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

Good morning, and welcome to Metro Bank's Half 1 2026 Results. As you can tell from the opening slide, you're about to see a very strong performance driven by our strategy. Our ability to win share by staying focused on relationship banking and delivering quality service will come out throughout the presentation. I'll start with a bit of an overview of the financial results, then Marc will walk you through the detail, and then I'll come back and talk about the strategy that drives the future for Metro. And then we're happy to take questions. So let's start. Metro delivered a GBP 61 million underlying profit for the first half of the year, up 34% year-on-year and the largest in the history of Metro Bank. RoTE increased to 7.5%, up 270 basis points over a year ago. Cost-income ratio continued to drop as revenue growth outpaced cost growth. Exit NIM expanded to 325 basis points (sic) [ 3.25% ], 30 basis points up year-on-year and the largest NIM in the history of the bank. We continue to find lots of opportunities to lend. We did GBP 1 billion in commercial and corporate lending in the first half of the year, and we have a GBP 1 billion credit-approved pipeline, the largest in the history of the bank. Historically, we've done about 120% to 130% of the approved pipeline in any half year. So we would expect in the second half of the year for lending to accelerate and for us to do about GBP 1.2 billion to GBP 1.3 billion of new commercial and corporate lending in the second half of the year. The reason we're confident about that is we saw the largest deal flow we have ever seen. We saw GBP 6 billion of deal flow in the second half of the year. 95% of the corporate deal flow came to us directly. That deal flow is not broker-led. It comes to us because of our relationships in the market and with long-standing customers of the bank. And as I mentioned, cost-income ratio dropped as revenue over the last 2 years has grown by 29% and costs have actually decreased by 9% over the similar period. So let's move on to RoTE. So the path to an 18% return on tangible equity becomes clearer by the day. The path to 13% in quarter 4 is broadly driven by the repricing of the treasury portfolio and then the benefit of the lending we did in the first half of the year. Those 2 things alone get you to almost 11% return on tangible equity. The delta is from the GBP 1.2 billion to GBP 1.3 billion of lending, the continued asset rotation of the balance sheet, which continues to drive NIM expansion as well as RoTE accretion. We get a further uplift in 2027 from treasury book repricing, which means the continued rotation that will occur in 2027 will continue to build RoTE over and above just the treasury book repricing. Another way to think about it is the first bullet point in the box above the bar chart. 9.2% of the RoTE uplift from 7.5% to the 18% is broadly baked in today. It is either activities that we have done or mechanical changes that will occur over time. So the 7.5% becomes 16.7% just through the passage of time. And we're very confident in our ability to continue to rotate assets given the largest pipeline we've ever had in the history of the bank to get us to the 18% return. All of that makes us extremely confident to reconfirm all guidance. In terms of NIM, we're already at 325 basis points and the repricing of the treasury portfolio in quarter 4 is worth another 15 basis points. So as we stand here today, the mechanical uplift from the treasury book repricing plus our current exit NIM already has us in the range. Further rotation of the assets as we close out the GBP 1 billion pipeline of commercial and corporate lending will further increase NIM above the 340 basis points. We've talked about cost-income ratio. Marc will come back to that and the RoTE build I've given you. We are extremely confident that we have a very clear path that is now evident to get us to 18% in 2028. With that, I'll turn it over to Marc. Thank you.

Thank you, Dan, and good morning, everyone. So let me take you through the financial performance for the first half of the year. And as a reminder, our financial transformation is relatively straightforward. We rotate assets to higher-yielding asset classes. We maintain and leverage our deposit franchise, which is a funding advantage with disciplined cost management and capturing treasury tailwinds, we're able to expand earnings. So let's look at that as you see it through the lens of the financial KPIs. Firstly, we have increased our lending yield by 11 basis points versus this time last year. That is a really strong performance given the interest rate environment has fallen by 100 basis points over this period. Our funding advantage means we can leverage and manage our cost of deposits, which has fallen over the same period. The combination of both those events has led to an improved exit NIM from 2.95%, up 30 basis points to 3.25%. This has increased revenue and with cost discipline, we have managed to lower the cost-to-income ratio by 5 points to 77% and on track to meet our guidance for the year-end. The combination of this financial performance has led to record profits for Metro Bank of GBP 61 million, which is 34% up on this period last year. That translates to a RoTE of 7.5%, and we'll take you through the bridge and the future and the drivers on the next few pages. So turning to the profit and loss account. I've referred to the GBP 61 million increased profit for the first period, which is 34% up year-on-year. If you break this down further, let's look at where that profit is coming from. It's a GBP 16 million profit improvement over this period and GBP 15 million of that has come from underlying revenue, which has increased by 5% from GBP 286 million to GBP 301 million. There are 2 parts to the revenue story. Firstly, our net interest income has grown by 8% over the period as the asset rotation and asset growth takes action. This has partially been offset by lower fee income as we move -- and the combination of both has led to a 5% increase in underlying revenue. If you look at where I would expect us to go from here, and we'll move on to asset rotation further, I would expect us to accelerate our interest-earning income, and I would expect fees in the second half of this year to be broadly consistent with fees in the first half. So let's take a lens of how each of our financial drivers has performed over the past 12 months. On the bridge on the right-hand side, you can see our profit growth from GBP 45 million to GBP 61 million has been driven by the 4 fundamental drivers: asset rotation, treasury, cost reductions and deposits. All of these have combined to more than offset rates and other headwinds that have been in the bank to drive an underlying profit of GBP 61 million. So let's turn to each of the drivers and where they go from here. Firstly, asset rotation. You can see that our total loan book has grown by 4% over the period to GBP 9.2 billion, up from GBP 8.9 billion. However, the fundamentals are much stronger than this. We have increased our core business lines by 43% or GBP 1.9 billion over this period. And we've done that efficiently by regenerating capital and liquidity from our runoff books, which have reduced by 34% over the same period. As we stand here today, our core business lines now represent 67% of our total lending book, reflecting the active trading strategy we are at reengineering our loan books. Asset quality remains strong, and we are optimizing for risk-adjusted returns. You can see this more visibly as you look on the charts on the right-hand side. This is a demonstration of how our book is changing over time. In commercial lending, a key segment of growth for us, now stands at 44% of the total loan book. This is up from 35% a year ago. In addition, 45% of our total mortgage book is now specialist in nature, and that was less than 1 in 4 this time last year. And why does that matter? It matters because this is about moving to higher-yielding, better RoTE returning segments. Our commercial lending lines bring us a net interest margin of 330 basis points to 350 basis points over base. And you can see in the mortgage space, our specialist yields are yielding over 200 relative to swaps, and that compares to a prime market rate of just 40 basis points to 70 basis points. So we are recycling assets to higher performing that will drive NIM and revenue as we move forward. This is all being done by maintaining strong underwriting and disciplines. And you can see in our cost of risk is 22 basis points as we stand here today, and that is significantly below our through-the-cycle guidance of 40 basis points to 60 basis points. Turning to the second driver, treasury asset repricing. At full year, I said there would be GBP 1 billion of maturities in 2026 and the majority of those maturities, GBP 833 million would be in the second half of the financial year. Those maturities are still there, will still mature and they are still coming off a pay rate of 85 basis points. What has changed is at full year '25, I expected those to mature on a base rate that would be around 3.25%. Currently, we are now expecting them to mature on to a rate more closely to 3.75%, which is a 50 basis point increase. Those maturities cumulatively will add GBP 24 million of revenue uplift or 2.7% of RoTE or 15 basis points of NIM, depending on which line of the P&L stack you're looking at. In addition to the treasury maturities, our book is becoming more commercial. By its nature, it is becoming more floating rate sensitive. To offset that, we've introduced a structural hedge program to maintain interest rate sensitivity as close to neutral as possible. In the period, we've added GBP 2.6 billion of a hedge notional compared to a year ago with an average duration of just over 3 years and a weighted yield of 3.4%. The effect of this is to try to maintain as close to neutrality as possible given the changing mix to floating rate. And you can see that in the table below, which demonstrates that our NII sensitivity on a static book for a significant rate shock either up or down is in the low single-digit millions. Turning to the third driver. We have an enduring strategic advantage in our funding mix. We have consistently stated that we have a significant and outsized market share of current account funding relative to the market and relative to our peers. You can see this by 43% of our balances being current account funded compared to the market peers of just 18%. This provides us with a deposit cost of 98 basis points, the lowest on the High Street. Our high-yielding deposits are less than 5% of our mix compared with the market of 34%. As the relationship model embeds, we will see this continue to give us strength and opportunity to grow into the future. On the right-hand side, you can see where those deposits are coming from. And more notably, as we transition and as we focus on our commercial and SME banking models, you can see that the share of those deposits has increased from 48% a year ago to now 53%. We have a strong LCR of 270% and a loan-to-deposit ratio of 69%, which provides us further capacity for growth as we move forward from here. The final driver is cost discipline. We've consistently said we will maintain cost discipline as we pivot the bank into our target segments. Costs are down 2% year-on-year at GBP 231 million, and you can see that is lower than a year ago and lower than Half 2 2025. We are maintaining guidance that costs will be broadly flat for full year '26 versus 2025. The combination of growing revenue and cost discipline has improved our cost-to-income ratio from 82% down to 77% and will continue to drive lower as we grow revenue from here on in. Turning to guidance. So what does this mean? We -- I've taken you through the drivers, which are clear, visible and enduring and will build earnings momentum. But I'll leave you with 3 points to take away in terms of our guidance. We have a clear pathway to higher exit NIMs. As we currently stand, our NIM is 3.25% and plus with the 15 basis points from treasury maturities, that places us at 3.40%. In addition, we are accelerating our lending into our target segments in the second half of this year, and that will drive that exit NIM further into the range and onwards towards 2027 targets. The combination of growing our book and growing our NIM will lead to increased revenue and drive the cost-to-income ratio down further in line with guidance. And then finally, turning to returns. The 7.5% print in RoTE sets us up very well for the future. We have over 9 points of mechanical RoTE build from here on in and the combination of growing, accelerating our lending into our target segments gives us strong confidence we can reiterate guidance in line with growing to more than 13% in Q4, more than 15% in 2027 and more than 18% in 2028. And with that, I'm going to hand back to Dan, who's going to take you through our strategy and opportunities we see from here in.

Thanks, Marc. Let's talk about where we go from here. So again, corporate and commercial is a huge differentiator for us. We continue to win share. We continue to win business day in and day out. Again, we saw 15%, 15% of all of the SME deal flow over the last year across the U.K. 95% of that deal flow in corporate came to us directly. You can see from the donut that we see -- we fish in a really, really big market. And of that deal flow, we rejected some of it because we don't like the risk-adjusted returns. And we're very disciplined about credit. So it gives us opportunities to be very selective. And we do support the whole U.K. Our regional hub strategy, our ability of building out new locations drives opportunities for us to lend outside of the Greater London area. So 82% of our lending came from outside of Greater London. And on the right-hand column, we are doing good established lending. 64% of the customers we've known for 5 years. The businesses have been in place for 10 years to 20 years and have over $43 million in turnover. And all of the lending is independently underwritten by people with 20 years to 25 years of experience on average. All of that gives us confidence that not only do we have opportunities to lend, but we're doing it very prudently. Let's talk about the future. We've talked about getting to the '28 RoTE of 18%. We've talked to you about how the majority of that movement is mechanical, how assets will continue to rotate to continue to drive RoTE even beyond. But let's talk about '28 and beyond. So we've worked hard to build a more scalable platform by embedding AI. We use AI to empower the human to make the human more productive, to allow the human to deepen relationships and further our relationship banking strategy. So we've created a prospecting tool that has allowed us to allow the lenders to spend less time preparing for meetings and more time meeting with customers. We've redone our account opening process, which allows us to be much slicker, quicker and more customer-focused during the account opening process. We just completed a review of all customers greater than GBP 1 million, and we did that by harnessing AI, which saved us significant man hours. We also were the first partner with Ask Silver that has helped us avoid and helped our customers avoid over GBP 3 million of fraud. And as I said on the prior slide, we fish in very large markets, be it commercial and corporate or specialist residential mortgages. And we'll continue to expand our store network. We signed leases in Leeds, Newcastle and Nottingham, and we will continue to look for more sites across the U.K. All of that, the scalable platform we're building, the large markets we fish in gives us real strategic optionality as we build capital in the future. We could easily increase commercial loan growth. We saw GBP 6 billion of flow and did GBP 1 billion of it. We chose not to do some of the lending because it wasn't the highest risk-adjusted return on regulatory capital we could achieve, but it was very strong risk-adjusted return on regulatory capital. And as we free up more capital resources, we can choose to go deeper into the pool we're already fishing in. We can clearly choose to disrupt the specialist markets. We have the lowest cost of funding of any High Street bank, let alone the mid-tier banks. We can use that funding advantage to become more disruptive in those specialist markets when and if we choose to. As I said, we're entering new geographies, and we'll continue to expand the store network to give us more access to SME, commercial and retail customers. We can also circle back and build out the digital foundations that haven't really existed at Metro since its inception. That would create new opportunities for growth in retail, SME and commercial. And obviously, as we've said, we will discuss the capital return policy at year-end 2026 results, and that will clearly be part of our story as we start to generate significant returns in '28 and beyond. So listen, the model is working. The local relationship-led model generates low-cost deposits that we use to fund better yielding assets. And we do it efficiently, and we work to get more efficient by the day. That allows us to operate in clear blue water. We are a universe of one. We have the lowest funding cost on the High Street, and we generate yields in line with specialist lenders. And what does that mean? It means the highest profits in the history of the bank, the highest NIM in the history of the bank. It means a clear path to getting to our RoTE guidance of 18%. And all of that is hugely pleasing to me. It was a very strong start to the year, but it's not what pleases me most. What pleases me most is the foundations we've built that allows us to have strategic optionality across corporate, commercial, specialist lending, deposits as we move forward. So we are very confident in the path to an 18% return in 2028. And with that, we're happy to take your questions. Thank you.

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

First is around, I guess, inorganic. The bank is very close to achieving its RoTE ambitions through dynamic actions that has taken over the last couple of years. At this stage in the delivery of the plan, how are you feeling about inorganic activity? Do you feel the bank can tolerate some execution risk if there's an asset out there, which could be transformative from a scale or an ROI perspective? And presumably, Metro has no desire to go back to being an MREL bank no matter how good a deal is put on the table. And then secondly, the bank's fee run rate stepped down in the half. Can you just give us some comfort on why you think that step down has now bottomed out with fees flattish from here?

Ben, I'll take the first question, and I'll turn it over to Marc on fees. So organic versus inorganic, we are really pleased with the opportunities we have on an organic basis. I mean GBP 6 billion of flow, 15% of all SME lending. I mean we are spoiled for choice. And we're still seeing really good margins over SONIA for specialist mortgages. So I mean, our organic path is really strong. So at this point, we're really focused on that. And as I said, we have strategic optionality, be it building out a digital offering or going deeper into the markets we already participate in. So I think we're very focused on organic. Do I think we have the capacity to deliver inorganic transaction? We do. We have a really strong management team that's clearly delivered a phenomenal turnaround. That gives us confidence that we could integrate a new business if we chose to. But at this point, we don't need to. I mean there aren't too many banks in the U.K. that are going to go from a 7.5% RoTE to an 18% RoTE in 18 months. We are really focused on delivery, and then we're focused on what we can do with that excess capital as we begin to generate it and the growth we can deliver beyond '28. So I think we have the capacity and capability to do something. I just don't know that it's our focus today. Marc, on fees?

Yes. So on fees, we're guiding that they'll be broadly similar to first half of the year. Largely, that's a function of activity that we're seeing and observing. We have seen competition in FX markets and interchange, but we're also seeing strong demand in terms of some of our own in-house services, so be that the safety deposit boxes, et cetera. So I think, look, we are -- it's becoming -- interchange and FX is an increasingly smaller part of our fee lines. And the activity we're seeing demonstrate would support kind of the guidance that I've said this morning in terms of fee activity levels. But where I would focus is really our momentum story is in the net interest income line. It's really -- it's demonstrating the activity we'll put in place, the accelerating lending into the second half of the year and the asset rotation strategy. That's the real engine for growth as we go forward.

[Operator Instructions] Our next question comes from Corinne Cunningham from Autonomous.

Can I ask a question about NII and why we're not already seeing stronger growth given that the lending is up, the NIM is up, treasury assets are already repricing. Is this a technical thing to do with denominator effect? I'm thinking particularly if you look at the exit NIM versus the average NIM, was something happening just before the balance sheet was closed in H1 to give you that pop up? Just not sure why we're not seeing more momentum in NII.