Results for Year ended 31 December 2020

• Continued support for customers, communities and colleagues during COVID-19, demonstrating that community banking has never been more relevant.

• Transformation plan is on track, although financial performance impacted by COVID-19.

• Strategic pillars unchanged. The liability-led strategy has been supplemented by an acceleration of asset mix shift in response to longer term impacts of COVID-19.

• Underlying loss before tax of £271.8 million for the year (2019: loss of £11.7 million)

• Estimated £124 million of impact from COVID-19, comprising c.£100million COVID-19 expected credit loss (ECL) expense and lower transaction fee income.

• Underlying loss halved H2 vs H1, with improved net interest margin (NIM) and fee income combined with significantly lower ECL charge.

• Statutory loss before tax of £311.4 million (2019: loss of £130.8 million) reflecting the underlying loss and a number of one-off items including the exit from a central London office and remediation costs.

• 11% year-on-year growth in deposits to £16.1 billion (2019: £14.5 billion) and 3% growth in H2, with mix improved as fixed term deposit accounts reduced to 21% (31 December 2019: 32%) and the share of retail (excluding partnerships) and SME customers increased to 73% (31 December 2019: 70%). Cost of deposits exited the year at 39bps.

• £3.1 billion residential mortgage portfolio disposal removes current need to issue MREL qualifying debt and creates headroom for growth in higher-yielding assets.

• Completion of RateSetter platform acquisition and announcement of back book purchase accelerating rebalancing of lending mix towards unsecured lending.

• Pro forma Common Equity Tier 1 (CET1) ratio of 16.3%¹ (31 December 2019: 15.6%), including c.0.8% of software assets. Pro forma total capital plus MREL of 24.4%¹ (31 December 2019: 22.1%).

• Strong liquidity position, pro forma liquidity coverage ratio (LCR) 331% ¹.

• Awarded Moneynet Banking Brand of Year 2021 and MoneyAge Bank of the Year 2020.

• Strengthened the Board and Executive Committee including appointment of Robert Sharpe as Chair on 1 November 2020.

Balance sheet optimisation

-   £3.1 billion residential mortgage portfolio disposal with an average yield of 2.1%

-   Acquisition and integration of RateSetter platform accelerates growth in consumer unsecured lending

-   Re-entered high LTV mortgage market as part of specialist mortgages strategy, specialist mortgage applications accounted for >80% of all mortgage applications in 4Q20

Revenue

-   Launched Bounce Back Loan Scheme (BBLS) and Coronavirus Business Interruption Loan Scheme (CBILS) government backed loans including BBLS top-ups

-   New products launched enhancing both retail and business customer propositions, including Business Account Online (BAO)

-   Unsecured consumer lending now originating through the RateSetter platform

Cost

-   Accelerated property strategy; exited central London property, purchased three freeholds of existing stores and shift to continued remote working

-   Procurement transformation and IT outsourcing transformed

-   E-forms and process automation across the Bank

-   Leveraging the existing store estate is a key driver and future store plans are always under evaluation

Infrastructure

-   RateSetter platform integrated and originating unsecured consumer lending

-   Regulatory requirements delivered including PSD2, high cost of credit and cross border regulation

-   IT landscape enhanced with a security operations centre and platform upgrades

Balance sheet optimisation

-   Accelerate unsecured lending and specialist mortgages to drive improved yields and reduce the lag effect on NIM

-   Remain dynamic and opportunistic to seek capital efficiencies

Revenue

-   Further proposition enhancements for both retail and business customers including insurance, credit cards, small business loans and enhanced business overdrafts

-   Focus on opportunity to reach more customers through digital channels

-   Furthering range of specialist mortgage products

Cost

-   Customer service transformation

-   Continued development of a strategic collections capability for the Bank including meeting BBLS requirements

-   Management focus on cost discipline, review of cost performance and discretionary spend

Infrastructure

-   Product delivery through digital channels

-   Delivery of regulatory requirements and enhancements to regulatory reporting

-   IT and operational resilience programmes

• Customer account growth of 0.2 million (2019: 0.4 million) in the year to 2.2 million, despite lockdown restrictions for much of the period and supported by the launch of Business Current Account Online.

• Total deposits grew by over £1.5 billion to £16,072 million as at 31 December 2020 (31 December 2019: £14,477 million) following an increase in SME and retail deposits, that together comprise 73% (2019: 70%) of the total. SME balances were boosted by the deposit of BBLSs loans provided. Action taken to reduce pricing of fixed term deposit (FTD) accounts to be more in line with high street competitors combined with a change in customer preference for current accounts and instant access (demand) savings improved the deposit mix during the year. Current accounts comprised 39% of total deposits at 31 December 2020, increased from 30% a year earlier, while FTD accounts reduced from 32% to 21% over the same period.
  
  Following higher than anticipated growth in 2020, deposit expansion will have less of a focus in 2021 with balances reflecting the transitory nature of the BBLS-related deposits together with the roll-off of high cost FTD accounts. Focus will remain on maintaining a high-quality mix of deposits.
  

• Cost of deposits was 65bps for the year, a decrease of 13bps compared to 78bps in 2019, reflecting the 65bps base rate reductions to 10bps and the roll-off of higher cost FTD accounts. The reduction in cost of deposits from 82bps in H1 to 49bps in H2 and the year-end exit rate of 39bps reflects the timing of the base rate cut in March and the progressive roll off of FTD accounts. The favourable impact on cost of deposits from FTD roll off and repricing is expected to continue into 2021.

• Total net loans as at 31 December 2020 were £12,090 million, down 18% from £14,681 million at 31 December 2019 primarily reflecting the £3.1 billion residential mortgage portfolio sale in December partially offset by capital-efficient government-supported new SME/business lending. Total net loans are expected to increase in the year ahead, with accelerating mix shift towards higher yielding assets benefitting from the actions taken in 2020.

• Commercial loans increased £1,096 million to £5,148 million at 31 December 2020 from £4,052 million at 31 December 2019. Commercial lending included £1,353 million of BBLS and £114 million of Coronavirus Business Interruption Loan Scheme (CBILS) lending at 31 December 2020.

• Retail mortgages remained the largest component of the lending book at 56% of gross lending down from 71% a year earlier, reflecting the £3.1 billion mortgage portfolio disposal in December. Higher yielding speciality mortgages comprised more than 80% of retail mortgage applications in the fourth quarter, a trend that is expected to continue.

• Consumer lending remained at 2% of the loan book, with a marginal decline in H1 reversed in Q4 following the start of Metro Bank funded lending through the RateSetter platform.
  
  Consumer lending is set to increase substantially in 2021, benefitting from the acquisition of the RateSetter back book (£384 million as at 29 January 2021) and the continued roll out of lending through the RateSetter platform across all of the Bank’s channels.

• Loan to deposit ratio ended the year at 75% (December 2019: 101%), reflecting the mortgage portfolio disposal and the increase in deposits.
  

Expected Credit Loss

• ECL expense of £126.7 million of which £112.0 million was incurred in H1 primarily reflected a deterioration in macro-economic assumptions and single name charges resulting from COVID-19. In H2, the ECL expense reduced to £14.7 million attributable to portfolio changes and single name charges.
  

• Less than 1% of residential mortgage customers by value had active payment deferrals as at 31 December 2020, significantly below the 17% of customers who had active deferrals as at 30 June 2020.

• Average debt to value (DTV) of the residential mortgage book as at 31 December 2020 was 56% (2019: 59%), while DTV in the commercial book was 56% (2019: 60%).

• Non-performing Loans increased to 2.10% (31 December 2019: 0.53%) primarily driven by customers who have received temporary COVID-19 support measures and now require further forbearance support.

• Net interest margin (NIM) of 1.22% compared to 1.51% for the year ended 31 December 2019, reflected continued margin compression following the 65bps base rate cut, a reduction in the loan-to-deposit ratio and a significant volume of new lending comprising lower yielding, although capital-efficient, government-backed schemes. NIM in the first half of 1.15% absorbed the lag effect of deposits repricing more slowly than lending in response to the March base rate cuts, while H2 gained momentum from lower cost of deposits, increasing to 1.28%.
  
  Continued reduction in cost of deposits combined with a favourable asset mix shift is expected to improve NIM performance in the year ahead compared to H2 NIM.

• Underlying net interest income down 19% year-on-year to £250.3 million (2019: £308.1 million), with H2 at £134.1 million higher than H1 (£116.2 million) following the movements in NIM described above.  

• Underlying net fee and other income decreased 5% to £86.3 million (2019: £90.4 million) primarily reflecting the impact of lockdowns on customer activity. This effect was evident within the year with a weaker performance in the first half (£36.1 million) than the second half when fewer social restrictions were in place. The outlook for 2021 will be significantly affected by the path towards the exit from the current lockdown.

• Underlying cost:income ratio increased to 143% in 2020 from 100% in the prior year, largely reflecting net interest income headwinds and planned higher investment opex. ‘Run the Bank’ (RTB) cost growth was 1% on a like for like basis, adjusting for items including RateSetter acquisition, COVID-19 related costs, six store openings, and colleague reward, or 9% in total. ‘Change the Bank’ (CTB) expenditure increased to £63m plus £33m of amortisation, with the new investment spend at a lower average capitalisation rate, in line with previous guidance.
  
  RTB is expected to deliver low to mid-single digit percentage growth in 2021, in addition to the annualisation of RateSetter costs. Expect marginally higher CTB spend in 2021 with the pace of expenditure dependent on capacity of the Bank to absorb the rate of change, plus amortisation.

• Underlying loss before tax was £271.8 million, an increase from the £11.7 million loss in 2019, reflecting ECL expense and income challenges including those arising from COVID-19. Within the year, the return towards profitability gathered momentum as the underlying loss in H2 was half the loss in the first six months.

• Statutory loss before tax of £311.4 million in 2020 (2019: loss of £130.8 million) including:

-       Impairment and write-off of property plant & equipment and intangible assets (£40.6 million): primarily relates to the accelerated exit from the Central London Office at Old Bailey and intangible asset impairment.

-       Remediation costs (£40.8 million): reflect primarily the ongoing remediation programme in relation to a previously disclosed review of the Bank’s sanctions procedures and to the January 2019 risk weighted assets (RWA) adjustment, and associated regulatory investigations.

-       Transformation costs (£16.7 million): costs associated with the delivery of the cost transformation programme and includes some costs related to the Old Bailey exit.

-       Business acquisition and integration costs (£5.4 million): costs associated with acquisition of the RateSetter platform, completed in September.

-       Net gain on Mortgage portfolio sale (£63.7 million): relates to the 90% of the £3.1 billion disposal derecognised upon signing in December, net of costs. The transaction completed on 2 February 2021, consequently the remaining gain on sale will be recognised in H1 2021.

• Statutory loss after tax of £301.7 million in 2020 (2019: £182.6 million) after a £9.7 million corporation tax credit.

• Strong liquidity and funding position maintained, supported by 2020 deposit growth. As a result, the Bank’s Liquidity Coverage Ratio (LCR) was 187% as of 31 December 2020, compared to the requirement of 100%. Following the settlement of a receivable on completion of the mortgage portfolio disposal in February 2020, pro forma LCR was estimated at 331%.
  
  We continue to use funds from the BoE’s Term Funding Scheme (TFS) which was closed to further drawdowns in February 2018. In 2020 we rolled over £550 million of maturing TFS drawings into TFSME (Term Funding Scheme with additional incentives for SMEs) which provides access to significant additional funding and further flexibility to the Bank’s funding plans.

• CET1 capital of £1,192 million as at 31 December 2020 (31 December 2019: £1,427) was 15.0% of RWA (31 December 2019: 15.6%), including £75 million related to software assets, equivalent to 0.8%, this compares to our minimum requirement of 9.3%⁵. 
  

  
  The Bank’s capital ratios include the application of the Capital Requirements Regulation ‘Quick Fix’ package, of this the revised IFRS9 transitional agreement contributes c. 1.1% to CET1 and a further c. 0.6% is derived from changes to the SME supporting factor. In addition, further capital relief has been provided through the EBA’s changes to the capital treatment of software, although the PRA has announced their intention in CP5/21 to modify the regulatory requirements and we expect that software will return to being fully deducted prior to 1 January 2022. We are therefore not considering the benefit when making capital decisions today or in our longer-term strategic planning.

• Total capital as a percentage of RWA was 18.1% reflecting the statutory loss reported in the period. Total capital plus MREL resources were £1,783 million with a total capital plus MREL ratio of 22.4% of RWA at 31 December 2020, this compares to our minimum interim requirement of 20.5%⁵.
  
  The requirement to meet the end-state MREL threshold is now 1 January 2023, as is the requirement to implement a HoldCo structure.

• Total RWA as at 31 December 2020 was £7,957 million (31 December 2019: £9,147 million). The reduction in 2020 reflects the mortgage portfolio disposal and capital-efficient lending through government-backed BBLS and CBILS together with lending discipline in other areas. The result is a loan risk weight density of 47% as at 31 December 2020 (31 December 2019: 48%).

• On completion of the residential mortgage portfolio sale, including the settlement of a receivable outstanding at the year-end, the 31 December pro forma CET1 ratio is estimated at 16.3% and the pro forma total capital plus MREL ratio at 24.4%.

• Regulatory leverage ratio of 5.6%.

5.   Based on current capital requirements, excluding any confidential PRA buffer, if applicable

• Since the last full year results in February 2020, Robert Sharpe joined the Board as Chair on 1 November 2020, while Anne Grim, Ian Henderson, and Nicholas Winsor were appointed as independent Non-Executive Directors. Following these changes, the Board is comprised of nine Non-Executive Directors in addition to the Chair, all of whom are independent, and two Executive Directors.

• In the same period, a number new appointments completed changes to the Executive Committee: Martin Boyle as Chief Transformation Officer; Carol Frost as Chief People Officer; and Richard Lees as Chief Risk Officer.