | 13 | (75) | (70) |
| Net cash outflows from investing activities | (443) | (857) | |
| Cash flows from financing activities | |||
| Shares issued | 19 | 304 | 279 |
| Cost of shares issued | 19 | (3) | (3) |
| Debt securities issued | 17 | 250 | – |
| Cost of debt security issued | 17 | (1) | – |
| Net cash inflows from financing activities | 550 | 276 | |
| Net increase in cash and cash equivalents | 260 | 1,712 | |
| Cash and cash equivalents at start of year | 2,212 | 500 | |
| Cash and cash equivalents at end of year | 2,472 | 2,212 | |
| Profit before tax includes: | |||
| Interest received | 437 | 296 | |
| Interest paid | 105 | 61 | |
| Cash and cash equivalents comprise: | |||
| Cash and balances with the Bank of England | 2,286 | 2,112 | |
| Loans and advances to banks | 186 | 100 | |
| 2,472 | 2,212 |
108 Metro Bank Plc Annual report and accounts 2018
AS AT 31 DECEMBER 2018
| 31 December | 31 December | ||
|---|---|---|---|
| Notes | 2018 £'million |
2017 £'million |
|
| Assets | |||
| Cash and balances with the Bank of England | 2,286 | 2,112 | |
| Loans and advances to banks | 160 | 94 | |
| Loans and advances to customers | 10 | 13,940 | 9,393 |
| Available-for-sale investment securities¹ | 11 | n/a | 361 |
| Held to maturity investment securities¹ | 11 | n/a | 3,554 |
| Investment securities held at fair value through other comprehensive income ('FVOCI')¹ | 11 | 674 | n/a |
| Investment securities held at amortised cost¹ | 11 | 3,458 | n/a |
| Property, plant and equipment | 454 | 328 | |
| Investment in subsidiaries | 15 | 15 | |
| Intangible assets | 13 | 190 | 141 |
| Prepayments and accrued income | 14 | 63 | 50 |
| Deferred tax asset | 40 | 54 | |
| Other assets | 15 | 355 | 240 |
| Total assets | 21,635 | 16,342 | |
| Liabilities | |||
| Deposits from customers | 16 | 15,661 | 11,669 |
| Deposits from central banks2 | 3,801 | 3,321 | |
| Debt securities | 17 | 249 | – |
| Repurchase agreements | 344 | 121 | |
| Other liabilities | 18 | 182 | 142 |
| Total liabilities | 20,237 | 15,253 | |
| Equity | |||
| Called-up share capital | 19 | – | – |
| Share premium | 19 | 1,605 | 1,304 |
| Retained earnings3 | 21 | (214) | (227) |
| Other reserves | 7 | 12 | |
| Total equity | 1,398 | 1,089 | |
| Total equity and liabilities | 21,635 | 16,342 |
On 1 January 2018 we adopted IFRS 9 which replaced IAS 39. As part of the transition our investment securities are classified as held at amortised cost and as FVOCI, rather than under the previous categories of available-for-sale and held to maturity. Further details about our transition to IFRS 9 can be found in note 1.4.
Deposits from central banks comprises solely of amounts drawn down under the Bank of England's Term Funding Scheme ('TFS').
The Company profit for the year was £29.0million (2017: £8.9 million).
The financial statements on pages 105 to 159 were approved by the Board of Directors on 10 April 2019 and signed on its behalf by:
Vernon W. Hill, II Chairman
Craig Donaldson Chief Executive Officer
David Arden Chief Financial Officer
FOR THE YEAR ENDED 31 DECEMBER 2018
| Notes | Called-up share capital £'million |
Share premium £'million |
Retained earnings £'million |
Available for-sale reserve £'million |
FVOCI reserve £'million1 |
Share option reserve £'million |
Total equity £'million |
|
|---|---|---|---|---|---|---|---|---|
| Balance as at 31 December 2017 IFRS 9 transition adjustment (net of tax) Balance as at 1 January 2018 |
1.4 | – – – |
1,304 – 1,304 |
(227) (14) (241) |
(4) 4 – |
n/a 1 1 |
16 – 16 |
1,089 (9) 1,080 |
| Net profit for the year Other comprehensive expense (net of tax) relating to investment securities designated at fair value through other comprehensive income |
– – |
– – |
27 – |
n/a n/a |
– (4) |
– – |
27 (4) |
|
| Total comprehensive income Share issue Cost of share issue Net share option movements |
– – – – |
– 304 (3) – |
27 – – – |
n/a n/a n/a n/a |
(4) – – – |
– – – (6) |
23 304 (3) (6) |
|
| Balance as at 31 December 2018 | – | 1,605 | (214) | n/a | (3) | 10 | 1,398 | |
| Balance as at 1 January 2017 | – | 1,028 | (236) | (3) | n/a | 10 | 799 | |
| Net profit for the year Other comprehensive income (net of tax) relating to available-for-sale investments |
– – |
– – |
9 – |
– (1) |
n/a n/a |
– – |
9 (1) |
|
| Total comprehensive income Share issue |
– – |
– 279 |
9 – |
(1) – |
n/a n/a |
– – |
8 279 |
|
| Cost of share issue Net share option movements |
– – |
(3) – |
– – |
– – |
n/a n/a |
– 6 |
(3) 6 |
|
| Balance as at 31 December 2017 | – | 1,304 | (227) | (4) | n/a | 16 | 1,089 | |
| Notes | 19 | 19 | 21 |
FOR THE YEAR ENDED 31 DECEMBER 2018
| Notes | Year ended 31 December 2018 £'million |
Year ended 31 December 2017 £'million |
|
|---|---|---|---|
| Reconciliation of profit before tax to net cash flows from operating activities: Profit before tax Adjustments for: |
40 | 16 | |
| Impairment and write-offs of property, plant and equipment and intangible assets Depreciation and amortisation Share option charge |
5 45 4 |
– 34 4 |
|
| Gain on sale of assets and fair value gains on derivatives Accrued interest on and amortisation of investment securities Changes in operating assets Changes in operating liabilities |
(8) (7) (4,675) 4,724 |
(4) (2) (3,753) 5,993 |
|
| Net cash inflows from operating activities | 128 | 2,288 | |
| Cash flows from investing activities Sales of investment securities Purchase of investment securities Purchase of property, plant and equipment Proceeds from sale of property, plant and equipment Purchase and development of intangible assets |
13 | 1,526 (1,740) (150) – (75) |
309 (997) (100) – (69) |
| Net cash outflows from investing activities | (439) | (857) | |
| Cash flows from financing activities Share issue Cost of share issue Share issue Cost of share issue |
19 19 17 17 |
304 (3) 250 (1) |
279 (3) – – |
| Net cash inflows from financing activities | 550 | 276 | |
| Net increase in cash and cash equivalents Cash and cash equivalents at start of year |
239 2,207 |
1,707 499 |
|
| Cash and cash equivalents at end of year | 2,446 | 2,206 | |
| Profit before tax includes: Interest received Interest paid |
425 105 |
286 61 |
|
| Cash and cash equivalents comprise: Cash and balances with the Bank of England Loans and advances to banks |
2,286 160 |
2,112 94 |
|
| 2,446 | 2,206 |
111
This section sets out the Group's ('our' or 'we') accounting policies which relate to the financial statements as a whole. Where an accounting policy relates specifically to a note then the related accounting policy is set out within that note. All policies have been consistently applied to all the years presented unless stated otherwise.
Metro Bank ('the Company') together with its subsidiaries ('the Group') provides retail and commercial banking services in the UK and is a public limited liability company incorporated and domiciled in the United Kingdom under the Companies Act 2006 (Registration number 6419578). The address of our registered office is One Southampton Row, London WC1B 5HA.
Our 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 our Directors are satisfied that the Group and the Company have the resources to continue in business for the foreseeable future.
In publishing the Company financial statements here together with the Group financial statements, we have taken advantage of the exemption in section 408(3) of the Companies Act 2006 not to present an individual income statement and related notes that form a part of these financial statements.
Cash and cash equivalents comprise balances with less than three months' maturity from the date of acquisition, including cash in hand, deposits held at call with banks and balances held with the Bank of England.
The consolidated cash flow statement shows the changes in cash and cash equivalents arising during the year from operating activities, investing activities and financing activities.
The cash flows from operating activities are determined by using the indirect method. Under that method, profit before tax is adjusted for non-cash items, changes in other assets and liabilities and other items that relate to investing and financing cash flows, to determine net cash inflows or outflows from operating activities. Cash flows from investing and financing activities are determined using the direct method, that is by directly reporting the cash effects of transactions.
During the year we adopted the following standards across all Group companies:
On 1 January 2018 we adopted IFRS 9 'Financial Instruments', which replaced IAS 39 'Financial Instruments: Recognition and Measurement'. This resulted in changes in accounting policies and adjustments to the amounts previously recognised in the financial statements. In accordance with the transitional provisions in IFRS 9, comparative figures have not been restated; accordingly, all comparative period information is presented in accordance with our previous accounting policies.
The following tables reconcile the carrying amount of financial assets and liabilities, from their previous measurement category in accordance with IAS 39 as at 31 December 2017 to their new measurement categories upon transition to IFRS 9 on 1 January 2018.
| IAS 39 | IFRS 9 | ||||
|---|---|---|---|---|---|
| Class of financial asset or liability | Measurement category | Carrying amount £'million |
Measurement category | Carrying amount £'million |
|
| Financial assets | |||||
| Cash and balances with central banks | Loans and receivables | £2,112 | Amortised cost | £2,112 | |
| Loans and advances to banks | Loans and receivables | £100 | Amortised cost | £100 | |
| Loans and advances to customers | Loans and receivables | £9,620 | Amortised cost | £9,598 | |
| Investment securities | Held to maturity | £3,554 | Amortised cost | £3,224 | |
| Available for sale | £361 | FVOCI | £698 | ||
| Financial liabilities | |||||
| Deposits from customers | Financial liabilities at amortised cost | £11,669 | Amortised cost | £11,669 | |
| Deposits from banks | Financial liabilities at amortised cost | £3,321 | Amortised cost | £3,321 |
| £'million | Cash and balances with central banks (IAS 39: Loans and receivables) |
Loans and advances to banks (IAS 39: Loans and receivables) |
Loans and advances to customers (IAS 39: Loans and receivables) |
Investment securities (IAS 39: Held to maturity) |
Total |
|---|---|---|---|---|---|
| Carrying value under IAS 39 | 2,112 | 100 | 9,620 | 3,554 | 15,386 |
| Transfer to FVOCI – Carrying amount transferred |
– | – | – | (332) | (332) |
| Remeasurement of investment securities held at amortised cost |
– | – | – | 2 | 2 |
| Remeasurement of impairment allowance | – | – | (22) | – | (22) |
| Carrying value under IFRS 9 – amortised cost | 2,112 | 100 | 9,598 | 3,224 | 15,034 |
Remeasurement of investment securities held at amortised cost – this relates to assets which were initially classified as available for sale under IAS 39. They were subsequently transferred to the held to maturity category, with the carrying value at the point of transfer being equal to the fair value. This adjustment restates the carrying value of these assets to reflect the appropriate amortised cost as if the assets had always been measured at amortised cost.
The total amount of remeasurement of £20 million was adjusted through opening equity on 1 January 2018. A corresponding increase in deferred tax assets of approximately £5 million was also adjusted through opening equity on 1 January 2018.
| £'million | Investment securities (IAS39: Available for sale) |
Total |
|---|---|---|
| Carrying value under IAS 39 | 361 | 361 |
| Transfer from amortised cost | ||
| – Carrying amount transferred | 332 | 332 |
| – Remeasurement from amortised cost to fair value | 5 | 5 |
| Remeasurement of impairment allowance | – | – |
| Carrying value under IFRS 9 – FVOCI | 698 | 698 |
£332 million fixed rate securities classified as held to maturity under IAS 39 have been classified as FVOCI under IFRS 9. Going forward, this pool of assets will be held to collect cash flows and to sell if required in order to effectively manage our interest rate risk, therefore it has been classified as FVOCI. Had IAS 39 remained in force, we would have maintained our intention and ability to hold these assets to maturity, and we would have sought other methods to manage our interest rate risk.
The total amount of remeasurement of £5 million was adjusted through opening equity on 1 January 2018. A corresponding decrease in deferred tax assets of approximately £1 million was also adjusted through change to equity on 1 January 2018.
113
CONTINUED
Reconciliation of impairment allowance balance from IAS 39 to IFRS 9
The following table reconciles the previous impairment allowance measured in accordance with the IAS 39 incurred loss model and the new impairment allowance measured in accordance with the IFRS 9 expected loss model at 1 January 2018:
| Measurement category (IAS 39/IFRS 9) | Loan loss allowance under IAS 39 £'million |
Reclassification £'million |
Remeasurement £'million |
Loan loss allowance under IFRS 9 £'million |
|---|---|---|---|---|
| Loans and receivables/Financial assets at amortised cost | 15 | – | 22 | 37 |
| Available-for-sale financial instruments/Financial assets at FVOCI | – | – | – | – |
| Total | 15 | – | 22 | 37 |
The increase in loss allowance under IFRS 9 when compared to that measured under IAS 39 is primarily due to earlier recognition of credit losses under the new expected loss model. The most significant impact has been observed in relation to our unsecured lending portfolios. For a number of these portfolios, no new lending is being originated.
The European Banking Authority has amended the Capital Requirements Regulation to establish IFRS 9 related transitional arrangements. On adoption of IFRS 9, movements in the opening impairment provision were posted as an adjustment to reserves, and therefore to capital. The transitional arrangement enables firms to 'add back' a portion of this capital adjustment in early years, thereby reducing the initial impact on capital. Add-back adjustments are also allowable for movements in provisions in subsequent years. We have elected to adopt the transitional arrangements.
IFRS 9 includes an accounting policy choice to remain with IAS 39 hedge accounting. Hedge accounting is not currently material for us and we have elected to continue applying the requirements of IAS 39.
From 1 January 2018, we adopted IFRS 15 'Revenue from Contracts with Customers' applying the modified retrospective method. The majority of our revenue is net interest income which is accounted for under IFRS 9, as such there are no material changes to the timing of revenue recognition which have arisen from the adoption of IFRS 15.
At the year end the following standards were in issue but not yet effective and have not been adopted early in these financial statements:
On 1 January 2019 we adopted IFRS 16 'Leases'. 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'. IFRS 16 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 being brought onto the face of the balance sheet.
We have adopted IFRS 16 on the modified retrospective basis and as such there will be no restatement of comparators within the 2019 Annual Report & Accounts, which will continue to be presented under IAS 17.
On adoption of the standard on 1 January 2019, we recognised lease liabilities for operating leases of £328 million. We elected the transitional option to set the RoU asset equal to the related lease liability (adjusted for current amounts accrued in respect of rent free periods) for all leases as at 1 January 2019 and therefore there is no opening adjustment to retained earnings. The total amount of RoU asset recognised on 1 January was £313 million. The weighted average incremental borrowing rate used to measure lease liabilities is 5.5%.
We have applied the available practical expedients of exempting leases with a short life (less than 12 months) or low value (less than £5,000). These leases will continue to be recognised on a straight line basis over the lease term and in total are immaterial to the bank. As a result, the key leases to which the full requirements of IFRS 16 have been applied are our leases of store and head office sites.
For all stores, the lease liability represents the present value of future lease payments for the full lease term, irrespective of any tenant break clauses. For office space, where it is certain we will exercise a break the lease liability has only been calculated up to such date. The key judgement used in the lease liability calculation is the choice of discount rate, which has been set at our incremental cost of borrowing.
Due to the relatively young age of the Group coupled with our store opening profile over recent years, the majority of our leases remain in the first half of their terms, with an average remaining lease length of 20 years. Our business model will also see us continue to open stores in the years ahead, leading to an expanding lease portfolio. These two factors will lead to significantly 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; IAS 17 requires lease expenses to be recognised on a straight line basis.
Our net interest margin ('NIM') will be 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 interest expense charge. This interest expense will be recognized within NIM, thus reducing it going forward. Customer NIM + fees considers the margin derived from customer deposits and lending only, and therefore is not impacted by the adoption of IFRS 16.
The undiscounted value of our lease commitments can be found in note 22. The table below reconciles this to the opening lease liability we will recognise under IFRS 16.
| £'million | |
|---|---|
| Total undiscounted lease commitments at 31 December 2018 (See note 22) | 659 |
| Exclusion of VAT from lease liability Discounting at a weighted average rate of 5.5% |
(116) (215) |
| Lease liability to be included in the statement of financial position at 1 January 2019 | 328 |
No other standards which are currently not yet effective, including IFRS 17 'insurance contracts' are deemed to have a significant impact on our financial statements.
IFRS 8 requires operating segments to be identified on the basis of internal reports and components of the Group which are regularly reviewed by the Chief Operating Decision Maker to allocate resources to segments and to assess their performance. For this purpose, the Chief Operating Decision Maker of the Group is our Board of Directors.
The Board considers the results of the Group as a whole when assessing the performance of the Group and allocating resources. Accordingly, the Group has a single operating segment.
We operate solely within the UK and, as such, no geographical analysis is required. We are not reliant on any single customer.
Items included in the financial statements are measured using pounds Sterling, the currency of the UK, which is the primary economic environment in which we operate ('the functional currency').
The financial statements are presented in pounds Sterling, which is our presentation currency.
Transactions in a foreign currency are translated into the functional currency using the exchange rates prevailing at the date of the transaction.
Monetary items denominated in a foreign currency are translated using the closing rate as at the reporting date. Non-monetary items measured at historical cost denominated in a foreign currency are translated with the exchange rate as at the date of initial recognition; non-monetary items in a foreign currency that are measured at fair value are translated using the exchange rates at the date when the fair value was determined.
Foreign currency differences arising on translation are recognised in other income. Gains and losses arising from foreign currency transactions offered to customers are also recognised in other income.
115
CONTINUED
The preparation of financial statements in conformity with IFRS requires us to make judgements and estimates which although based on our best assessment, by definition will seldom equal the actual results. Management believes that the underlying assumptions applied at 31 December 2018 are appropriate and that these financial statements therefore present the financial position and results of the Group fairly. The areas involving a higher degree of complexity, or areas where estimates have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are disclosed below.
The recognition and measurement of expected credit losses ('ECL') is complex and involves the use of significant estimation and judgements. We consider that the key judgement assumption for us relates to the determination of whether a "significant increase in credit risk" has occurred. We consider that the key source of estimation uncertainty relates to the formulation and incorporation of multiple forward-looking economic scenarios into the ECL estimates to meet the measurement objective of IFRS 9.
As described in more detail in note 23, IFRS 9 requires a higher level of expected credit loss to be recognised for underperforming loans. This is considered based on a staging approach. Financial assets that have had no significant increase in credit risk since initial recognition or that have low credit risk at the reporting date are considered to be performing loans and are classified as "Stage 1". Losses are calculated based on our expectation of losses expected on defaults which may occur within the next 12 months. Assets which are considered to have experienced a significant increase in credit risk since initial recognition, but that do not have objective evidence of impairment, are classified as "Stage 2". Losses are calculated based on defaults which may occur at any point in the asset's lifetime.
Judgement is required to determine when a significant increase in credit risk has occurred. An assessment of whether credit risk has increased significantly since initial recognition, resulting in transfer to stage 2, is performed at each reporting period by considering the change in the probability of default ('PD') occurring over the remaining life of the financial instrument. The assessment explicitly or implicitly compares the PD occurring at the reporting date compared to that at initial recognition, taking into account reasonable and supportable information, including information about past events, current conditions and future economic conditions. We assess whether PD has increased using qualitative and quantitative measures, as described in note 23.
As described in note 23, the ECL recognised in the financial statements reflects the effect on expected credit losses of a range of possible outcomes, calculated on a probability-weighted basis, based on a number of economic scenarios and including management overlays where required. These scenarios are representative of our view of forecast economic conditions, sufficient to calculate unbiased ECL. At 31 December 2018, three main scenarios were applied ("Baseline", "Upside" and "Downside"), plus a specific "Hard Brexit" scenario incorporating the high degree of uncertainty in estimating the current uncertainty in the UK economy ahead of the UK's departure from the European Union in 2019.
The following assumptions, considered to be the key drivers of ECL, have been used for the scenarios applied:
The weightings applied to each scenario at 31 December 2018 are:
The weighted ECL is higher than the baseline scenario, reflecting the impact of the downside and Hard Brexit scenarios, offset by the impact of the upside scenario. Further details on how the assumptions and scenario weightings have been determined can be found in note 23.
The weightings applied to each scenario are considered to represent a significant accounting estimate. We have performed an assessment of the impact on the ECL if each of the Baseline, Upside, Downside and Hard Brexit scenarios were applied to the ECL calculation using a 100% weighting (that is, ignoring all other scenarios in each case):
| Scenario | ECL (£'million) |
Variance to reported weighted ECL at 31 December 2018 |
|---|---|---|
| Weighted | 33.8 | – |
| Baseline | 31.6 | (7%) |
| Upside | 26.5 | (22%) |
| Downside | 40.4 | 19% |
| Hard Brexit | 49.4 | 46% |
We note that the sensitivities disclosed above represent example scenarios and may not represent actual scenarios which occur in the future. If one of these scenarios did arise then at that time the ECL would not equal the amount disclosed above, as the amounts disclosed do not take account of the alternative possible scenarios which would be considered at that time. We also note that the sensitivities disclosed above do not take into account movements in impairment stage allocations that would result under the different scenarios
Accounting policy We recognise interest income and expense for all interest-bearing financial instruments within 'interest income' and 'interest expense' in the income statement using the effective interest rate method. The effective interest rate method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate we estimate cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but do not consider future credit losses except for purchased or originated credit impaired assets. The calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.
For loans that are credit impaired interest income is calculated on the carrying amount of the loan net of credit impairment.
| Group | 2018 £'million |
2017 £'million |
|---|---|---|
| Cash and balances held with the Bank of England | 11.2 | 3.3 |
| Loans and advances to customers | 365.2 | 241.8 |
| Investment securities held to maturity and available for sale | n/a | 56.9 |
| Investment securities held at amortised cost | 57.7 | n/a |
| Investment securities held at FVOCI | 10.3 | n/a |
| Total interest income | 444.4 | 302.0 |
| Group | 2018 £'million |
2017 £'million |
|---|---|---|
| Deposits from customers | 75.1 | 46.9 |
| Deposits from central banks | 22.7 | 5.4 |
| Debt securities | 7.2 | – |
| Repurchase agreements | 0.7 | 1.6 |
| Other | 8.6 | 7.1 |
| Total interest expense | 114.3 | 61.0 |
| Accounting policy | for fees and commissions as follows: | Fee and commission income is earned from a wide range of services we provide to our customers. We account |
|---|---|---|
| Product or service | Nature, timing and satisfaction of performance obligations and payment terms | |
| Service charges and other fee income |
We levy a range of standard charges and fees for account maintenance or specific account services. Where the fee is earned upon the execution of a significant act at a point in time, for example CHAPs payment charges, these are recognised as revenue when the act is completed for the customer. Where the income is earned from the provision of services, for example an account maintenance fee, this is recognised as revenue when the service is delivered. |
|
| Safe deposit box | Revenue is recognised over the period the customer has access to the box from the date possession is taken. Safe deposit box fees are billed on either a monthly or annual basis with a standard set price payable dependent on the size of box. |
|
| ATM and interchange fees |
Where we earn fees from our ATMs or from interchange this is recognised at the point the service is delivered. |
|
| As disclosed in note 1.6, we provide services solely within the UK and therefore revenues are not presented on a geographic basis. Revenue is grouped solely by contract-type as we believe this best depicts how the nature, amount and timing of our revenue and cash flows are affected by economic factors. |
| Group | 2018 £'million |
2017 £'million |
|---|---|---|
| Service charges and other fee income | 23.2 | 17.9 |
| Safe deposit box income | 11.1 | 9.1 |
| ATM and interchange fees | 3.3 | 2.7 |
| Total fee and commission income | 37.6 | 29.7 |
| Accounting policy | Other income is accounted for as follows: | |
|---|---|---|
| Product or service | Nature, timing and satisfaction of performance obligations and payment terms | |
| Gains on foreign currency transactions |
Gains on foreign currency transactions is the spread earned on foreign currency transactions performed for our customers along with any associated fees. It is recognised at the point in time that the exchange is executed. |
|
| Rental income | Rental income is primarily earned from the letting out of surplus space in some of our properties. The revenue is recognised on a straight line basis over the life of the lease. Further details of future amounts due can be found in note 22. |
| Group | 2018 £'million |
2017 £'million |
|---|---|---|
| Foreign currency transactions | 22.5 | 17.4 |
| Rental income | 1.4 | 1.4 |
| Other | 1.8 | 0.5 |
| Total other income | 25.7 | 19.4 |
| Group | 2018 £'million |
2017 £'million |
|---|---|---|
| People costs | 154.9 | 123.8 |
| Occupancy expense | 39.4 | 30.9 |
| Information technology costs | 26.8 | 19.9 |
| Marketing costs | 5.9 | 3.7 |
| Legal, regulatory and professional fees | 9.1 | 7.0 |
| Money transmission and other banking related costs | 19.6 | 14.3 |
| Costs relating to the RBS alternative remedies package application | 3.8 | 0.1 |
| Other | 46.1 | 33.1 |
| Total general operating expenses | 305.6 | 232.9 |
Included within legal, regulatory and professional fees is £0.4 million (2017: £0.6 million) in respect of the Financial Services Compensation Scheme ('FSCS') levy.
| 6. People costs | ||
|---|---|---|
| Accounting policy | We operate a defined contribution pension scheme for our colleagues. Contributions to colleagues' individual personal pension plans are made on a contractual basis, with no further payment obligations once the contributions have been paid. These contributions are recognised as an expense when they fall due. |
|
| Group | 2018 £'million |
2017 £'million |
|---|---|---|
| Wages and salaries | 128.0 | 102.0 |
| Social security costs | 13.7 | 10.7 |
| Pension costs | 8.5 | 6.5 |
| Equity-settled share-based payments¹ | 4.7 | 4.6 |
| Total people costs | 154.9 | 123.8 |
The average monthly number of persons employed during the year was 3,552 (2017: 2,831).
| Group | 2018 | 2017 |
|---|---|---|
| Customer-facing Non-customer-facing |
2,107 1,445 |
1,774 1,057 |
| Total number of persons employed | 3,552 | 2,831 |
Payments were made amounting to £9.1 million (2017: £7.1 million) to employees' individual personal pension plans during the year.
Fees payable to our auditors PricewaterhouseCoopers LLP ('PwC') are analysed below:
| Group | 2018 £'000 |
2017 £'000 |
|---|---|---|
| For Metro Bank's statutory audit For the statutory audit of Metro Bank's subsidiaries For all other services |
968 49 123 |
1,175 37 79 |
| Total fees payable to the Group's auditors | 1,140 | 1,291 |
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
| 8. Taxation | |||
|---|---|---|---|
| Accounting policy | Current tax Our current tax comprises the expected tax payable or receivable on the taxable profit for the year and any adjustment to the tax payable or receivable in respect of previous years. It is measured using tax rates enacted or substantively enacted at the reporting date. |
||
| Where we have tax losses that can be relieved only by carry-forward against taxable profits of future periods, a deductible temporary difference arises. Those losses carried forward are set off against deferred tax liabilities carried in the balance sheet. |
|||
| Deferred tax Deferred tax is recognised in respect of temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the date of the balance sheet and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. |
|||
| The principal differences arise from trading losses, depreciation of property, plant and equipment and relief on research and development expenditure. |
|||
| We recognise a deferred tax asset to the extent that it is probable that future taxable profits will be available against which they can be used and deferred tax liabilities are provided on taxable temporary differences. Deferred tax assets and liabilities are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised or the deferred tax liability settled. |
|||
| Deferred tax assets and liabilities are offset where there is a legally enforceable right to offset current tax assets against current tax liabilities and where the deferred tax assets and liabilities relate to taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle on a net basis. |
|||
| Tax expense | The components of the tax expense for the year are: | ||
| Group | 2018 £'million |
2017 £'million |
|
| Group | £'million | £'million |
|---|---|---|
| Current tax | ||
| Current tax | (2.8) | (1.0) |
| Adjustment in respect of prior years | (0.7) | 0.1 |
| Total current tax expense | (3.5) | (0.9) |
| Deferred tax | ||
| Origination and reversal of temporary differences | (9.8) | (5.2) |
| Effect of changes in tax rates | (0.7) | (3.0) |
| Adjustment in respect of prior years | 0.5 | 1.2 |
| Total deferred tax expense | (10.0) | (7.0) |
| Total tax expense | (13.5) | (7.9) |
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:
| Group | 2018 £'million |
Effective tax rate % |
2017 £'million |
Effective tax rate % |
|---|---|---|---|---|
| Accounting profit before tax | 40.6 | 18.7 | ||
| Tax expense at statutory tax rate of 19% (2017: 19.25%) | (7.7) | 19.0% | (3.6) | 19.25% |
| Tax effects of: | ||||
| Non-deductible expenses – depreciation on non-qualifying fixed assets | (2.6) | 6.4% | (2.6) | 14.10% |
| Non-deductible expenses - investment property impairment | (0.5) | 1.2% | – | – |
| Non-deductible expenses – other | (0.6) | 1.4% | (0.5) | 2.90% |
| Share-based payments | (1.3) | 3.1% | 0.6 | (3.40%) |
| Adjustment in respect of prior years | (0.2) | 0.5% | 1.2 | (6.50%) |
| Effect of changes in tax rates | (0.6) | 1.5% | (3.0) | 15.90% |
| Tax expense reported in the consolidated income statement | (13.5) | 33.2% | (7.9) | 42.20% |
During the year the Metro Bank share price fell from £35.84 to £16.93. This had the impact of significantly reducing the deferred tax asset held for share options and in turn resulted in an associated deferred tax charge of £1.3 million. This charge contributes 3.1% to the 2018 effective tax rate.
The effective tax rate for the year is 33.2% (2017: 42.2%).
The effective tax rate for the year excluding the effect of changes in tax rates and prior year adjustments is 31.2% (2017: 32.8%). Further excluding the impact of the deferred tax charge relating to the fall in the share price and the investment property impairments the effective tax rate for the year is 26.9% (2017: 32.8%)
A deferred tax asset must be regarded as recoverable and therefore recognised only when, on the basis of all available evidence, it can be regarded as more likely than not there will be suitable tax profits from which the future of the underlying timing differences can be deducted. Due to the investment property impairment being unrealised there is an unrecognised DTA of £0.5m. The following table shows deferred tax recorded in the balance sheet and changes recorded in the tax expense:
| Group | Unused tax losses £'million |
Investment securities and impairments £'million |
Share-based payments £'million |
Property, plant and equipment £'million |
Intangible assets £'million |
Total £'million |
|---|---|---|---|---|---|---|
| 2018 Deferred tax assets Deferred tax liabilities |
53 – |
7 (2) |
1 – |
– (11) |
– (7) |
61 (20) |
| Deferred tax assets (net) | 53 | 5 | 1 | (11) | (7) | 41 |
| At 31 December 2017 IFRS 9 transition adjustments |
57 – |
– 4 |
11 – |
(8) – |
(6) – |
54 4 |
| At 1 January 2018 Income statement Other comprehensive income Equity |
57 (4) – – |
4 (1) 2 – |
11 (1) – (9) |
(8) (3) – – |
(6) (1) – – |
58 (10) 2 (9) |
| At 31 December 2018 | 53 | 5 | 1 | (11) | (7) | 41 |
CONTINUED
| Group | Unused tax losses £'million |
Investment securities and impairments £'million |
Share-based payments £'million |
Property, plant and equipment £'million |
Intangible assets £'million |
Total £'million |
|---|---|---|---|---|---|---|
| 2017 | ||||||
| Deferred tax assets | 57 | 1 | 11 | – | – | 69 |
| Deferred tax liabilities | – | (1) | – | (8) | (6) | (15) |
| Deferred tax assets (net) | 57 | – | 11 | (8) | (6) | 54 |
| At 1 January 2017 | 61 | (2) | 6 | (5) | (5) | 55 |
| Income statement | (3) | – | 1 | (3) | (1) | (6) |
| Other comprehensive income | (1) | 2 | – | – | – | 1 |
| Equity | – | – | 4 | – | – | 4 |
| At 31 December 2017 | 57 | – | 11 | (8) | (6) | 54 |
We account for our financial assets under three measurement categories, as defined by IFRS 9:
IFRS 9 applies one classification approach for all types of financial assets. Two criteria are used to determine how financial assets should be classified and measured:
If assets pass the SPPI test, and are within a business model that holds to collect contractual cash flows, they are measured at amortised cost. If assets pass the SPPI test, and are within a business model that holds to collect contractual cash flows and for sale, they are measured at FVOCI. If an asset does not meet the criteria for amortised cost or FVOCI, it is measured at FVPL.
Under IFRS 9, assets will only move between categories if there is a significant change to the business model within which they are held; this is expected to be infrequent.
Financial assets are derecognised when the contractual rights to the cash flows from the financial asset expire, or when the financial asset and substantially all the risks and rewards of ownership of the asset are transferred to another entity.
All financial liabilities are classified and subsequently measured at amortised cost, except for those designated at fair value through profit or loss at initial recognition. Financial liabilities are derecognised when they are extinguished, i.e. when the obligation specified in the contract is discharged or cancelled or expires.
2017 comparative data is disclosed under IAS 39. The specific policies applied to loans and advances to customers and investment securities are described in note 10 and 11. There are no significant differences relating to the classification and measurement of our financial liabilities.
Our financial instruments primarily comprise customer deposits, loans and advances to customers, cash held at banks and investment securities, all of which arise as a result of our normal operations. Information on loans and advances to customers can be found in note 10, and on investment securities in note 11.
We do not enter into transactions for speculative purposes and there are no instruments held for trading. From time to time, we may use interest rate derivatives such as swaps to manage part of our interest rate risk.
The main financial risks arising from our financial instruments are credit risk, liquidity risk and market risks (price and interest rate risk). Further details on these risks can be found in notes 23 to 25.
The financial instruments we hold are simple in nature and we do not consider that we have made any significant or material judgments relating to the classification of financial instruments under IFRS 9.
Accounting policy Loans and advances to customers are classified as held at amortised cost. All customer lending is held to collect cash flows, with no sales expected in the normal course of business. We aim to offer products with simple terms to customers, and as a result, all loans comprise solely payments of principal and interest. Loans are initially recognised when cash is advanced to the borrower at fair value – which is the cash consideration to originate the loan including any transaction costs – and measured subsequently at amortised cost using the effective interest rate method, which is detailed further in note 2. Interest on loans is included in the income statement and is reported as 'Interest income'. Expected credit losses ('ECL') are reported as a deduction from the carrying value of the loan. Changes to the ECL during the year are recognised in the income statement as "Expected credit loss expense".
2017 comparative data is disclosed under IAS 39; instead of an ECL an allowance for impairment is held. The allowance for impairment represents the cumulative credit impairment losses recognised and are reported as a deduction from the carrying value of the loan. Credit impairment losses recognised during the year are shown as in the income statement as 'Credit impairment charges'.
| Gross carrying amount £'million |
ECL allowance1 £'million |
Net carrying amount £'million |
|
|---|---|---|---|
| Consumer lending | 288 | (9) | 279 |
| Retail mortgages | 9,625 | (11) | 9,614 |
| Commercial lending (excluding asset and invoice finance) | 4,057 | (10) | 4,047 |
| Total loans and advances to customers (Company) | 13,970 | (30) | 13,940 |
| Asset and invoice finance | 299 | (4) | 295 |
| Total loans and advances to customers (Group) | 14,269 | (34) | 14,235 |
| 31 December 2017 | ||||
|---|---|---|---|---|
| Gross carrying amount £'million |
Allowance for impairment1 £'million |
Net carrying amount £'million |
||
| Consumer lending | 217 | (6) | 211 | |
| Retail mortgages | 6,231 | (3) | 6,228 | |
| Commercial lending (excluding asset and invoice finance) | 2,957 | (3) | 2,954 | |
| Total loans and advances to customers (Company) | 9,405 | (12) | 9,393 | |
| Asset and invoice finance | 229 | (2) | 227 | |
| Total loans and advances to customers (Group) | 9,634 | (14) | 9,620 |
123
Further information on the movements in gross carrying amounts and ECL can be found in note 23. An analysis of the gross loans and advances by product category is set out below:
| Group 31 December 2018 £'million |
Group 31 December 2017 £'million |
Company 31 December 2018 £'million |
Company 31 December 2017 £'million |
|
|---|---|---|---|---|
| Overdrafts | 70 | 86 | 70 | 86 |
| Credit cards | 11 | 9 | 11 | 9 |
| Term loans | 207 | 122 | 207 | 122 |
| Total consumer lending | 288 | 217 | 288 | 217 |
| Retail mortgages | 9,625 | 6,231 | 9,625 | 6,231 |
| Total retail lending | 9,913 | 6,448 | 9,913 | 6,448 |
| Overdrafts | 226 | 139 | 226 | 139 |
| Credit cards | 3 | 2 | 3 | 2 |
| Term loans | 3,828 | 2,816 | 3,828 | 2,816 |
| Asset and invoice finance | 299 | 229 | – | – |
| Total commercial lending | 4,356 | 3,186 | 4,057 | 2,957 |
| Gross loans and advances to customers | 14,269 | 9,634 | 13,970 | 9,405 |
| Amounts include: | ||||
| Repayable at short notice | 251 | 160 | 251 | 160 |
Accounting policy Our investment securities may be categorised as amortised cost, FVOCI or FVPL. Currently all investment securities are non-complex, with cash flows comprising solely payments of principal and interest. We hold some securities to collect cash flows; other securities are held to collect cash flows, and to sell if the need arises (e.g., to manage and meet day to day liquidity needs). Therefore, we have a mixed business model and securities are classified as either amortised cost or FVOCI as appropriate. We do not categorise any investment securities as FVPL.
Investment securities held at amortised cost consist entirely of debt instruments. They are accounted for using the effective interest method, less any impairment losses.
Investment securities held at FVOCI consist entirely of debt instruments. Investment securities held at FVOCI are initially recognised at fair value, which is the cash consideration including any transaction costs, and measured subsequently at fair value with gains and losses being recognised in other comprehensive income, except for impairment losses and foreign exchange gains and losses, until the investment security is derecognised. Interest is calculated using the effective interest method.
2017 comparative data is disclosed under IAS 39. At 31 December 2017, under IAS 39, investment securities were classified as held to maturity or available for sale.
Held to maturity investments are carried at amortised cost using the effective interest method, less any impairment losses. A sale or reclassification of more than an insignificant amount of held to maturity investments would result in the reclassification of all held to maturity investments as available-for-sale and would prevent us from classifying investment securities as held to maturity for the current and the two following financial years.
Available-for-sale investment securities are initially recognised at fair value, which is the cash consideration including any transaction costs, and measured subsequently at fair value with gains and losses being recognised in other comprehensive income, except for impairment losses and foreign exchange gains and losses, until the investment security is derecognised. If an available-for-sale investment security is determined to be impaired, the cumulative gain or loss previously recognised in the statement of comprehensive income is recognised in the income statement. Interest is calculated using the effective interest method, and foreign currency gains and losses on monetary assets classified as available-for-sale are recognised in the income statement.
| Group and Company | Level 1 £'million |
Level 2 £'million |
Total £'million |
|---|---|---|---|
| At 31 December 2018 (financial instruments held at FVOCI) | 607 | 67 | 674 |
| At 31 December 2017 (available for sale financial instruments) | 290 | 71 | 361 |
The classification of a financial instrument is based on the lowest level input that is significant to the fair value measurement in its entirety. The two levels of the fair value hierarchy relevant to the Group and Company are defined below.
Investment securities are classified as Level 1 if their value is observable in an active market. Such instruments are valued by reference to unadjusted quoted prices for identical assets or liabilities in active markets where the quoted price is readily available, and the price represents actual and regularly occurring market transactions on an arm's length basis. An active market is one in which transactions occur with sufficient volume and frequency to provide pricing information on an ongoing basis.
125
Inputs other than quoted prices included within Level 1 that are observable for the asset, either directly (as prices) or indirectly (derived from prices).
At 31 December 2018, financial investments classified at amortised cost (31 December 2017: held to maturity) were as follows:
| Group and Company | Carrying amount £'million |
Fair value £'million |
|---|---|---|
| At 31 December 2018 (held at amortised cost) | 3,458 | 3,429 |
| At 31 December 2017 (held to maturity) | 3,554 | 3,590 |
On 17 February 2017 £33.2 million, 18 April 2017 £60.4 million, 21 November 2017 £95.0 million, 19 December 2017 £87.8 million and on 22 December 2017 £46.1 million of financial assets classified as available-for-sale were reclassified as held to maturity. The carrying amount (excluding accrued interest) and fair value of the assets at 31 December 2017 were as follows:
| Carrying amount £'million |
Fair value £'million |
|---|---|
| At 31 December 2017 314 |
324 |
A £1.2 million fair value gain was recognised with respect to the reclassified assets in 2017; had these assets not been reclassified, an additional fair value gain of £0.9 million would have been recognised in other comprehensive income. The effective interest rates on available-for-sale assets reclassified to held to maturity at 1 January 2017 and 31 December 2017 ranged from 0.96% to 3.65%, with all cash flows expected to be recoverable.
Accounting Policy Our property, plant and equipment primarily consists of investments and improvements in our store network and is stated at cost less accumulated depreciation and any recognised impairment.
We depreciate property, plant and equipment on a straight-line basis to its residual value using the following useful economic lives:
| Leasehold improvements Freehold land |
Lower of the remaining life of the lease or the useful life of the asset Not depreciated |
|---|---|
| Buildings | Up to 50 years |
| Fixtures and fittings and equipment | 5 years |
| IT hardware | 3 to 5 years |
We keep depreciation rates, methods and the residual values underlying the calculation of depreciation of items of property, plant and equipment under review to take account of any change in circumstances.
All items of property, plant and equipment are reviewed annually for impairment.
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.
All items of investment property are reviewed annually for impairment.
| Group | Investment property £'million |
Leasehold improvements £'million |
Freehold land and buildings £'million |
Fixtures, fittings and equipment £'million |
IT hardware £'million |
Total £'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 |
Investment property consists of shops and offices which are located within the same buildings as some of our stores, where we have acquired the freehold interest. Investment property is held to earn rental income and for capital appreciation. At 31 December 2018 our investment property had a fair value of £7 million (31 December 2017: £11 million).
| Group | Investment property £'million |
Leasehold improvements £'million |
Freehold land and buildings £'million |
Fixtures, fittings and equipment £'million |
IT hardware £'million |
Total £'million |
|---|---|---|---|---|---|---|
| Cost | ||||||
| 1 January 2017 | – | 170 | 86 | 20 | 31 | 307 |
| Additions | 3 | 36 | 50 | 6 | 4 | 99 |
| Transfers | 8 | (8) | – | – | – | – |
| 31 December 2017 | 11 | 198 | 136 | 26 | 35 | 406 |
| Accumulated depreciation | – | |||||
| 1 January 2017 | – | 22 | 3 | 11 | 24 | 60 |
| Charge for the year | – | 8 | 2 | 3 | 5 | 18 |
| Transfers | – | (1) | 1 | – | – | – |
| 31 December 2017 | – | 29 | 6 | 14 | 29 | 78 |
| Net book value | 11 | 169 | 130 | 12 | 6 | 328 |
Transfers represents costs associated with the improvements made to previously leased stores which we have purchased within the year.
Relevant disclosures for the Company have not been included, as these are not materially different to the Group disclosure above.
127
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
| 13. Intangible assets | ||||||
|---|---|---|---|---|---|---|
| Accounting policy | Goodwill Goodwill arises on the acquisition of subsidiaries and represents the excess of the consideration transferred over our interest in net fair value of the net identifiable assets, liabilities and contingent liabilities of the acquiree and the fair value of the non-controlling interest in the acquiree. |
|||||
| For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the cash-generating units ('CGUs'), or groups of CGUs, that is expected to benefit from the synergies of the combination. Each unit or group of units to which the goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes. |
||||||
| Goodwill is not amortised, however it is reviewed for impairment on an annual basis. The recoverable amount of a CGU is the higher of its fair value less cost to sell, and the present value of its expected future cash flows. If the recoverable amount is less than the carrying value, an impairment loss is charged to the income statement. Goodwill is stated at cost less accumulated impairment losses. Any impairment is recognised immediately as an expense and is not subsequently reversed. |
||||||
| Other intangible assets Software includes both purchased items and internally developed systems, which consists principally of identifiable and directly associated internal staff and other costs. |
||||||
| Purchased intangible assets and costs directly associated with the development of systems are capitalised as intangible assets where there is an identifiable asset which we control and which will generate future economic benefits in accordance with IAS 38. |
||||||
| Costs to establish feasibility or to maintain existing performance are recognised as an expense. Intangible assets are amortised on a straight-line basis within the income statement using the following useful economic lives: |
||||||
| Core banking software1 Other banking software Software licences Customer contracts |
20 years 3 to 10 years Licence period 10 years |
|||||
| 1. Core banking software consists of our central banking transaction platform. It has been assessed as having a 20 year life due to it being the central component of our digital infrastructure. It has been in use since we first opened and given its significance is unlikely to be replaced within the foreseeable future. |
||||||
| All intangible assets are reviewed annually for impairment. | ||||||
| Customer | ||||||
| Group | Goodwill £'million |
contracts £'million |
Software £'million |
Total £'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 |
128 Metro Bank Plc Annual report and accounts 2018
At 31 December 2018, core banking software with a useful economic life of 20 years had a carrying amount of £7.8 million (2017: £8.6 million).
| Customer | ||||
|---|---|---|---|---|
| Goodwill | contracts | Software | Total | |
| Group | £'million | £'million | £'million | £'million |
| Cost | ||||
| 1 January 2017 | 4 | 1 | 102 | 107 |
| Additions | – | – | 70 | 70 |
| Reclassifications | – | – | 2 | 2 |
| 31 December 2017 | 4 | 1 | 174 | 179 |
| Amortisation | ||||
| 1 January 2017 | – | 1 | 14 | 15 |
| Charge for the year | – | – | 15 | 15 |
| Reclassifications | – | – | 1 | 1 |
| 31 December 2017 | – | 1 | 30 | 31 |
| Net book value | 4 | – | 144 | 148 |
The goodwill held on our balance sheet is tested at least annually for impairment. For the purposes of impairment testing the goodwill is allocated to the appropriate CGU; of the total balance of £4.1 million (2017: £4.1 million), 100% has been allocated to SME Invoice Finance Limited.
The recoverable amount of SME Invoice Finance Limited has been based on a value-in-use calculation using pre-tax cash flow projections based on financial budgets and plans approved by management covering a seven-year period and a discount rate of 7.9%. The long-term growth rate is consistent with external sources of information reviewed by management. Management believes that any reasonably possible change in the key assumptions above would not cause the recoverable amount of SME Invoice Finance Limited to fall below the balance sheet carrying value. Seven years was used as the basis for discounted cash flow calculation to align with the 2018-2024 plan, prepared by management and approved by the Board, and used in decision-making. The plan is reviewed and updated annually.
| 2018 | 2017 | |
|---|---|---|
| Software | Software | |
| Company | £'million | £'million |
| Cost | ||
| 1 January | 171 | 101 |
| Additions | 75 | 68 |
| Reclassifications | – | 2 |
| 31 December | 246 | 171 |
| Amortisation | ||
| 1 January | 30 | 14 |
| Impairments | 1 | – |
| Charge for the year | 25 | 15 |
| Reclassifications | – | 1 |
| 31 December | 56 | 30 |
| Net book value | 190 | 141 |
129
CONTINUED
| 31 December | 31 December | |
|---|---|---|
| 2018 | 2017 | |
| Group | £'million | £'million |
| Prepayments | 32 | 26 |
| Accrued income | 29 | 22 |
| VAT receivable | 3 | 3 |
| Other | 2 | 1 |
| Total prepayments and accrued income | 66 | 52 |
| Current portion | 66 | 52 |
| Non-current portion | – | – |
| Company | 31 December 2018 £'million |
31 December 2017 £'million |
|---|---|---|
| Prepayments | 29 | 24 |
| Accrued income | 29 | 22 |
| VAT receivable | 3 | 3 |
| Other | 2 | 1 |
| Total prepayments and accrued income | 63 | 50 |
| Current portion | 63 | 50 |
| Non-current portion | – | – |
| 31 December | 31 December | |
|---|---|---|
| 2018 | 2017 | |
| Group | £'million | £'million |
| Assets pledged as collateral | 14 | 11 |
| Other¹ | 36 | 15 |
| Total other assets | 50 | 26 |
| Current portion | 39 | 15 |
| Non-current portion | 11 | 11 |
| Company | 31 December 2018 £'million |
31 December 2017 £'million |
|---|---|---|
| Assets pledged as collateral | 14 | 11 |
| Other¹ | 36 | 14 |
| Amounts owed by Group undertakings | 305 | 215 |
| Total other assets | 355 | 240 |
| Current portion | 344 | 229 |
| Non-current portion | 11 | 11 |
The total deposits from customers is comprised of 47% from retail customers (2017: 47%) and 53% from commercial customers (2017: 53%).
| Group and Company | 31 December 2018 £'million |
31 December 2017 £'million |
|---|---|---|
| Deposits from retail customers | 7,429 | 5,477 |
| Deposits from commercial customers | 8,232 | 6,192 |
| Total deposits from customers | 15,661 | 11,669 |
Accounting policy Debt securities in issue are recognised initially at fair value, being proceeds less transaction costs. Subsequently debt securities are measured at amortised cost using the effective interest method.
On 18 June 2018 we issued £250 million of subordinated debt securities to provide Tier 2 capital to support future growth.
| Amount issued | |||||
|---|---|---|---|---|---|
| Issue date | Currency | £'million | Coupon rate | Call date | Maturity date |
| 18th June 2018 | GBP | 250 | 5.50% | 26/06/2023 | 26/06/2028 |
| Group and Company | 31 December 2018 £'million |
31 December 2017 £'million |
|---|---|---|
| Amount at 1 January | – | – |
| Issuances | 250 | – |
| Costs associated with issuance | (1) | – |
| Accrued interest payable | – | – |
| Carrying amount at 31 December | 249 | – |
| Group | 31 December 2018 £'million |
31 December 2017 £'million |
|---|---|---|
| Trade creditors | 5 | 0 |
| Other taxation and social security costs | 6 | 5 |
| Accruals | 97 | 67 |
| Deferred income | 18 | 16 |
| Other liabilities | 63 | 59 |
| Total other liabilities | 189 | 147 |
| Current portion | 159 | 133 |
| Non-current portion | 30 | 9 |
131
CONTINUED
| Company | 31 December 2018 £'million |
31 December 2017 £'million |
|---|---|---|
| Trade creditors | 5 | 0 |
| Other taxation and social security costs | 6 | 5 |
| Accruals | 96 | 67 |
| Deferred income | 18 | 16 |
| Other liabilities | 57 | 54 |
| Total other liabilities | 182 | 142 |
| Current portion | 153 | 133 |
| Non-current portion | 30 | 9 |
Accounting policy On issue of new shares, incremental directly attributable costs are shown in equity as a deduction from the proceeds.
We have a single class of shares. As at 31 December 2018 we had 97.4 million ordinary shares of 0.0001p (31 December 2017: 88.5 million) authorised and in issue.
In July 2018, we issued 8.9 million ordinary shares of 0.0001p each, for consideration of £303 million. Related transaction costs of £3 million have been deducted from equity during the year.
Additionally, during the year we issued 0.1 million ordinary shares which relate to the exercise of previously awarded share options. These options contributed £1 million to share premium
| Group and Company | 31 December 2018 £'million |
31 December 2017 £'million |
|---|---|---|
| Called-up ordinary share capital, issued and fully paid | ||
| 1 January | – | – |
| Issued | – | – |
| 31 December | – | – |
| Group and Company | 31 December 2018 £'million |
31 December 2017 £'million |
|---|---|---|
| Share premium account | ||
| 1 January | 1,304 | 1,028 |
| Issued | 304 | 279 |
| Costs of shares issued | (3) | (3) |
| 31 December | 1,605 | 1,304 |
The fair value of colleague share option plans is calculated at the grant date using a Black-Scholes model. The resulting cost is charged to the income statement over the vesting period. The value of the charge is adjusted to reflect expected and actual levels of vesting.
We offer options to Executive Directors and colleagues. The exercise price of the granted options is equal to the estimated market price determined at the date of the grant. Options generally vest in equal tranches over five years and have a contractual option term of ten years, with the only vesting condition being the continuing service of the colleague. Options acquired via 'exchange' of some or all of the cash element of a colleague's variable reward vest immediately. All our options are equity settled and we have no legal or constructive obligation to repurchase the shares or settle the options in cash.
The table below summarises the movements in the number of options outstanding and their weighted average exercise price:
| 2018 | 2017 | |||||
|---|---|---|---|---|---|---|
| Group | Number of options '000 |
Weighted average exercise price £ |
Number of options '000 |
Weighted average exercise price £ |
||
| Outstanding at 1 January Granted Exercised Lapsed |
3,377 1,001 (144) (131) |
18.98 35.36 16.14 25.05 |
2,907 768 (195) (103) |
15.04 32.73 13.94 20.37 |
||
| Outstanding at 31 December | 4,104 | 22.90 | 3,377 | 18.98 | ||
| Exercisable at 31 December | 2,287 | 18.22 | 1,694 | 16.19 |
The average share price during 2018 was 3,075p (2017: 3,488p). The number of options outstanding at year end was as follows:
| 2018 | 2017 | ||||
|---|---|---|---|---|---|
| Exercise price | Number of options '000 |
Weighted average remaining contractual life years |
Number of options '000 |
Weighted average remaining contractual life years |
|
| £9.00 | 47 | 2.8 | 52 | 3.8 | |
| £10.00 | 129 | 3.8 | 145 | 4.8 | |
| £12.00 | 236 | 4.9 | 260 | 5.9 | |
| £13.00 | 60 | 5.2 | 66 | 6.2 | |
| £13.50 | 621 | 5.8 | 650 | 6.8 | |
| £14.00 | 194 | n/a | 212 | n/a | |
| £16.00 | 647 | n/a | 713 | n/a | |
| £20.00 | 498 | 7.2 | 536 | 8.2 | |
| £32.73 | 708 | 8.2 | 743 | 9.2 | |
| £35.36 | 963 | 9.2 | – | – | |
| Total | 4,104 | 7.4 | 3,377 | 7.6 |
133
The fair value of the options granted during the year is determined using a Black-Scholes valuation model. The total fair value of options granted in 2018 was £4.3 million (2017: £3.3 million), based on the following assumptions:
| Group | 2018 cash bonus exchange |
2018 share options |
|---|---|---|
| Weighted average risk-free interest rate | 0.87% | 0.94% |
| Weighted average expected life | 2.5 years | 3.25 years |
| Weighted average expected volatility | 22.52% | 21.96% |
| Weighted average expected dividend yield | nil | nil |
| Weighted average share price | £35.36 | £35.36 |
| Weighted average exercise price | £35.36 | £35.36 |
Expected volatility is a measure of the amount by which our shares are expected to fluctuate during the life of an option. The expected volatility is estimated based on a statistical analysis of the historic share prices of other FTSE 350 banks over the most recent period which is commensurate with the expected life of the option. The analysis is based on FTSE 350 banks rather than our own share price due to insufficient available price data, having only been listed since March 2016.
We have no other remuneration related instruments in issue.
| 31 December | 31 December | |
|---|---|---|
| 2018 | 2017 | |
| Group | £'million | £'million |
| 1 January | (219) | (230) |
| IFRS 9 transition adjustment (net of tax) | (17) | – |
| Profit for the year | 27 | 11 |
| 31 December | (209) | (219) |
| Company | 31 December 2018 £'million |
31 December 2017 £'million |
|---|---|---|
| 1 January | (227) | (236) |
| IFRS 9 transition adjustment (net of tax) | (14) | – |
| Profit for the year | 27 | 9 |
| 31 December | (214) | (227) |
The IFRS 9 transition adjustment (net of tax) is the day one impact arising from the adoption of IFRS 9 on 1 January 2018. Further details about this adjustment can be found in note 1.4.
We lease various offices and stores under non-cancellable operating lease arrangements. The total operating lease expenditure recognised in the statement of comprehensive income during the year was £25.5 million (2017: £19.6 million). The leases have various terms, escalation, renewal and rights. At the balance sheet date, future minimum payments under operating leases relating to land and buildings, inclusive of irrecoverable VAT, were as follows:
| Group | 31 December 2018 £'million |
31 December 2017 £'million |
|---|---|---|
| Due | ||
| Within one year | 30 | 20 |
| Due in one to five years | 133 | 81 |
| Due in more than five years | 495 | 318 |
| Total | 659 | 419 |
On 1 January 2019 we adopted IFRS 16 which will significantly change the way we account for leases. Further details on the impact of the adoption of IFRS 16 can be found in note 1.5.
We lease out surplus space in some of our properties. The table below sets out the cash payments expected over the remaining non-cancellable term of each lease, exclusive of any VAT. Of the total below, £11.3 million (2017: £12.0 million) relates to sub-letting of leased stores. During the year, £1.0 million (2017: £1.4 million) was recognised as rental income in the statement of comprehensive income.
| Group | 31 December 2018 £'million |
31 December 2017 £'million |
|---|---|---|
| Receivable | ||
| Within one year | 1 | 1 |
| Due in one to five years | 4 | 4 |
| Due in more than five years | 9 | 10 |
| Total | 14 | 15 |
135
Accounting policy We assess on a forward-looking basis the expected credit losses ('ECL') associated with the assets carried at amortised cost and FVOCI and recognise a loss allowance for such losses at each reporting date.
Impairment provisions are driven by changes in credit risk of loans and securities, with a provision for lifetime expected credit losses recognised where the risk of default of an instrument has increased significantly. Risk of default and expected credit losses must incorporate forward looking and macroeconomic information.
Sophisticated impairment models have been developed for our retail and commercial loan portfolios, with three core models: revolving products; fixed term loans; and mortgages . Expected credit losses are calculated for drawn loans, and for committed lending.
The same broad calculation approach is applied for each core model. Expected credit losses are calculated by multiplying three main components, being the probability of default, loss given default and the exposure at default, discounted at the original effective interest rate.
Key model inputs and judgements include:
IFRS 9 requires a higher level of expected credit loss to be recognised for underperforming loans. This is considered based on a staging approach:
| Stage | Description | ECL recognised | ||
|---|---|---|---|---|
| Stage 1 | Financial assets that have had no | 12-month expected credit losses | ||
| significant increase in credit risk since initial recognition or that have low credit risk at the reporting date. |
Total losses expected on defaults which may occur within the next 12 months. Losses are adjusted for probability weighted macro-economic scenarios. |
|||
| Stage 2 | Financial assets that have had a | Lifetime expected credit losses | ||
| significant increase in credit risk since initial recognition but that do not have objective evidence of impairment. |
Losses expected on defaults which may occur at any point in a loan's lifetime. Losses are adjusted for probability weighted macro-economic scenarios. |
|||
| Stage 3 | Financial assets that are credit impaired | Lifetime expected credit losses | ||
| at the reporting date. A financial asset is credit impaired when it has met the definition of default. We define default to have occurred when a loan is greater than 90 days past due (non-performing |
Losses expected on defaults which may occur at any point in a loan's lifetime. Losses are adjusted for probability weighted macro-economic scenarios. |
|||
| loan) or where the borrower is considered unlikely to pay. |
Interest income is calculated on the carrying amount of the loan net of credit allowance. |
|||
| Purchased or originated | Financial assets that have been | Lifetime expected credit losses | ||
| credit-impaired (POCI) asset | purchased and had objective evidence of being "non-performing" or "credit impaired" at the point of purchase. |
At initial recognition, POCI assets do not carry an impairment allowance. Lifetime expected credit losses are incorporated into the calculation of the asset's effective interest rate. Subsequent changes to the estimate of lifetime expected credit losses are recognized as a loss allowance. |
A significant increase in credit risk may be identified in a number of ways:
A loan will be considered to be 'non-performing' or 'credit impaired' when it meets our definition of default – that is to say, the loan is 90 days past due, or the borrower is considered unlikely to pay without realization of collateral. Unlikeliness to pay is assessed through the presence of triggers including the loan being in repossession, the customer having been declared bankrupt, or evidence of financial distress.
A loan may also be considered to be non-performing when it is subject to forbearance measures, consisting of concessions in relation to:
It may not be possible to identify a single discrete event which defines an asset as "non-performing" or "credit impaired". Instead, the combined effect of several events may cause financial assets to become credit impaired.
A probation period is implemented before transferring a financial instrument to a lower stage (ie, from Stage 3 to Stage 2, or from Stage 2 to Stage 1). Specifically, in order to move an account from Stage 3 to Stage 2, we apply a backstop such that the instrument should meet the Stage 2 criteria for three consecutive months. The same logic is applied when transferring an account from Stage 2 to Stage 1.
The probability of default represents the likelihood of a borrower defaulting on its financial obligation either over the next 12 months (for Stage 1 accounts), or over the remaining lifetime of the loan (for Stage 2 and 3 accounts). A probability of default is calculated for all loans based on historic data and incorporates:
The loss given default ('LGD') represents our expectation of the extent of a loss on a defaulted exposure, and is expressed as a percentage considering expected recoveries on defaulted accounts. We apply two LGD rates – one for unsecured lending and one for secured lending. LGD rates have been modelled considering a range of inputs, including:
This is the amount that we expect to be owed at the point of default. This is subject to judgement since a balance will not necessarily remain static between the balance sheet date and the point of expected default. For example:
137
The ECL recognised in the financial statements reflects the effect on expected credit losses of a range of possible outcomes, calculated on a probability-weighted basis, based on a number of economic scenarios and including management overlays where required. These scenarios are representative of our view of forecast economic conditions, sufficient to calculate unbiased ECL, and are designed to capture material 'non-linearities' (i.e. where the increase in credit losses if conditions deteriorate, exceeds the decrease in credit losses if conditions improve).
In the normal course of business, we use three scenarios. These represent a 'most likely outcome', (the "Baseline" scenario) and two, less likely, 'Outer' scenarios on either side of the Baseline scenario, referred to as an "Upside" and a "Downside" scenario respectively. The Baseline scenario captures the most likely economic future; the downside scenario presents particular adverse economic conditions; and the upside scenario presents more favourable economic conditions.
Key scenario assumptions are set using data sourced from independent external economists. This helps ensure that the IFRS 9 scenarios are unbiased and maximise the use of independent information.
The following assumptions, considered to be the key drivers of ECL, have been used for the scenarios applied:
Macroeconomic scenarios impact the ECL calculation through varying PDs and LGDs. We use UK HPI to index collateral which has a direct impact on LGDs. Other metrics are considered to have a direct impact on PDs and were selected following a search and data calibration exercise of possible drivers. A list of around 15 potential drivers were initially considered, representing drivers which capture trends in the economy at large, and may indicate economic trends which will impact UK borrowers. The list included variables which impact economic output, interest rates, inflation, stock prices, borrower income and the UK housing market. An algorithm was then used to choose the subset of drivers which had the greatest significance and predictive fit to Metro Bank data.
Each scenario was determined by flexing the baseline scenario, taking into account a number of factors in the global and UK economy such as commodity prices, global interest rates, UK investment spend and exchange rates, as well as the possible impact of recessionary conditions or financial shocks. A large number of possible future paths is simulated. The Downside scenario has been set to be worse than 90% of possible future outcomes; the Upside scenario has been set to be better than 90% of possible future outcomes. These assumptions are considered sufficient to capture any material nonlinearities.
A simulation process was designed to determine the weighting to apply to each scenario based on the severity of each scenario and the range of possible scenarios for which that scenario was representative.
We recognise that applying the above three scenarios will not always be sufficient to determine an appropriate ECL in all economic environments. A forth scenario has been included in the 31 December 2018 ECL, a "Hard Brexit" scenario, adding to the result derived using the three scenarios detailed above. This additional scenario reflects management's judgement that the scenarios above do not fully reflect the high degree of uncertainty in estimating the current uncertainty in the UK economy ahead of the UK's departure from the European Union in 2019 ('Brexit'). The Hard Brexit scenario is more severe than the current downside scenario and is considered to be in keeping with some of the more severe outcomes published by UK government departments and industry bodies. The Hard Brexit scenario is used as an add-on to the three "business as usual" scenarios.
The weightings applied to each scenario at 31 December 2018 are:
This weighting scheme is deemed as being appropriate for the computation of unbiased ECL.
• Baseline – 37%
The period-end assumptions used for the ECL estimate as at 31 December 2018 are as follows:
| 2019 | 2020 | 2021 | 2022 | |
|---|---|---|---|---|
| Interest rates (%) | Base: 2.2% Upside: 2.1% Downside: 0.9% Brexit:0.5% |
Base: 2.6% Upside: 3.1% Downside: 1.2% Brexit: 0.8% |
Base: 2.8% Upside: 3.1% Downside: 1.4% Brexit: 0.9% |
Base: 3.2% Upside: 3.5% Downside: 1.6% Brexit: 1.3% |
| UK unemployment (%) | Base: 4.6% Upside: 3.3% Downside: 6.2% Brexit: 6.7% |
Base: 4.8% Upside: 3.4% Downside: 7.2% Brexit: 8.4% |
Base: 5.0% Upside: 3.6% Downside: 7.3% Brexit: 8.5% |
Base: 5.0% Upside: 3.0% Downside: 6.9% Brexit: 8.1% |
| UK house price index – % change year-on year |
Base: 1.9% Upside: 7.6% Downside: (5.3)% Brexit: (8.5)% |
Base: 0.5% Upside: 4.5% Downside: (6.4)% Brexit: (11.1)% |
Base: 1.2% Upside: 1.9% Downside: 0.0% Brexit: (1.7)% |
Base: 1.9% Upside: 0.9% Downside: 3.7% Brexit: (4.3)% |
| UK GDP – % change year-on-year |
Base: 1.6% Upside: 4.0% Downside: (1.9)% Brexit: (3.6)% |
Base: 1.4% Upside: 2.1% Downside: 0.8% Brexit: (0.2)% |
Base: 1.9% Upside: 1.9% Downside: 2.6% Brexit: 2.6% |
Base: 1.8% Upside: 1.6% Downside: 2.0% Brexit: 2.3% |
The assumptions used for the ECL estimate as at 1 January 2018 are as follows:
| 2018 | 2019 | 2020 | 2021 | 2022 | |
|---|---|---|---|---|---|
| Interest rates (%) | Base: 1.7% Upside: 1.8% Downside: 1.5% Brexit: n/a |
Base: 2.3% Upside: 2.6% Downside: 1.0% Brexit: n/a |
Base: 2.7% Upside: 2.9% Downside: 1.0% Brexit: n/a |
Base: 2.6% Upside: 3.0% Downside: 1.3% Brexit: n/a |
Base: 3.0% Upside: 3.3% Downside: 1.8% Brexit: n/a |
| UK unemployment (%) Base: 4.6% | Upside: 4.0% Downside: (5.7)% Brexit: n/a |
Base: 4.8% Upside: 3.5% Downside: 7.1% Brexit: n/a |
Base: 5.0% Upside: 3.6% Downside: 7.5% Brexit: n/a |
Base: 5.1% Upside: 3.9% Downside: 7.3% Brexit: n/a |
Base: 5.1% Upside: 4.1% Downside: 6.9% Brexit: n/a |
| UK house price index – % change year-on year |
Base: 2.9% Upside: 5.8% Downside: (0.9)% Brexit: n/a |
Base: 1.3% Upside: 7.2% Downside: (7.3)% Brexit: n/a |
Base: 0.9% Upside: 3.2% Downside: (2.7)% Brexit: n/a |
Base: 1.8% Upside: 1.6% Downside: 1.8% Brexit: n/a |
Base: 2.4% Upside: 1.0% Downside: 4.3% Brexit: n/a |
| UK GDP – % change year-on-year |
Base: 1.6% Upside: 3.4% Downside: (1.1)% Brexit: n/a |
Base: 1.6% Upside: 3.2% Downside: (0.8)% Brexit: n/a |
Base: 1.8% Upside: 2.1% Downside: 1.9% Brexit: n/a |
Base: 1.9% Upside: 1.7% Downside: 2.5% Brexit: n/a |
Base: 1.8% Upside: 1.6% Downside: 2.0% Brexit: n/a |
Following the initial four year projection period, the Upside and Downside scenarios converge to the Baseline scenario. The rate of convergence varies based on the macro economic factor, but at a minimum convergence takes place three years from the initial four year projection period.
We note that the scenarios applied comprise our best estimate of economic impacts on the ECL, and the actual outcome may be significantly different.
Impairment provisions have been calculated based on our best estimate of expected credit losses on other assets classified and measured at amortised cost and fair value through other comprehensive income. These include investment securities, cash held at banks and other financial assets. Impairment provisions are not material.
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
2017 comparative data is disclosed under IAS 39, with principal accounting policies outlined below.
We assess at each reporting date whether there is objective evidence that a financial asset is impaired. The impairment relating to loans and advances is calculated and assigned in accordance with the accounting standards for individual and collective impairment:
Collective impairment models are based on analysis of historical arrears data and estimated loss rates, in order to derive the expected loss net of the recoverable value. For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of the product risk profile: residential mortgage lending, commercial lending and consumer lending. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the income statement.
When a loan is uncollectable, it is written off against the related allowance for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. The maximum time a loan can remain in past due without being written off is 24 months. Impairment charges relating to loans and advances to banks and customers are classified in credit impairment charges while impairment charges relating to investment securities (held to maturity) are classified in 'Net gains/losses on investment securities'.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in the income statement.
We assess at each date of the balance sheet whether there is objective evidence that a financial asset or a group of financial assets is impaired. Impairment losses on available-for-sale assets are recognised by reclassifying the losses accumulated in the fair value reserve in equity to profit or loss. The cumulative loss that is reclassified from equity to profit or loss is the difference between the acquisition cost, net of any principal repayment and amortisation, and the current fair value, less any impairment loss previously recognised in profit or loss.
Credit risk is the risk of financial loss to us if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from our loans and advances to customers and other banks, and investment debt securities. Given our main income generating activity is lending money to customers, credit risk is one of our principal risks.
Details of how we manage our credit risk can be found on pages 32 to 33.
The principal method by which we mitigate credit risk is through requesting collateral and guarantees against our retail mortgage and commercial lending. The principal collateral types for loans and advances are:
Longer-term finance and lending to corporate entities are generally secured; revolving individual credit facilities are generally unsecured. In addition, in order to minimise credit loss, we will seek additional collateral from the counterparty as soon as a significant increase in credit risk is identified for the relevant individual loans and advances.
Collateral held as security for financial assets other than loans and advances depends on the nature of the instrument. Our investment securities are generally unsecured with the exception of asset-backed securities and similar instruments, which are secured by portfolios of financial instruments.
We prepare a valuation of the collateral obtained as part of the loan origination process. This assessment is reviewed periodically for longer-term financing or when a significant increase in credit risk has been identified.
Our policies regarding obtaining collateral have not significantly changed during the reporting period and there has been no significant change in the overall quality of the collateral held by the Group.
We invest in high-quality liquid debt instruments as required by our Securities Trading and Investment policy. The analysis below details the credit rating of the securities as at 31 December 2018 and 31 December 2017.
| 31 December 2018 £'million |
31 December 2017 £'million |
||||
|---|---|---|---|---|---|
| Credit rating | Investment securities held at amortised cost |
Investment securities held at FVOCI |
Investment securities held to maturity |
Available for-sale investment securities |
|
| AAA | 3,113 | 230 | 2,924 | 181 | |
| AA- to AA+ | 306 | 319 | 381 | 125 | |
| A- to A+ | 39 | 28 | 108 | 26 | |
| Lower than A- | – | 97 | 141 | 29 | |
| Total | 3,458 | 674 | 3,554 | 361 |
All investment securities held at FVOCI are deemed to be in Stage 1. Any credit loss allowance is, however, included as part of the revaluation amount in the FVOCI reserve. At 31 December 2018 the loss allowance is included within the FVOCI reserve is £0.3 million (31 December 2017: N/A).
All investment securities held at amortised cost are deemed to be in Stage 1. The total expected credit loss recognised for these assets at 31 December 2018 is £0.2 million (31 December 2017, allowance for impairment: nil).
The table below stratifies credit exposures from retail mortgages by ranges of debt-to-value ('DTV') ratio. The average DTV of the residential mortgage loan book is 61% (2017: 60%):
| 31 December 2018 £'million |
31 December 2017 £'million |
|||||
|---|---|---|---|---|---|---|
| Group and company | Retail owner occupied |
Retail buy-to-let |
Total retail mortgages |
Retail owner occupied |
Retail buy-to-let |
Total retail mortgages |
| DTV ratio | ||||||
| Less than 50% | 2,124 | 458 | 2,582 | 1,404 | 316 | 1,720 |
| 51–60% | 1,195 | 493 | 1,688 | 771 | 342 | 1,113 |
| 61–70% | 1,374 | 553 | 1,927 | 1,010 | 415 | 1,425 |
| 71–80% | 1,362 | 596 | 1,958 | 716 | 420 | 1,136 |
| 81–90% | 1,205 | 129 | 1,334 | 538 | 130 | 668 |
| 91–100% | 80 | 33 | 113 | 80 | 35 | 115 |
| More than 100% | 11 | 12 | 23 | 39 | 15 | 54 |
| Total retail mortgage lending | 7,351 | 2,274 | 9,625 | 4,558 | 1,673 | 6,231 |
141
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
A geographic analysis of the location of retail mortgage collateral is set out below:
| 31 December 2018 £'million |
31 December 2017 £'million |
|||||
|---|---|---|---|---|---|---|
| Group and company | Retail owner occupied |
Retail buy-to-let |
Total retail mortgages |
Retail owner occupied |
Retail buy-to-let |
Total retail mortgages |
| Region | ||||||
| Greater London | 3,034 | 1,231 | 4,265 | 1,989 | 911 | 2,900 |
| South east | 1,797 | 383 | 2,180 | 1,115 | 280 | 1,395 |
| South west | 616 | 122 | 738 | 342 | 82 | 424 |
| East of England | 492 | 91 | 583 | 289 | 66 | 355 |
| North west | 405 | 138 | 543 | 236 | 105 | 341 |
| West Midlands | 293 | 81 | 374 | 164 | 51 | 215 |
| Yorkshire and the Humber | 207 | 73 | 280 | 131 | 57 | 188 |
| East Midlands | 241 | 57 | 298 | 138 | 39 | 177 |
| Wales | 141 | 36 | 177 | 81 | 24 | 105 |
| North east | 83 | 31 | 114 | 51 | 27 | 78 |
| Northern Ireland | 4 | 27 | 31 | 4 | 28 | 32 |
| Scotland | 38 | 4 | 42 | 18 | 3 | 21 |
| Total retail mortgage lending | 7,351 | 2,274 | 9,625 | 4,558 | 1,673 | 6,231 |
An analysis of our retail mortgage book by repayment type is set out below:
| 31 December 2018 £'million |
31 December 2017 £'million |
|||||
|---|---|---|---|---|---|---|
| Group and company | Retail owner occupied |
Retail buy-to-let |
Total retail mortgages |
Retail owner occupied |
Retail buy-to-let |
Total retail mortgages |
| Repayment | ||||||
| Interest | 2,242 | 2,166 | 4,408 | 1,413 | 1,597 | 3,010 |
| Capital and interest | 5,109 | 108 | 5,217 | 3,145 | 76 | 3,221 |
| Total retail mortgage lending | 7,351 | 2,274 | 9,625 | 4,558 | 1,673 | 6,231 |
The table below stratifies credit exposures from commercial term loans by ranges of debt-to-value ('DTV') ratio. The average debt-tovalue ('DTV') of the commercial term loan book is 59% (2017: 58%):
| Group and company | 31 December 2018 £'million |
31 December 2017 £'million |
|---|---|---|
| DTV ratio | ||
| Less than 50% | 1,277 | 1,011 |
| 51–60% | 936 | 610 |
| 61–70% | 791 | 495 |
| 71–80% | 249 | 209 |
| 81–90% | 100 | 116 |
| 91–100% | 51 | 32 |
| More than 100% | 424 | 343 |
| Total commercial term lending | 3,828 | 2,816 |
A geographic analysis by location of customers who hold commercial term loans is set out below:
| Group and company | 31 December 2018 £'million |
31 December 2017 £'million |
|---|---|---|
| Region | ||
| Greater London | 2,465 | 1,914 |
| South east | 677 | 457 |
| South west | 229 | 167 |
| East of England | 151 | 93 |
| North west | 145 | 96 |
| West Midlands | 50 | 21 |
| Yorkshire and the Humber | 26 | 16 |
| East Midlands | 33 | 16 |
| Wales | 29 | 22 |
| North east | 16 | 8 |
| Northern Ireland | 3 | 2 |
| Scotland | 4 | 4 |
| Total commercial term loans | 3,828 | 2,816 |
An analysis of our commercial term loan book by repayment type is set out below:
| Group and company | 31 December 2018 £'million |
31 December 2017 £'million |
|---|---|---|
| Repayment | ||
| Interest | 1,592 | 1,111 |
| Capital and interest | 2,236 | 1,705 |
| Total commercial term loans | 3,828 | 2,816 |
A sector analysis of our commercial term loan book is set out below:
| Group and company | 31 December 2018 £'million |
31 December 2017 £'million |
|---|---|---|
| Industry sector | ||
| Real estate (rent, buy and sell) | 2,547 | 1,704 |
| Legal, accountancy and consultancy | 384 | 304 |
| Health and social work | 217 | 214 |
| Hospitality | 235 | 185 |
| Real estate (management of) | 72 | 104 |
| Retail | 99 | 84 |
| Construction | 60 | 69 |
| Investment and unit trusts | 1 | 21 |
| Recreation, cultural and sport | 19 | 18 |
| Real estate (development) | 52 | 26 |
| Education | 15 | 4 |
| Other | 127 | 83 |
| Total commercial term loans | 3,828 | 2,816 |
The remainder of commercial lending consists of overdraft and credit cards which are generally unsecured alongside asset and invoice finance lending.
CONTINUED
We assess the credit quality of all financial instruments that are subject to credit risk. The credit quality of financial instruments is a point in time assessment of the probability of default of financial instruments, whereas IFRS 9 Stages 1 and 2 are determined based on relative
deterioration of credit quality since initial recognition. We consider that the arrears status of customer lending is an appropriate method of assessing the credit quality of that lending. The stage of customer lending is also influenced by other metrics as described in our accounting policy above. The tables below set out the distribution of customer lending by credit quality and stage allocation. The ECL on our investment securities and other financial assets is immaterial and therefore no analysis has been provided.
| 31 December 2018 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| £'million | Stage 1 12 month ECL |
Stage 2 Lifetime ECL |
Stage 3 Lifetime ECL |
POCI 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 |
| 31 December 2018 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| £'million | Stage 1 12 month ECL |
Stage 2 Lifetime ECL |
Stage 3 Lifetime ECL |
POCI 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 | – |
| 31 December 2018 | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| £'million | Stage 1 12 month ECL |
Stage 2 Lifetime ECL |
Stage 3 Lifetime ECL |
POCI Lifetime ECL |
|||||
| Up to date | 3,918 | 6 | 2 | – | |||||
| 1 to 29 days past due | 52 | 44 | – | – | |||||
| 30 to 89 days past due | – | 27 | 1 | – | |||||
| 90+ days past due | – | – | 7 | – | |||||
| Gross carrying amount | 3,970 | 77 | 10 | – |
| 31 December 2018 | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| £'million | Stage 1 12 month ECL |
Stage 2 Lifetime ECL |
Stage 3 Lifetime ECL |
POCI Lifetime ECL |
|||||
| Up to date | 295 | – | – | – | |||||
| 1 to 29 days past due | – | – | – | – | |||||
| 30 to 89 days past due | – | – | 4 | – | |||||
| 90+ days past due | – | – | – | – | |||||
| Gross carrying amount | 295 | – | 4 | – |
The following tables explain the changes in both the gross carrying amount and loss allowances of our loans and advances during the period. Significant changes in the gross carrying amount which contributed to changes in the loss allowance are explained below. Other movements consists of changes to model assumptions and forward looking information.
New lending includes the purchase of a seasoned mortgage book in March 2018 for c.£520 million. All lending in the portfolio is secured on property, predominantly in London and the South East, with the remainder spread across the UK, and has a similar credit risk profile to the rest of our book. Approximately 65% of the book is classified within retail mortgages, with the remainder within commercial lending.
| Gross carrying amount | Loss allowance | Net carrying amount | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| £'million | Stage 1 | Stage 2 | Stage 3 | POCI | Total | Stage 1 | Stage 2 | Stage 3 | POCI | Total | Stage 1 | Stage 2 | Stage 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 1¹ | 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 transfers² |
– | – | – | – | – | 1 | (2) | (1) | – | (2) | 1 | (2) | (1) | – | (2) |
| New lending³ | 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) |
| Derecognitions⁴ | (424) | (26) | (10) | – | (460) | 1 | – | 1 | – | 2 | (423) | (26) | (9) | – | (458) |
| Changes to model assumptions⁵ |
– | – | – | – | – | – | – | 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 |
Represents stage transfers prior to any ECL remeasurements
Represents the remeasurement between the twelve month and lifetime ECL due to stage transfer, including any changes to the model assumptions and forward looking information.
Represents the increase in balances resulting from loans and advances that have been newly originated, purchased or renewed.
Represents the decrease in balances resulting from loans and advances that have been fully repaid, disposed of or written off.
Represents the change in loss allowances resulting from changes to the model assumptions, forward looking information and changes in the customers risk profile
| Gross carrying amount | Loss allowance | Net carrying amount | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| £'million | Stage 1 | Stage 2 | Stage 3 | POCI | Total | Stage 1 | Stage 2 | Stage 3 | POCI | Total | Stage 1 | Stage 2 | Stage 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 |
Our top 10 commercial exposures total £347 million (2017: £250 million) representing 9% (2017: 8%) of our total commercial lending.
| Gross carrying amount | Loss allowance | Net carrying amount | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| £'million | Stage 1 | Stage 2 | Stage 3 | POCI | Total | Stage 1 | Stage 2 | Stage 3 | POCI | Total | Stage 1 | Stage 2 | Stage 3 | POCI | Total |
| 1 January 2018 | 2,855 | 93 | 11 | 1 | 2,960 | (2) | (1) | (1) | – | (4) | 2,853 | 92 | 10 | 1 | 2,956 |
| Transfers to/(from) stage 1 | 50 | (50) | – | – | – | – | – | – | – | – | 50 | (50) | – | – | – |
| Transfers to/(from) stage 2 | (53) | 53 | – | – | – | – | – | – | – | – | (53) | 53 | – | – | – |
| Transfers to/(from) stage 3 | (4) | (3) | 7 | – | – | – | – | – | – | – | (4) | (3) | 7 | – | – |
| Net remeasurement due to | |||||||||||||||
| transfers | – | – | – | – | – | – | (2) | (1) | – | (3) | – | (2) | (1) | – | (3) |
| New lending | 1,512 | 10 | 1 | – | 1,523 | (1) | – | – | – | (1) | 1,511 | 10 | 1 | – | 1,522 |
| Repayments, additional drawdowns and interest |
|||||||||||||||
| accrued | (75) | (7) | (2) | – | (84) | – | – | – | – | – | (75) | (7) | (2) | – | (84) |
| Derecognitions | (315) | (19) | (7) | (1) | (342) | – | – | – | – | – | (315) | (19) | (7) | (1) | (342) |
| Changes to model | |||||||||||||||
| assumptions | – | – | – | – | – | (1) | – | (1) | – | (2) | (1) | – | (1) | – | (2) |
| 31 December 2018 | 3,970 | 77 | 10 | – | 4,057 | (4) | (3) | (3) | – | (10) | 3,966 | 74 | 7 | – | 4,047 |
| Gross carrying amount | Loss allowance Net carrying amount |
||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| £'million | Stage 1 | Stage 2 | Stage 3 | POCI | Total | Stage 1 | Stage 2 | Stage 3 | POCI | Total | Stage 1 | Stage 2 | Stage 3 | POCI | Total |
| 1 January 2018 | 219 | 2 | 5 | – | 226 | (3) | – | (2) | – | (5) | 216 | 2 | 3 | – | 221 |
| Transfers to/(from) stage 1 | – | – | – | – | – | – | – | – | – | – | – | – | – | – | – |
| Transfers to/(from) stage 2 | – | – | – | – | – | – | – | – | – | – | – | – | – | – | – |
| Transfers to/(from) stage 3 | (2) | (1) | 3 | – | – | – | – | – | – | – | (2) | (1) | 3 | – | – |
| Net remeasurement due to | |||||||||||||||
| transfers | – | – | – | – | – | – | – | (1) | – | (1) | – | – | (1) | – | (1) |
| New lending | 142 | – | – | – | 142 | (2) | – | – | – | (2) | 140 | – | – | – | 140 |
| Repayments, additional | |||||||||||||||
| drawdowns and interest | |||||||||||||||
| accrued | (45) | – | (2) | – | (47) | – | – | – | – | – | (45) | – | (2) | – | (47) |
| Derecognitions | (19) | (1) | (2) | – | (22) | – | – | 1 | – | 1 | (19) | (1) | (1) | – | (21) |
| Changes to model | |||||||||||||||
| assumptions | – | – | – | – | – | 3 | – | – | – | 3 | 3 | – | – | – | 3 |
| 31 December 2018 | 295 | – | 4 | – | 299 | (2) | – | (2) | – | (4) | 293 | – | 2 | – | 295 |
| Total | |
|---|---|
| Gross carrying amount | Loss allowance | Net carrying amount | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| £'million | Stage 1 | Stage 2 | Stage 3 | POCI | Total | Stage 1 | Stage 2 | Stage 3 | POCI | Total | Stage 1 | Stage 2 | Stage 3 | POCI | Total |
| 1 January 2018 | 9,330 | 244 | 55 | 5 | 9,634 | (7) | (15) | (13) | (1) | (36) | 9,323 | 229 | 42 | 4 | 9,598 |
| Transfers to/(from) stage 1 | 112 | (104) | (8) | – | – | (1) | 1 | – | – | – | 111 | (103) | (8) | – | – |
| Transfers to/(from) stage 2 | (278) | 279 | (1) | – | – | 1 | (1) | – | – | – | (277) | 278 | (1) | – | – |
| Transfers to/(from) stage 3 | (23) | (12) | 35 | – | – | – | 1 | (1) | – | – | (23) | (11) | 34 | – | – |
| Net remeasurement due to | |||||||||||||||
| transfers | – | – | – | – | – | 1 | (5) | (4) | – | (8) | 1 | (5) | (4) | – | (8) |
| New lending | 5,747 | 88 | 5 | 2 | 5,842 | (6) | (2) | – | – | (8) | 5,741 | 86 | 5 | 2 | 5,834 |
| Repayments, additional | |||||||||||||||
| drawdowns and interest | |||||||||||||||
| accrued | (298) | (15) | (5) | (1) | (319) | – | – | – | – | – | (298) | (15) | (5) | (1) | (319) |
| Derecognitions | (805) | (59) | (23) | (1) | (888) | 1 | 10 | 5 | – | 16 | (804) | (49) | (18) | (1) | (872) |
| Changes to model | |||||||||||||||
| assumptions | – | – | – | – | – | 2 | – | 1 | (1) | 2 | 2 | – | 1 | (1) | 2 |
| 31 December 2018 | 13,785 | 421 | 58 | 5 14,269 | (9) | (11) | (12) | (2) | (34) 13,776 | 410 | 46 | 3 | 14,235 | ||
| Off Balance sheet items | |||||||||||||||
| Commitments and | |||||||||||||||
| gurantees¹ | 1,125 | – | 1,125 |
Non-performing loans are loans which have more than three instalments unpaid (90+ days past due). All non-performing loans are included within Stage 3 within the credit risk exposure and loss allowance tables on pages 144 to 147.
| 31 December 2018 | 31 December 2017 | ||||
|---|---|---|---|---|---|
| Group | Non-performing £'million |
Non-performing loans ratio |
Non-performing loans £'million |
Non-performing loans ratio |
|
| Retail-residential mortgages | 9 | 0.09% | 9 | 0.15% | |
| Retail-consumer and other | 5 | 1.74% | 6 | 2.78% | |
| Commercial (including asset and invoice finance) | 7 | 0.16% | 11 | 0.35% | |
| Total | 21 | 0.15% | 26 | 0.27% |
Cost of risk is credit impairment charges expressed as a percentage of average gross lending. Further details can be found on page 164.
| Group | 2018 | 2017 |
|---|---|---|
| Retail-residential mortgages | 0.01% | 0.03% |
| Retail-consumer and other | 1.54% | 2.03% |
| Commercial (including asset and invoice finance) | 0.10% | 0.13% |
| Average cost of risk | 0.07% | 0.11% |
CONTINUED
We write off financial assets (either partially or fully) when there is no realistic expectation of receiving further payment from the customer. Indicators that there is no reasonable expectation of recovery include debt sale to a third party and ceasing enforcement activity. We may write-off financial assets that are still subject to enforcement activity.
The outstanding contractual amounts of such assets written off during the year ended 31 December 2018 was £0.4 million.
We sometimes renegotiate the terms of loans provided to customers with a view to maximising recovery.
Restructuring activities include extended payment arrangements or the modification or deferral of payments. Restructuring policies and practices are based on indicators or criteria which, in the judgement of management, indicate that payment will most likely continue. These policies are kept under continuous review. Restructuring is most commonly applied to term loans. In the majority of cases, restructuring results in the asset continuing to be credit-impaired. During the year only an immaterial amount of loans were modified and none of the modifications gave rise to a modification gain or loss.
The disclosures below were included in our 2017 financial statements, however have no directly comparable equivalent this year owing to the adoption of IFRS 9. These disclosures have therefore been shown separately rather than adjacent to the 2018 tables.
All loans and advances are categorised as either 'neither past due nor impaired', 'past due but not impaired', 'individually impaired' or 'portfolio impaired'. For the purposes of the disclosures in the loan asset credit quality section below:
| Group 2017 | Company 2017 | |||
|---|---|---|---|---|
| Loans and advances to customers £'million |
Loans and advances to banks £'million |
Loans and advances to customers £'million |
Loans and advances to banks £'million |
|
| Neither past due nor impaired | 9,486 | 100 | 9,259 | 95 |
| Past due but not impaired | 109 | – | 109 | – |
| Individually impaired | 12 | – | 10 | – |
| Portfolio impaired | 27 | – | 27 | – |
| Total | 9,634 | 100 | 9,406 | 95 |
| Less: allowance for impairment | (14) | – | (13) | – |
| Total | 9,620 | 100 | 9,393 | 95 |
| Individually impaired | (3) | – | (2) | – |
| Collectively impaired1 | (11) | – | (12) | – |
| Total allowance for impairment | (14) | – | (13) | – |
| Group 31 December 2017 £'million |
Company 31 December 2017 £'million |
|
|---|---|---|
| Allowance for impairment at 1 January | (7) | (7) |
| Write-offs | 1 | 1 |
| Balance sheet reclassification of operational loss provision | – | – |
| Increase in impairment allowance | (8) | (8) |
| Allowance for impairment at 31 December | (15) | (13) |
Credit impairment charges of £8.2 million in the consolidated statement of comprehensive income are shown net of recoveries on previously written off loans.
The gross amounts of loans and advances to customers that were past due but not impaired was as follows:
| 31 December 2017 | Retail-residential mortgages £'million |
Commercial £'million |
Retail-consumer and other £'million |
Total (Company) £'million |
Asset and Invoice Finance £'million |
Total (Group) £'million |
|---|---|---|---|---|---|---|
| Past due less than 7 days | 27 | 37 | 1 | 65 | – | 65 |
| Past due 7–30 days | 19 | 19 | 1 | 39 | – | 39 |
| Past due 31–60 days | 2 | – | 1 | 3 | – | 3 |
| Past due 61–90 days | 1 | – | 1 | 2 | – | 2 |
| Over 90 days | – | – | – | – | – | – |
| Total | 49 | 56 | 4 | 109 | – | 109 |
Liquidity risk is the risk that do not have sufficient financial resources to meet our obligations as they fall due, or will have to do so at an excessive cost.
Details of how we manage our liquidity risk can be found on page 35.
The tables below set out the maturity structure of our financial assets and liabilities by their earliest possible contractual maturity date; this differs from the behavioural maturity characteristics in both normal and stressed conditions. The behavioural maturity of customer deposits is much longer than their contractual maturity. On a contractual basis these are repayable on demand or at short notice, however in reality are static in nature and provide long-term stable funding for our operations and liquidity. Equally our Loans and advances to customers, specifically mortgages, are lent on longer contractual terms however are often redeemed or remortgaged earlier.
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
The total balances depicted in the analysis do not reconcile with the carrying amounts as disclosed in the consolidated balance sheet. This is because the maturity analysis incorporates all the expected future cash flows, on an undiscounted basis.
| Group | Repayable on demand £'million |
Up to 3 months £'million |
3–6 months £'million |
6–12 months £'million |
1–5 years £'million |
Over 5 years £'million |
No contractual maturity £'million |
Total £'million |
|---|---|---|---|---|---|---|---|---|
| 31 December 2018 | ||||||||
| Cash and balances with the | ||||||||
| Bank of England | 2,286 | – | – | – | – | – | – | 2,286 |
| Loans and advances to banks | 186 | – | – | – | – | – | – | 186 |
| Loans and advances to customers | – | 313 | 289 | 558 | 4,092 | 16,886 | 374 | 22,512 |
| Investment securities | – | 98 | 321 | 407 | 3,273 | 290 | – | 4,389 |
| Total financial assets | 2,472 | 411 | 610 | 965 | 7,365 | 17,176 | 374 | 29,373 |
| Other assets | – | 113 | 1 | 2 | 379 | 3 | – | 498 |
| Total assets | 2,472 | 524 | 611 | 967 | 7,744 | 17,179 | 374 | 29,871 |
| Deposits from customers | (10,818) | (964) | (686) | (1,587) | (954) | – | (700) | (15,709) |
| Deposits from central banks | – | (7) | (9) | (19) | (3,871) | – | – | (3,906) |
| Debt securities | – | – | (7) | (7) | (297) | – | – | (311) |
| Repurchase agreements | – | – | (1) | (37) | (259) | – | (58) | (355) |
| Other liabilities | – | (113) | – | (2) | (380) | (3) | – | (498) |
| Total financial liabilities | (10,818) | (1,084) | (703) | (1,652) | (5,761) | (3) | (758) | (20,779) |
| Capital | – | – | – | – | – | – | – | – |
| Total equity and liabilities | (10,818) | (1,084) | (703) | (1,652) | (5,761) | (3) | (758) | (20,779) |
| Cumulative liquidity gap | (8,346) | (8,906) | (8,998) | (9,683) | (7,700) | 9,476 | – | – |
| Group | Repayable on demand £'million |
Up to 3 months £'million |
3–6 months £'million |
6–12 months £'million |
1–5 years £'million |
Over 5 years £'million |
No contractual maturity £'million |
Total £'million |
|---|---|---|---|---|---|---|---|---|
| 31 December 2017 | ||||||||
| Cash and balances with the | ||||||||
| Bank of England | 2,112 | – | – | – | – | – | – | 2,112 |
| Loans and advances to banks | 100 | – | – | – | – | – | – | 100 |
| Loans and advances to customers | – | 188 | 173 | 353 | 2,720 | 10,458 | 295 | 14,187 |
| Investment securities | – | 56 | 62 | 459 | 2,990 | 611 | – | 4,178 |
| Total financial assets | 2,212 | 244 | 235 | 812 | 5,710 | 11,069 | 295 | 20,577 |
| Other assets | – | 116 | – | – | 53 | 5 | 2 | 176 |
| Total assets | 2,212 | 360 | 235 | 812 | 5,763 | 11,074 | 297 | 20,753 |
| Deposits from customers | (8,437) | (565) | (389) | (1,129) | (598) | – | (581) | (11,699) |
| Deposits from central banks | – | (32) | (1) | (92) | – | – | (125) | |
| Repurchase agreements | – | (3) | (4) | (10) | (3,396) | – | – | (3,413) |
| Other liabilities | (1) | (116) | (54) | (5) | – | (176) | ||
| Total financial liabilities | (8,438) | (716) | (393) | (1,140) | (4,140) | (5) | (581) | (15,413) |
| Capital | – | – | – | – | – | – | – | – |
| Total equity and liabilities | (8,438) | (716) | (393) | (1,140) | (4,140) | (5) | (581) | (15,413) |
| Cumulative liquidity gap | (6,226) | (6,582) | (6,740) | (7,068) | (5,445) | 5,624 | – | – |
We have pledged £5,768 million (2017: £4,478 million) of assets as encumbered collateral which can be called upon in the event of default. Of this, £1,762 million (2017: £2,419 million) is made up of high-quality securities and £4,006 million (2017: £2,059 million) is from our own loan portfolio prepositioned with the Bank of England to support some of the Term Funding Scheme ('TFS') drawings.
£5,412 million (2017: £4,358 million) of this encumbered collateral is pledged to the Bank of England through the Bank's participation in the TFS to support the £3,801 million (2017: £3,321million) of cash drawn down.
The remaining £356 million (2017: £120 million) is pledged with market participants in the form of repurchase agreements.
While we have drawn down borrowings from the Bank of England's Term Funding Scheme ('TFS'), our business model is primarily that of a deposit-led bank – with more deposits than loans. At the 31 December 2018 our loan-to-deposit ratio was 91% (31 December 2017: 82%) in line with our long term target. The closure of the TFS drawdown window in 2018 will not adversely affect us from the perspective of obtaining future funding. We anticipate refinancing our TFS drawings through future deposit growth.
Market risk is the risk that changes in market prices, such as interest rates will affect our income or the value of our holdings of financial instruments.
Details of how we manage our market risk can be found on page 36.
We are exposed to movements in interest rates arising from the mismatch between the dates on which interest receivable on financial assets and interest payable on financial liabilities are next reset to market rates. We manage this risk within a risk appetite framework that is set and approved by the Board.
Limits are set for the economic value of equity ('EVE') and net interest income ('NII'). EVE shall not drop more than £20 million based on the worse of a +200bps or -200bps instantaneous symmetrical parallel shock to interest rates, and one-year NII shall not drop more than £15 million based on the same shock. The EVE limits are monitored daily by risk, whilst NII limits are monitored weekly. Performance against limits are reported monthly to the ALCO (with exceptions communicated by email) and more regularly to senior management, as well as being noted by the Risk Oversight Committee and the Board.
Furthermore, a £15 million limit is set for a set of asymmetrical movements between LIBOR and the Bank of England Base Rate. Our Treasury Risk function runs a series of other interest rate risk simulations on a monthly basis to ensure that the ALCO is kept updated of any other risks not captured by the policy measures.
While we occasionally enter into hedging arrangements the impact of these arrangements is immaterial.
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
The tables below set out the interest rate risk repricing gaps of our balance sheet in the specified time buckets, indicating how much of each type of asset and liability reprices in the indicated periods.
| 31 December 2018 | Up to 3 months £'million |
3–6 months £'million |
6–12 months £'million |
1–5 years £'million |
Over 5 years £'million |
Non-interest bearing £'milion |
Total £'million |
|---|---|---|---|---|---|---|---|
| Loans and advances to banks Loans and advances to customers Other assets |
– 5,235 5,644 |
– 579 – |
– 1,184 50 |
– 7,186 751 |
– 51 – |
186 – 781 |
186 14,235 7,226 |
| Total assets | 10,879 | 579 | 1,234 | 7,937 | 51 | 967 | 21,647 |
| Deposits from customers Other liabilities Shareholders' funds |
(7,914) (3,949) – |
(683) – – |
(1,565) – – |
(929) (445) – |
– – – |
(4,570) (189) (1,403) |
(15,661) (4,583) (1,403) |
| Total liabilities | (11,863) | (683) | (1,565) | (1,374) | – | (6,162) | (21,647) |
| Interest rate sensitivity gap | (984) | (104) | (331) | 6,563 | 51 | (5,195) | – |
| Cumulative gap | (984) | (1,088) | (1,419) | 5,144 | 5,195 | – | – |
| 31 December 2017 | Up to 3 months £'million |
3–6 months £'million |
6–12 months £'million |
1–5 years £'million |
Over 5 years £'million |
Non-interest bearing £'million |
Total £'million |
|---|---|---|---|---|---|---|---|
| Loans and advances to banks | – | – | – | – | – | 100 | 100 |
| Loans and advances to customers | 4,173 | 343 | 753 | 4,311 | 37 | 3 | 9,620 |
| Other assets | 5,586 | 42 | 137 | 478 | – | 392 | 6,635 |
| Total assets | 9,759 | 385 | 890 | 4,789 | 37 | 495 | 16,355 |
| Deposits from customers | (5,853) | (596) | (1,124) | (609) | – | (3,487) | (11,669) |
| Other liabilities | (3,505) | – | (1) | (52) | (5) | (26) | (3,589) |
| Shareholders' funds | – | – | – | – | – | (1,097) | (1,097) |
| Total liabilities | (9,358) | (596) | (1,125) | (661) | (5) | (4,610) | (16,355) |
| Interest rate sensitivity gap | 401 | (211) | (235) | 4,128 | 32 | (4,115) | – |
| Cumulative gap | 401 | 190 | (45) | 4,083 | 4,115 | – | – |
A positive interest rate sensitivity gap exists when more assets than liabilities reprice during a given period. A positive gap position tends to benefit net interest income in an environment where interest rates are rising; however, the actual effect will depend on a number of factors including actual repayment dates and interest rate sensitivities within the banding periods. The converse is true for a negative interest rate sensitivity gap.
The below shows the sensitivity arising from the regulatory scenario of a +200bps and -200bps parallel interest rate shock for a one-year forecasting period upon projected net interest income.
| Sensitivity of projected net interest income to parallel interest rate shock for a one-year forecasting period | 200bps increase £'million |
200bps decrease (not floored at zero) £'million |
|---|---|---|
| At 31 December 2018 | (3.4) | 2.8 |
| At 31 December 2017 | (7.6) | 7.1 |
There is no material difference between the interest rate risk profile for the Group and that for the Company.
| Accounting policy | To meet the financial needs of our customers, we enter into various irrevocable commitments. These generally consist of financial guarantees, letters of credit and other undrawn commitments to lend. |
|---|---|
| Even though these obligations are not recognised on the balance sheet, they do contain credit risk and an ECL is calculated and recognised for them (see note 23). |
|
| When these commitments are drawn down or called upon, and meet the recognition criteria as detailed in note 9, these are recognised within our loans and advances to customers. |
At 31 December 2018, we had undrawn loan facilities granted to retail and commercial customers of £883 million (2017: £688 million).
In addition, as part of our retail and commercial operations, we had commitments of £242 million (2017: £138 million) in respect of credit card and overdraft facilities. These commitments represent agreements to lend in the future, subject to certain conditions. Such commitments are cancellable, subject to notice requirements, and given their nature are not expected to be drawn down to the full level of exposure.
'Fair value' is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which we have access at that date. The fair value of a liability reflects its non-performance risk. In order to show how fair values have been derived, financial instruments are classified based on a hierarchy of valuation techniques, as summarised below:
CONTINUED
| Group | Carrying value £'million |
Quoted market price Level 1 £'million |
Using observable inputs Level 2 £'million |
With significant unobservable inputs Level 3 £'million |
Total fair value £'million |
|---|---|---|---|---|---|
| 31 December 2018 | |||||
| Assets | |||||
| Loans and advances to banks | 186 | – | – | 186 | 186 |
| Loans and advances to customers | 14,235 | – | – | 14,857 | 14,857 |
| Investment securities | 4,132 | 1,212 | 2,891 | – | 4,103 |
| Liabilities | |||||
| Deposits from customers | 15,661 | – | – | 15,605 | 15,605 |
| Deposits from central bank | 3,801 | – | – | 3,801 | 3,801 |
| Debt securities | 249 | 219 | – | – | 219 |
| Repurchase agreements | 344 | – | – | 344 | 344 |
| 31 December 2017 | |||||
| Assets | |||||
| Loans and advances to banks | 100 | – | – | 100 | 100 |
| Loans and advances to customers | 9,620 | – | – | 10,084 | 10,084 |
| Investment securities | 3,915 | 922 | 3,029 | – | 3,951 |
| Liabilities | |||||
| Deposits from customers | 11,669 | – | – | 11,650 | 11,650 |
| Deposits from central bank | 3,321 | – | – | 3,321 | 3,321 |
| Repurchase agreements | 121 | – | – | 122 | 122 |
For cash and balances with the Bank of England and repurchase agreements, the carrying value approximates to the fair value, and therefore no pricing level has been identified for them in the above table.
Information on how fair values are calculated for the financial assets and liabilities noted above are explained below:
Fair value is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the balance sheet date. Fair values approximate carrying amounts as their balances are generally short-dated.
Fair value is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the balance sheet date, adjusted for future credit losses and prepayments, if considered material.
The fair value of investment securities is based on either observed market prices for those securities that have an active trading market (fair value Level 1 assets), or using observable inputs (in the case of fair value Level 2 assets).
Fair values are estimated using discounted cash flows, applying current rates offered for deposits of similar remaining maturities. The fair value of a deposit repayable on demand is approximated by its carrying value.
Fair values are determined using the quoted market price at the balance sheet date.
Fair values are estimated using discounted cash flows, applying current rates. Fair values approximate carrying amounts as their balances are generally short-dated.
154 Metro Bank Plc Annual report and accounts 2018
Our key management personnel, and persons connected with them, are considered to be related parties for disclosure purposes. 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.
Total compensation cost for key management personnel for the year by category of benefit was as follows:
| Group | 2018 £'million |
2017 £'million |
|---|---|---|
| Short-term benefits | 6.0 | 4.8 |
| Share-based payment costs | 3.1 | 2.4 |
| Total compensation for key management personnel | 9.1 | 7.2 |
Short-term employee benefits include salary, medical insurance, bonuses and cash allowances paid to key management personnel. The share-based payment cost includes the IFRS 2 charge for the year associated with listing awards awarded in previous years. 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 successful private placement and admission of Metro Bank to the London Stock Exchange.
We provide 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:
| Group | 2018 £'million |
2017 £'million |
|---|---|---|
| Loans outstanding at 1 January Loans relating to persons and companies newly considered related parties Loans relating to persons and companies no longer considered related parties |
3.0 0.1 – |
3.2 – (0.3) |
| Loans outstanding as at 1 January for current key management personnel and their connected persons | 3.1 | 2.9 |
| Loans issued during the year Loan repayments during the year |
0.8 (0.1) |
0.4 (0.3) |
| Loans outstanding as at 31 December | 3.8 | 3.0 |
| Interest expense on loans payable to the Group (£'000) | 82 | 80 |
There were ten (31 December 2017: seven) loans outstanding at 31 December 2018 totalling £3.8 million (31 December 2017: £3.0 million). Of these, nine are residential mortgages secured on property and one is an unsecured loan; all loans were provided on our standard commercial terms.
In addition to the loans detailed above, the bank has issued credit cards and granted overdraft facilities on current accounts to Directors and key management personnel.
Credit card balances outstanding at 31 December were as follows:
| Group | 2018 £'000 |
2017 £'000 |
|---|---|---|
| Credit cards outstanding as at 31 December | 34 | 27 |
CONTINUED
Deposit balances outstanding at 31 December were as follows:
| Group | 2018 £'million |
2017 £'million |
|---|---|---|
| Deposits held at 1 January Deposits relating to persons and companies newly considered related parties Deposits relating to persons and companies no longer considered related parties |
3.4 0.3 (0.2) |
5.2 – (3.0) |
| Deposits held as at 1 January for current key management personnel and their connected persons | 3.5 | 2.2 |
| Net amounts deposited | 1.0 | 1.2 |
| Deposits outstanding as at 31 December | 4.5 | 3.4 |
The following transactions were carried out with related parties:
| Group | 2018 £'000 |
2017 £'000 |
|---|---|---|
| Architectural design services Creative and brand services |
4,084 498 |
4,135 513 |
| Total purchase of services with entities connected to key management personnel | 4,582 | 4,648 |
| Amounts outstanding as at 31 December owed by Metro Bank | 51 | 23 |
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, the Chairman.
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 our Audit Committee using benchmarking reviews conducted by independent third parties. For the architectural design contract, which covers the build and design of our stores, a big four professional services firms carries out the benchmarking review. The creative and brand services contract which covers branding, marketing and advertising services is reviewed by the largest independent global marketing audit firm. For 2018, having reviewed the output from the independent audit of each contract, 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.
In order to expand the suppliers used, the management intends to run a competitive tender in 2019 to identify an additional alternative supplier of architecture services.
Further details of the review conducted by the Audit Committee can be found on page 71.
InterArch provide various architectural design services, 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. Certain additional services are provided on an hourly basis. The contract for architectural design services has recently been renegotiated. As part of the renegotiation, any recommendations of the independent audit have been picked up and included in the contract.
InterArch also provide branding, marketing and advertising services. The contract for creative and brand services has recently been renegotiated. As part of the renegotiation, any recommendations of the independent audit have been picked up and included in the contract.
For 2019, both the architectural design services and creative and brand services contracts have been aligned to be effective from 28 February 2019, for one year. In addition, both contracts have been subjected to the bank's recently adopted supplier risk management process.
156 Metro Bank Plc Annual report and accounts 2018
Capital is held to protect our depositors, cover our inherent risks, provide a cushion for stress events and to support our business strategy. In assessing the adequacy of our capital resources, we consider our business plan, risk appetite, the material risks to which we are exposed and the appropriate strategies required to manage those risks. We prepare an annual Internal Capital Adequacy Assessment Process document that sets out how we identify and manage the key risks to which we are exposed and details our capital requirements, capital resources and capital adequacy over the planning period, including under stress scenarios. This process is used to ensure that we apply appropriate management buffers to regulatory capital requirements in line with risk appetite.
In order to appropriately monitor and manage the Bank's capital resources, we produce regular reports on the current and forecasted level of capital for the Board and the Executive Leadership Team (chaired by the Chief Executive Officer). The key assumptions and risk drivers used to create the stress tests are regularly monitored and reported, and are used in determining how we will evolve our capital resources and ensure they are appropriate for growth.
We manage capital in accordance with prudential rules issued by the PRA and FCA, in line with the EU Capital Requirements Directive. In June 2013 the European Parliament approved new capital reforms (referred to as "CRD IV"), which implements Basel III in Europe. CRD IV legislation has been effective from 1 January 2014. We are committed to maintaining a strong capital base under both existing and future regulatory requirements.
The strength of our capital base is dependent upon the size of our capital relative to Risk Weighted Assets. In January 2019, we announced that we had adjusted the risk weighting of certain commercial loans secured on commercial property and certain specialist buy-to-let loans that had the combined effect of increasing our RWAs by £900 million. Whilst the risk weightings have been adjusted, there is no deterioration in the credit quality of the affected assets. We are learning the lessons from this and will continue to improve our systems and controls around capital and risk-weighted assets.
| Group | 2018 £'million |
2017 £'million |
|---|---|---|
| Ordinary share capital | – | – |
| Share premium | 1,605 | 1,304 |
| Retained earnings | (209) | (219) |
| Intangible assets | (197) | (148) |
| Deferred tax asset (CET1 element) | (54) | (57) |
| Deferred tax liability (CET1 element) | 7 | 5 |
| Other reserves | 7 | 12 |
| IFRS 9 transitional adjustment | 12 | – |
| Total Tier 1 capital (CET1) | 1,171 | 897 |
| Debt securities | 249 | – |
| Total Tier 2 capital | 249 | – |
| Total regulatory capital | 1,420 | 897 |
Basic earnings per share is calculated by dividing the earnings attributable to ordinary equity holders of Metro Bank by the weighted average number of ordinary shares in issue during the year.
| 2018 | 2017 | |
|---|---|---|
| Earnings attributable to ordinary equity holders of Metro Bank (£'million) | 27.1 | 10.8 |
| Weighted average number of ordinary shares in issue – basic ('000) | 92,964 | 84,412 |
| Basic earnings per share (pence) | 29.1 | 12.8 |
Diluted earnings per share has been calculated by dividing the earnings 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. For the year to 31 December 2018 1.7 million share options were anti-dilutive and excluded from the weighted average number of shares (year to 31 December 2017: nil)
| 2018 | 2017 | |
|---|---|---|
| Earnings attributable to ordinary equity holders of Metro Bank (£'million) Weighted average number of ordinary shares in issue – diluted ('000) |
27.1 95,853 |
10.8 85,927 |
| Diluted earnings per share (pence) | 28.2 | 12.6 |
There have been no transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of the completion of these financial statements which would require the restatement of EPS.
Accounting policy We apply the acquisition method to account for business combinations. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Inter-Company transactions and balances are eliminated upon consolidation. All subsidiaries follow the same accounting policies as the Group.
The Group had the following subsidiaries at 31 December 2018:
| Name | Country of incorporation and place of business |
Nature of business | Proportion of ordinary shares directly held by the Parent (%) |
Proportion of ordinary shares directly held by the Group (%) |
|---|---|---|---|---|
| SME Invoice Finance Limited | UK | Invoice financing and factoring | 100 | – |
| SME Asset Finance Limited | UK | Asset finance | – | 100 |
| RDM Factors Limited | UK | Dormant | – | 100 |
All subsidiary undertakings are included in the consolidation. The proportion of the voting rights in the subsidiary undertakings held directly by the Parent Company do not differ from the proportion of ordinary shares held.
| 2018 £'million |
2017 £'million |
|
|---|---|---|
| Interest on inter-Company loan with SME Asset/Invoice Finance | 6.1 | 4.1 |
| Amounts outstanding as at 31 December owed by SME Asset/Invoice Finance | 305 | 215 |
Details of the registered offices of all our Group companies can be found on page 166.
On 23 January 2019 we announced that we had adjusted the risk weighting of certain commercial loans secured on commercial property and certain specialist buy-to-let loans that had the combined effect of increasing our RWAs by £900 million. Whilst the risk weightings have been adjusted, there is no deterioration in the credit quality of the affected assets. We are learning the lessons from this and will continue to improve our systems and controls around capital and risk-weighted assets.
There is no impact to any of the financial information disclosed in these or prior years' financial statements as a result of this adjustment.
On 22 February 2019 we were awarded £120 million from the RBS alternative remedies package-capability and innovation fund, the largest award available.
The financial effects of this award have not been recognised at 31 December 2018. This transaction will reflected in our results from the date we are contractually entitled to the funds.
On 26 February 2019 we announced our intentions to raise c.£350 million in additional equity. As part of this we have a committed standby underwrite in place to support this raise.
The financial effects of this equity raise have not been recognised at 31 December 2018, but will reflected in our results from the date any raise is undertaken.
On 26 February 2019 we received notification that the PRA and FCA are investigating the circumstances and events that led to the RWA adjustment announced on 23 January 2019.
No adjustments have been made to these financial statements in respect of these investigations.
Metro Bank and its subsidiaries only operate with the United Kingdom ('UK') and are all UK registered entities. The Parent Company, Metro Bank, is a credit institution for the purposes of CRD IV and is therefore within the scope of CBCR. Our activities are disclosed within note 1 to the financial statements.
For the purposes of CBCR, the appropriate disclosures required are summarised below:
| UK | |
|---|---|
| Number of employees (average full-time equivalent) | 3,552 |
| Turnover (£'million) | 404.1 |
| Profit before tax (£'million) | 40.6 |
| Tax expense (£'million) | 13.5 |
| Corporation tax paid (£'million) | 3.6 |
No public subsidies were received during the year.
In our opinion, Metro Bank PLC's country-by-country information for the year ended 31 December 2018 has been properly prepared, in all material respects, in accordance with the requirements of the Capital Requirements (Country-by-Country Reporting) Regulations 2013.
We have audited the country-by-country information for the year ended 31 December 2018 in the Annual Report and Accounts.
We conducted our audit in accordance with International Standards on Auditing (UK) ("ISAs (UK)"), including ISA (UK) 800 and ISA (UK) 805, and applicable law. Our responsibilities under ISAs (UK) are further described in the Auditors' responsibilities for the audit of the country-by-country information section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
We remained independent of the company in accordance with the ethical requirements that are relevant to our audit of the country-by-country information in the UK, which includes the FRC's Ethical Standard, as applicable to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements.
In forming our opinion on the country-by-country information, which is not modified, we draw attention to the relevant note of the country-by-country information which describes the basis of preparation. The country-by-country information is prepared for the directors for the purpose of complying with the requirements of the Capital Requirements (Country-by-Country Reporting) Regulations 2013. The country-by-country information has therefore been prepared in accordance with a special purpose framework and, as a result, the country-by-country information may not be suitable for another purpose.
We have nothing to report in respect of the following matters in relation to which ISAs (UK) require us to report to you when:
However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the company's ability to continue as a going concern.
The other information comprises all of the information in the Annual Report and Accounts other than the country-bycountry information and our auditors' report thereon. The directors are responsible for the other information. Our opinion on the country-by-country information does not cover the other information and, accordingly, we do not express an audit opinion or any form of assurance thereon.
In connection with our audit of the country-by-country information, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the country-by-country information or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the country-by-country information or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities.
161
The directors are responsible for the preparation of the country-by-country information in accordance with the requirements of the Capital Requirements (Country-by-Country Reporting) Regulations 2013 as explained in the basis of preparation and accounting policies in note 1, and for determining that the basis of preparation and accounting policies are acceptable in the circumstances. The directors are also responsible for such internal control as they determine is necessary to enable the preparation of country-by-country information that is free from material misstatement, whether due to fraud or error.
In preparing the country-by-country information, the directors are responsible for assessing the company's ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.
It is our responsibility to report on whether the country-by-country information has been properly prepared in accordance with the relevant requirements of the Capital Requirements (Country-by-Country Reporting) Regulations 2013.
Our objectives are to obtain reasonable assurance about whether the country-by-country information as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this country-by-country information.
A further description of our responsibilities for the audit of the country-by-country information is located on the FRC's website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors' report
This report, including the opinion, has been prepared for and only for the company's directors in accordance with the Capital Requirements (Country-by-Country Reporting) Regulations 2013 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come, save where expressly agreed by our prior consent in writing.
The engagement partner responsible for this audit is Darren Meek
Chartered Accountants and Statutory Auditors London 10 April 2019
Application programming interface ('API')
Common equity tier 1 capital ('CET1')
Financial services compensation scheme ('FSCS')
Internal Capital Adequacy Assessment Process ('ICAAP')
Internal Ratings-Based approach ('IRB')
Partially Exemption Special Method ('PESM')
The protocols, routines, functions and/or commands that programmers use to develop software or facilitate interaction between distinct systems.
The highest quality form of regulatory capital under CRD IV that comprises common shares issued and related share premium, retained earnings and other reserves less specified regulatory adjustments. A breakdown of our CET1 capital can be found in note 29.
Debt-to-value ratio ('DTV') The ratio of the gross outstanding amount to the indexed value of the collateral.
Expected credit loss ('ECL') The present value of the amount expected to be lost on a financial asset.
Exposure at default ('EAD') The amount that we expect to be owed at the point of default.
Encumbered assets Assets recognised on the balance sheet which have been pledged as collateral against an existing liability, and as a result are assets which are unavailable for us to secure funding or be sold to reduce potential future funding requirements.
Forbearance Forbearance takes place when a concession is made on the contractual terms of a loan in response to an borrowers financial difficulties.
The statutory deposit insurance and investors compensation scheme for customers of UK authorised banks, building societies and credit unions. The scheme protects up to £85,000 per depositor in the event of the firms insolvency.
Our own assessment, based on Basel II requirements, of the levels of capital that we need to hold in respect of our regulatory capital requirements.
A methodology of estimating the credit risk within a portfolio by utilising internal risk parameters to calculate credit risk regulatory capital requirements. There are two approaches to IRB: Foundation IRB and Advanced IRB.
Loss given default ('LGD') The estimated loss which will arise if a customer defaults. It is expressed as a percentage considering expected recoveries on defaulted accounts.
A special method is a calculation agreed with HMRC which is different to their standard method. It enables us to calculate how much input value added tax ('VAT') we may recover.
Probability of default ('PD') The likelihood of a borrower defaulting on its financial obligation either over the next 12 months (for Stage 1 accounts), or over the remaining lifetime of the loan (for Stage 2 and 3 accounts).
Regulatory leverage ratio The ratio of our common equity tier 1 capital (see above) compared to our total assets.
Risk weighted assets ('RWA') A measure of our assets adjusted for their associated risk. Risk weightings are applied in accordance with the Basel Capital Accord as implemented by the Prudential Regulation Authority ('PRA').
Term funding scheme ('TFS') A scheme implemented by the Bank of England which provides funding to banks and building societies at rates close to Base Rate. It is designed to encourage lenders to reflect cuts in Base Rate in the interest rates faced by households and businesses.
In the reporting of financial information, we use certain measures that are not required under IFRS, the Generally Accepted Accounting Principles ('GAAP') under which we report. These measures are consistent with those used by management to assess underlying performance. In addition, a number of non-IFRS metrics are calculated which are commonly used within the banking industry.
These alternative performance measures have been defined below:
| 2018 £'million |
2017 £'million |
|
|---|---|---|
| Credit impairment charges | n/a | 8.2 |
| Expected credit loss expense | 8.0 | n/a |
| Average gross lending | 12,005 | 7,587 |
| Cost of risk | 0.07% | 0.11% |
| 2018 £'million |
2017 £'million |
|
|---|---|---|
| Interest expense | 114.3 | 61.0 |
| Interest on FLS, TFS and repos | (23.4) | (7.0) |
| Interest on debt securities | (7.2) | – |
| Customer interest expense | 83.7 | 54.0 |
| Average deposits from customer | 13,610 | 9,785 |
| Cost of deposits | 0.61% | 0.54% |
Loans and advances to customer expressed as a percentage of total deposits. It is a commonly used ratio within the banking industry to assess liquidity.
| 2018 £'million |
2017 £'million |
|
|---|---|---|
| Loans and advances to customers Deposits from customer |
14,235 15,661 |
9,620 11,669 |
| Loan-to-deposit ratio | 91% | 82% |
Net interest income as a percentage of average interest-earning assets.
| margin ('NIM') | |
|---|---|
| ---------------- | -- |
| 2018 £'million |
2017 £'million |
|
|---|---|---|
| Net interest income Average interest-earning assets |
330.1 18,279 |
241.0 12,466 |
| Net interest margin ('NIM') | 1.81% | 1.93% |
Reflecting the interest return from the investment of our customer deposits.
We also disclose a number of capital and liquidity metrics which are required by the PRA and FCA. The basis of calculation of those metrics is defined within the relevant legislation.
165
Registered and other offices The Company's registered office and head office is:
One Southampton Row London WC1B 5HA
Telephone: 0345 08 08 500/0345 08 08 508 Website: www.metrobankonline.co.uk
Other subsidiaries of the Company are also registered at the same registered office and head office of the Company.
The Company has appointed Equiniti Limited to maintain its register of members. Shareholders should contact Equiniti using the details below in relation to all general enquiries concerning their shareholding:
Equiniti Limited1 Aspect House Spencer Road Lancing, West Sussex BN99 6DA Telephone: 0371 384 20302 International callers: +44 121 415 7047
Annual General Meeting – 21 May 2019 First quarter results – 1 May 2019 Half year results – 24 July 2019 Third quarter results – 23 October 2019
These are preliminary dates and may be subject to change.
The Company is required by law to make its share register available on request to unconnected organisations. As a consequence, shareholders may receive unsolicited mail, including mail from unauthorised investment firms. If you wish to limit the amount of unsolicited mail received, please contact the Mailing Preference Service, an independent organisation whose services are free for consumers.
Further details can be obtained from: Mailing Preference Service MPS Freepost LON 20771 London W1E 0ZT Website: www.mpsonline.org.uk
The Company's next Annual General Meeting will take place on 21 May 2019 at the Bank's registered office address at One Southampton Row, London WC1B 5HA, at 1:30pm. The Chairmen of each of the Board's Committees will be present to answer questions put to them by shareholders.
The Annual General Meeting gives shareholders an opportunity to hear about the general development of the business and to ask questions of the Chairman and the Chairmen of the various Committees.
This annual report contains statements that are, or may be deemed to be, forward-looking statements. Forward-looking statements typically use terms such as 'believes', 'projects', 'anticipates', 'expects', 'intends', 'plans', 'may', 'will', 'would', 'could' or 'should' or similar terminology. Any forward-looking statements in this annual report are based on the Company's current expectations and, by their nature, forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond the Company's control, that could cause the Company's actual results and performance to differ materially from any expected future results or performance expressed or implied by any forward-looking statements. As a result, you are cautioned not to place undue reliance on such forward-looking statements. Past performance should not be taken as an indication or guarantee of future results, and no representation or warranty, expressed or implied, is made regarding future performance.
No assurances can be given that the forward-looking statements in this annual report will be realised. The Company undertakes no obligation to release the results of any revisions to any forward-looking statements in this annual report that may occur due to any change in its expectations or to reflect events or circumstances after the date of this announcement and the Company disclaims any such obligation.
| Range | Total number of holdings |
Percentage of holders |
Total number of shares held at 31 December 2018 |
Percentage of total |
|---|---|---|---|---|
| 1–1,000 | 194 | 36.00% | 56,002 | 0.06% |
| 1,001–5,000 | 82 | 15.30% | 199,174 | 0.20% |
| 5,001–10,000 | 53 | 9.89% | 398,606 | 0.41% |
| 10,001–50,000 | 104 | 19.40% | 2,355,770 | 2.42% |
| 50,001–100,000 | 34 | 6.34% | 2,470,508 | 2.54% |
| 100,001–500,000 | 42 | 7.84% | 9,959,403 | 10.22% |
| 500,001–1,000,000 | 12 | 2.24% | 8,145,602 | 8.36% |
| 1,000,001 and above | 16 | 2.99% | 73,833,372 | 75.79% |
| Total | 537 | 100.00% | 97,418,437 | 100.00% |
| Category | Number of holders |
Percentage of holders within type |
Shares held at 31 December 2018 |
Percentage of issued share capital |
|---|---|---|---|---|
| Private shareholders | 142 | 26.44% | 2,243,515 | 2.30% |
| Banks | 3 | 0.56% | 10,210 | 0.01% |
| Nominees and other institutional investors | 392 | 73.00% | 95,164,712 | 97.69% |
| Total | 537 | 100.00% | 97,418,437 | 100.00% |
It should be noted that many private investors hold their shares through nominee companies and therefore the percentage of shares held by private shareholders may be higher than that shown.
167
Piccadilly
Watford
Northampton
Putney Oxford
Southampton
* Including our Moorgate store, opened in January 2019
METRO BANK PLC
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