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

Good morning. Welcome to Metro Bank's Half 1 2025 Results Presentation. I'm Dan Frumkin, CEO of Metro Bank. Half 1 2025 shows the strategic pivot we started 18 months ago, refocusing on Metro Bank's relationship banking ethos is working. The strong financial performance, combined with the actions taken, positions Metro Bank to deliver best-in-class returns over time. You're going to hear from me this morning a bit of an overview. Then we'll go into Marc, who will give you more detail on the financial performance. And then I'll talk a bit about the strategy driving the future through 2027 and beyond. And then we're always happy to take your questions. So, let's start. Revenue was up 22% year-on-year. It's up 22% even though the Bank of England base rate is down 100 basis points. We also shrunk the balance sheet by 24%. So, we managed to grow revenue while shrinking the balance sheet and living in a lower rate environment. We also managed to reduce cost -- to reduce cost by 8% year-on-year. That gave us a jaw of 30%, it led to a GBP 45 million underlying PBT. That is triple what we did in the second half of 2024. On the upper right, we did GBP 1 billion of commercial and corporate lending. That's twice what we did a year ago. We have an GBP 800 million credit-approved pipeline. The credit-approved pipeline is more than all of the lending we did in 2023. You can see we expanded NIM in the bottom left by over 100 basis points in the year. The 2.95% exit NIM is very close to our year-end guidance. And we've created real capacity for growth through our capital actions in the first half of the year, both the unsecured personal loan sale and the GBP 250 million of AT1 we raised. And we believe and we expect to be reclassified a transfer bank under the new MREL regime. And when we're reclassified a transfer bank under the new regime, it means MREL capital is set equal to your minimum capital requirements. Therefore, Metro Bank has no intention of raising any more MREL debt. We told you that there are 4 key drivers for us to deliver 2027 guidance. The first was cost discipline. As I've mentioned, costs are down 8% year-on-year. Our costs are now better than they need to be to deliver 2027 guidance. Our cost of deposits -- our exit cost of deposits was 102 basis points. That is the best of any high street bank in the U.K. Our cost of deposits is now below what it needs to be to deliver the 2027 guidance. We talked about just the passage of time that our treasury portfolio, our natural hedge rolls off and we can reinvest the proceeds when those securities mature. We have GBP 0.5 billion this year, GBP 1 billion in '26 and another GBP 0.5 billion in '27. Just the roll-off and reinvestment of those proceeds under the current yield curve delivers a 660-basis point improvement in return on tangible equity by the end of 2027. And we said we need to rotate assets. Well, you saw, and I talked about earlier, we've done GBP 1 billion of commercial and corporate. We have an GBP 800 million pipeline. We're launching new products in our specialist residential mortgage base. And most importantly, we saw GBP 0.5 billion of our prime resi mortgage book run off. One of the strengths of the business plan is that we free up about GBP 4 billion of liquidity and significant amounts of capital because we're running off the prime residential mortgage book. You've seen this slide before. I'm not going to spend a lot of time on the why we win drivers. I'll come back to those in the second half of the presentation. But I do want to spend a bit of time on the chart on the right. You've seen it before. This is our clear blue water chart. Metro Bank is in a universe of its own. We are uniquely positioned to generate outsized returns on a going-forward basis. We have a funding model that delivers a cost of deposits that is better than the high street banks. And we have a lending platform that's delivering risk-adjusted yields in line with the specialist lenders. That combination driven by our relationship ethos allows Metro Bank to win every day. And this is the guidance. Marc will come back to it. But again, as I've talked about, for the '27 guidance, the building blocks are in place now for a lot of the guidance that will be delivered in '27. And with that, I'll turn it over to Marc to go through the details of the financials. Thank you.

Thank you, Dan. Look, it's great to be able to talk about such a strong level of performance. And what I'd like to take you through today is a little bit more about the drivers and the actions we've taken and how we think they translate to forward momentum as we go forward from here. So, look, firstly, let's look at the performance dashboard over a longer period of time. The first thing to notice is all of our trading metrics have improved, and let's go through those one by one. So firstly, as Dan mentioned, we have more than halved the cost of deposits from just over 2% to just over 1% versus the same period last year. That has helped increase our exit NIM, along with the asset rotation strategy, which we'll come back to later, to an exit NIM of 2.95%. That, in turn, has increased our revenue to GBP 286 million, which is 22% up on the prior year on a smaller balance sheet and a lower rate environment. Combined with 2 things, combined with cost discipline, that improves our cost-to-income ratio from 95% at year-end down to 82% and well on track to deliver all future guidance. From a credit risk perspective, strong underwriting disciplines in markets we already know has kept the cost of risk low, already low and stable compared to half 1 2024. The combination of increasing revenue, lowering costs, on low cost of risk means we've increased underlying profits to GBP 45 million in the period, which is more than triple the half 2 period in 2024. In addition to that, we are seeing convergence between our statutory profit and underlying profits with a statutory profit of GBP 43 million, which translates into a return on tangible equity of 7% in the period, which is right in line with our guidance, all at the same time as increasing our capital position, and we're going to come on to more of these drivers in depth as we go through the next section. So, Dan mentioned there was 4 things that were important to the transformation in terms of our PBT. Let's go through them one by one. So firstly, how have we managed to reduce the cost of deposits by more than half? Well, on the left-hand side, this shows how our deposit mix has changed over time. And I'll draw your attention to the third column. And importantly, our cost -- our mix of deposits, which are checking accounts or noninterest-bearing is 43% of our mix. Now that equates to a market average of 18%. So, we have more than twice the amount of mix in low-cost deposits, which are borne out of the relationship strategy we hold there. In addition, we are starting from an extremely strong place in terms of liquidity, so an LCR ratio of 315% and a loan-to-deposit ratio of 65%. That means we can be very disciplined with the types of deposits we need. And as such, we have offloaded expensive deposits from a mix of 15% this time last year down to 7%, and that actually compares with over 34% versus the market peers. The combination of our relationship strategy gives us a strong foothold in terms of deposit -- our cost of deposits and a pricing advantage versus peers. All of that has led to a cost of deposits on the right-hand side of just over 1% in the period, which is the best on the high street. Secondly, cost discipline. We mentioned that most of our heavy lifting of the transformation was completed last year from a people perspective, and that's true. And as you can see on the chart, we have reduced total costs half-on-half by GBP 21 million in the period versus full year. But you can see our people costs are stable, reflecting the fact that all of the heavy lifting on people transformation was done last year. Pleasingly, we have further improved our operating efficiency by GBP 21 million in our non-people costs as a result of targeted actions and embedded in our partnership with Infosys. All of this combines with the increased revenue to improve our cost-to-income ratio to 82% and well on track to deliver the guidance we set out in the plan. The third component, as Dan mentioned, was tailwinds from treasury investments. Here, you can see the effect of the nearly GBP 2 billion of maturities as they yield from low-yielding rates on to higher-yielding rates. Cumulatively, we expect GBP 15 million worth of benefit this year, which is worth 10 points on NIM. That builds substantially into 2026 to drive a GBP 44 million increase or 29 basis points on NIM. And cumulatively, over the period, it drives 660 basis points of RoTE. Now all of this is largely locked in. We know the rates; we know the balances and are currently performing in line with our projections of the yields they're expecting to deliver. Finally, let's go to asset rotation. What does it mean for us? On the left-hand side, this shows how our balance sheet has changed in loans and advances over the period since half 1 2025 -- half 2 '24. Our total loans are now GBP 8.9 billion, down from GBP 9.2 billion. But really, the story is in the middle block of how we're recycling runoff portfolios into targeted growth areas. You can see in our runoff books; we have run off the book by GBP 1.2 billion from GBP 5.8 billion down to GBP 4.6 billion. We have recycled this into our targeted areas and growing them by GBP 0.9 billion in the period. As you can see on the right-hand side, a lot of that growth is driven by our targeted acquisition in corporate and commercial lending. We did GBP 1 billion worth of new lending in half 1 '25 compared to GBP 0.5 billion in '24 and GBP 0.3 billion in the same period in '23. So double '24, travel 2023 and building momentum. And as you can see, we have over GBP 800 million of credit approved pipeline ready to complete in the remainder of this year. Again, this gives us strong confidence our growth and strategy is delivering. But it's more than just growth. It's also within asset rotation about yield management and optimizing for risk-adjusted returns. Now in our 2 target portfolios, in the middle 2 blocks, we've split out what the yields are spread to base for commercial and customers joining, so 357 and attrition, 333. So, the combination of growing in this segment and at a better yield has improved the spread to base from 3.12% to 3.46% in the period. That is NIM accretive and income earning. Likewise, in the mortgage portfolio on the right-hand side, you can see that our attrition equals our gross lending, but actually the yield of gross lending significantly outperforms the attrition. So, 577 place 460. We guided that we would generate new commercial loans over the course of the plan of 350 points over base rate, and we are at that level, and we're at the lending volumes we need to deliver the guidance. Likewise, in mortgages, we're delivering over 200 basis points of swap rates. We continue to launch new products in this segment, and we look forward to telling you the results of those as they mature. So, let's zoom out a little bit. What does all of that mean in terms of our 4 performance drivers on the key metrics Well, versus half 1 2024, our NIM has increased from 1.78% to 2.95%, driven by 2 key components: the asset rotation strategy and the cost of deposit management. That exit NIM is already within 5 basis points of our full year guidance of 3% to 3.25% for the remainder of the year. The strategic actions taken to increase revenue and lower costs have improved our jaws by 30% and the combination of which has improved our PBT to GBP 45 million in the period. Now let's just look at that GBP 45 million and how that's emerged over the passage of time. The reason we keep talking about these 4 drivers is because they have a material impact on the profitability of the bank. You can see the effects of deposit optimization, cost management, treasury assets and asset rotation as we build to a ROTE of 7%, which is the midpoint of our guidance for the year. all of which has been achieved by strengthening our already robust capital position and key significant changes on capital in the first half of this year is we raised GBP 250 million of AT1s. We completed the unsecured personal loan of GBP 584 million portfolio sale. We organically generated CET1 through profits. And as you can see on the right-hand side, that now leads to an increase in our CET1, our total capital and our MREL to the highest point we've had to date. All of this, we further expect benefits from the changes from the MREL regime, and we'll come back with further details as more is known in the future. Finally, ending on guidance. Look, on the left-hand side, this is the halfway stage for the year. You can see where we are versus where we've said we'll be for the full year. And hopefully, this brings you confidence that we are well on track to deliver. The strategies in action are working, and we expect to have a very clear path to delivering the returns we set out in our guidance. And with that, I'm going to hand back to Dan, who's going to take you through our strategic drivers.

Thanks, Marc. So, listen, we're going to spend a little bit of time talking about the strategy driving the future, where we go to beyond '27 and how we get to '27 going forward. So, listen, these are the strategic pillars that I've discussed before. These are the strategic pillars that underpinned the delivery of the strategic repositioning of Metro. So, as we talked about cost. We have 38% fewer colleagues onshore today than we had 18 months ago. We've restructured our frontline distribution team. We've reduced store hours but still have the longest store hours of any high street bank. That has built a scalable platform. All of those energies, all of those efforts were put into building a scalable platform. Infrastructure, our partnership with Infosys has given us access to new colleagues who bring something different to Metro. We've upgraded our financial crime capabilities. We've upgraded our fraud technologies, and we've redone our call center infrastructure to take advantage of AI. We have capabilities now that we did not possess 18 months ago. In terms of communications, we have increased colleague engagement during a tremendous effort in turning around the bank. The culture of Metro remains strong. And balance sheet optimization, again, we sold GBP 2.5 billion of residential mortgages. We sold almost GBP 600 million of unsecured personal loans. We raised GBP 0.25 billion of AT1. All of that gives us capacity to grow. And then in terms of revenue, you saw the progress we've made on lending. You saw the new products we're launching in the specialist space. We've increased our regional expansion in the North. 2/3 of our commercial lending is now done outside of London. That builds huge confidence in our ability to deliver in '27 and beyond. I said I'd come back to the why we're winning, the 4 key pillars of why we win every day. Our local relationship-led service model is a true differentiator. We're the only bank that assigns a relationship manager to every borrower of all sizes. We have 102 local business managers across our 76 stores. We are committed to those communities in which we operate, and we have physical presence to support SMEs, commercial and corporate across the country. We've talked about cost of deposits. And Marc mentioned our relationship-led model drives a differentiator in cost of deposits because we have a much higher mix of current accounts, almost 2.5x the market, and we have a much smaller percentage of high-cost fixed-term deposits and cash ISAs, where we have 1/5 the market penetration. We spent a lot of time talking about the scalable platform and the efficiencies we've built in. Those set us up well for the future. And then funding high-yield specialist lending. Again, the bottom box in the middle, we are a local relationship-led service model that differentiates us from the big banks and the breadth of our service offering differentiates us from the other challenger banks. We have a team of over 400 professionals in the commercial and corporate space that, on average, have over 20 years of experience. They're supported by a credit team that has over 25 years on average of experience. We have small market shares. We only have a sort of a 7% market share in the SME space. And we lend into large markets. The SME, commercial and corporate is GBP 0.25 trillion market. And the specialist mortgage market is over GBP 50 billion. We are doing niches inside those markets. But all of those give us confidence in our ability not only to deliver '27, but to continue to grow beyond '27 as we take more market share, as we take larger shares of a very large market. And back to this slide. The chart on the right means Metro Bank is uniquely placed to deliver outsized returns. And the reasons we're uniquely placed are completely sustainable. Our relationship-based model generates low-cost deposits, best in the market. And our lending teams who are skilled and capable generate yields in line with specialist lenders. That gives us the confidence that by 2027, Metro Bank will be generating one of the highest return on tangible equity, if not the highest, of any high street bank. Thank you so much, and we're happy to take your questions.

[Operator Instructions] Our first question comes from Benjamin Toms from RBC Capital Markets.

A couple of questions from my side. You noted in the presentation that Metro will become a transfer firm from an MREL perspective from the 1st of 2026. I appreciate at the moment that you don't have all the answers, but can you speak a little bit about how you think about the arguments for and against calling the MREL debt now versus letting it mature in 2028 and how this might -- this news might impact your current strategy, particularly around targeted growth loan segments? And secondly, Metro, a profitable comfort on capital. There's a boost to MREL coming at some stage. When is it a reasonable expectation for us to start putting dividends into our model? And then lastly, if that's okay, on Slide 14, I can see that you're meeting your ambition in advancing commercial lending at a spread of greater than 350 basis points. The right-hand side of that slide on mortgages makes it less clear how you're progressing versus your greater than 200 basis points spread over swaps for mortgages. A quick and dirt suggests that you're running slightly behind on that ambition. Is that the right way to think about it in terms of front book mortgage profitability? And do you expect the spread to pick up from here?

Good. Okay. Thanks, Ben. I'll do those in order. And Marc, I'll let you talk about the mortgage swaps. So, we expect to be designated a transfer firm. You're right, we have GBP 525 million of existing MREL debt at a 12% interest rate that we could try to buy back before its call date in April '28. Again, we'll run the economics and the math on it, but it is trading at 114 plus. So, the math around whether it's worth buying it back now and using up the CET 1 for the premium we'd have to pay to buy it back versus using that CET 1 to invest in the business in other ways is math we need to do. We haven't really run the math yet. We're waiting to get written confirmation of the change. And again, the new rules don't become in effect until January 1, 2026. So, there's a bit of time. In terms of capital return, you're right. A bank that's generating mid- to upper teens return on tangible equity sustainably, which we think we will be starting in '27, clearly needs a capital return policy. So, we haven't yet had those conversations internally. But I think it's fair to assume that we will start to have those conversations as we near the '27 sort of upper teens return on tangible equity and what that means. So, I would think we will be talking about capital return policy sort of in year-end '26 results, and we'll create clarity for what that means for '27 and '28 and beyond. I don't know if you want to talk about mortgage swaps.

Yes. Just I think it's harder to show the margin versus swaps. So, you're right, Ben. I think the way to think about it is we're at the volumes we need to. In terms of the margin to swaps, it actually is at about the 2% and we've just launched new products. So, we've got more to come in the second half. So, look, we're really comfortable with where we are on the mortgage side, and it's in line with what we've guided.

And all I would add to that is, remember, per the guidance, we're doing GBP 1 billion, GBP 1.2 billion a year in a GBP 50 billion market. As we launch the products, there's lots of niches for us to go after to generate the yield we want.

Our next question comes from Grace Dargan from Barclays.

Maybe one first on kind of loan growth more broadly. I mean, I note in the appendix, you're making a point of highlighting the CAGRs as you talked about at '24. Maybe you could give us an update on how you're thinking about that today? What's changed, if anything? And then secondly, maybe you could give us a view on kind of what your targeted or expected RWA density is over time. I guess you've talked about that previously. So, any color on that would be helpful.