Metro Bank Holdings PLC (MTRO) Earnings Call Transcript & Summary

Hello, and welcome to the Metro Bank PLC FY 2020 results. [Operator Instructions] Today, I am pleased to present Daniel Frumkin, CEO; and David Arden, CFO. Please go ahead with your meeting.

Good morning, everyone. And thank you for taking the time in what I know is an extremely busy period for everyone. I promise we'll be significantly briefer than last year. If for no other reason, and we're on track, we're delivering what we said we would deliver last February. I will say that I'm getting a bit tired of being stuck in my lower ground floor. It is really time for COVID lockdown to end and for normalcy to return. I have no idea when that will be. And I think the new normal will be different than the old normal. But I genuinely look forward to being able to do this in person. Turning to the agenda. It's relatively straightforward. Again, you'll hear from me for a bit, then David will walk you through the financial results, and then we'll come back to me for a bit of a wrap-up. So this slide is a slide we used last year. And I think the core to this slide really is the upper 2 bullets under our strengths. They remain exactly as they were pre-COVID. We're uniquely positioned as an organization that while Covid has damaged the financials in the short-term and created some long-term challenges, which I'll come on to. It doesn't change the ability for Metro to be successful. Because for metro to be successful, we need our tremendous colleagues, be it in-store, Amaze Direct or in EMA central to do what they do well, to do what they do better than anybody else. And that's look after our customers by being completely focused on customer service, on taking customers and creating fans. If we do that, we then need to just simply provide more products, provide more options to our existing customer base, that's the strategy. And we now have 2.2 million customers, up 10% on last year, and it puts us in a place where we can deliver on the strategy even with COVID. So listen, I'm not making light of the year we've had. At a personal level, it's been extremely difficult for lots of our colleagues and lots of people throughout the U.K. It has been a challenging year financially. It has been a more challenging year financially than we expected. And as you look forward, there are some challenges with rate environments based on the Bank of England reducing the base rate to 0.1% to create a further hurdle for the organization going forward. But even in the face of those challenges, Metro has stood up, been resilient and has a clear path forward to [indiscernible] profitability in generating adequate growth. Now it doesn't mean the lower for longer rates aren't painful. It doesn't mean that lower for longer rates actually don't create some pressures on our negative operating jaws. That being said, what we've effectively done this year is accelerated the asset mix part of our strategy. It was always part of our strategy to do large-scale personal lending to do more specialist niche mortgages to deliver more free products like insurance, it was always part of our strategy. So we will still look to create new customers, we will look to generate new deposits but we've also started to meaningfully get traction on accelerating the asset mix of the bank. We'll come back to some of the points at the bottom. I just want to end this slide with being very clear. The strategic drivers that we discussed last year are still the strategic drivers for Metro. The strategy we laid out about being more Metro and doing more for existing customers still exist even with COVID. Turning to the next slide. I don't have much to say on this other than you'll see that for us, it still is all about customers, colleagues and communities. We still strive to be the best community bank in the U.K., and we'll simply get there by being more Metro by being more of what we already are by doing a better job for customers by meeting more of their needs, it's who we are and who we want to be. Now with that, I'll turn it over to David, who will walk you through the financials.

Thank you, Dan, and good morning, everybody. First up KPIs. We said last year that COVID-19 will deepen the J curve, and our financial performance reflects this. Excluding the impacts of COVID though, the financials are broadly in line with our expectations at this stage of our transformation plan. The underlying loss before tax of GBP 272 million includes an estimated GBP 124 million of COVID impact, principally in the form of increased ECL. The statutory loss of GBP 302 million was further impacted by a number of exceptional items, which I'll come on to shortly. We've continued to saw different customers start a very difficult year. And consequently, the business has retained momentum in the core franchise, evidenced by stronger cap growth and deposits ahead of where we were expecting them to be this time last year. Liquidity remains high and capital metrics are well in excess of regulatory minimum, given the actions we have taken on the balance sheet. And importantly, the core financial performance of the business really gain the month in the second half, with the underlying loss reducing by more than half. I'll [ impact this ] over the coming slides. Turning to revenue. Once the full year is unsurprisingly softer given the rate environment and multiple lockdowns. I'll focus on the evolution we've seen during the second half. Net interest income increased 15% half-on-half. As we took action on deposit pricing, we started to move to high-yielding asset mix, both of which are true to NIM. We would expect NIM to accrete further in 2021, as cost of deposits continue to fall and lending mix continues to shift to high-yielding segments. Fee income recorded material in the first half, up 39%. This is a combination of increased customer activity, particularly through the summer and the autumn as well as the implementation of new fee initiatives. The outlook for fees during 2021 will be significantly affected by the path towards the exit from the current lockdown. However, I would anticipate as the country returns to some level of normality fee income will increase from current levels. Also, and Dan will pick up on this later, as we continue to fill the product shelves, this will provide further incremental fee opportunities. Turning now to costs. On Run the Bank cost, we have shown strong discipline on cost growth. Whilst the headline increases 9%, adjusting for new items such as RateSetter and new stores, on a like-for-like basis, cost growth has been contained at 1%. I anticipate that Run the Bank costs will grow low to mid-single-digit in 2021, excluding the annualization of RateSetter costs. On RateSetter itself, post the purchase of the backbook, we will accelerate plans to more fully integrate the business, which should provide further opportunities for cost efficiency in 2021. Looking at change the bank spend, we're broadly where we thought we would be at this stage and in line with the parameters that we guided to in February last year. Change spend this year has been primarily focused on infrastructure and regulatory programs. And as this will continue in 2021, we do expect a greater proportion of the expenditure to be allocated to revenue and cost initiatives. Our guidance on the broad Change The Bank program is unchanged. However, I would anticipate a marginal uptick in expenditure in '21 over 2020 as we seek to maintain the strong momentum we've built up throughout the year. Moving on to expected credit loss. Pleasingly, there's been no material change here compared to when we last spoke. In fact, the macro picture has so far being better than we predicted in June. That said, we believe it is too early to form a definitive view given the ongoing certainty and continued government measures to support the economy. As such, we've increased our postmodel overlays and postmodel adjustments to bring us to a broadly flat position relative to half 1, and thereby retaining our conservative position overall. We believe this is fundamentally the right thing to do at this time. Now provided recurrent turns out as modeled, then we would expect the ECL charge in 2021 to be relatively benign. Although I would caution that there is still a high level of uncertainty as we head into the year. Overall asset quality remains robust. Dan will talk in more detail shortly. But on the graph on the left, you should expect to see a greater proportion of consumer unsecured in 2021 as we leverage the rate set of platform and brand. And within retail mortgages, a greater proportion will be high-yielding assets. On the line chart, we've illustrated the progression of active payment deferrals across the year. At the onset of COVID, we saw a large number of customers taking up the option of the payment deferral. That peaks at 21%. As we progress through the second half, the vast majority of mortgage customers came off payment deferral and returned to normal repayment terms. It's pleasing to see they were down to just 1% from October onwards. However, there has been a small portion of customers, who have required further support in the form of forbearance, which is driving the uptick in NPLs in H2, which you can see on the right there. This increase was anticipated within our ECL assessment, and we are appropriately holding postmodel overlays to manage the impacts of this migration. And before I move on from this slide, and also note the positive movement in debt to value half-on-half, both in retail mortgages, which is due to HPI indexation on the portfolio sale and the commercial loan book as customers have paid down debt. Turning now to the balance sheet. We continue to maintain a strong liquidity position, further strengthened by the mortgage disposal, which results in a pro forma LCR of 331%, and an LTD ratio of 75%. It's clear that the value of liquidity in the market today given elevated savings balances and ongoing support measures is less than it was 12 months ago. We intend to reduce liquidity over the medium term. And note on this slide, we are and we'll continue to utilize TFS and e funding as this provides low-cost flexible funding options for the bank, which brings me on to deposits. All the metrics are heading in the right direction, but a particular note is that the quality of the deposit base continues to improve. 16% growth in retail and SME balances is strong. And we've seen 7% of ISS switches choose Metro Bank through a punching above our weight in terms of market share. The mix shift is positive with 39% of the book now in current accounts, compared to 29% last year. Given that the 11% deposit growth is ahead of where we're expecting this time last year, alongside the additional funding that the mortgage disposal brings and the likelihood that some of the BBLS-related deposits were the transient, absolute deposit growth will be less of a focus for us in 2021. Our focus will be managing both the quality and the cost of deposits. Cost of deposits themselves fell to 65 bps this year, which to both pricing actions taken and the structural mix of the book. The exit rate on COD was 39 basis points, we would anticipate that continuing to fall into 2021. Turning to capital. Post completion of the mortgage book sale, our position is strong, and the disposal will move any near-term need to raise MREL. Pro forma total capital plus MREL stands at 24.4% and CET1 at 16.3%. A few points to highlight here. Given the PRA's recent comments, we are not including the EBA software benefit in management decisions regarding capital going forward. The RateSetter backed acquisition that we announced in January, and we expect to complete in April, we'll reduce on day 1. The precise amount will depend on the level of amortization in the book at that time. Clearly, though, we expect this to be capital accretive all the time. We note the change to timing on MREL from 1/1/22 to 1/1/23, and we can confirm that we have until 2023 to implement a HoldCo. And finally, on this slide, we are currently drafting our response to the Bank of England's MREL review discussion paper, but we have no view on the outcome. Turning to the P&L. I've covered most of these items earlier, and in particular, the improvement on half-on-half losses, they improved by more than 50%. Looking at the full year loss, GBP 124 million, that's nearly half the loss is attributable to the impacts of COVID-19. And GBP 96 million relates to Change the Bank costs, which nearly doubled, largely because of the lower capitalization rate. I also want to take a moment to focus on the exceptional items below the line. On impairment and write-off, the bulk of this relates to the later fall Baylor, the Central London Office we exited in H1. We've continued to see ongoing remediation costs, principally related to sanctions work. I would anticipate those continuing into 2021, the rate should be at a lower level than we've seen in 2020. And finally, just for clarity, we have booked the gain on sale of the mortgage book below the line. That's 90%, and we've got the remaining 10% in the early part of 2021. On the balance sheet, I'll not talk to in detail over set remains relatively simple and highly liquid. Before I pass back to Dan, a couple of summary points from me. We appreciate that these are another challenging set of financials, that said, we have taken appropriate action to manage the impacts of COVID, the bank's capital position and to also accelerate the mix shift on the asset side of the balance sheet. The P&L will gain momentum in the second half with the underlying loss reducing by more than 50%. We have been and we will remain disciplined on cost. And we are entirely focused on completing the turnaround and returning the business back to medium-term profitability. Dan, back over to you.

Thanks, David. So let's just spend a few minutes turning through a few of the strategic drivers that we enacted throughout this year and built on from what we set last February. So again, this slide is a slide you've seen before. It's been slightly modified. And I think the key to this slide is that the core drivers, the foundation or building loan continues to be available to us to service the foundation for the turnaround. And that is just the exemplary customer experience that we deliver. And again, we were the #1 High Street bank under the CMA results for the sixth time in a row. We're the bank of the Year at Money Age. There is every evidence that our customer service proposition is delivered by our phenomenal colleagues, be it in-store, and Amaze Direct or Amaze Central continues to resonate with our customers and gives us an opportunity to do more for those customers as we go forward. To be able to do more for those customers, you heard last year that we needed to build out our product offerings. I told the story of the credit card debacle, that was my experience. I think that is shared, if it was unsecured lending or overdrafts, we just need to get better at meeting more customer needs. And we've made real progress this year in building out some of our core infrastructure, not only on product but on channel as well by launching business current account opening online, which we think compares favorably with anything in the market. And we've just reopened business account opening online this week, and we're excited by quickly getting into a multidirector space and being in a unique offering in the marketplace. So again, for us, it is really about doing more for our existing customer base while continuing to grow our customer base through exemplary customer service. Now we need to get better at channel. We need to invest in digital. We need to invest in the telephone, all of which is understandable, given the focus on store investment in the first decade of Metro's existence. We will continue to leverage the existing store state. We're going to open 2 more stores in '21 in Bradford and Leicester, which we're very excited about. But beyond that, we're going to pause store openings for a period of time and continue to invest and develop our existing colleagues in-store and our existing customer base while growing customers throughout our existing footprint. However, as mentioned earlier, clearly, the lower rate environment has meant we've needed to accelerate our asset-led strategy. The bit that's good is we're not turning up to tell you what we're going to do. We're telling you -- turning up telling you what we have done. This isn't a story about, oh, we've realized that rates are going to be lower for longer, and we should do something. This is a story about taking action as early as late March, early April to reposition the balance sheet, to ensure a return to profitability and adequate RoTE for our shareholders. So you can see in the upper left, the strategy of being able to take excess liquidity and invest it in treasury assets at relatively low-risk rates, leverage up the balance sheet and generate a good return on tangible equity is no longer really available to us. With AAA RMBS yielding 40 bps, it's really difficult to see how one can take its excess liquidity and make an adequate RoTE going forward. Therefore, you'll see in the upper right, we've meaningfully reduced our pricing on fixed-term deposits. That isn't prospective, that is retrospective. We have already done it. You can see in 2019 that we had 103 basis point differential between Metro Bank 1-year fixed-term deposit pricing in the big 4. Today, that's 8 basis points. You can see on the bottom left, we'd always talked about entering specialist sort of niche mortgages, it was always part of the plan, and we were going to gradually move into that space over the next few years. The reality is with COVID rates fighting, we decided to make that transition much quicker. And you can see we went from sort of 90% prime mortgages, 10% specialist, niche and turned that on its head on a dime, actually, and they've been running greater than 80% specialist niche mortgages and only 20% prong, really since most of the second quarter in 2020. And again, we made the acquisition of rates at a business that I don't think was in our plays to acquire. I don't think we thought it would become available. We made that acquisition, announced it in the spring, and closed it in the late summer. And since we started lending under the right set platform in October, we've done greater than GBP 120 million of unsecured personal land bank. To be clear, that is more unsecured personal lending that Metro Bank has done organically since its inception. In addition, rates not only delivered talented colleagues, a good platform, skills in credit scoring and decisioning and product management and agile it that have been very value-add to the day. It also delivered a brand and a channel, the aggregator sites, and were never in our play in last February. So being able to leverage up the rates at our brand not only for unsecured personal lending, but most likely credit cards in the aggregator channel is incremental to what we envisioned for unsecured mandate volume going forward. And again, the backlog purchase of the rate center loans is an opportunistic transaction that will be NIM accretive and RoTE accretive. Turning to the next slide. Most of this was covered by David. So I won't spend a lot of time. I just really want to say that not only did we accelerate the strategy we laid out last February, but we did so with real discipline around costs. So 1% cost growth, like-for-like, I think, is the lowest cost growth in the history of Metro Bank. Again, we were opportunistic, we purchased the freehold on 3 properties and took advantage of the changing market dynamic helped the optionality and financials of Metro going forward. Turning to the next page. Again, David covered most of this, but I do want to highlight one thing, and it's on revenue, the first launch, BBLS and CBILS. We did about GBP 1.5 billion, maybe a little more than that, but government-backed lending from a standing start. We did roughly 35,000 BBL loans over a few months and GBP 1.4 billion in lending. Now again, that's more than 70x the total SME lending done at Metro Bank since its inception. I don't say that to talk about the past. I say it to talk about the future. We've demonstrated our ability to scale. We've demonstrated our ability to take advantage of a market opportunity. We demonstrate our ability to meet customer needs. We've demonstrated our ability to do more for our existing customer base in a very difficult environment, all on controlling costs and delivering other inorganic activities. I think it makes it pretty clear we have an opportunity going forward. This slide is really here, really a few requests of investors and analysts. It was used at the half year. And I think there's a couple of bits that I'd like to show. One is the drop going into this lockdown as it is severe as the drop going into the first lockdown. And some of that January will be seasonal. And you can see we've already started to see a meaningful uptick in activity, while we're still on lockdown. The majority of our stores remain busy. We have a significant portion of our footprint still up in 7 days a week, and we still have the longest hours on the High Street. That activity pickup gives us hope that fee income and other activity-based income will rebound as we come out of lockdown. So lastly, I think the summary speaks for itself. I'm not going to add much other than a couple of comments. And that is we had a good year. I know the financials aren't what anybody would hope for, myself included. I know the loss has been impacted by COVID. I know we ate up more capital than we would hope to have done in the first year in the turnaround due to COVID. But we delivered organically against the strategy. We started to build out new products. We started to enhance our digital offering. We've continued to make progress in-store, customer numbers have grown by 10%. We were #1 in the CMA results again. It was a good year. Not only have we moved forward with our core strategy, not only have we delivered against what we told you last February, but we also took new inorganic activity, and we're opportunistic off of the back of the pandemic. We sold GBP 3.1 billion of mortgages to NatWest. That transaction was good for both parties. Those mortgages, given their yields are better owned by NatWest. We got a fair price and what we were quite happy with. We acquired rates -- from a standing start, we acquired that business in about 60 days. We closed it about 60 days after that. We were up and running in lending under the rate center platform within 30 days of acquisition. It's now built into every channel at Metro. You can now borrow money digitally through Metro, which you could never have done before, thanks to the rate center platform. It's built into all our stores and will launch once the pandemic starts to live. It's given its functionality and capability we didn't possess. We've acquired the rates at our back book. Again, a transaction that was opportunistic and make good sense for the bank going forward. And we also bought out a few properties from landlords who needed the cash, and we're happy to do transactions. It made sense for them and made sense for the bank. Lastly, I'll just add with a statement. So last year, I said there was a path forward that returned this organization to profitability and generated reasonable return on tangible equity for our shareholders going forward. That path still exists. COVID hasn't changed the strategic opportunity available to Metro, COVID hasn't blown us off course. What COVID's done has created an opportunity for us to do some inorganic things that has allowed us to accelerate parts of the strategy to put Metro in good stead going forward. So it will be difficult going forward. I will ask a lot of my colleagues. I will ask a lot of everyone in Metro to continue to drive the organization forward. But I am confident, more confident today than I was last year based on the delivery and the transactions we did in the path forward for Metro. So with that, I will just say thank you for your time this morning, and Dave and I are happy to take any questions.

[Operator Instructions] And our first question comes from the line of Benjamin Toms of RBC.

Two for me, please. Firstly, I appreciate that you've not reprinted your longer-term plans in the presentation. But broadly speaking, do you expect to be profitable by the end of 2024 on a reported or an adjusted basis? If you can't give guidance on this, could you give some color on what the biggest unknown factors are, which are driving the uncertainty? Is it rates or loan losses or volumes or something else? And then my second question, you gave Run the Bank cost guidance for FY '21 of low to mid-single-digit percentage growth. Plus then you add on the annualization of RateSetter costs. So am right in saying on an all-in basis, for the year-on-year guidance to run the bank cost is roughly in the 8% to 10% range?

So Ben, thanks for the question. I really appreciate it. The long-term guidance, the medium-term guidance, we're really just not on a place to reconfirm where that sits. And I think you hit the reasons in your speech. We don't know where rates are going to go, the bank's still talking periodically about negative rates. We don't really understand what the macroeconomy is going to look like post the withdrawal of government support that needs to occur over the next few months. So given that uncertainty, I think it would be imprudent for us to guide and provide any medium-term guidance. But I do want to be clear, there is a path forward that returns this bank to profitability. And I think that path is pretty self-evident off of the performance we did this year and the actions we took to begin to reposition the balance sheet to improve NIM and then in turn, that NIM will flow through to profitability. So we do see a path, we're just not really willing to guide at a medium-term level because of the uncertainty around rates in the macro environment. In terms of cost, David, I'll let you pick up the specifics around costs.

Thanks, Dan. Ben so yes, on Run The Bank costs, we've been very clear that excluding RateSetter, you should expect a low to mid-single-digit in '21. With RateSetter, we acquired the business in mid-September. It added GBP 8 million to our cost base in '20, when you annualize that, you should get to a broader way you pan out, Ben, although I would say that, as we said in the presentation, once the backbook transaction is complete, we'll look to more fully integrate the RateSetter business into the Metro Bank business. And therefore, I would anticipate there's opportunities for cost efficiency there.

Our next question comes from the line of Freddie Sleiffer of KBW.

Firstly, you've given us a lot of color around unsecured and mortgages, but just curious on your thoughts about SME lending, which was obviously strong in 2020. How are you expecting balances to develop over the year once the government vaccine ends? And what assumptions are you making around SME lending in your NIM guidance of slightly up this year. And then sort of tagging on from that, just on risk-weighted assets. I'm wondering if you can give us some guidance as to the progression you expect over the next year or 2 years even. Obviously, the mortgage book is rolling off. But then the unsecured book will be at a higher risk weighting. I'm assuming that that's only a 2-year book. So just sort of if you could give us a sense as to how to think about the headwinds and tailwinds to risk-weighted assets, that would be very helpful.

Sure. Thanks, Freddie, for the question. I think SME lending is an important part of the foundations we're building. So I think the infrastructure we built around Bios lending is being morphed into what I would call kind of a standard sub GBP 250,000 SME lending platform that we'll have available through our LBMs who are present in every store and our mobile corporate lending, which we have regionalized throughout the U.K. We're hopeful in that space, although I must admit, Freddie, we don't know what lending looks like beyond all the BBLS and CBILS support that customers have gotten. Our sense is that a fraction of those customers and maybe not an insignificant fraction of those customers borrowed money to provide some insulation because they were unsure of what COVID was going to cause in their businesses. So in terms of demand for lending in that space, we are not sure what we see over the next 12 to 18 months, but we're positioned to take advantage of it. In terms of the NIM growth, the majority of the NIM growth is driven by the existing SME lending we've done and then call it up by more unsecured lending and mortgages. We're not really expecting a huge push on the SME side, mainly because we don't think there'll be much demand based off of the government support programs. In terms of RWAs, I think you got it and want. I mean, so unsecured personal lending, 75% risk-weighted versus the mortgages that are 35% because we're seeing that bank. So therefore, clearly, RWA utilization goes up as we expand the unsecured lending platform or the SME lending platform, which would be 75% risk-weighted as well. And we're completely focused on risk-adjusted returns on regulatory capital. So we will manage the balance sheet and the asset mix of the balance sheet, based off of what we believe is the right risk-adjusted return on regulatory capital as we move forward. So I think you could -- you will see the RWA utilization drift up slightly as the asset mix shifts to unsecured consumer and then a bit of SME.

Our next question comes from the line of Grace Dargan of Barclays.

If I could just ask a couple. So on deposit repricing, could you give us a stare maybe on the NIM improvement you're expecting from that? And can I confirm whether there's any part of the deposit base yet to reprice? And if so, roughly how much? And then secondly, it's good to see the investment in the high-yielding assets. Do you have a time scale for the full reinvestment? And perhaps just hanging on to that. On the specialist mortgages, could you give us a little bit more detail on the market that you're targeting with those specialist niche mortgages and kind of how the spreads compare to your vanilla products?

Sure, grace. Listen, thanks for the question. I'll reverse the order, if that's okay, and then I'll turn it over to David to talk about deposit repricing and how the base is repricing over time because obviously, some of the 1-year fixed earn money will reprice as we go out through the course of the year. So in terms of the investment in higher yielding, we hope to continue to build up the unsecured lending portfolio at reasonable pace throughout the course of the year. We're being a bit measured given the uncertainty in the macro environment at the moment. So we are top of the best buy tables on the aggregate of sites with the rates that are brand. And we think quality is probably more important than volume as we sit here today. But we're pretty pleased with that. And I think if you're modeling it forward, you should expect unsecured lending portfolio to grow throughout the course of the year. In terms of other activities in the high-yield space in terms of the specialty mortgages, what we're doing. For the last few months, it's really been focused on sort of the 90% loan-to-value product, which, as you know, got completely dislocated in the U.K. during the pandemic, which was an opportunity for us. It was a real opportunity for us to generate some volume that we're quite comfortable with. In addition, I think we will be looking at professional by the lab. We're looking at things like self-employed. The niches that are pretty well-known and serviced by other really good specialist lenders, an OSB or a Paragon. And they're well-established markets and well-established niches that we're going after. So we're pretty comfortable. There's an opportunity for us there. And we have a team in place that really grew up doing specialist lending. So we're quite pleased with the quality of what we've seen today. And then, David, I don't know if you want to pick up the deposit repricing in the deposit base, repricing, yes.

Yes, Grace. So as Dan said in the slides, we're currently just above the average rate for the big 4. I wouldn't anticipate that we price below the big 4, ours will be just slightly above. But we've still got some of the FTDs to roll through in the first half of this year and probably a bit into the second half. So that gives us quite strong momentum on further reductions in card, alongside the structural mix that we now see, nearly 40% of the book is noninterest-bearing and variable rates, I think all the pricing actions we've taken on the variable rates now. So that structural mix should see us continue to reduce as we go into the new year.

Our next question comes from the line of Chris Cant of Autonomous Research.

I'll limit myself to 2. And perhaps I have -- I know we've got a session on Friday. First one, do you still think you can achieve sustainable profitability? Anything commensurate with the return target you are hoping to hit by 2024 without raising fresh equity to support the strategy. You've had an unexpected pandemic hit you and you've had 65 bps of rate cuts, which you weren't expecting. There's been a bite out of your capital from incremental provisions. I just think the capital glide path looked very forward when you stated a year ago that you would be able to deliver that without raising fresh equity. I'd say it's -- well, I really struggle to actually put numbers in a spreadsheet, which get you anywhere close to profitability without needing a fresh equity injection in order to upscale the business. So just your thoughts around that would be very helpful. And then on the costs, I was trying to roll together your cost guidance. Obviously, there's quite a lot of parts to it. But it looks to me like you're pointing to sort of Run The Bank cost of GBP 420 million to GBP 430 million. And then with the Change The Bank, it sounds like that's going to be a bit higher, so are we looking at GBP 530-ish million costs in 2021 in terms of the above the line, costs you report, not including the remediation stuff you're still taking below the line?

So Chris, I know it's a busy stretch road. So I really appreciate you making the time for the presentation, and I appreciate the questions. And David, I'll come to you in a second around the costs. It feels like Chris got his numbers about right, as usual. In terms of the achieving profitability without needing fresh equity. We're still pretty confident, Chris. So we think there is a path forward based off of an asset mix shift, a repricing of liabilities and discipline around costs as we get beyond the transformation plan. So you need to remember, while the Change the Bank costs were elevated this year. And you're right, we think they'll be a bit higher next year the Change the Bank cost. That's because we've been successful in driving more change quicker than we anticipated. It hasn't changed what change we've done. I mean, the list of programs really we set almost last February, we're just ticking through them with some minor amendments, but for the most part. So so at some point, that starts to subside. We start to get some cost benefit from that investment, a bit more straight-through processing, a bit more self-serve for our customers, which again, helps on the cost side as we get into the outer years of the plan. We would think we could build up a reasonably sized unsecured lending portfolio in line with others in those markets, especially now that we have access the aggregator side at and we think the specialty mortgage market is one, given the scale that we possess, that we can do well in. And the combination of all that really becomes quite NIM accretive. And then with the discipline around cost, I think there's a path to profitability. And I think there is a path to getting to a reasonable RoTE. Now we don't know what's next. So I thought your summary was really, really good. And I wish I would have had it before the Board earlier in the week. It was a better summary that I gave. But the pandemic and the rate cuts and the provisions are things that were definitely headwinds that weren't in the original plan. But even with those, we see a path back to profitability, and we see a path back to a reasonable RoTE over a reasonable time horizon. I don't know that we can say much more than that because I don't really know with the next 6 to 12 months holds, depending upon how the macroeconomy evolves, depending upon where rates go. But we do see a path. And the plans we put together, as we sit here today, we don't anticipate raising further comm. So I accept that it might be a point where we disagree, and we can spend some time, I think it's Monday, not Friday now. And we got the new decession. It's on Monday from Friday. We can spend this more time over together on Monday and dig through it a bit. I'm happy to spend some time, but we do see a path forward. And David, I don't know if you want to cover off costs.

Sure. Chris, you're right, Chris. We've been -- I think we've been very transparent on the cost. I think the split between Run The Bank and Change The Bank is helpful. We've been very clear on how we anticipate when the costs progressing. And on the Change The Bank program, we're broadly in line with what we said where we said we've been this time last year. We had GBP 63 million of OpEx in 2020. Given the strong momentum we've seen in the program throughout 2020 and as we head into the first part of '21, I would anticipate that GBP 63 million is slightly bigger in the year. So that should give you enough to work through what the outcome will be on the cost base for '21. I think what we're providing is really transparent and helps you to understand exactly where we're heading on the cost base. What I would say on the Change The Bank is we're now predominantly OpEx in that change spend. So it's not ballooning out in terms of capitalization spend. And once the Change The Bank program is done, that should reduce gradually over time.

And in terms of the implications, I mean, is the GBP 530 million the right sort of ballpark allowing for some inflation in that Change The Bank in terms of the above-the-line costs?

Work through that, is that math, but it sounds right when you work it through. That's really -- we've been very clear on how we see that progressing.

If I could ask one more and sort of just coming back to sort of the strategy and the equity side of things, can you talk about focusing on risk-adjusted returns on RWAs and the challenge faced with liquidity in a low rate environment. Obviously, you sold this book of mortgages to NatWest with a yield of, I think it was 2%, 2.1%. If I think about that from a risk-adjusted return perspective, particularly if you are to get IRB down the line, I suspect the revenue to RWA on that after allowing for normalized cost of risk would have been higher than the RateSetter book that you acquired because I think that was an 8% yield, but on a much higher risk weight, and obviously, that will come with a meaningfully higher cost of risk. So can I infer anything from that with regards to your expectations on IRB? It's something you didn't touch on in the presentation or perhaps I missed it, but -- yes. I struggle a little bit with the risk-adjusted returns comment just because the book you sold would appear to have better post-IRB risk-adjusted returns to me.

Yes. So Chris, a really fair challenge. So I think there's a couple of bids. We don't really control AIRBs sort of it's up to the regulator to make a determination based on the quality of the submission we make to gain AIRB. Clearly, we're continuing to work on it. Clearly, we brought in some individuals who are quite skilled in that area to help make progress. But again, the time line for that is an iterative process, working with the regulator and through all that. So I don't know the time line. But the reality is that in a future state, where we get risk weights that are significantly lower than the 35%, then the math you've walked through is relatively straightforward. In an environment where we have 75% risk weights on unsecured personal and 35% risk weights on resi mortgages, an 8% versus a 2% is a pretty good trade, yes. So in the mortgages that we sold to NatWest were prime, very prime mortgages and had a duration. I think we disclosed the duration when we did the trade. I think they had a duration of sub-2 years. So they -- I'm not sure what the balances would have been last in a couple of years' time. And we can originate and have an engine that can originate replacement mortgages at pace. So we thought it was a transitory relationship for a period of time and not actually that long a duration. So a pretty short period of time. Does that make sense?

Yes. I mean, I guess the duration on the RateSetter book that you've acquired is also...

Pretty short. Yes, it runs.