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

Good morning, everyone, and welcome to today's conference call -- to the Metro Bank webcast call. My name is Ellen, and I'll be the call operator for today. [Operator Instructions] I would now like to turn the call over to Daniel Frumkin, CEO of Metro Bank to begin. Daniel, please go ahead whenever you are ready.

Good morning, everyone. Thank you so much for joining the call. I really appreciate you taking the time. I know the announcement got out a bit later last night than we were expecting, but I'm really glad you had a chance to digest it, and I look forward to spending some time with you this morning. So listen, I think we need to back up to what we've always said about Metro since the time I joined. It is a great franchise. It does a phenomenal job at looking after customers and growing deposits, current accounts, business current accounts. It continues to deliver for our colleagues, our communities and ultimately, our customers. I think if we go back to what we said at the half year, without wanting to be too repetitive, you'll see the first slide in the slide deck on Slide 3, the strategic pillars. I want to be really clear that we have delivered everything we said we were going to do, and we positioned Metro in a unique position, as you can see on the chart on the right on this slide that differentiates us from everybody else in the U.K., be it another monoline challenger or a full-service high-street bank. Our funding advantages and our ability to generate assets in a diversified way means that Metro has an opportunity to grow and generate meaningful returns. What we said at the half year on this slide is we just needed more petrol. We needed a bit more fuel for the tank. This is it. This capital raise positions Metro to leverage up the foundations it has built and allows us to drive the business forward. If you turn to the next slide, the famous tick mark slide. The reality is, is that we are well positioned across an array of asset classes, a truly full-service financial institution and we can now start to leverage up those abilities for the benefit of all stakeholders. And then if you go on to the next slide on Slide 5, as we talked about at the half year, we have a unique opportunity to grow our deposit franchise by introducing new products into our array of existing products. As I said at the time, we have a very limited product set as an institution. So at the moment, our Cash ISA product is not digitally enabled, is not straight through processing, and we don't take advantage of the switcher service. In both Retail Easy Access and Business Easy Access, we have a single account. It doesn't give us the flexibility to reward those most loyal and those most committed to supporting the bank. We are in the process of building those products out and would hope to be in a position to launch them by early next year. And if we can simply get to our existing market share for personal or business current accounts, we would generate the thick end of GBP 15 billion of incremental deposits over time. That doesn't even account for other products we'll introduce over time or other growth we would expect to receive. So again, Metro has always been well positioned to grow and deliver good returns. The missing link was the capital. This fills that need. Now turning on to the specificity on the next slide of what we've done in the last few days, we've secured GBP 325 million of new capital, GBP 150 million of that is new equity, mainly provided by existing shareholders. We've also secured GBP 175 million of new MREL. At the same time of doing that, we thought it prudent to refinance the existing GBP 600 million of debt. Those refinance of the GBP 600 million of debt has bought Metro not only time but additional resources to grow in the market. And as we have informed the market, we were also considering a GBP 3 billion mortgage sale that should complete this year. The mortgage sale is not dissimilar to what Metro did 3 years ago when we did what we affectionately call internally as Project [ Eaton ] when we sold GBP 3 billion of residential mortgages to NatWest to reposition the balance sheet, to allow for further growth, higher margin lending and improve profitability. The mortgage sale, depending upon pricing, makes a lot of sense for the exact same reasons. The mortgages we have on our balance sheet are of high quality, but aren't necessarily what we want on our balance sheet as we move forward. They're probably better placed on another institution's balance sheet. As I've said, this package gets us out of our combined buffers. That is a major accomplishment and gives us the room to stretch our legs. Well, based on the 30th of June numbers, the pro forma CET1 would have been over 13% and the MREL ratio in excess of 21.5%. And as I've said before, the refinancing means that all our MREL senior instruments aren't due until 2028. So we have petrol and time. Those are 2 resources that were quite limited at Metro and constrained our strategic optionality. Now that we have capital and time, we can drive the business forward in an extremely accretive manner. We're looking forward to growing the business over the coming years. We've also provided guidance that we had not provided previously. So we expect in 2025 to have a RoTE in excess of 9% and then growing to low double digit to mid-teens thereafter over the medium term. So I just want to make sure everybody really understands that what we are saying is this bank is profitable, will be profitable and its profitability will grow. We also have provided guidance for 2024 of a mid-single-digit RoTE which we believe is deliverable if we deliver on the plans we've outlined in this document. And again, quarter 3 on an after-tax basis was profitable again. It's the fourth quarter in a row where we saw profitability. And we continue to see personal and business current account growth. And to be clear, even over the last handful of days, we saw new accounts being opened. Let's get into a bit more detail on Slide 7, the capital package overview. I'm not going to spend a lot of time on this. I'm happy to take questions. There's a fair amount of detail in here. I think you can read it at your leisure and go forward. What I would say is the equity raise was supported by the majority of our shareholder register and we were happy for that support. I think the investment we got in was completely aligned with Metro being Metro and the folks who continue to support us completely believe in the model and completely believe in the prospects for Metro going forward. I think they all realize the missing ingredient was a bit more capital, and they were happy to provide it. In terms of the debt refinancing, we managed to obtain GBP 175 million more of MREL resources that, again, helps us grow. I'm not going to spend a lot more time on that slide because I think we've covered well on the prior slide. So if you go on to Slide 8. There's a bit of additional guidance so that everybody has an understand. Loan growth, we expect asset rotation as we did post the original mortgage sale we did. That mortgage sale will allow us to continue to rotate assets. As for the additional capital, we're focused on continuing to grow our specialist mortgage business and really start to grow our commercial lending business again. Our commercial lending business has been really constrained over the last few years due to the capital, and it's an area where between our regional commercial, our corporate and our SME lending franchises, we are very confident in our ability to grow share in a very accretive way. The loan book obviously contracted in 2023. If we sell the loan book -- I mean if we sell GBP 3 billion of loans, obviously, it will contract, but we expect double-digit compound annual growth rates between '24 and '28 in loan growth as we stretch our legs in commercial lending and specialist mortgages. The funding, again, we will fund the balance sheet through native activities. We fully anticipate to be able to grow deposits quite quickly in '24, followed by a mid-single-digit growth in '25 and '26. I will say it's an area that I would hope to outperform over time, but we need to get the products built, get them launched and understand how quickly we can get the growth in. But again, for us, going back to the first slide, we're uniquely positioned where our funding model gives us a huge competitive advantage. We expect NIM to grow. We would hope that NIM starts to approach 3% by 2026. Again, we don't hedge our mortgage portfolio. So some of the banks who have had a hedge in place have probably shown more NIM expansion due to the value of the hedges. We naturally hedge, so as the mortgage book rolls off and our investment portfolio rolls off and when we reinvest at higher yields, we get natural NIM expansion. In addition, as we now have the capital to really go after commercial and corporate lending, those are significantly NIM-accretive activities. You will see in the RNS that we were very clear that we need to reduce cost by GBP 30 million. I want to be clear though that, that is not GBP 30 million down year-on-year. That is GBP 30 million down on the '24 forecast that investors saw as part of the capital activities. And we expect cost-to-income ratio to continue to improve, both through our cost actions and as we leverage up the fixed cost base of Metro. And again, in case you missed it, we put it in red to make it really clear. We expect a RoTE in excess of 9% in 2025, and we will be a double-digit RoTE organization thereafter, growing into mid-teens in the medium term. There is nothing wrong with the Metro business model. It has a huge potential to deliver for all stakeholders. And with the capital we've just obtained, we are very confident in where we go. In terms of the capital, again, I think those are there for you to be able to model. The timetable and conditions of the capital, we expect to issue a prospectus and a shareholder circular in the next few weeks. We expect to complete by Quarter 4 2023. But -- and obviously, conditions in the capital package, that's what happens when the lawyers draft half a slide, I think there's a couple of bits you need to know more than anything else. Of the debt, we had a 100% support from all debt holders, both in the Tier 2 and on the senior of the ones we could find. So that equaled a little over 74% after trades are settled this week for both instruments and so we're within 100 basis points of the 75% needed to be able to compel those refinancings. So we're very confident in our ability to deliver that. We've been very engaged with the shareholder base, obviously, over the last stretch. And we're confident in our ability to get to the 75% needed to enact the transaction. We think we have delivered a transaction that is meaningfully superior to any alternative for all stakeholders. And we would hope the benefits of the transaction are self-evident. And therefore, we're confident in the support. And then lastly, just because I like to be a bit repetitive. On Slide 10, we're going to end where we started with the right-hand box. Metro Bank is uniquely positioned because it has a funding model that is differentiated and asset-generating capabilities that are diverse. We are not a monoline and we fund ourselves like a High Street bank. We just need to be bigger, and we now have the capital to do that. And with that, I'm happy to take questions. Thank you.

[Operator Instructions]. Our first question comes from Grace Dargan from Barclays.

So I guess a couple for me if possible. So firstly, to what extent are you prepared to move back into your capital buffers? And would you be prepared to do that across the stack and kind of what's the conversation being like with the PRA regarding that? And then secondly, on the potential kind of asset sales. So I note the commentary around kind of being capital accretive in '24 and kind of beyond. Are you trying to tell us something around the potential discount you'd be willing to absorb that, maybe something around kind of 5% to 10%? And is that realistic, kind of given where the portfolio is sitting? And I guess would you also consider further portfolio sales? Or how are you thinking about that?

Listen, Grace, 2 really good questions. Although I find the first one quite hurtful just because we haven't -- I just got out of buffers, at least let me have a day. Listen, we haven't really contemplated going back into buffers, you can assume that the 5-year plan that we've created over the last few days has been reviewed in detail with the PRA as part of this as it has been with potentially new and existing investors as they contemplated whether they would move forward. We become quite capitally accretive, Grace. I mean if we're generating upper single digit, low double digit, mid-teens return on tangible equity, actually, you would assume that, that would build capital over time. So I think that's probably the best answer I can give you. But -- I had a little bit of PTSD there. So let's not talk about that anymore because I'm quite glad to be out of buffers. In terms of the asset sales, we've been really clear that we will treat the balance sheet in the best interest of all stakeholders, and we will trade in and out of assets when we think it's appropriate. Yes? I would say a 5% to 10% discount on the mortgage sale is significantly outside anything we would consider. I think the book and the yield on the book and the quality of the book will not require that. I think you're off by a pretty significant magnitude even at the 5%. I think if you cut the 5% in half, you might be sneaking up on it. The reality is that there is a way for that math to work, but we think actually the book is good quality. Fundamentally, given the fact that we're still a standardized bank, after the recent headlines, those assets we're selling are probably better off on a bank's balance sheet that has AIRB, yes? So in essence, their mortgages we put on our balance sheet in anticipation of gaining AIRB now that, that is unlikely in the near term, then the reality is that they're better off on somebody else's balance sheet, we think they will pay us for them, and we'd rather redeploy that capital and that liquidity into different earnings classes. In terms of whether we sell other portfolios, Grace, I'm not wedded to anything. If somebody wants to pay me a price that I find attractive that I can then redeploy the capital and make more money for all stakeholders, then I would sell the furniture. So I will do whatever it takes to drive the business forward. The beauty of it is now that we have additional capital and that we actually have the petrol we need, the business can really stretch its legs across a lot of vectors, and we're very excited about the prospects.

Our next question comes from Perlie Mong from KBW.

Another 2 questions. Just congratulations for the capital raise. I'm sure it's a relief for you. I guess 2 questions for me. One is I don't know whether I'm missing something, but you talked about GBP 200 million capital increase from the package, but the new equity is GBP 150 million. And I guess, the benefit you get from the liability management of the 40% haircut is GBP 100 million. So I just struggled to get to GBP 200 million benefit, so you could help me with that, that would be great. And secondly, on -- I guess, just some of the assumptions you have on the loan growth, because a 10%, then, well, I guess, more than 10%, double-digit CAGR in specialist mortgages and commercial feels quite ambitious in the current environment when obviously, mortgages are not growing across the sector and commercial lending, well, I guess, especially SME lending has been falling for coming to 29 to 30 months now. So I guess just what assumptions are you making around those loan book growth?

Okay. Great. So listen, I'll give a quick answer on the GBP 200 million and then I'll let James give a little bit more detail. So you're right, it's GBP 150 million of common and GBP 100 million of debt discount. You do need to remember the debt discount has a bit of a tax hit to it, and they're obviously a bit of cost to get here. But we'll let James come in and give you a bit more detail. But I think those are the 2 things you need to think. And also, we want to be a bit conservative in the numbers we provided. In terms of loan growth, we are actively not accepting certain loan applications because we have been capitally constrained in our commercial and corporate business. We have seen limited to very limited effect of interest rate rises and COVID and everything else on our corporate and commercial loan book because it's extremely well underwritten, really well collateralized. We have teams of very experienced, very seasoned corporate and commercial lenders who've not been able to attack the market the way they would like. If you go back in time, the amount of loan volume we need to generate in corporate commercial while above is not significantly above what we were doing the pre-2019 issues. So we're pretty confident in that space. In terms of our specialist mortgage space, I mean, the gentleman who runs our mortgage business, who I have a ton of time for, who does a great job, Charlie. I mean, he used to run distribution for Kensington Mortgage Corp. The gentleman who runs products in commercial form in the mortgage space used to be at OSB. We probably know the specialist mortgage business better than we know the prime resi business. We're very convinced given the contracts we have in the marketplace and our ability to generate significant volumes. And in terms of processing those volumes, those volumes would still be below what we did about a year ago, 15 months ago in mortgages when we really stretch our legs for a period of time. We've also just put in a new platform that will allow us to introduce some scoring technology and some other things to automate and a little bit more straight-through processing to free up capacity of underwriters. So we're pretty confident. I don't want to say overconfident, but we're really confident in our ability to grow those asset platforms. And then, James, if you want to just come back to the capital.

Well, I mean, I think you answered that incredibly well. And just to reiterate what you said, we wanted to be conservative in how we modeled it. We have assumed a full tax charge against the gain on the Tier 2 haircut. And also there are additional costs associated with all of the transactions. So I think that's the way to think about it. If we can out deliver that, then great. And then on the asset side as well, I mean, I think -- as Dan said, we're very excited about the opportunity we see in the corporate and commercial space. We opened up, we think about 7% of the U.K.'s business account openings in the first half of this year. We're getting really good momentum into that business. Our offering resonates with that segment. So we're looking forward to being able to really lean in and support that important part of the economy. So I wouldn't add anything more to that.

Our next question comes from [ Alexei Lougovtsov ] from Bank of America.

Thanks for the announcement today. My question is about lockup agreements. You mentioned in the announcement that the debt haircut depends on the lockup agreements. However, I don't see details of what exactly those lockup agreements are? And my second question is when will prospectuses become available?

Okay. So I'll do the first one. First one is really easy. So there's an incentive for the debt holders to get to 75%. So I think that's why the language isn't there, but we're at 74.1%, I think 74.3% on the other -- on the 2 pieces. We're so close to after trade settle. We're so close to 75%. I wouldn't get hung up on the lockups. The deal is pretty well papered. We're -- we can't -- it's very well papered. So I think we're in really good shape. I wouldn't focus on that. And then this prospectuses, I think it's a fair question. To be honest, we've been pretty focused and resources have been dedicated to getting the deal done and structured and papered. It's going to take us a little bit of time to get the prospectus out. I would think you're thinking sometime in early to mid-November by the time it gets out.

And to me, lockup agreements sounded like the holders of new notes, would commit to not sell them in the secondary market or?

No, no, no, that is not to be. I get it.

It will be completely free to trade, right?

They will be -- I think so. I mean I'll have to check with the lawyers to make sure there's no short-term or [ short-rated ], but we did not ask for any exceptional lockup, yes.

Okay. So you said 74.9 -- or 74% of the senior committed over the Tier 2?

Yes, they're both over 74%. So we had 100% support from both the Tier 2 and the seniors, yes, but we could only identify a bit over 74% after trade set of both bonds. So they're both over 74%. And we've just got -- we've got to find less than 1% of both bonds to get over 75%, yes.

And then everyone will be taken into the deal, right, 100% will be taken because 75% is sufficient.

Exactly.

Our next question comes from John Cronin from Goodbody.

Few from me, please, some positive details. One, look, notably absent from the statement is there any commitments in relation to consumer lending growth? Just wondering what your perspectives are there for the medium to longer term? Do you think you are rightsized at this stage in terms of proportionality, just your thoughts on that would be helpful. Secondly, can you give us an update on where deposits are now and how they evolved since the H1 update. Thirdly, sorry for all the questions, [indiscernible] than IRB. Like you had a GBP 7.6 billion mortgage portfolio at the end of June. Okay, you might sell GBP 3 billion of assets there, but still pretty relevant in the context of the other GBP 4.6 million, assuming you do achieve the sale. Are we -- should we think about that as a possibility into '24 [indiscernible]? And anything you can say on that would be helpful. And then, look, on the equity raise mechanics, I'm just [indiscernible]. Look, I know it's not a right issue. But going off and just doing the basic math around calculating what a theoretical ex-raise price would be, guessing to about 34p. And while it is coming in though for GBP 102 million and will have 53% currently, your market close on Friday, I understand they had about [ 9% ]. So struggling to dovetail that with how they get to 53%. And so anything you can be a bit more specific on with respect to the equity raise and also the outlook. And look, finally, although I probably don't expect much of an answer on this. I mean, you built about 400 bps of MREL, if I remember correctly, when you did the asset sales to NatWest 3 years ago. You're talking similar quantum in terms of asset sales. Any sense of what might be a reasonable expectation based on your conversation so far. But again, just to reiterate, I appreciate maybe just can't really say much in terms of that as it is speculation at this juncture.

Okay. So let me go through them, John. I'll try to go through them at a little bit of pace, but I think I'll get it. So the consumer lending growth, actually, it's a business we're really happy we bought. It's worked out really well. However, at this point, margins in that business have compressed. Pricing in the market has not kept pace with base rate movements. So again, we always say we look at risk-adjusted returns on regulatory capital and then risk-adjusted returns on regulatory capital in that business have been hindered by the lack of margin expansion in the market. So I doubt it's going to grow. I think it's probably flat to down over the next 18 months to 2 years, but it's a business we like, and we think in a low rate environment does quite well. Deposits. In terms of recent activity, I genuinely appreciate the question, and you already know my answer, which is we don't disclose that information intraperiod, but I know that is something that people want to know. AIRB, that is a great question, John. So we have not yet received written feedback on -- I expect it shortly. We've only gotten verbal feedback. So we need to take the written feedback from the Bank of England and digest it and then rerun it through the models and see what reduction in capital it gives us. I know you always modeled sort of we'd end up at sort of 20% to 25% risk weights. I think if we take the feedback back and that's where we end up. We end up with risk weights around 20%, 22%, then my answer to you is, yes, I don't think we're far away. I think it's a tidy up exercise, and we can get it done in sometime in '24, '25, who knows. I've never really commented on time line, but it's not a huge exercise. I am worried when we get the written feedback back that it's going to -- when we run it through our models, it's going to get us risk weights in the upper 20s or the low 30s. And at that point, John, I think the Board would have to reassess whether it's a futile exercise. And given our lack of internal data, we should just pause the program and reposition the balance sheet. I mean there are lots of good mid-tier banks that generate really good returns without having AIRB and we know full well that one of the reasons we were constraining our commercial business and our corporate business is because we weren't sure how they were going to model under AIRB. Well if we're not going to have AIRB, there are definitely business lines there that we can take advantage of to generate really good returns on a very conservative basis. So the AIRB question is a live question. We just talked about it at the Board a couple of weeks ago. And I don't have an answer. We'll get the written feedback. We'll run it through the models. But if we're not chasing a really good savings on our residential mortgage book, I don't know why we do it because as you know, because you know as well if not better than I do, every other portfolio in a bank kind of gets hurt or stays flat under AIRB. You really need to get the benefit out of your residential mortgage portfolio to make up for the impact it has on your commercial and corporate books. So I think it's -- I don't know. We'll have to wait and see. The equity raise mechanics, we gave -- the rights issue is at 30p, John. So we had 172 million shares outstanding, I think, plus or minus, if you multiply that by 30p, I think it's GBP 52 million. I'm doing this in my head right now, John. So if I get it slightly wrong, bear with me. But I think that gets you to GBP 52 million. There's GBP 150 million of new equity coming in, which gets you at a total of GBP 202 million. Spaldy [indiscernible] putting in GBP 102 million, which is a little over 50% of the GBP 202 million, but he also owned a little over 9% of the 52%. And I think if you put those 2 things together, you end up with sort of 53%. Yes. And sorry, let me just finish on the loan sale because it's the last thing. So you'll remember, the GBP 3 billion loan sale we did at par, slightly above par. This loan sale, I mean, I'd love to get par, and I hope somebody falls down and hits their head and I hope they're not listening right now. I hope somebody falls down and hits their heads and pays me par. But I think given the rate moves you've had over the last little bit, I think it will be a below par trade. I gave Grace a pretty good indication of where our tolerance starts to break. So I think if you factor in a little bit of a discount to par, magically, you'll find out 400 basis points is a bit too much. If you factor in a little bit, if you cut it in half and maybe a little bit less, you'll be okay, yes?

I think we've given guidance on the RWA. Obviously...

It's GBP 1 billion of RWAs that goes away, yes.

And it's I think it is accretive as well. So...

Yes. I mean one of the best parts of the trade and somebody wrote it, it wasn't you, John, because your maths is too good. But somebody else wrote if they didn't think it would help earnings. I don't understand. And we got GBP 3 billion back that's earning us somewhere around GBP 3.5 billion and we put it just in cash at the Bank of England, and we pick up 175 basis points on GBP 3 billion. I mean that's not insignificant from an earnings perspective, yes.

No, no, not at all. Actually, just a couple of follow-ups if you don't mind. I think It's important on the AIRB point, so I really want to just understand it like -- I mean, you've highlighted the lack of internal data. When the bank business came out in 2017 with the highest [indiscernible] around relaxing requirements around data to include external data for challenger banks, kind of led to believe from that speech and kind of subsequent using this wasn't going to mean that you would end up with late 20s or early 30s on the risk weights. I mean, I'm struggling with that. And then secondly, on that point, like you're talking about GBP 30 million of valuable cost reduction. In my understanding, and please correct me if I'm wrong, but like a lot of the investments you've put into, the cost has been to support an IRB enabled bank. I mean, can you kind of walk away from some of this now, like if you can sort of help us piece that together, that would be helpful? Secondly, on the equity, thanks for clarification that must have read that wrong, where I thought the GBP 150 million of new equity was effectively the raise of 30p, but sorry, the GBP 102 million is obviously separate to the 30p per share raise. And that sort of dovetails then in terms of the math around Spaldy. And then finally, look, I've not asked it initially, but look, cost of risk, is there anything to say in terms of evolution there on the consumer book maybe most particularly, but just generally, any kind of update, please?

Happy to. So AIRB, listen, they also -- the Bank of England published a paper on reference points, John, which they use that if you didn't have sufficient internal data, especially about Probability Possession Given Default, PPGD, and the use of reference points, which I think is actually something they published that requires, if you don't have enough internal data that they would request that you use their suggested outcomes, yes, for some of the attributes. And then if you layer in conservatism because we don't have internal data, the math becomes quite onerous. Yes, that's -- listen, that's -- when they say, "Oh, you have more work to do". It's just because they didn't like our risk weights, John. I mean it's lovely. I mean math is math. It's not hard. I mean we gave them over 1,000 pages. We did every module. I mean there was no other feedback about anything else. I think they were fine with our stress test and they were fine with our governance, they were fine with everything else. It's just our models gave us a risk weight that they didn't think it was high enough. I mean that's what this game is, right? So we just need to -- we need to kind of figure out -- we need to figure out whether there's a pass-through that makes sense for us. In terms of the investment, you are right. We have built the balance sheet. We built a GBP 7.5 billion mortgage portfolio in anticipation of getting AIRB and I think one of the things that we need to decide strategically at the Board level over the next handful of months is whether we need to reposition that GBP 7.5 billion of mortgages, make it maybe a bit smaller, a bit more specialist and really start to stretch our legs in commercial and corporate. Funny, we spent a lot of time, as you can imagine, over the last couple of months, modeling all sorts of different scenarios. And actually, we get to about mid-teens RoTE medium term, whether we're an AIRB bank or whether we're not an AIRB bank, and so we've just got to decide where we want to stretch our legs. If for an AIRB bank, we do more resi mortgages, we do more prime resi mortgages, a bit of specialist. If we're a non-AIRB bank, we do more corporate, more commercial, and we do a bit of specialist mortgages. It is back to that tick mark slide, and it really brings the tick mark slide to life. We are lucky to have the level of asset optionality we possess at Metro because it really insulates us and allows us to pivot based on risk-adjusted returns on rate cap. And if the denominator, i.e. rate cap changes, well, then we change the numerator. And then in terms of risk, it's really weird. We're still not seeing anything. So we're seeing like a little bit here and there, John. You'll see when we get to the year-end, you'll see the risk metrics have ticked up a bit in unsecured personal, but it's only because the book seasoning. Because it's all new lending, so some of that needs to occur. We've seen a little bit in our mortgage portfolio that we acquired before I got here. Somebody bought a mortgage portfolio that's actually just not very good. So we're seeing a bit coming out of that. We've seen some little bits and bobs on the mortgage portfolio, but not too much. So again, we'll get more into year-end. We tend not to disclose much even at the quarters, as you know. But the portfolio is holding up really, really well.

Okay. Look, one final clarification and sorry for dominating the call for so long, but -- on the GBP 30 million of annual cost saves that you articulate, I mean, is that independent of IRB. So again, just back to my queries around...

Yes, yes. No. Completely, John. It has to be independent. We haven't really solutionized it yet, John, if I'm honest. Yes. We're starting to think through what the implications of it...

I think there'll be more in the tank.

It may be. I don't know.

In terms of cost saving?

Maybe, I don't know, 30% seems like a big number. And I want to be really clear, it's not 30% off of the 23% number because I think we've guided that we thought we'd have kind of mid-single-digit growth in costs next year. I think that was the guidance we gave at the half year. I can't remember what we said. I think it was mid-single digit. And so low to mid or mid. And so the reality is that you need to kind of take 23% up and then take the 20% of it off in '24, and then we'll take another further 10% off as we get into '25. Because that will -- I think we need to really rethink what we do.

Our next question comes from Corinne Cunningham from Autonomous.

Corinne, how are you? Give me a favor. Thanks Chris for this cameo last week. It was nice to see them pop back up.

Okay. I will. I think he might be listening. So I'm sure he's hearing you ear to ear, so to speak. A couple of tricky ones from me. First one, just in terms of do you expect to be profitable in Q4 after restructuring costs and then whatever you're going to book on the mortgage sale? Another one is just on the capital ratio. I assume we're still using phased-in ratios in the 13%, et cetera. Do you move to full phase out or fully phased in, I should say, on 1st of Jan. And is that still about a 70 bps difference? And then last question is on TFSME refinancing. Would part of the mortgage disposals, would that be expected to go towards TFSME refinancing? If not, what are your plans there?

So I'll start at the end and then -- and I assume the phase -- and you're talking about the add back we get for ECL, yes. The thing that went back to COVID, yes, okay, fine. So yes, it assumes it phases out, yes. It is in -- so the June 30 numbers are as they were, i.e., with a bit of the phase and left and then the rest rolls off. The TFSME, it's a really good question. You're the first person to ask it, and I think it's -- so listen, I think the liquidity we generate is likely to end up at the Bank of England in cash for the near term. Whether we use it to pay back the Bank of England and whether we put them within the cash, it's the exact same interest rate. So we're having that debate internally. Clearly, if we use it to pay off TFSME, it probably helps NIM a bit more, if we're honest. So it's a conversation we're having. I think it's a really clever observation, yes. But I don't know the answer to it, if I'm honest, because we don't have the cash yet. Loan sale is not done. So we're really just debating it. We talked about the phase in and the capital ratios. I think it's lovely that you've asked about profitability for quarter 4, but it's not guidance we're going to provide. Again, quarter 3, we did say on an after-tax basis, we made a bit of money, not a lot, but it was a positive number. We did talk about the fact that the business we had lost a bit of momentum because of a bit of deposit outflow in the first half of the year as everybody saw in the marketplace. And I think everybody was modeling that the second half of the year would be significantly less profitable than the first half of the year. I don't know that, that changes. I think what does change is as we start to get into 2024 is we can start to deploy the growth capital we just got our hands on and really start to transform the P&L of the bank. But since it's not even going to close until December, there's no way I can use the growth capital to transform the fourth quarter, yes. So I think I don't really have an answer for you on quarter 4, even if I did, I wouldn't tell you. But I think there's a lot of moving pieces. What I am really confident in is beyond '24, because we now have the growth capital necessary to really stretch our legs.

One last one, which you're probably not going to appreciate just on your Pillar 2 requirements, they've been gradually kind of coming down. Do you expect that, that would go into reverse and is that to go up?

I have no idea. No idea. So the reality is we need to spend some time with the regulator. They do periodic C-SREPs, as everybody knows. We'll get through that process when our next C-SREP is, and I'm not going to tell you when that is and we'll see where it goes. I have no idea. I think I've learned a valuable lesson not to speak for the regulator, and I learned it years and years ago, and I'm not going to start now. It's really within their discretion. Yes?

[Operator Instructions] Our next question comes from Aman Rakkar from Barclays.

So I've got two. I'm revisiting topics that have already been addressed. But I think there's a point of clarification on both I just wanted to get to. Can I just check on this mortgage sale? Are you registering interest at the kind of commercial terms that you've alluded to? Or is this just a kind of hope and aspiration?

No, we're registering interest. No, no. We have genuine interest and yes, genuine interest across a range of names, not one dissimilar to what's on your paycheck.

That's great to know. I guess I was just noting you did a GBP 3 billion mortgage sale in 2020, and you broadly speaking, sold that par value and it had a weighted average rate of 208 basis points. So that would have been quite an attractive fixed rate asset portfolio. But given interest rates are so much higher, there has to be a pretty significant negative fair value on this portfolio on acquisition.

So I think you need to think a few things through, actually, right? So again, if you're doing any kind of an NPV model, you need to figure out how long they're durated for, when the buyer might be able to get access to re-underwrite the credit and then be able to reprice it up, yes. So you're right, if we sold mortgages that had 5-year duration from today yielding a little under 4%, the haircut might be bigger. If we sold mortgages that had an 18-month duration, and we're a little under 4%, the mark would be different. So I think you need to factor that in your thinking. And then the second thing is that you got to factor in the ability of certain financial institutions to be able to have grown their mortgage book. I think it was actually -- I can't remember, I think it was Perlie's question actually, about whether we were confident in our ability to grow assets and confident in our ability to get the loan growth given the compression in the mortgage market. So I think if I ran a big mortgage shop and I was going to have to show that I was going backwards from an asset perspective, I think I might be motivated to try to do a transaction. So I think there's a lot of factors that go in there. So -- and again, if we don't sell it, I don't really care, we'll just let it run off. It doesn't really matter to me. It's just the pace at which we could reposition the balance sheet is attractive because we'd like to crack on with it. But if we have to wait for it to roll off ourselves, well, we'll take the margin uplift when it rolls off. It doesn't really matter. Yes?

I mean, that's really helpful color. The second was just on costs. And sorry if I've kind of misheard you. I think there's been a kind of nod couple of times towards a '24 cost number. I think I heard actually in your prepared remarks or at some point during your presentation that the GBP 30 million of cost savings is versus a '24 cost number that some kind of investors that have had access to that number or I have seen that number. And forgive me if I've missed guidance that you've issued at H1 or something. But I mean, can you just clarify that point? So is there a '24 cost number that you're pitching for?

Yes, yes. So sorry, because I know it's important for the model. So I think we have a session later today with the analysts and stuff too as well. So the reality is that I think when we stood up at the half year, we showed a negative little red arrow going up about costs. And I think with the voice overlay was, I think, something along inflationary pressures low to mid-single-digit increases should be expected. I think that was the language we used. And so, I think if you take the [ 5.33% ] or whatever [ 5.34% ] whatever the number was at the half year, and you gross it up a little bit by somewhere between low single to mid-single digits. And then if you then took GBP 30 million off of it, that's probably a closer to a better answer than just taking GBP 30 million off of the '23 number.

We have time for one more question, and that comes from Daniel Crowe from Goldman Sachs.

You've asked most of my questions. Just a couple of points of clarification. The extension on the Senior, I assume that's going to match the GBP 175 million coming in, so a 6 non-call 5.

What we did is we're just grossing up the Senior. To make it as simple as we could, given the time line that we had that GBP 350 million is going to become a GBP 525 million. It's going to go up from GBP 350 million to GBP 525 million. So the terms will be exactly the same because it will be the exact same [indiscernible].

So it becomes 6 non-call 5.

Yes. it's a little bit -- it's like actually like a 5.5 non-call 4.5, I think, technically, because I think it's like April of '28 or something. Do you know what I mean?

Yes, that's no problem. And then the Tier 2, I mean, I think it's pretty clear, but just checking the GBP 100 million there effectively contributing to CET1. They don't get anything apart from, I guess, not getting burned.

I have nothing to add to that comment, Daniel.

And then just finally, on the TFSME, I know you kind of talked around it there. The -- just given the mark-to-market loss in the portfolio, I know you said you previously you matched TFSME to your bond portfolio. Is there a bit of an asset and liability match there?

Maybe. We don't really -- I mean that was prior management. We don't really look at it that way, if I'm honest. Listen, we have tons of liquidity. I mean, just tons. And so we've held on to the TFSME just for a level of prudence. We're either going to repay it from the liquidity we generate from our deposit book, which continues, which I think everybody is seeing or we're going to potentially use the asset sale proceeds to repay some of it. We're not really all that worried. We just think in an uncertain marketplace, having extra liquidity just makes sense. And it's sort of income neutral and NIM dilutive, right? And we basically take it and put it back with the bank. I mean it's not -- it's a relatively straightforward trade but it does give us a bit of insulation. But it is really NIM dilutive. So I don't know. We're kicking around, but there's no -- we're not worried about how we get the liquidity to pay it back because we have so much excess liquidity.

Yes, no, I mean I agree, the rates at which that's paying on now doesn't make a huge amount of difference. And then just a final clarification on the mortgage sale. You were kind of alluding to it there, but I assume to reduce day 1 capital less, I mean you effectively want to match the assets. Well, I guess, reduce the duration and bring them more up to the kind of levels the rates are now or just [indiscernible] effectively sell-off the shorter dated?

It's spot on. So if you start looking at swap curves instead of looking at base rate, you start to probably come out with different math. So that's spot on. And then I think for us, it's capitally accretive on a ratio perspective because again, we're going to take a bit of a hit in terms of we're not going to sell it at par. So obviously, that means it comes out of CET1. But we do have a big reduction in RWA. So it is ratio accretive, and we get earnings uplift. So whether you make it back in earnings or not, it depends on what price we get. So it's that, and you are right, when you're trying to figure out the price, I think everybody kind of thinks "Oh, a base rate of [ 5%]. No, no, look at the short-durated swaps.

We have no further questions. So I will now hand back to Daniel for any closing remarks.

Listen, I just -- first, thank you all for the time. I genuinely appreciate it. I think -- I just want to sort of reiterate what this means for Metro going forward and how it repositions us to genuinely take advantage of the unique franchise we have built. And we are very excited about the prospects this gives Metro going forward, and we're very excited about the core profitability we will be able to generate and the capital generation and how we can deploy that capital generation. All the capital we generate, we know we have ability to redeploy it in accretive ways. So again, thank you all for the time and thank you all for your support of Metro. Take care.

This now concludes today's conference call for everybody. Thank you very much for joining. You may now disconnect your lines. Have a great rest of your day.