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

Hello, and welcome to the Metro Bank PLC Full Year 2021 Results. [Operator Instructions] Today, I'm pleased to present CEO, Daniel Frumkin. Please go ahead with your meeting.

Good morning, everyone. And thank you so much for joining us. I need to start by apologizing to our U.S. stakeholders, I know this timing is inconvenient. But again, it's a difficult choice for us. But we need to look after our U.K. stakeholders as well. So on to the presentation. So you'll see the first slide -- clicker is not working. You'll see the first slide actually talks about on the left-hand side, there's a clear indication that we're sticking to what has made Metro successful for a long period of time, which is the customer service proposition. So we're very clear that we continue to stay focused on providing exceptional customer service and creating fans. Again, the CMA results we were #1 for in-store service on the High Street. Once again, we've been recognized by various industry awards, which is always nice. And we continue to grow customer numbers. I think the middle part of this graph is really important. And we have, since 2019, fundamentally changed the shape of the balance sheet. So you see small business lending, it continues to be a part of what we do. But you'll see consumer lending has grown up to 7% of the overall balance sheet. And actually, government-backed lending has grown to 13% of the overall lending portfolio. Again, not something that even existed when we were in 2019. That has led to meaningful increases in lending yield. And then on deposits, we've reduced fixed-term deposits down to about 9% of overall deposit book by 2021. A significant reduction. So what that leads to is, you end up with a 61 basis point increase in lending yield over the period, and almost a 60 basis point decrease in cost of deposits. So a meaningful uptick in overall margin. That widening of the jaws in a mere 18 months is really the thing that's driving the transformation. On the right-hand side, we sort of do a small tick list. It's not everything. But it gives you an idea of everything we've managed to accomplish. In terms of balance sheet actions taken, I mean GBP 3.1 billion mortgage sale, the RateSetter acquisition, all have had transformative effects on the P&L and the shape of the balance sheet. Again, we'll talk about AIRB a couple times throughout the presentation, but we're really not going to say much more than the application is progressing. And we continue to work with the PRA in an iterative process. The legacy issues, we're quite pleased we put in place a provision today for the FCA investigation. We put a provision in place of GBP 5.3 million. We've made enough progress in that investigation that we're comfortable to put in place a provision. There's still some ongoing work to be done. It will still take a few months before it's finally resolved. We continue to work closely and collaboratively with the FCA and are comfortable. The PRA investigation and the RWA issue has been closed. And it's a nice moment to put those behind us. It's a nice moment to put those legacy issues behind us and move on with driving the business forward. Again, we continue to enhance IT and resilience. And again, cost growth for us, it's not -- I think it might be the first time ever in Metro's history, underlying operational cost decreased in the second half of the year versus the first half of the year. And actually cost went down. Yes. So in terms of near-term focus on the path to profitability, you'll see in the upper-left a couple of big drivers. Spot headcounts actually down year-on-year, averages are still up a bit, but spot headcounts down. The one I'm actually sort of proud of, it doesn't make that big of a difference, but it's actually something we strove to do. All of you know we have excess space in the stores, moving 310 desks into the stores, for colleagues to work in-store has started to eat up some of that excess space. It makes a small dent, but it is a step in the right direction. Below the upper-left, you will see that we are optimizing our property footprint. And we announced today we're closing 3 stores. So at the end of the day, those 3 stores had unique challenges to them. And we thought it appropriate to close them and move on. I've always said that we would treat the store state with a cold calculating eye. And we will continue to treat the store state with a cold calculating. And if it makes sense to exit stores, we'll exit stores. However, we're really comfortable with the store state where it is now post these 3 closures. We remain committed to stores. We think the service proposition in stores makes sense. We think it's a differentiator for Metro. And as you saw on the previous slide, we're the clear #1 for service on the High Street in stores. So I wouldn't take this as an indication we're walking away from stores as the basis for Metro going forward. But if there are stores that that need to be exited, we'll do what we need to do for all stakeholders. We've also, as we've said before, exited Old Bailey, and we now have a hybrid working environment. In our Holborn offices we have about 1 desk for every 3 colleagues. We are improving efficiency overall. As I said, headcounts down a little bit. And we continue to drive forward. We do expect '22 exceptional cost to be down meaningfully on '21. So again, we'll get to guidance in a bit, but we really have gotten through the various investigations as well as the remediation efforts and we're comfortable with the exceptionals. The middle column just shows some activity levels. We are seeing some pickup post COVID. Obviously, January was a bit of a tough month given the sort of quasi lockdown, but we've seen real activities bounce back in terms of spending and store activity. On the right-hand side, this is all about what we're going to do, which is really just continue to execute on the plan as we've done to date. We are going to introduce some digital products for SMEs in the lending space, which we think will be quite attractive. And we are going to enter the auto lending space under the RateSetter brand. We continue to build up our consumer lending operation as well as our specialist mortgage operation. We do continue to shrink the commercial real estate book, the transactional commercial real estate book, which we think is appropriate given our strive to improve risk-adjusted returns on regulatory capital. So this slide you've seen before. These are the key performance indicators. I think the takeaway from this slide is all the hours are going in the right direction except for capital, which I'll come on to next. And the bottom, that we put in a box, to make it even easy for you, the bottom bullet point is really meaningful, yes. So if you adjust for the GBP 3.1 billion mortgage sale that we did at the end of 2020, revenue increased 42% year-on-year. NII increased 56% year-on-year. I've been doing this a long time, and I've looked at a lot of bank peers that both in the U.S., the U.K. and across Europe, I don't remember another bank growing revenue 42% in a year. And we did it the old-fashioned way. We changed the shape of the balance sheet, we lent money and we brought down the cost of deposits. Now on to capital. So listen, capital, we are currently operating within buffers. So we're now into 2022. We know the EBA software adjustment roll-off, and we knew we lost 1/4 of the IFRS 9 adjustment, which means we're now operating within buffers. We are very comfortable operating within buffers. We see no problem operating in buffers as we sit here today. The regulator is fully aware of our capital position. They've seen our '22 budget. They've seen our 5-year forecast. And we continue to work closely with the regulator. But we are very comfortable operating within buffers. And let me be really clear that I understand regulatory capital requirements. But if you look at whether we have sufficient capital to operate the business and you go to any kind of an economic capital model. And for my sins, I started doing economic capital modeling in the '90s. The reality is, for a bank that has GBP 9 billion sitting in on treasury portfolio and half its loan book in resi mortgages, we need a lot less capital than we currently hold to run the business. Now we understand the importance of the regulatory. We're very clear we're not going to go below regulatory minimum, but we're also very comfortable operating within buffers. You'll see the bottom-right bullet point. The HoldCo implementation has now been pushed back to June of '23. It aligns with the first call date of the Tier 2 instrument. 5 pillars. We've talked about this since February of 2020. This is the strategy in a nutshell. And I think across all 5 pillars we've made progress. We continue to work hard to optimize the balance sheet and drive risk-adjusted returns on regulatory capital. I think from an infrastructure perspective, this bank is a safer and sounder bank than it was when I arrived. We've made real progress, be it on cyber, fin crime and other activities. We continue to drive costs down while protecting our service proposition. And we continue to do things as creatively as we can in terms of buying freehold -- buying leasehold and creating freehold to change the P&L profile of some of our properties and give us a bit more financial flexibility. So again, striving for scalable growth and improving the margin and NII growth. And ultimately, our goal is to become the best U.K.'s -- the U.K.'s best community bank. So this slide, I want to spend a minute on. So this is just a typical P&L slide, and we're going to spend a couple of minutes on the P&L. You see the NIM bridge on the left. So if you take the end-of-year, second half NIM from 2020, which is 128 basis points. Now again, this has to be from memory because I cannot see that slide. So you're going to have to trust me. If I get it a basis point or 2 wrong, bear with me. But that 128 basis point NIM needs to be adjusted down for the drop in loan-to-deposit ratio, yes, mainly caused by the mortgage sale. So that 31 basis point drop in loan-to-deposit ratio means we started the year with a NIM that was 97 basis points, okay? We ended the year with an exit NIM in the fourth quarter of 156 basis points. If my math is right, that's a 59 basis point improvement in NIM from the start of the year to the quarter 4 NIM run rate. Again, I'm not sure how many banks have ever driven NIM that hard that quickly. And you'll see fee income growth on the right-hand side. The reality is, is we've seen increase in fee income. We're a pretty simple bank. We need people to do stuff. If people do stuff, our fee income grows. So as the economy opens up, we will drive more traction, and we expect to see further fee income growth. Operating cost discipline. I think in the upper-left you'll see that overall operating costs. And to be clear, we're going to start talking about overall operating cost again. We're going to move away from Run the Bank and Change the Bank. This is the last time you will see the Run the Bank and Change the Bank split. But in the upper-left, cost increased, by not an insignificant sum, but you need to remember, rates at our annualized costs are in there. And you'll see on the bottom-right that it's the largest single year that we've ever had for Change the Bank spend, yes? And so we don't anticipate that reoccurring in '22 and beyond. We think '21 will be the single largest year for Change the Bank spend in the history of Metro. So we -- you've seen a drop already from the first half to the second half, which means, on the upper-left, we actually reduced overall operating expenses 1% in the second half of the year. And again, I'm not sure Metro's ever been able to say that. And we are guiding that overall operating expenses will decline a little bit in '22. So expected credit losses. I'm not going to -- expected credit losses really aren't the story. The credit portfolio continues to hold up well with a couple of exceptions, and I'll point that out really quickly. But overall, I want to be really clear, we have credit loss expense this year. Not many of our peers actually have an expense. Most of them did net releases. We still have an expense. We're still carrying PMOs and PMAs, which are about 26% of our overall provision number. So at the end of the day, we have taken the decision, because of the uncertainty of the macro environment, to be conservative about our overall provision levels. And actually, coverage, provision coverage went up from 1.30% to 1.35% during the year. And again, most of our peers, you will have seen their coverage went down during 2021. So again, we think there's a level of prudence. The only number that probably is worth highlighting, which we put a little bar around, is commercial nonperformance have increased. The majority of that is driven by BBLS. And we can talk about BBLS in Q&A if people have questions. So then let's talk a little bit about the balance sheet and what that means for the income statement. So again, we've talked about cost to deposits. We started in 2020 with -- we ended 2020 with 21% of our deposit book and fixed-term deposits. We end '21 with 9% of our deposit book and fixed-term deposits. And I think the bottom-left needs to be called out because I can hear the headlines now, deposits only grew 2%, malarkey. The reality is, we grew demand current accounts by 18%. We grew demand savings account by 20%. We actually shrunk fixed-term deposits by 58%. So you're right. Overall, we grew deposits by 2%, but the reality is we had a ton of activity and a ton of growth that we offset by shrinking fixed-term deposits. That gives us a much better deposit mix to improve our asset sensitivity on the right. We are an asset-sensitive bank. As rates go up, we make more money. Now the chart on the right is, every bank does it, right? It's a parallel shift, assuming a beta. Our beta is 60%. The reality is that the curve shift won't be parallel and our beta won't be 60%. But it gives you an indication of the earning potential from a rising rate environment at Metro. So these slides, I think, the next couple of slides are new. And they're new because we really want to try to tell the story in a different way. So if you look at unsecured lending volumes in the upper left, we were averaging less than GBP 1 million a month organically pre the acquisition of RateSetter. And you can see the growth in there, and you can try to draw the lines across. We have cheated here. It's the only place we provide it. We do provide a January '22 number. We did GBP 102 million of unsecured personal lending during the month of January. The largest single month in the history of RateSetter, more than Metro Bank did since its inception prior to the acquisition of RateSetter, and 100x we've ever done in a single month organically at Metro prior to the acquisition RateSetter. You'll also see that specialist mortgages, which you define by yield, it's not a great definition. We have a bit of work to do there, but the trend is right. And that is we are doing a much greater proportion of our overall mortgage lending in the specialist space. In the bottom left you see loan interest income divided by lending RWAs. We have been much more efficient about bringing out every pound of earnings from every pound of RWA than we were historically. To increase that from the second quarter of '20. So in 18 months, to add 200 basis points in the loan interest income divided by lending RWAs is yeoman's effort. And you'll see the blended mortgage yield. We put that on there for a couple of reasons. One, we didn't chase mortgage yields down in the second half of '21. We did not feel the need for volume. We were very disciplined about our pricing. And so overall, we're really pleased with how both businesses are performing. Now this next slide, I will tell you that it hurts your head a little bit. So let me walk you through left to right what it is. So on the left, it's a bit like the lending yield divided our RWAs, but now it has a capital lens on it, where we take that times 20.5% to give you capital. So I said when I arrived, we would focus on risk-adjusted returns on regulatory capital. I said that would become nomenclature inside the organization. It would drive our conversations about how we prioritize what assets we focused on, and we would drive the organization forward accordingly. That has absolutely occurred. And the graph on the left gives you that indication. Now I accept the numerator isn't risk-adjusted, fine. But it is still indicatively true that it is the return divided by regulatory capital. And you can see that in the second quarter of '20, we were sort of 19%. For almost all of '19 we were low 20s to high teens. We're now running 35%. And for almost all of '21, we were in the 30s. So if you want to know how we grew NIM or how we grew NII or how we grew revenue, that's how we did it. And that you would say, well, geez, you would think you'd be closer to breakeven if you're generating those kind of returns, you're right. The middle column shows you the headwinds. So our treasury book, which again is bigger than it has been because of the mortgage sale, we have almost GBP 9 billion in treasury between cash and investments. Has really struggled to provide the returns it was providing pre the pandemic. As you would expect, the rate reductions affect our returns on the treasury book. You will see towards the tail end of '21 the yield curve started to steepen and we started to generate a bit more return, which has turned out to be great. The other headwind is loan-to-deposit ratio. We are a capitally constrained bank. We know that. We're mature enough to deal with it. And we're generating as much return as we can out of the lending assets we have. As we begin to free up capital, be it through AIRB accreditation, organic capital generation or access to capital markets, this bank has a huge growth potential because we can continue to stretch loan-to-deposit ratio to align better with our peers and drive significant [ roadie ] for our shareholders. Now for those of you who find the math hard, I can suggest a couple of things. If you go to footnote 2 in the interim financials, you will see the lending income. You will also see the treasury income in note 2. You will see lending income year-on-year is down about GBP 15 million. That lending income is down year-on-year by about GBP 15 million after the GBP 60 million drop caused by the mortgage sale. So we have recovered GBP 45 million of the GBP 60 million of loan income in a year. And then if you go to Page 50 of the interim results and you go to the bottom of Page 50, you are going to see the RWA table. And if you look at RWAs related to credit, they dropped by GBP 550 million in the year. So we have grown lending income by GBP 45 million in the year, almost closing the full gap from the mortgage sale, and we've reduced credit RWAs by GBP 550 million in the year. If you need the example of what we're talking about, risk-adjusted return on regulatory capital, it's in those 2 numbers. And then if you also look at Note 2, you'll see the earnings from the treasury, either cash or the investment portfolio. You'll notice they're down about GBP 5 million year-on-year. That GBP 5 million drop is after putting GBP 3 billion more into the treasury portfolio. So as rates come off the bottom and we can unleash the treasury portfolio to generate more earnings because we're asset-sensitive, that headwind turns into a tailwind, which is truly helpful in terms of getting to breakeven. So year-on-year profitability. So this slide is in here to humor me a bit, if I'm honest. I was very worried that analysts would write -- well, you lost GBP 272 million in '20, you lost GBP 171 million in '21, you've reduced ECL by GBP 104 million. Oh, it's just ECL. And the whole momentum story would be lost. No. Actually, that's not the way it work because you need to take the GBP 272 million, adjust for the mortgage sales, which is GBP 57 million. You need to then get the cost and reduce the GBP 65 million of cost increase, really rates that are -- as well as some Change the Bank spend, then you realize we grew NII GBP 106 million in the year. We're a tiny little bank. To grow NII GBP 106 million a year is really hard yards. And then fees grew by GBP 15 million in the year. So that's GBP 121 million of elbow grease we put in to transforming the P&L during the year. Then I think we get into this opportunities for growth slide. So the reality is, as we start at the GBP 171 million, if you use the exit rate in the fourth quarter NIM, which is 156 basis points, and you project it out, we begin to close that gap a little bit. And then the things on the right, we didn't want to be overly specific, but rate rises are going to happen. We know we'll continue to shift the asset mix. We've already had GBP 102 million of unsecured lending in the month of January alone. We will see continued fee growth because we think activity will bounce back. We've told you that costs are going to go down year-on-year. So as you -- and we told you exceptionals are going to drop meaningfully. So at the end of the day, I think you can start to see a path. And again, the last bullet point I want to spend a minute on because I think it's gotten lost in the story. This isn't about getting to breakeven. This is about getting the growth engine that was Metro Bank firing on all cylinders down. And what we've successfully started to do, and I think by the middle of this year we'll have for all intents and purposes accomplished when we launched the SME products and the auto lending products, we will have hooked a very good asset-generating engine, be it specialist mortgages, unsecured lending, auto, credit cards, small business lending, on to a really good liability-generating engine. We both created a balanced institution that will continue to grow significantly beyond breakeven and be able to get to really good returns for our shareholders. In addition, we're not in a lot of markets. We're not in Newcastle, we're not in Newark, we're not in Leeds. We're in Bradford but not Leeds. There's a lot of places we're not. We don't have good coverage in the Midlands. We're not in Norfolk in any meaningful way. There is a lot for us to do to continue to drive the Metro story into communities to deserve the service quality that we deliver. So this is a growth story that's kind of gotten lost for the last couple of years. And I think you can now see that the growth is both on the asset side and the liability side, which is transformational for the organization. So I think that the next slide, I think all of that, all of this, to get to this point has been accomplished by our colleagues. We shouldn't kid ourselves. This has been a hard 2 years between the pandemic, the amount of change we've asked Metro to go through, to transforming the balance sheet, all of that has asked a lot of our colleagues. And they're a great group. They're wonderfully diverse. They look like the communities we operate in. They are phenomenal at looking after customers and creating fans. Those in AMAZE Central do everything they can to support the frontline staff in the stores, in [ AD ] to try to make sure we're doing everything we can to grow fans. If you think about Metro, we stayed open 7 days in almost all our stores throughout the whole pandemic. We were open more hours than any other bank during the pandemic. We've educated almost 0.25 million children since inception in our Money Zones. The thing that makes Metro special is our localness. We are connected to the communities in which we operate. One of the ways we do that, we have 120 local business managers scattered across our store estate to help the local community be successful. They are to help small businesses grow and prosper so the communities in which we operate in can do better. And then we put some quotes in from fans because we thought it was appropriate and gives you an indication of the advocacy we create. Good. So then we get into outlook. We are not providing medium-term outlook. We think it's premature given the uncertainty in the macro environment. You've got inflationary pressures. Are they transitory, not transitory. But let's take a little bit of a look of where we are in terms of the momentum-building in the business. So if you look at the second half versus the first half, NIM is up 23 basis points. We've seen a 17% increase in fees in the second half of the year versus the first half of the year. We reduced cost in the second half of the year, and we've seen a 44% improvement in the underlying loss before tax half 2 over half 1. That's pretty good going in a half. And then if you take a look at the quarter 4 average, is there momentum going into '22, there is. So our cost of deposits for the year were 0.24%. We're down to 15 basis points. Lending yields up to 3.19% and NIM is up to 1.56%. So we think '22, we think you'll see higher loan growth in '22 than you saw in '21, although again we're going to be very disciplined about risk-adjusted returns on regulatory capital, and that will always influence how much loan growth you see. I think you've seen the strong exit NIM. I would say there is some momentum in that number, but it will be a bit offset by cost of deposits potentially, but there is some momentum in that number. Fees will be influenced by the pace of recovery. But it looks like the pace of the recovery will be reasonably strong, which should mean there'll be a bit of fee growth. Cost, we've been pretty clear that we're guiding to a reduction in operating costs year-on-year. And exceptionals, we think will be less than 20% of what they've been running. And capital, we're comfortable operating within in buffers, and we'll do what we need to do if we think we need to do it. So I'm going to close here, but I want to be really clear about the momentum in the business. So '21 was meaningfully better than '20. The second half of '21 was meaningfully better than the first half of '21. The fourth quarter of '21 was meaningfully better than the prior 3 quarters of '21. We have real momentum in the business that is now coming through in the NIM, in the P&L and is embedded in the balance sheet. So thank you. I'm happy to take your questions now.

[Operator Instructions] Our first question comes from the line of Ben Toms from RBC.

First one is on capital really. The MREL ratio capital fell 0.5 and 0.5, although you note that both you and the regulator are comfortable operating in your buffers. Although clearly it's not what you want, can we extend the assertion to mean that everybody is comfortable with your MREL ratio ultimately going as low as the lower regulatory bound of 18%. And the second question, you've continued to grow your unsecured lending book really well. Slide 10, I think, shows the positive momentum here, particularly at the beginning of this year, as you noted. What was the particular driver of the strong originations in January? And should we expect the trajectory to continue upwards in 2022? Or do you think it will now start to tail off a bit? And then lastly, just around your guidance and the balance sheet. You say that you expect growth higher in 2022 versus 2021. When we just think about the base growth of 2021 as a reference point, should we be stripping out the RateSetter transaction? Or do you expect growth in 2022 will be higher than '21 even when reference growth rate includes RateSetter.

Yes, no worries, Ben, 3 really good questions. I'm going to do them in reverse order, if that's okay. So I think balance sheet growth, we mean even with the RateSetter acquired portfolio in there. We think, listen, we made a conscious decision to continue to exit some mortgages during '21 that came up and rolled off, and we didn't work very hard to retain them because they didn't provide the risk-adjusted return on rate cap. It was attractive as some other asset classes we had. We also had continued to shrink our transactional commercial real estate book. Those things will continue a bit in '22, but we think they'll be offset by further growth in our specialist mortgage business and further stretching of our legs in unsecured lending as well as a bit of auto and a bit of SME lending. So I think you can expect some balance sheet growth. In terms of unsecured lending, the GBP 102 million in January. We have worked really hard to get to a point where we could do real-time quotes, and I think it's been transformational. So instead of getting indicative pricing, you now get real-time quotes from RateSetter, which is one of a handful of institutions that does that. And they work really hard with their scorecards. And all their vendors try to make that work. So operationally, we are slicker about doing unsecured personal lending. We're also doing a bit more through the stores, a bit more through the direct channels, RateSetter. Through its website it's doing a fair amount more. We actually think the unsecured lending market is bouncing back a bit. And we expect that to continue through '22. We think we're one of the top couple 3 players on the aggregator sites for unsecured personal lending, and we anticipate that continuing through '22. So we think there's reasonable growth. Do I think it's GBP 100 million a month? I don't actually. I think January was an exceptional month. But you can take a look at where the balance of the unsecured personal lending is. It tends to be an 18- to 20-month product. You can pick a number of unsecured personal lending originations for a month and realize that the balances of our unsecured personal lending will be meaningfully higher at the end of '22 than they were the start. And then lastly, MREL. All we're guiding is that we are happy to operate within buffers, and we won't breach regulatory minima. So our MREL regulatory minima, from memory is I think 18.2%. And that's the regulatory minima that we will not breach. Above that, everything else is buffers.

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

Maybe if I could ask 1 on cash flow as well and then 1 on costs. And so on capital, I guess, near-term, I understand you've got roughly 100 basis points of headwinds kind of this year. What are the avenues to support your capital throughout '22 given you may still be loss-making this year, albeit noticing the momentum in the business. And then secondly on costs on your guidance, what kind of inflation assumptions are you including in that wage growth assumptions? Any color around that would be helpful.

Sure. Happy to. Yes. Listen, Grace, great questions again. So listen, in terms of supporting capital, I think we've been pretty clear that we have multiple different actions available to us. And if we choose to take them, we can. So but at this point, we are not planning to take any actions. I think the key to this organization is getting it to breakeven. I think you've seen the momentum in the business and that momentum, I think, creates a clear path that can be modeled to breakeven. And that's the single most important thing for Metro Bank to achieve. In terms of cost, I provided this to a reporter this morning, so I feel like I should just provide it. And I think I'm getting in a bit of trouble for it. But the reality is, we had initially budgeted for '22 salary increases for colleagues of about 2%, 2.5%. We ended up approving and have rolled out and will be announcing over the next week or so to our colleagues a pay round that's closer to 5% overall. That creates a bit of budget headwinds, probably about GBP 8 million to GBP 10 million for the organization. Even with that headwind, we are still guiding that operating expenses will be down year-on-year marginally.

Our next question comes from the line of Sheel Shah from JPMorgan.

Could you give us a sense of the moving parts for NIM over 2022? I've noticed that you've used the 60% pass-through assumption for the deposits. Could that be higher given around 50% of the deposit base is to SMEs and corporates? And what are you assuming on mortgage margins through the year?

Okay. Let me -- give me 2 seconds, and then I'll come back to you. So if you go to the NIM slide, which is Slide 6. And apologies, I have to put on glasses, I am old enough to need reading glasses. If you take a look at the NIM slide on the left-hand side of Slide 6, yes. So a lot of the NIM accretion getting us from 97 basis points to even the 151, a chunk of that was cost of deposits, right? So we had 24 basis point increase related to cost of deposits. It's likely, while there'll be some annualized effect on cost of deposits because again, fixed-term deposits exited throughout the year, I think you should model in as much benefit from cost of deposits because it can't really get much lower than it is, yes. So I think the lending mix and the lending yield, I think, will continue to create benefit as we roll into '22, as will the investment yield. So I think those are the moving parts for NIM. In terms of the asset sensitivity. And if you go to slide -- sorry, let me flip through. If you go to Slide 9, in terms of the asset sensitivity, the 60% beta for the first 40 basis points of rate rise that we've already seen, we've had a beta significantly below the 60%. But you are right, over time, I'm not sure what the beta will be. We haven't really come off of 0 before in the country, so for a long time. So coming off of 0 rates, we continue to stay plugged into the market. We continue to review what competitors are doing, and we continue to reassess. But at least for the first 40 basis points, we've been below the 60% pass-through rate or beta if you're from America. And the reality is our deposit mix being mainly noninterest-bearing liabilities, gives us a bit more flexibility than somebody who's funding the balance sheet with fixed-term deposits. So we're pretty confident that there is earnings in rising rates.

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

I had a few, please. On mortgages, obviously you focused on specialist mortgages. And I think a lot, not all, but I think a lot of what you were doing in 2021 was higher LTV business within that kind of specialist envelope, and I guess some buy-to-let in there too. If I think about what's been happening with pricing in the market, higher LTV and buy-to-let pricing for the market overall has been really, really compressed quite dramatically in recent months. And I think that the spread pickup you're getting for the industry overall, for high LTV business right now is the lowest it's been since before the financial crisis. So what spreads do you think you're actually going to be able to develop going forward on specialist lending? I know earlier in the year you're talking about getting 100 bps spread pickup versus peers or sort of vanilla business, I suppose. What spread are you actually seeing on applications at the moment on a blended basis? Because I can't imagine you're seeing that higher level. And if you are, do you think you're more competitive in that space?

Yes. So can I ask a question because what would you think would be -- so can I turn it on its head a little bit? What would you expect us to be seeing given the competitive pressure for acquisition…

If I think about what some of your larger peers are saying, NatWest recently said at the end of the fourth quarter their blended application spreads were down to 70 basis points. And I would guess that the 100 bps spread pickup that you would have been talking about earlier this year would have come down a bit given what we've seen in terms of higher LTV and buy-to-let pricing relative to the vanilla resi business. So I guess, less than 100 bps above that. But I honestly don't know because your pricing is quite standoffish at the moment. When I look at the rates on your website, you say, you've been willing to kind of not grow mortgages. I'm just curious as to what you actually see as the sort of an application spread relative to that 70 that some of your large peers are talking about. Where are Metro's application spreads at the moment, and where do you think they're going to be.

Yes, sure. So why don't we do that first, and then we can go through the rest of your questions, okay? We're doing -- because I think it's a good one. So I think if you go to Slide 10, you'll see last year where first half and second half, and we did the majority of our volume specialist mortgage in the first half of the year, not the second half of the year. So 2.7, 2.9, the blend is, I don't know, upper 2.8s probably for the year, yes. Maybe even in the low…

But that's the spread to base rate, right…

No, that's the overall yield. That's the overall yield.

Spread.

That's just the overall yield, that's the gross yield, Chris, yes. So we can argue about what you want to use to take off of that. I'm just going to give you overall yield, yes? Because is it the swap rate, you know what I mean, I don't want to get into -- yes, because we could argue about what we're actually doing is spread over. So I'm going to give you gross yield, okay? I think so far -- and again, I'm providing some '22 numbers, but I'm going to do it because I think it's indicative. We have seen a meaningful uptick in application volume in the last 3 or 4 weeks. We're almost running at application volumes that look like the first half of '21, yes. So pretty strong for those who remember because at that point you had all the stamp duty stuff and everything else. So pretty strong application volumes. And we are within 30 or 40 basis points of the 2.8-ish kind of a number you see there. So upper 240s to mid-250s in terms of gross yield, which I think provides a pretty good risk-adjusted return on rate cap, yes?

And so if I think about that versus where swap rates are today, and I don't know where you write the majority of your business, your larger peers talk about writing kind of a 50-50 split of 2- and 5-year fixes. And if I think about where the 5-year rate is right now, you're talking about a spread of a 5-year business there of maybe 140 versus the sort of 70 bps NatWest would be talking about. Is that the sort of level we should be thinking about…

Yes. I would say for our 5-year business, we're charging more. So that's a blended app yield, yes. So I would think on our 5-year business, it would be closer to a 2.9% or 3%, yes? Okay. So I think we're there or thereabouts, Chris. I mean I don't have a sense that we're, I think we did a lot of specialist volume last year. We would be in line with some of the asset-only generators that are currently in market. The reality is we run a really good specialist business with a great team who are very well connected in the market. And we still think we're generating really good returns out of that business. And we continue to be nimble about introducing new products and being creative in that space. And listen, so this is getting long-winded, and I apologize because I know we need to -- we got Barclays behind us. But the reality is that we manually underwrite every mortgage decision. Now we were doing that when we were doing prime resi. Why we were doing, I don't know. But the reality is we have a group of people who allow us to do creative things in a pretty risk-averse kind of a way. So we're really happy with that business. Yes.

Okay. If I could ask then about capital, I'm conscious, as you said, there's another call coming up, so I'll limit myself to 2. When you talk about operating within buffers, I appreciate you're now operating within your MDA buffers. Are you happy to go below your Tier 1 MDA because -- and I asked this question in the first half, and I guess things have moved on a bit now. So we now know that the countercyclical buffer in the U.K. is growing up to 1% this year and likely going to 2% by mid-2023. So your MDA is going to be 11.3% for Tier 1. And as of Jan 1, you're at 11.5% and that's pre growth, pre further losses in 2022. So are you happy to run below your Tier 1 MDA as a bank?

So again, when we have conversation with the regulators, we acknowledge that we are going to be in buffers across the capital spectrum, yes?

Okay. And the regulators -- I mean, generally dipping into the capital buffers. I appreciate MREL might be a little bit of a sort of a softer debate given that it's an emerging requirement over the last couple of years. But when we think about going into capital buffers, let's say, CET1 or Tier 1 level, generally we'd expect the regulator to then start having some degree of intervention in certain aspects of the running of the business. So do you expect dipping into your regulatory capital buffers as opposed to MREL buffers going below the MDA on Tier 1? Do you expect there to be any constraints in your ability to grow or to pay people or anything like that?

No. We've not had a single conversation that leads me to believe that there will be constraints on the plan we've put in place for the business.

Our next question comes from the line of John Cronin from Goodbody.

My questions have mostly been asked at this stage on capital. So I guess, look, in terms of alternatives of capital actions remain available to you. And as a follow on, I guess, from Chris' question. Are you progressing any plans to sell loan portfolios at the current time? And would that be your preference rather than an [ outside ] capital raise, if you needed to build up your capital base a bit more strongly as you continue to print losses?

Yes. So John, a great question in that question, right? So you would expect as a CEO of a bank that's operating within buffers that we have lots of contingency plans and have lots of things that we could do if we need to, yes. And I would say that those contingency plans exist as you'd expect them to exist. It would be remiss of me not to do that, yes? But the reality is, the single most important thing is to get this place to breakeven. I think we've shown a really clear path to breakeven today. I think it is now really beyond doubt that this place will get to breakeven. It's really hard to see how 0 is still on the table. But the -- our debt capital markets friends and our fixed income investor friends need to figure out how to do math because at the end of the day the yield-to-maturities on our MREL and our Tier 2 stuff are deeply offending. So I think we always have contingency plans as needed, and I really don't understand how our debt is priced. So it's pretty frustrating to me, John, as you can tell. But of course, we would always have contingency plans.

Okay. And I guess just one final one, looking for the press reports recently linking you to a potential acquisition that links you to a potential acquisition of Sainsbury's Bank in the past. And any prospects of anything else in the pipeline in the near term?

So John, I can't make any comment on that. If we have something to say, we'll come back and tell you, yes. But we've always been clear that we're always looking at organic and inorganic. But the reality is that we're really focused on getting the organic business back to breakeven. And I think the results here demonstrate -- I know there was noise about PE and there was noise about everything else, we stay completely focused on delivering results for our stakeholders, as you can see from these numbers, yes?

Sure. And look, just a quick final one, if I can, on the AIRB accreditation. So, look, is there any more color you can give us? I mean the application has been with the regulator for a number of years. I understand there's been a lot of dialogue between Metro Bank and the PRA on this. And is there anything more you can say around what other requirements need to be met before you would be in a position to potentially achieve accreditation? And anything on timing of associations with the further work that has to be done?

Yes, listen, I know my predecessor got drawn on timing. So I'm really averse to providing any kind of insight on timing because I think that was a moment that really hasn't borne out to be true. What I can say is, we continue to work closely with the PRA, we find them to be helpful in regards to working on the AIRB application as we find them to be helpful overall. We find them to be bright, intelligent and knowledgeable, and we continue to have those debates. We have rebuilt the credit team from the ground up since my arrival. And we have a new Chief Credit Officer. We have a team that is really capable in the modeling space. We have very different conversations internally that would clearly clear any use test kind of requirements. So again, the work is ongoing. We just -- we need to let it play out. And I'm not going to be drawn on timing because I just think that's a mug's game, yes.

Our next question comes from the line of Sajan Shah from Morgan Stanley.

Maybe a bit more on behalf of those fixed income investments you talked about. But you have a story to sell now on the platform. Do you think that GBP 100 million to GBP 200 million capital raise is available for you if you want to go there and get that self-driven boost towards organic capital generation. Obviously that will change material things on the fixed income side. Any color on that, especially from your key shareholders in their package. That's my first question.

Yes. So it's a fair question. We continue to have strong support from our key shareholders. I think they've demonstrated that support by being patient through this turnaround. I think we're now on the cusp of providing positive earnings, which I think will be well-received by our shareholder base. And I believe we continue to garner their support. Are we anticipating doing an equity raise, we're not really at this juncture. It doesn't mean we wouldn't consider it. And I believe we have shareholder support if something interesting came along. But I think as we sit here today, we're not. I do not understand when I look at the peer group yield-to-maturities and the growth that this organization is demonstrating and the clear path to profitability, why the fixed income guys are lagging behind. But it's fine. We'll get it fixed over time. I don't need them right now. They're welcome to do the math over time.

And then just -- obviously, this platform seems like a perfect model for the private equity world. Any color on why those negotiations didn't materialize? And then the third question, can you just give us some color on the duration of the treasury portfolio?

Yes. So listen, a couple of bets. I've known the Carlyle team for a long time, right? I mean, they were at Butterfield. I was hired and interviewed by the Carlyle team into Butterfield in 2010. That was the last bank investment that they did through the FIG Fund. The FIG Fund at Carlyle actually hasn't raised money separately. They now invest as part of the overall European fund or the U.S. Buyout Fund. It just didn't really work. And we couldn't get to a price that we thought was fair and reasonable for all parties included. And it's going to happen, right? So I wish it wouldn't have leaked, I wish it wouldn't have leaked because it leaked very early. And I would prefer not to talk about it and just have it happen behind the scenes. But listen, they're allowed to come in. And I think at the moment for the Board, given the financial performance of the organization and the path forward from here, the Board is left in a difficult spot for what actual value of this organization is. And so it just didn't work yes? Yes, I don't have much more to say about the PE stuff.

And then just on the treasury portfolio duration…

Treasury portfolio duration, I don't have at hand. I think my guess is we sit on a bunch of cash. So if you exclude the cash, I think the overall treasury portfolio duration for actually what's invested, which is a small piece of our liquidity, I think hovers around 3 years, somewhere between 2.8 and 3.1 years, yes? But that's from memory. So again, we'll get the IR team to come back to you and give you a better number, yes. But it's directionally correct, yes.

Our next question comes from the line of Perlie Mong from KBW.

I'll try to be quick here because obviously we're running out of time. So just a few quick one. The first one is on interest sensitivity. So just I've noticed -- so thank you for the disclosure on that. I've noticed that a lot of it is sort of tilted towards year 2. But I think a lot of peers tend to see more of the impact coming through in first year. So just wondering why is it that the impact is a bit more delayed for you? So that's one. #2 is on cost. Just definitely hearing your guidance on managing down the underlying cost. But I've noticed that Run the Bank cost is up 3% in the previous year. And obviously you've talked about some inflation expectations in the numbers as well. So I'm just wondering how you're thinking about investment spend. Is that what is being cut down essentially to manage the cost target? And #3, just very quickly on management change. So obviously David has announced his departure about a week ago. So sort of just any color on how do you think that might impact on the delivery of your strategy.

Yes. So okay, let's go to that. So interest sensitivity, relatively straightforward. I haven't looked at the other bank's disclosures, but the other banks have worked at it. It tends to have a bit of a spike in year 2. For us, there's just some asset repricing that takes us a bit of a lag, which is actually, I think, the question for Morgan Stanley before about the duration of our treasury book. We need a bit of that to roll off to be able to generate the earnings in the outer years. Nothing interesting or overly complicated. We just have some repricing that kicks in. And again, we are doing, which was Chris' question originally, and the market is doing a lot of fixed rate mortgage lending. So again, the mortgage lending needs to roll through. We need to do new originations for some of that to take a bite. In terms of cost, I think if you go to the cost slide on Slide 7, you'll see in half 2 we came down to GBP 51 million from GBP 60 million. I think you will see in '22 that we will spend less than twice that GBP 51 million. You'll see a continued reduction. And that's certain for a couple of things. One, we've done a ton of heavy lifting and we're pretty much through the majority of which I think I said when I stood up in February '20, the first 2 years would be the majority of the change spend, and we've done exactly that. But you'll see it ramp down. And there's also so much change the organization could absorb. At some point you need the organization to breathe a little bit to bed in a lot of the change we've enacted. So you are right. Overall OpEx will be reducing, a chunk of that will come from the change spend. And lastly, regards to David, I really [ rate ] David. So I think David's good at his job and was a good friend and remains a good friend. I think the Board was supportive with David. David's departure has nothing to do with change in strategy. David's departure had nothing to do with the falling out over the financials or some big disagreement. It was unrelated to sort of the strategy as it sits today. I will miss David's guidance. But at the end of the day, the strategy was put in place and will remain the strategy going forward.

Our final question comes from the line of Daniel Crowe from Goldman Sachs.

I just want to come back around on capital and MREL again. So I know you said you're happy just operating within your buffers. Does that mean you have no intention to issue or attempt to issue MREL this year because you're already GBP 70 million short as of 1st of Jan? And then back to Chris' question just on the Tier 1. I know you're saying you want to grow, but you're capital-constrained at the moment. And by end of year, the buffer just on current numbers will be very slim to your Tier 1, and you mentioned that you want to work within the buffers. So if you could just -- can you give more guidance about what is your kind of capital planning to allow you to grow into the stuff that will provide you the additional earnings that you need?

So again, I think a couple of bets. So again, we look at all different optionality around capital, and I think John Cronin is right to have raised, are you thinking about small asset sales? What do you do? What does that look like? And again, one of the contingencies we have is whether we want to issue some MREL and how we would do that and what that looks like. All of that's in play. Do I think it's a '22 issue? I don't know that it is. Maybe tail end, maybe sometime in '23. We are very comfortable with the capital plans we have in the budget for '22 that has growth in it. And the regulator has seen those and understands how we operate within buffers during that period, yes. So again, I don't have much more to say than that. It seems to be causing consternation, and I don't quite understand it because from an overall sufficiency perspective, we have more capital than we could ever need. And we continue to make sure the regulator is aware of everything we're doing. Now what I would say is we do need to execute. So we earn the respect and the right of time from our regulator by continuing to move the organization forward. And we will continue to move the organization forward throughout '22 and continue on the path to profitability. And I think that path isn't all that long. So at the end of the day, the bleed of capital starts to ameliorate at which point the whole conversation shifts. Yes.

Yes. I guess just the last time there was a breach of MREL, you effectively -- you issued a 9.5% coupon MREL which was terrible for your NIM.

Actually, we weren't -- so let's be clear. We weren't in breach of MREL then. That was an emerging requirement that we needed to be in compliance with by a certain time. We didn't approach the regulator at this time to ask for an extension or do anything else. We literally just chose to issue at 9.5%. So slightly different situation, yes. And it transferred a lot of the economics from the business from our equity holders to the bondholders on that 9.5% piece of paper, yes? And so I don't know, Daniel. I mean, again, we can do math here. We get it. And we'll consider our options accordingly.

At this stage there are no further questions. I will hand back to Daniel for any final remarks.

No, I just want to thank everybody for their time today. I know the presentation bumped up against Barclays. And again, I think there's real momentum in the business, and that momentum creates a clear path back to profitability. And I appreciate all your support. And I look forward to talking to you all individually over the coming months. Thank you so much.