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Metro Bank PLC - Annual Financial Report

RNS Number : 2354K
Metro Bank PLC
20 April 2020
 

 

Legal Entity Identifier: 213800X5WU57YL9GPK89

METRO BANK PLC (the "Company")

 

Following the release on 26 February 2020 of the Company's preliminary results for the financial year ended 31 December 2019 (the "Preliminary Announcement"), the Company is pleased to announce that it has today published its Annual Report and financial statements for the financial year ended 31 December 2019 (the "2019 Annual Report and Accounts") and is available for viewing in the Investor Relations section of the Company's website at www.metrobankonline.co.uk.

The 2020 Annual General Meeting of Shareholders is currently scheduled to take place on 26 May 2020. An announcement with further details including publication of the 2020 Notice of Annual General Meeting will be circulated in due course.

 

Hard copies of the 2019 Annual Report and Accounts will be mailed together with the Notice of Meeting in due course to those shareholders who have elected to receive them. Copies of the 2019 Annual Report and Accounts have also been submitted to the National Storage Mechanism and will shortly be available for inspection at http://www.morningstar.co.uk/uk/NSM.

 

The Disclosure Guidance and Transparency Rules (DTR) require that an announcement of the publication of an annual report should include the disclosure of such information from the annual report as is of a type that would be required to be disseminated in a half-yearly report in compliance with the DTR 6.3.5(2) disclosure requirement, in unedited full text through a Regulatory Information Service. Accordingly, these disclosures are made in the Appendix below.

 

The Appendix to this announcement contains the following additional information for the purposes of compliance with DTR 6.3.5 only:

·      a description of the principal risks and uncertainties relating to the Company;

·      indication of important events during the year;

·      a note on related party transactions; and

·    directors' responsibilities statement.

The Preliminary Announcement included a set of condensed financial statements. Together these constitute the material required by DTR 6.3.5 to be communicated to the media in unedited full text through a Regulatory Information Service.

 

Enquiries

For further information on this announcement, please contact:

 

Metro Bank PLC

Investor Relations

Jo Roberts

+44 (0)20 3402 8900

[email protected] 

 

Media Relations

Tina Coates / Abigail Whittaker

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

[email protected]

 

Teneo

Charles Armitstead / Haya HerbertBurns

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

[email protected] 

 

APPENDIX 

 

References to page numbers and notes to the accounts made in the Appendix refer to page numbers and notes to the accounts in the 2019 Annual Report and Accounts. This announcement should be read in conjunction with, and is not a substitute for reading, the full 2019 Annual Report and Accounts.

 

 

PRINCIPAL RISKS AND UNCERTAINTIES

 

The principal risks and uncertainties relating to the Company are set out on pages 21-37 of the 2019 Annual Report and Accounts. The following is extracted in full and unedited text from the 2019 Annual Report and Accounts:

 

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 on the Bank. The principal risks are designed to be both comprehensive and mutually exclusive.

 

The principal risks are detailed below. In addition to the eight risks listed, there is also a 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.

 

1.         Credit Risk

Definition: Credit risk is the risk of financial loss due to a borrower's failure to meet the terms of any debt contract or where a borrower otherwise fails to perform as agreed due to financial difficulties.

For more information on our business model please see pages 6 to 9

Change since 2018: No change

Link to business model: Risk-adjusted returns

 

APPETITE

 

Our credit risk appetite is set to ensure that the risk we take is commensurate to the returns we receive. Our credit risk appetite is defined through our Credit Risk Policy which 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 ERC and the 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.

 

CHANGE IN YEAR

 

There have been no changes to the risk level during 2019.

 

MITIGATION

 

Lending and collateral

 

Our foremost exposure to credit risk is through the loans, limits and advances we make available 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, debentures 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 2019, 95% (31 December 2018: 94%) of our loans consisted of retail mortgages and commercial term loans secured on collateral with average debt-to-value of 59% (2018: 61%) and 60% (2018: 59%) respectively.

 

Our exposure to loans of greater than 100% remains low at less than 1% of retail mortgage lending (31 December 2018: less than 1%) and 11% of commercial term lending (31 December 2018: 11%). In the retail mortgage lending portfolio, these loans have principally been part of portfolios we have acquired. For commercial term lending, additional forms of collateral (such as debentures or unsupported guarantees giving 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.

 

Table 1: Retail mortgage lending by DTV


31 December 2019
£'million

31 December 2018
£'million

Audited

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%

2,647

464

3,111

 2,124

 458

 2,582

51-60%

1,383

393

1,776

 1,195

 493

 1,688

61-70%

1,422

505

1,927

 1,374

 553

 1,927

71-80%

1,813

554

2,367

 1,362

 596

 1,958

81-90%

1,201

13

1,214

 1,205

 129

 1,334

91-100%

23

-

23

 80

 33

 113

More than 100%

4

8

12

 11

 12

 23

Total retail mortgage lending

8,493

1,937

10,430

 7,351

 2,274

 9,625

 

Table 2: Commercial term lending by DTV

Audited

31 December 2019

£'million

31 December 2018

£'million

DTV ratio



Less than 50%

1,274

1,277

51-60%

818

936

61-70%

747

791

71-80%

221

249

81-90%

41

100

91-100%

49

51

More than 100%

396

424

Total commercial term lending

3,546

3,828

 

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.

The approval for commercial lending is a manual approval undertaken by a specialist team of commercial underwriters in accordance with agreed delegated lending authorities. It is underpinned by a commercial lending policy supported by sector specific standards/guidelines.

Undrawn commitments

We have additional limited credit exposure to committed and undrawn amounts, such as unused overdraft limits and facilities. At 31 December 2019 we had £296 million (31 December 2018: £242 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.

Interest-only lending

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 (31 December 2018: £4.4 billion). There is further exposure to refinance risk in the Commercial Book of £1.5 billion (31 December 2018: £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.

 

 

Table 3: Retail mortgage lending by repayment type


31 December 2019
£'million

31 December 2018
£'million

Audited

Retail owner occupied

Retail buy-to-let

Total retail mortgages

Retail owner occupied

Retail buy-to-let

Total retail mortgages

Repayment







Interest

2,573

1,834

4,407

2,242

2,166

4,408

Capital and interest

5,920

103

6,023

5,109

108

5,217

Total retail mortgage lending

8,493

1,937

10,430

7,351

2,274

9,625

 

Table 4: Commercial term lending by repayment type

Audited

31 December 2019

£'million

31 December 2018

£'million

Repayment



Interest

1,483

1,592

Capital and interest

2,063

2,236

Total commercial term loans

3,546

3,828

 

Sector exposure

 

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.

 

Table 5: Commercial term lending by sector exposure

Audited

31 December 2019

£'million

31 December 2018

£'million

Industry sector



Real estate (rent, buy and sell)

2,374

2,547

Hospitality

308

235

Health and social work

263

217

Legal, accountancy and consultancy

236

384

Retail

100

99

Real estate (development)

62

52

Recreation, cultural and sport

51

19

Construction

35

60

Education

30

15

Real estate (management of)

11

72

Investment and unit trusts

8

1

Other

68

127

Total commercial term loans

3,546

3,828

 

Geographic exposure

 

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 broadly 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. A geographic analysis of the location of retail mortgage collateral and commercial term loan collateral is set out below:

 

Table 6: Retail mortgages by geographic exposure


31 December 2019
£'million

31 December 2018
£'million

Audited

Retail owner occupied

Retail buy-to-let

Total retail mortgages

Retail owner occupied

Retail buy-to-let

Total retail mortgages

Region







Greater London

3,424

1,197

4,621

3,034

1,231

4,265

South East

2,094

337

2,431

1,797

383

2,180

South West

738

97

835

616

122

738

East of England

570

76

646

492

91

583

North West

482

66

548

405

138

543

West Midlands

340

62

402

293

81

374

Yorkshire and the Humber

275

37

312

207

73

280

East Midlands

243

26

269

241

57

298

Wales

169

21

190

141

36

177

North East

93

11

104

83

31

114

Scotland

65

7

72

38

4

42

Northern Ireland

-

-

-

4

27

31

Total retail mortgage lending

8,493

1,937

10,430

7,351

2,274

9,625

 

Table 7: Commercial term loans by geographic exposure

Audited

31 December 2019

£'million

31 December 2018

£'million

Region



Greater London

2,264

2,465

South East

648

677

South West

208

229

East of England

139

151

North West

136

145

West Midlands

60

50

Yorkshire and the Humber

37

26

East Midlands

17

33

Wales

14

29

North East

13

16

Northern Ireland

6

3

Scotland

4

4

Total commercial term loans

3,546

3,828

 

Investment securities

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 2019 we held £2.6 billion (31 December 2018: £4.1 billion) of investment securities which are used for balance sheet and liquidity management purposes, of which £2.4 billion (31 December 2018: £3.4 billion) is eligible as collateral at the BOE.

We hold investment securities at amortised cost or fair value through other comprehensive income ('FVOCI') depending on our intentions regarding each asset. We do not hold securities at fair value through profit and loss.

Table 8: Investment securities by credit rating


31 December 2019
£'million

31 December 2018
£'million

Audited

Investment securities held at amortised cost

Investment securities held at FVOCI

Total

Investment securities held at amortised cost

Investment securities held at FVOCI

Total

Credit rating







AAA

1,943

156

2,099

3,113

230

3,343

AA- to AA+

144

255

399

306

319

625

A- to A+

67

-

67

39

28

67

Lower than A-

-

-

-

-

97

97

Total

2,154

411

2,565

3,458

674

4,132

 

We have a robust securities trading and investment policy which requires us to invest in high-quality liquid debt instruments. At31 December 2019, 82% of our investment securities were rated as AAA (31 December 2018: 81%) with a further 16% (31 December 2018: 15%) rated AA- or higher with some use of derivatives for hedging purposes.

Additionally, we hold £3.0 billion (31 December 2018: £2.5 billion) in cash balances, which is either held by ourselves or at the BOE, where there is minimal credit exposure.

MEASUREMENT

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 AIRB programme. Our stress testing capability was enhanced significantly during 2018 and continued to be so over the last 12 months.

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.

KPIs are defined, reported against and escalated through to the ROC. KPIs on portfolio concentrations are included in the monitoring reviewed by the Executive and Board Committees as part of our risk appetite. They are reviewed annually, with limit setting a collaborative exercise between first and second line teams. Limits are dependent on business objectives for the coming year. There are three classes of metrics: Tier 1 owned by the Board, Tier 2 owned by the Executive Leadership Team, and tracking metrics owned by management.

We monitor lending policy exceptions and their subsequent performance.

Credit risk quality assurance reviews are performed regularly and cover our sub-portfolios and sector exposure. The reviews cover top exposures, portfolio trends, concentration, key risk areas and recommendations.

As of 31 December 2019, all exposures are measured under the standardised approach for credit risk for regulatory capital; we are parallel running the AIRB rating system for residential mortgages. We continue to progress our AIRB application and continue to engage with the PRA on this iterative and detailed project.

MONITORING

Credit risk is overseen by the CRO, ERC and the ROC.

Three functions support the management of credit risk and report to the CRO:

• Our Commercial Credit Underwriting team supports the creation of commercial credit policies, ensures the business has suitable credit assessment tools and procedures and provides an independent review of individual commercial credit proposals and renewals.

• Our Credit Risk and Analytics team develops credit risk policies in accordance with the risk appetite, develops appropriate frameworks to comply with regulatory and statutory requirements and works with other areas of the Bank to ensure credit risk control practices are effectively implemented throughout the Bank. It monitors aggregate exposures and reviews portfolio performance and concentrations, providing comprehensive reports including KPIs to senior management, ERC and the ROC. It also develops and monitors models used for automatic credit decisioning, portfolio management and impairment, and develops stress test methodologies.

• Our Treasury Risk team supports the development and implementation of applicable policies and procedures and monitors the credit risk aspects of the Treasury portfolio.

Non-performing loans

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.

 

 

Table 9: Non-performing loans


31 December 2019

31 December 2018

Group

Non-performing loans £'million

Non-performing loans ratio

Non-performing loans £'million

Non-performing loans ratio

Retail-residential mortgages

25

0.24%

9

0.09%

Retail-consumer and other

10

4.30%

5

1.74%

Commercial (including asset and invoice finance)

42

1.12%

7

0.16%

Total

77

0.53%

21

0.15%

 

Cost of risk

Cost of risk is credit impairment charges expressed as a percentage of average gross lending. Further details can be found on page 177.

Table 10: Cost of risk

Group

 

2019

2018

Retail-residential mortgages

0.00%

0.01%

Retail-consumer and other

1.92%

1.54%

Commercial (including asset and invoice finance)

0.11%

0.10%

Average cost of risk

0.08%

0.07%

 

2.         Operational Risk

Definition: 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 business model please see pages 6 to 9

Change since 2018: Increase

Link to business model: Unique culture

 

APPETITE

We aim to minimise the amount of operational risk and as such seek to maintain robust operational systems and controls.

CHANGE IN YEAR

Operational risk has increased during the year. The change in delivery pipeline in 2019 contained remediation, regulatory and mandatory change, and exciting developments for the SME marketplace using the C&I funds. This volume of change has heightened both the change delivery risk, and the ability of business areas to absorb large amounts of change into their processes. These risks are being activity managed through our change risk frameworks and reported through governance. As operational resilience, fraud and cyber security threats continue to evolve and affect the banking industry, we continue to monitor and manage these to appetite.

MITIGATION

Policies

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.

Investment in our systems and technology

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 and levels of change experienced inside and outside the Bank have increased the execution risks associated with delivery of the transformation programme described earlier in this report while also continuing to deliver consistently great service to our customers. Therefore, in 2019, we continued to invest heavily in our systems. One of the largest changes was the delivery of the upgrade of the T24 core banking system which went live in July 2019. We will continue to invest in fully or semi-automated controls to support us in managing within risk appetite, while freeing up colleagues to focus on our customers.

We have been expanding our SME product offerings as part of the BCR Capability and Innovation programme, working with new third party providers, extending our physical store presence and enhancing our technology for growth. To mitigate the risks introduced through this change 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 which is crucial to protect data and provide secure reliable services.

We continue to evolve our ability to deliver superior service to our customers through our integrated technology stack. Given the rapid pace of change, continuous improvement of our technology infrastructure is essential to effective management of the risks associated with Bank's delivery agenda and the expansion of our digital footprint.

Delivery of the new strategy is dependent on additional investment in technology infrastructure. Ongoing investment is also required to protect us and our customers from the evolving threat of cyber risk.

Culture and training

As we evolve, we aim to do so safely through continued investment in training our colleagues. This enables them to deliver the right outcomes to our customers, whilst maintaining a safe, reliable and resilient banking operation.

Operational resilience

Operational resilience has been a central part of our risk management activity throughout 2019. This includes an ongoing maturity assessment of our cross organisational resilience capability, a review of our mobile channels; enhancement of our crisis management plan and operational disruption event response planning as part of the T24 upgrade, and enhanced operational risk scenario analysis, particularly as part of our Internal Capital Adequacy Assessment Process ('ICAAP').

MEASUREMENT

We measure operational risk using a number of quantitative metrics. These KRIs and KPIs are defined, reported against and escalated to the ROC.

MONITORING

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 2019 we continued to enhance our risk and control framework with the refresh of our risk appetite statement and operational risk policy, and development of operational (including IT) resilience capability; change risk management tools, and further alignment of risk governance to support consistent monitoring and escalation across the business areas.

Operational risk is overseen by the CRO, ERC and ROC.

Monthly Business Risk Committees are the business governance forums used to escalate risks and issues that are outside of appetite to the ERC and the ROC. Monitoring and oversight, along with compliance to policy, is provided on an ongoing basis by the Operational Risk Oversight team.

Targeted deep dive, thematic and desktop operational risk reviews are completed as part of an annual assurance plan completed by the Risk and Compliance Assurance team.

3.         Liquidity and funding Risk

Definition: 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.

We consider liquidity and funding risk to have increased year on year due to observed adverse movements in deposits and liquidity throughout the year, and the enhanced rates required to raise debt and deposits during 2019.

For more information on our business model please see pages 6 to 9

Change since 2018: Increase

Link to business model: Diversified low-cost deposits

 

APPETITE

 

Our liquidity risk appetite is based on the principle that we will ensure 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.

 

CHANGE IN YEAR

 

Liquidity and funding risk has increased during the year owing to deposit outflows experienced prior to our equity capital raise, increased competition in the deposit market, and higher volatility of large commercial deposits. Additionally, in 2020 we expect the impact of COVID-19 to have a negative effect, however given the inherent uncertainty over the length and scale of the pandemic it is too early to fully evaluate the impact of the situation.

 

MITIGATION

 

Deposit-funded approach

 

Our mid-term guidance as set out on page 11 underlines our approach of having a long-term loan-to-deposit ratio of less than 100%. Our retail deposit-led approach means we do not currently have reliance on wholesale funding to enable our ongoing lending.

 

We aim to attract deposits that are diverse and are low cost, which are less sensitive to competition within the deposit market. At 31 December 2019 40% of our deposits came from commercial customers (31 December 2018: 53%) with the remaining 60% (31 December 2018: 47%) coming from retail customers. Additionally, 29% of deposits at year end (31 December 2018: 30%) were in the form of current accounts, with the remainder split between a combination of instant access and fixed-term savings products. In 2019 our cost of deposits was 0.78% (2018: 0.61%).

 

Despite large adverse movements in deposits during short periods of the year, our deposit base at year end is stable and resilient, and retail deposits form a higher portion of our balance sheet than commercial deposits.

 

Liquidity management

 

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 BOE as well as high-quality liquid assets ('HQLAs') that are available to monetise in the event of stress.

 

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.

 

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 (including interest), on an undiscounted basis.

 

Term Funding Scheme repayments

 

TFS closed to further drawdowns in February 2018. Our drawdowns of £3,801 million will mature in 2020, 2021 and 2022 in the amounts of £543 million, £2,778 million and £480 million respectively. We will repay TFS through a combination of deposit growth and via a reduction in excess liquidity. This is currently under review in light of measures announced by the Bank of England in March 2020, which included a new funding scheme, the TFSME.

 

Table 11: Contractual maturity

 

 

Audited

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 2019









Cash and balances with the









BOE

2,989

-

-

-

-

-

2,989

2,989

Loans and advances to customers

-

349

317

584

4,191

16,893

394

22,728

Investment securities

-

269

229

74

1,924

215

-

2,711

Total financial assets

2,989

618

546

658

6,115

17,108

-

28,428

Other assets

-

194

93

250

1,345

1

-

1,883

Total assets

2,989

812

639

908

7,460

17,109

394

30,311

Deposits from customers1

(9,668)

(602)

(1,102)

(1,838)

(1,178)

-

(161)

(14,549)

Deposits from central banks

-

(6)

(7)

(556)

(3,274)

-

-

(3,843)

Debt securities

-

-

(23)

(23)

(766)

-

-

(812)

Repurchase agreements

-

(54)

-

-

(204)

-

-

(258)

Other liabilities

-

(194)

(94)

(251)

(1,354)

(1)

-

(1,894)

Total financial liabilities

(9,668)

(856)

(1,226)

(2,668)

(6,776)

(1)

(161)

(21,356)

Capital

-

-

-

-

-

-

-

-

Total equity and liabilities

(9,668)

(856)

(1,226)

(2,668)

(6,776)

(1)

(161)

(21,356)

Cumulative liquidity gap

(6,679)

(6,723)

(7,310)

(9,070)

(8,386)

8,722

-

-

 

 

Audited

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









BOE

2,472

-

-

-

-

-

-

2,472

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 customers1

(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

-

-

 

1. Deposits from customers with no contractual maturity comprises of notice accounts. These accounts continue indefinitely until the customer gives notice to withdraw some or all of the funds. Notice periods range from 30 to 100 days and customers cannot access their funds on demand, even with a penalty.

 

Capital management

 

We hold capital 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. We are working to ensure we are compliant with the incoming CRD V/CRR 2 requirements which were published in June 2019, mostly taking effect from mid-2021. These include requirements on the leverage ratio, market risk, and counterparty credit risk.

 

The MREL took effect on 1 January 2020 on an interim basis, and comes fully into effect in 2022. Holding MREL debt 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.

 

Table 12: Capital resources

Audited

31 December

2019

£'million

31 December

2018

£'million

Ordinary share capital

-

-

Share premium

1,964

1,605

Retained earnings

(392)

(209)

Intangible assets

(168)

(197)

Deferred tax asset (CET1 element)

-

(54)

Deferred tax liability (CET1 element)

4

7

Other reserves

11

7

IFRS 9 transitional adjustment

8

12

Total Tier 1 capital (CET1)

1,427

1,171

Debt securities

249

249

Total Tier 2 capital

249

249

Total regulatory capital

1,676

1,420

 

 

Recovery planning

 

The Recovery Plan ('RP') details a series of indicators which would tend to suggest a stress event may be in train. It assigns responsibilities and actions to key individuals, specifies timeframes, and establishes the Recovery Committee ('RC') chaired by the CFO which sits as required in the event of a liquidity stress. The RC was convened in 2019 during the periods of heightened media speculation described elsewhere in this report.

 

MEASUREMENT

 

Our asset and liability management ('ALM') system 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 RP. Colleagues monitor these on a regular basis 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 ILAAP every year for the identification, measurement, management and monitoring of liquidity, having due regard for the PRA Rulebook section 'Internal Liquidity Adequacy Assessment'. The Treasury team seeks ILAAP input from a range of teams including Finance, Risk, and Products, before taking the ILAAP through a robust governance process.

 

The conclusions of the ILAAP are reviewed and approved by the Board, assisting in: identification of our material liquidity risks; deciding the management of material liquidity risks; and determining the Board's risk appetite.

 

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.

 

MONITORING

 

The Treasury function 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 MREL debt for the first time in October 2019. Our LCR has remained strong throughout the year, ending 2019 at 197% (2018: 139%).

 

4.         Market Risk

Definition: 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 business model please see pages 6 to 9

Change since 2018: No change

Link to business model: Low-risk diversified lending

 

APPETITE

 

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.

 

CHANGE IN YEAR

 

There have been no changes to the risk level during 2019. Market volatility has increased during the start of 2020, driven by global economic uncertainty resulting from the COVID-19 pandemic.

 

MITIGATION

 

Interest rate risk

 

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.

 

Foreign exchange exposure

 

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.

 

Treasury management

 

We are mindful of upcoming regulatory changes, as we shape the investment portfolio in 2020 and beyond - and are working to reduce the proportion of our assets that are ineligible for a ring-fenced entity. 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.

 

MEASUREMENT

 

We measure interest rate risk exposure using methods including:

 

• economic value sensitivity: calculating repricing mismatches across our assets and liabilities and then evaluating the change in value arising from a change in the yield curve. Our risk appetite scenario is based on a parallel rate movement of 2% to all interest rates, but we evaluate based on a series of other parallel and non-parallel rate changes. The scenarios are designed to replicate severe but plausible economic events and to have regard to risks which would not be evident through the use of parallel shocks alone.

• interest income sensitivity: the impact on 12-month future income arising from various interest rate shifts. Our risk appetite scenarios are based on parallel rate movements of 2% and of divergences of up to 1.15% between BOE base rate and LIBOR against a constant balance sheet. We also evaluate a series of other parallel, non-parallel and non-instantaneous rate changes.

• interest rate gaps: calculating the net difference between total assets and total liabilities across a range of time buckets.

 

The frequency of calculating and reporting each measure varies from daily to quarterly appropriate to each risk type.

 

We use an integrated 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. The model also takes into account future contracted or expected growth in lending and deposits.

 

We measure and monitor our exposures to foreign exchange risk daily and do not maintain net exposures overnight in any currency other than pounds sterling, above 5% of our total assets and liabilities.

 

MONITORING

 

Interest rate risk

 

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.

 

Limits are set for the economic value of equity ('EVE') and net interest income ('NII'). EVE shall not drop more than £25 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 and NII limits are monitored daily by risk. 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 ROC and the Board.

 

Furthermore, a £15 million limit is set for a set of asymmetrical movements between LIBOR and the BOE 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.

 

We enter into hedging arrangements when the natural hedging in our book is insufficient to enable the Bank to remain within our limits. All derivatives are entered into macro or micro fair value hedge accounting arrangements in order to minimise volatility in the profit & loss account.

 

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, after applying expected non-contractual and out-of-course early repayments in line with the Market Risk Policy.

 

Table 13: Repricing analysis

Audited

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

31 December 2019








Cash and balances with the BOE

2,811

-

-

-

-

178

2,989

Loans and advances to customers

4,567

639

1,505

7,961

9

-

14,681

Other assets

2,513

-

3

472

22

720

3,730

Total assets

9,891

639

1,508

8,433

31

898

21,400

Deposits from customers

(5,974)

(1,089)

(1,819)

(1,147)

-

(4,448)

(14,477)

Other liabilities

(3,855)

-

-

(795)

-

(690)

(5,340)

Shareholders' funds

-

-

-

-

-

(1,583)

(1,583)

Total liabilities

(9,829)

(1,089)

(1,819)

(1,942)

-

(6,721)

(21,400)

Interest rate sensitivity gap

62

(450)

(311)

6,491

31

(5,823)

-

Cumulative gap

62

(388)

(699)

5,792

5,823

-

-

 

Audited

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

31 December 2018








Cash and balances with the BOE

2,242

-

-

-

-

230

2,472

Loans and advances to customers

5,235

579

1,184

7,186

51

-

14,235

Other assets

3,402

-

50

751

-

737

4,940

Total assets

10,879

579

1,234

7,937

51

967

21,647

Deposits from customers

(7,914)

(683)

(1,565)

(929)

-

(4,570)

(15,661)

Other liabilities

(3,949)

-

-

(445)

-

(189)

(4,583)

Shareholders' funds

-

-

-

-

-

(1,403)

(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

-

-

 

 

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 table below shows the sensitivity arising from the standard 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 2019

8.1

(8.2)

At 31 December 2018

(3.4)

2.8

 

 

5.         Financial crime risk

Definition: 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).

For more information on our business model please see pages 6 to 9

Change since 2018: Increase

Link to business model: Diversified low-cost deposits

 

APPETITE

 

We have no risk appetite in relation to financial crime risk.

 

CHANGE IN YEAR

 

Financial crime risk has increased during the year due to changes to global sanctions and obligations with which we must comply.

 

MITIGATION

 

Investment in our systems and controls

 

We continue to conduct horizon scanning activity to identify emerging trends and typologies as well as to identify and prepare for new legislation and regulation. This includes participating in key industry forums (or associations) such as those hosted by UK Finance. As required, we will update our control framework to ensure emerging risks are identified and mitigated. We updated all our Financial

Crime policies in 2019 to ensure alignment with regulatory obligations.

 

In 2019 we also mobilised a Financial Crime Improvement Programme to invest in and deliver enhancements to our business-wide financial crime systems and controls.

 

Resourcing and training

 

Resourcing continues to be a significant focus for us to ensure the Financial Crime Framework is implemented effectively. Headcount has increased across all lines of defence and we have recruited additional specialist resource in 2019 to support operational teams in the first line of defence and to bolster second line Financial Crime Policy, Advisory and Assurance functions. We continue to invest in our colleagues' development to improve their capabilities through industry recognised financial crime qualifications. All colleagues receive financial crime training which is updated to reflect new requirements, ensuring our colleagues are able to meet their personal regulatory obligations and assist us in achieving our risk appetite and financial crime obligations.

 

Sanctions

 

We have no appetite for non-compliance with legal and regulatory obligations in respect of sanctions.

 

In November 2017, on the advice of external legal counsel, we notified OFAC that we had discovered that a UK-based entity with which we had a banking relationship was subject to US sanctions relating to Cuba. We ended our relationship with the relevant entity.

 

In addition, in 2019 we discovered that a payment made to one of our customer's accounts, which had been received from a UK-based financial institution, had been routed to the UK-based financial institution from Iran. A further notification was made to OFAC.

 

We have initiated a review of the foregoing matters together with a review of our broader sanctions compliance and transaction monitoring policies and procedures with the support of external advisors, which is still ongoing. Metro Bank continues to fully cooperate with its regulators in relation to any enquiries in this regard.

 

Anti-Money Laundering and Combating Terrorist Financing

 

We have no risk appetite for financial crime and seek to comply with all relevant UK Anti-Money Laundering and Combating Terrorist Financing legislation. We continue to invest in capabilities to identify and detect potentially suspicious activity with work to enhance automated monitoring capabilities continuing through 2019 into 2020. This will improve our ability to identify suspicious activity to support external reporting obligations under the Proceeds of Crime Act 2002 and the Terrorism Act 2000.

 

Anti-bribery and corruption and anti-tax evasion

 

We comply with the UK Bribery Act 2010 and have zero tolerance for undertaking and/or facilitating bribery and/or corruption and will always avoid giving or receiving improper financial or other benefits in our business operations. We also comply with the Criminal Finances Act 2017 and have a zero tolerance approach to facilitation of tax evasion. We are committed to acting professionally, fairly and with integrity in all our business dealings and relationships. Policies and standards were revised in 2019.

 

Fraud

 

We have maintained our investment in fraud prevention and detection systems which has resulted in some significant losses being prevented, thus protecting our customers from becoming victims of fraud.

 

In 2019 we successfully updated our core banking platform with no increase in fraudulent activity impacting our customers. We also worked in collaboration with the telecommunications industry to enhance our controls preventing the social engineering of customers by fraudsters imitating Metro Bank.

 

Following the launch of our 'Be Your Own Hero' campaign in 2018, we continued to update our customers on new fraud trends as well as providing hints and tips to enable them to protect themselves from becoming victims of fraud.

 

We anticipate that in 2020 we will see fraudsters targeting customers through social engineering attacks and utilising our digital channels to make fraudulent payments. We have measures in place to help combat these, including technology to enable us to proactively avoid, respond, recover and learn from fraud events. We work in close partnership with our cyber security team and external cyber alliance agency in this area.

 

MEASUREMENT

 

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, KPIs are defined, reported against and escalated through to the ROC. We report monthly on our Bank-wide account opening pass rates, fraud volumes and associated operational losses through this process.

 

MONITORING

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 compliance 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 financial crime area.

 

We participate in external industry forums, including being an active member of the Cyber Defence Alliance and liaise with government bodies such as UK Finance, the Home Office, HMRC, Financial Conduct Authority ('FCA') and law enforcement to support our identification of new and evolving risks.

 

6.         Regulatory Risk

Definition: 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 business model please see pages 6 to 9

Change since 2018: Increase

Link to business model: Diversified low-cost deposits; Risk-adjusted returns

 

APPETITE

 

We have no appetite for regulatory non-compliance. We aim to comply with all relevant rules, regulations and sourcebooks. We have policies and procedures in place to ensure compliance with our 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.

 

CHANGE IN YEAR

 

The range and complexity of regulations with which we are required to comply has increased, and this continues into 2020. During 2019, several key initiatives to implement regulatory changes were significantly progressed or completed. Notably, these included PSD2, High Cost of Credit and Annual Statement of Fees, alongside the implementation of new measures required by the Competition and Markets Authority ('CMA').

 

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.

 

MITIGATION

 

Avoidance

 

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 that 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 Board-approved policies and standards.

 

MEASUREMENT

 

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.

 

In 2018, Metro Bank, supported by a 'big four' accounting firm, undertook a review of the classification and 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 by £900 million ('RWA Adjustment'), as announced in January 2019.

 

The Prudential Regulation Authority ('PRA') and Financial Conduct Authority ('FCA') are independently investigating the circumstances and events that led to the RWA Adjustment. The FCA are also investigating disclosure relating to our application for AIRB accreditation.

 

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.

 

MONITORING

 

As an industry, our regulatory obligations are increasing, including the introduction of minimum requirements for own funds and eligible liabilities ('MREL'), and the second Payment Services Directive ('PSD II'), 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 to not only implement the changes but also ensure we have clear visibility of the impact of changes on our business model.

 

7.         Conduct Risk

Definition: Conduct risk is the risk of treating customers unfairly, and delivering inappropriate outcomes that lead to customer detriment.

For more information on our business model please see pages 6 to 9

Change since 2018: Increase

Link to business model: Unique culture

 

APPETITE

 

We have no appetite for conduct risk. We aim to provide customers with simple, fairly priced products delivered with consistently great service and convenience. We are committed to avoiding customer harm.

 

CHANGE IN YEAR

 

Conduct risk has increased in 2019, driven by changes to complaints handling processes relating to fraud and social engineering, and an increase in compensation for fraud instances.

 

MITIGATION

 

Simple and transparent products

 

Our simple, transparent product range continues 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 are committed to ensuring that our communications to our customers are clear, fair and not misleading. Sales incentives in stores neither exist nor are perceived by colleagues to exist.

 

Make every wrong right

 

Our service-led business model gives us an inherent advantage. We are committed to doing the right thing for our customers and to making every wrong right. When we identify issues that have caused customers detriment as a result of our own actions we will seek to put these right.

 

In 2019 we made a provision of £12m for customer remediation, which predominately relates to non-compliance with certain requirements to provide SMS warning alerts to customers regarding overdraft charges. The error was subsequently corrected, and the CMA was informed. We pride ourselves on providing exceptional levels of service and we regret the impact on customers; any related charges will be refunded during the course of 2020.

 

MEASUREMENT

 

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 forums. We also use our 'Voice of the Customer' surveys to inform continuous improvement activity. KPIs are also defined, reported against and escalated to the ROC.

 

MONITORING

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.

 

8.         Model Risk

Definition: 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 business model please see pages 6 to 9

Change since 2018: No change

Link to business model: Diversified low-cost deposits

 

APPETITE

There is a low appetite for model risk. This is defined as part of our overall risk appetite and is regularly monitored by the Model Oversight Committee ('MOC') 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 model risk.

 

CHANGE IN YEAR

 

There have been no changes to the risk level during 2019.

 

MITIGATION

 

Governance

 

MOC 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 MOC for approval ahead of implementation or model changes.

 

The MOC defines and approves standards relevant to model risk and recommends policies and model risk appetite to ROC for approval on an annual basis. The MGC owns the minimum standards and target operating models to mitigate model risk and also defines 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 from both MGC and MOC.

 

Independent review

 

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.

 

MEASUREMENT

 

A set of KPIs are regularly reported and discussed at the MGC, MOC, ROC and Board. On a monthly basis the MGC reviews any material validation actions and tracks their completion.

 

MONITORING

 

A dedicated Model Monitoring team is responsible for assessing the ongoing performance of credit risk models against pre-specified tolerances approved by the MGC as part of the model monitoring standards. Model monitoring is regularly performed and results are discussed at the MGC and MOC where actions are agreed and tracked to completion. Non-credit risk models are also subject to monitoring according to metrics and a schedule agreed at MGC but this monitoring is carried out by the user areas concerned rather than by the Model Monitoring team.

 

SIGNIFICANT EVENTS

 

In February 2019, the Bank was awarded the Pool A funding of £120 million from BCR Ltd as part of the Capability and Innovation Fund. The funds are being used to enhance the mobile offerings to the Bank's SME customers as well as more advanced business current accounts and ancillary products.

Following a change to our strategy, a revised business case was submitted to BCR, and as part of this it was agreed that £50 million of the grant will be returned to BCR.

 

Further to the authority granted by shareholders at a General Meeting on 3 June 2019, a further 75,000,000 new ordinary shares of an aggregate nominal value of 0.0001 pence were issued at £5.00 per share. The new shares were admitted for trading on the London Stock Exchange on 5 June 2019.

 

In July 2019, the Bank disposed of a £521 million loan portfolio. The disposed portfolio was not considered a strategic asset, with its sale having no impact on the Bank's customer franchise, given it was continually serviced by an external provider.

 

During the year, we successfully priced a £350 million MREL-Eligible Debt Issuance with an order book in excess of £550 million which allowed the issuance to be upsized from the original size of £300 million.

 

RELATED PARTY TRANSACTIONS

 

Key management personnel

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

Key management compensation

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

 


2019

£'million

2018

£'million

Short-term benefits

5.8

6.0

Share-based payment costs

1.7

3.1

Total compensation for key management personnel

7.5

9.1

 

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

Banking transactions with key management personnel

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


2019

£'million

2018

£'million

Loans outstanding at 1 January

3.8

3.0

Loans relating to persons and companies newly considered related parties

-

0.1

Loans relating to persons and companies no longer considered related parties

(3.1)

-

Loans issued during the year

0.2

0.8

Loan repayments during the year

(0.2)

(0.1)

Loans outstanding as at 31 December

0.7

3.8

Interest expense on loans payable to the Group (£'000)

90

82

 

There were five (31 December 2018: ten) loans outstanding at 31 December 2019 totalling £0.7 million (31 December 2018: £3.8 million). Of these, three are residential mortgages secured on property, one is an asset finance loan one is an unsecured loan; all loans were provided on standard commercial terms.

In addition to the loans detailed above, the Group has issued credit cards and granted overdraft facilities on current accounts to Directors and key management personnel and persons connected to them.

Credit card balances outstanding at 31 December were as follows:


2019

£'000

2018

£'000

Credit cards outstanding as at 31 December

16

34

 

Deposit balances outstanding at 31 December were as follows:


2019

£'million

2018

£'million

Deposits held at 1 January

4.5

3.4

Deposits relating to persons and companies newly considered related parties

2.1

0.3

Deposits relating to persons and companies no longer considered related parties

(1.8)

(0.2)

Net amounts (withdrawn)/deposited

(1.5)

1.0

Deposits outstanding as at 31 December

3.3

4.5

 

Transactions with Group companies

Details of transactions with Group companies can be found within note 37.

Other transactions with related parties

The following transactions were carried out with related parties:


2019

£'000

2018

£'000

Architectural design services

4,885

4,084

Creative and brand services

428

498

Total purchase of services with entities connected to key management personnel

5,313

4,582

Amounts outstanding as at 31 December owed by Metro Bank

82

51

 

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

Architectural design services

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

Creative and brand services

InterArch also provided branding, marketing and advertising services.

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

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

Further details of the review conducted by the Audit Committee can be found on page 67.

 

DIRECTORS' RESPONSIBILITY STATEMENT

 

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 financial statements in accordance with IFRS as adopted by the European Union and applicable law and have elected to prepare the 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:

 

• select suitable accounting policies and then apply them consistently;

 

• make judgements and accounting estimates that are reasonable and prudent;

 

• state whether applicable IFRS as adopted by the European Union have been followed, subject to any material departures disclosed and explained in the financial statements; and

 

• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company and the Group will continue in business.

 

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 and Directors' report on remuneration comply with the Act. 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 54 and 55, confirm that, to the best of their knowledge:

 

• the financial statements, which have been prepared in accordance with IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group taken as a whole; and

 

• the Strategic report contained in the Annual Report includes a fair review of the development and performance of the business and the position of the Group taken as a whole, together with a description of the principal risks and uncertainties that it faces.

 

 

About Metro Bank

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

 

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

 

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

 

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

 

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

 

All Metro Bank products are subject to status and approval.

 

Metro Bank PLC is an independent UK bank - it is not affiliated with any other bank or organisation (including the METRO newspaper or its publishers) anywhere in the world. Please refer to Metro Bank using the full name. 

 

 


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