TIDMMTRO
RNS Number : 3887T
Metro Bank PLC
24 March 2021
Legal Entity Identifier: 213800X5WU57YL9GPK89
METRO BANK PLC (the "Company")
PUBLICATION OF ANNUAL REPORT AND ACCOUNTS
Following the release on 24 February 2021 of the Company's
preliminary results for the financial year ended 31 December 2020
(the "Preliminary Announcement"), the Company is pleased to
announce that it has today published its Annual Report and
financial statements for the financial year ended 31 December 2020
(the "2020 Annual Report and Accounts") and is available for
viewing in the Investor Relations section of the Company's website
at www.metrobankonline.co.uk .
The 2021 Annual General Meeting of Shareholders is currently
scheduled to take place on 18 May 2021. An announcement with
further details including publication of the 2021 Notice of Annual
General Meeting will be circulated in due course.
Hard copies of the 2020 Annual Report and Accounts will be
mailed in due course to those shareholders who have elected to
receive them. Copies of the 2020 Annual Report and Accounts have
also been submitted to the National Storage Mechanism and will
shortly be available for inspection at
https://data.fca.org.uk/#/nsm/nationalstoragemechanism.
The Disclosure Guidance and Transparency Rules (DTR) require
that an announcement of the publication of an annual report should
include the disclosure of such information from the annual report
as is of a type that would be required to be disseminated in a
half-yearly report in compliance with the DTR 6.3.5(2) disclosure
requirement, in unedited full text through a Regulatory Information
Service . Accordingly, these disclosures are made in the Appendix
below.
The Appendix to this announcement contains the following
additional information for the purposes of compliance with DTR
6.3.5 only:
a description of the principal risks and uncertainties relating
to the Company;
indication of important events during the year;
a note on related party transactions; and
directors' responsibilities statement.
The Preliminary Announcement included a set of condensed
financial statements. Together these constitute the material
required by DTR 6.3.5 to be communicated to the media in unedited
full text through a Regulatory Information Service.
Enquiries
For further information on this announcement, please
contact:
Metro Bank PLC
Investor Relations
Jo Roberts
+44 (0)20 3402 8900
IR@metrobank.plc.uk
Media Relations
Tina Coates / Abigail Whittaker
+44 (0)7811 246016 / +44 (0)7989 876136
pressoffice@metrobank.plc.uk
Teneo
Charles Armitstead / Haya Herbert -- Burns
+44 (0) 7703 330269 / +44 (0) 7342 031051
Metrobank@teneo.com
APPIX
References to page numbers and notes to the accounts made in the
Appendix refer to page numbers and notes to the accounts in the
2020 Annual Report and Accounts. This announcement should be read
in conjunction with, and is not a substitute for reading, the full
2020 Annual Report and Accounts.
PRINCIPAL RISKS AND UNCERTAINTIES
The principal risks and uncertainties relating to the Company
are set out on pages 26-53 of the 2020 Annual Report and Accounts .
The following is extracted in full and unedited text from the 2020
Annual Report and Accounts :
Changes in principal risks and risk profile
In line with the UK Corporate Governance Code requirements, we
have performed a robust assessment of the principal and emerging
risks we face, including those that could result in events or
circumstances that might threaten our business model, future
performance, solvency or liquidity, and reputation. In deciding on
the classification of principal risks, we considered the potential
impact and probability of the related events and circumstances and
the timescale over which they may occur. The principal risk
categories remain similar to those outlined in the Annual Report
and Accounts 2019, with changes relating to the identification of
capital risk as a principal risk and the recognition of climate
risk as a cross-cutting risk, which manifests through the existing
principal risk framework.
An overview of the principal risks and how they have changed
over the year are set out on pages 28 to 29. While further
information on all of the principal risks can be found on pages 30
to 51 of the Risk report.
During the year, we have been working hard to support our
customers and minimise the impact of COVID-19 for businesses and
households across the UK, maintaining our customer service
operations and store distribution with minimal interruption. We
have also participated in the various UK Government-backed loan
schemes for businesses, in addition to offering payment holidays to
mortgage, personal and business customers.
Our response to the pandemic demonstrates the robustness of our
approach to risk management and mitigation as we continue to
successfully manage these events. Like many businesses, COVID-19
has, however, increased our risk profile. The measures introduced
to support the economy create new operational, conduct and
financial risks for the Bank. These risks are being managed and
will be monitored over time.
The table below summarises the changes in our principal risks
since 2019 and the key risk implications of the pandemic.
Principal risk Risk Movement in 2020 Impact of COVID-19
------------------------------ ------------------------------------ --------------------------------
1. Credit risk We have participated in
The risk of financial Although the impacts regulatory and government
loss should our borrowers on our retail and business support schemes, with
or counterparties fail credit portfolios are a priority focus on supporting
to fulfil their contractual yet to fully manifest, existing customers through
obligations in full it is clear that the COVID-19. Capital repayment
and on time. level of risk has increased, holidays, interest free
with levels of defaults overdrafts (for retail
expected to increase customers) and extensions
over time, particularly of credit, as well as
once government support other flexible supporting
schemes come to an end. measures, continue to
be provided and monitored.
Policies, risk appetite,
credit decisioning and
supporting frameworks
have been reviewed and
updated to reflect the
changing environment and
risk profiles.
------------------------------ ------------------------------------ --------------------------------
2. Operational risk COVID-19 brought heightened
The risk that events The risk has increased, people risk as some of
arising from inadequate driven by increased our colleagues worked
or failed internal remote working, the to keep our stores open,
processes, people and implementation of new whilst others worked from
systems, or from external processes and pressure home. It also necessitated
events cause regulatory on customer support changes to working practices,
censure, reputational areas arising from changing which are managed closely
damage, financial loss, customer needs, which via an enhanced governance
service disruption could lead to increased structure. We are now
and/or detriment to errors or delays and investigating permanent
our FANS. subsequent losses. improvements that can
be made.
------------------------------ ------------------------------------ --------------------------------
3. Liquidity and funding The impact of COVID-19
risk Liquidity and funding has resulted in an overall
The risk that we fail risk has decreased during improvement to our overall
to meet our short-term the year, increasing liquidity profile through
obligations as they stability. improved deposit balances
fall due. and participation in the
Bounce Back Loan Scheme,
The risk that we cannot with clients placing funds
fund assets that are drawn-down on deposit,
difficult to monetise prior to their utilisation.
at short notice (i.e. This effect has been observed
illiquid assets) with across the industry and
funding that is behaviourally is anticipated will be
or contractually long temporary in nature.
term (i.e. stable funding).
------------------------------ ------------------------------------ --------------------------------
4. Market risk Not directly impacted
The risk of loss arising Market risk has remained by COVID-19, we are able
from movements in market stable through the year. to manage and hedge interest
prices. Market risk rate risk through different
is the risk posed to rate environments.
earnings, economic
value or capital that
arises from changes
in interest rates,
market prices or foreign
exchange rates.
------------------------------ ------------------------------------ --------------------------------
5. Financial crime New government support
risk The risk has decreased schemes have provided
The risk of financial during the year due opportunities for fraudsters
loss or reputational to enhancements made and we have implemented
damage due to regulatory to our AML and Sanctions controls to counter their
fines, restriction controls through the attempts.
or suspension of business, Financial Crime Improvement
or cost of mandatory Programme.
corrective action as
a result of failing Overall fraud attacks
to comply with prevailing continue to significantly
legal and regulatory increase in line with
requirements relating what is being seen across
to financial crime. the industry, year on
year; albeit, in 2020,
fraud losses have reduced
from 2019.
------------------------------ ------------------------------------ --------------------------------
6. Regulatory compliance We have deployed multiple
risk We remain exposed to new policies and processes
The risk of: failing regulatory and compliance to implement government,
to understand and comply risk as a result of regulatory and central
with relevant laws significant ongoing bank COVID-19 support
and regulatory requirements; and new regulatory change. measures. Additional regulatory
not keeping regulators We will seek to comply and compliance risks are
informed of relevant with all regulations associated with adherence
issues; not responding as they evolve, and to both COVID-19-specific
effectively to information as customer expectations regulatory guidance and
requests or failing continue to develop. with existing regulation.
to meet regulatory Consequently, additional
deadlines; or obstructing risk assessments, governance
the regulator. processes and assurance
activities have been deployed
across the Bank.
------------------------------ ------------------------------------ --------------------------------
7. Conduct risk COVID-19 has generally
The risk of treating had a detrimental impact
customers unfairly The risk has increased on customers' financial
and delivering poor driven by the impact stability and affordability
outcomes that lead of the external environment, due to income loss caused
to customer detriment, namely COVID-19 and by furlough and/or complete
such as financial loss the UK economy, where job loss. This has resulted
and/or distress and customers are increasingly in increased reliance
inconvenience. This more vulnerable to dramatic on savings, inability
can also result in income changes, job to meet repayment demands
wider adverse impacts, losses and behavioural and the need for the regulator
for example, loss of changes driven by social/political and lenders to introduce
our FANS, reputational agendas. enhanced forbearance measures,
damage, regulatory such as payment deferrals.
and/or legal action. We have now sought to
include some of these
measures as part of our
ongoing collections strategy.
------------------------------ ------------------------------------ --------------------------------
8. Model risk The uncertain economic
The risk of potential The risk has increased environment has affected
loss and regulatory as a result of the rapid all model components including
non-compliance due application of COVID-19 input data, default markers,
to decisions that could model adjustments. outputs, model accuracy
be principally based and performance.
on the output of models,
due to errors in the
development, implementation
or use of such models.
------------------------------ ------------------------------------ --------------------------------
9. Capital risk There have been several
The risk that we fail Our capital ratios were regulatory capital developments
to meet minimum regulatory broadly flat year-on-year. in the UK and Europe in
capital (and MREL) We took action to strengthen response to COVID-19,
requirements. Management our MREL resources through which have reduced certain
of capital is essential the sale of a portfolio capital requirements for
to the prudent management of owner occupied residential banks across the industry.
of our balance sheet, mortgages, which is Additionally, in order
ensuring our resilience in line with our strategy to provide operational
under stress, and the to enhance risk-adjusted capacity for banks to
maintenance of the returns on capital through respond to the immediate
confidence of our current the ongoing focus on financial stability priorities
and potential creditors balance sheet optimisation. resulting from the impact
(including bondholders, We also purchased the of COVID-19, both the
the bond market, and peer-to-peer lender PRA and Basel communicated
customers) and key RateSetter, to provide revised timelines across
stakeholders in the unsecured personal loans key regulatory initiatives.
pursuit of our business direct to customers.
strategy.
------------------------------ ------------------------------------ --------------------------------
Further information on our principal risks are set out on pages
30 to 51.
1. Credit risk
Definition Change since 2019:
Credit risk is the risk of financial Increased
loss should our borrowers or counterparties
fail to fulfil their contractual obligations
in full and on time.
-------------------
Appetite
We have a moderate appetite for credit risk. As part of our
strategic priorities we are rebalancing our lending mix, increasing
the proportion of unsecured lending which will lead to an increased
level of credit risk. Our tolerance for credit loss has been set
within our ability to meet our capital requirements but also
reflects the increased level of risks associated with COVID-19. Our
metrics, and how we monitor them, will allow for informed decisions
and meaningful risk management action to take place to ensure our
capital and other resources are adequate in order to achieve our
long-term strategic objectives.
Mitigation
Lending and collateral
Our foremost exposure to credit risk is through the loans,
limits and advances we make available to our customers. We
primarily mitigate credit risk through holding collateral against
our residential mortgage and commercial term loan portfolios.
Collateral is usually held in the form of real estate, guarantees,
debentures and other liens that we can call upon in the event of
the borrower defaulting. At 31 December 2020, 84% (31 December
2019: 95%) of our loans consisted of retail mortgages and
commercial term loans secured on collateral, with average
debt-to-value of 56% (2019: 59%) and 56% (2019: 60%)
respectively.
Our exposure to loans of greater than 100% debt to value (or
where no real estate collateral is present) remains low at less
than 1% of retail mortgage lending (31 December 2019: less than 1%)
and 12% of commercial term lending (31 December 2019: 11%). In the
retail mortgage lending portfolio, these loans have principally
been part of portfolios we have acquired. For commercial term
lending, additional forms of collateral (such as debentures or
unsupported guarantees giving recourse to our customers) are
excluded from these debt-to-value figures, so the true credit risk
exposure on these loans is lower and is underwritten on the
strength of all types of collateral.
Table 1: Retail mortgage lending by DTV
31 December 2020 31 December 2019
GBP'million GBP'million
--------------------------------------------- ---------------------------------------
Audited Retail Retail Total retail Retail Retail Total retail
owner occupied buy-to-let mortgages owner buy-to-let mortgages
occupied
---------------- ------------ ------------- ---------- ------------ -------------
DTV ratio
---------------- ------------ ------------- ---------- ------------ -------------
Less than 50% 1,855 502 2,357 2,647 464 3,111
---------------- ------------ ------------- ---------- ------------ -------------
51-60% 842 390 1,232 1,383 393 1,776
---------------- ------------ ------------- ---------- ------------ -------------
61-70% 836 533 1,369 1,422 505 1,927
---------------- ------------ ------------- ---------- ------------ -------------
71-80% 1,084 407 1,491 1,813 554 2,367
---------------- ------------ ------------- ---------- ------------ -------------
81-90% 359 4 363 1,201 13 1,214
---------------- ------------ ------------- ---------- ------------ -------------
91-100% 74 - 74 23 - 23
---------------- ------------ ------------- ---------- ------------ -------------
More than 100% 1 5 6 4 8 12
---------------- ------------ ------------- ---------- ------------ -------------
Total retail mortgage
lending 5,051 1,841 6,892 8,493 1,937 10,430
---------------- ------------ ------------- ---------- ------------ -------------
Table 2: Commercial term lending by DTV (excluding BBLS)
31 December 2020 31 December 2019
GBP'million GBP'million
----------------------------------------- -----------------------------------------
Audited Professional Other Total commercial Professional Other Total commercial
buy-to-let term term loans buy-to-let term term loans
loans loans
------------- ------- ----------------- ------------- ------- -----------------
DTV ratio
------------- ------- ----------------- ------------- ------- -----------------
Less than 50% 353 876 1,229 363 911 1,274
------------- ------- ----------------- ------------- ------- -----------------
51-60% 261 546 807 283 535 818
------------- ------- ----------------- ------------- ------- -----------------
61-70% 351 255 606 404 343 747
------------- ------- ----------------- ------------- ------- -----------------
71-80% 133 100 233 135 86 221
------------- ------- ----------------- ------------- ------- -----------------
81-90% 9 51 60 10 31 41
------------- ------- ----------------- ------------- ------- -----------------
91-100% 6 13 19 12 37 49
------------- ------- ----------------- ------------- ------- -----------------
More than 100% 4 411 415 12 384 396
------------- ------- ----------------- ------------- ------- -----------------
Total commercial
term loans 1,117 2,252 3,369 1,219 2,327 3,546
------------- ------- ----------------- ------------- ------- -----------------
We have developed an automated credit approval process for
consumer lending and retail mortgages utilising credit scorecards,
affordability calculators and policy rules. This is supported by a
team of skilled manual underwriters for more complex decisions, who
operate within agreed delegated lending authorities, and a clear
Credit Policy and Lending Standards.
All commercial lending is individually reviewed. This is
undertaken by Relationship Managers and a specialist team of
commercial underwriters, reviewing these proposals in accordance
with agreed delegated lending authorities. It is underpinned by a
commercial lending policy supported by sector specific standards
and guidelines.
Undrawn commitments
At 31 December 2020, we had undrawn loan facilities of GBP769
million (2019: GBP726 million). This includes commitments of GBP351
million (2019: GBP296 million) in respect of credit card and
overdraft facilities. These commitments represent agreements to
lend in the future, subject to certain conditions. Such commitments
are cancellable, subject to notice requirements, and given their
nature are not expected to be drawn down to the full level of
exposure. We mitigate credit risk in respect of these undrawn
balances by regular customer monitoring to allow undrawn limits to
be removed if we observe credit quality deterioration. We also have
exposure to Invoice Finance assets (GBP36 million drawn on limits
of GBP138 million) where the amount drawn is capped both by the
discounted value of available invoices and a set relationship cap.
Similarly, we have a small exposure to Commercial Real Estate
Development Finance, where a limit to draw down is agreed in
principle and funds are released in stages, throughout the
development and following satisfactory surveyor reports. In
commercial lending, undrawn commitments are regularly reviewed to
ensure relationship caps remain appropriate. This has been
particularly evident during 2020 as we continue to support
customers through COVID-19.
Interest-only lending
We have exposure to refinance risk. This is the risk from loans
to customers who are subject to a bullet or balloon payment at
contractual maturity but who find themselves unable to refinance or
otherwise make this payment. At 31 December 2020, this risk arises
principally in the mortgage book where the exposure to
interest-only loans stands at GBP4.1 billion (31 December 2019:
GBP4.4 billion). There is further exposure to refinance risk in the
Commercial Book of GBP1.3 billion (31 December 2019: GBP1.5
billion) from interest-only loans and a portion of amortising term
loans.
All borrowers of interest-only lending are assessed as being
able to refinance the lending at the end of the term or have an
appropriate repayment plan in place. These loans are also
appropriately collateralised (see lending and collateral section on
page 30), ensuring we have a first charge in the event of default
by the borrower. The reduction in owner occupied mortgages is as a
result of the GBP3.1 billion retail mortgage sale, agreed in
December 2020.
Table 3: Retail mortgage lending by repayment type
Audited 31 December 2020 31 December 2019
GBP'million GBP'million
--------------------------------------- ---------------------------------------
Retail Retail Total retail Retail Retail Total retail
owner buy-to-let mortgages owner buy-to-let mortgages
occupied occupied
---------- ------------ ------------- ---------- ------------ -------------
Repayment
---------- ------------ ------------- ---------- ------------ -------------
Interest 2,337 1,751 4,088 2,573 1,834 4,407
---------- ------------ ------------- ---------- ------------ -------------
Capital and interest 2,714 90 2,804 5,920 103 6,023
---------- ------------ ------------- ---------- ------------ -------------
Total retail mortgage
lending 5,051 1,841 6,892 8,493 1,937 10,430
---------- ------------ ------------- ---------- ------------ -------------
Table 4: Commercial term lending (excluding BBLS)
Audited 31 December 2020 31 December 2019
GBP'million GBP'million
----------------------------------------- -----------------------------------------
Professional Other Total commercial Professional Other Total commercial
buy-to-let term term loans buy-to-let term term loans
loans loans
------------- ------- ----------------- ------------- ------- -----------------
Repayment
------------- ------- ----------------- ------------- ------- -----------------
Interest 1,058 281 1,339 1,155 328 1,483
------------- ------- ----------------- ------------- ------- -----------------
Capital and interest 59 1,971 2,030 64 1,999 2,063
------------- ------- ----------------- ------------- ------- -----------------
Total commercial
term loans 1,117 2,252 3,369 1,219 2,327 3,546
------------- ------- ----------------- ------------- ------- -----------------
Sector exposure
We manage the level of credit risk concentration based on
individual borrowing entities and sector. Our credit risk appetite
includes limits for high risk sectors and/or high levels of
concentration.
Within commercial lending we set credit risk policy and lending
standards for key sectors. We have specialist sector lending teams
including in healthcare, hospitality, and property.
Over 2020, we have observed that some sectors have been more
severely impacted by COVID-19 lockdowns. Hospitality has
experienced a more significant reduction in income than other
sectors, and as a consequence we are seeing higher levels of
COVID-19 support required by these customers.
Table 5: Commercial term lending by sector exposure (excluding
BBLS)
Audited 31 December 2020 31 December 2019
GBP'million GBP'million
----------------------------------------- -----------------------------------------
Professional Other Total commercial Professional Other Total commercial
buy-to-let term term loans buy-to-let term term loans
loans loans
------------- ------- ----------------- ------------- ------- -----------------
Industry sector
------------- ------- ----------------- ------------- ------- -----------------
Real estate (rent,
buy and sell) 1,117 1,032 2,149 1,219 1,155 2,374
------------- ------- ----------------- ------------- ------- -----------------
Hospitality - 376 376 - 308 308
------------- ------- ----------------- ------------- ------- -----------------
Health and social
work - 248 248 - 263 263
------------- ------- ----------------- ------------- ------- -----------------
Legal, accountancy
and consultancy - 208 208 - 236 236
------------- ------- ----------------- ------------- ------- -----------------
Retail - 107 107 - 100 100
------------- ------- ----------------- ------------- ------- -----------------
Real estate (development) - 60 60 - 62 62
------------- ------- ----------------- ------------- ------- -----------------
Recreation, cultural
and sport - 53 53 - 51 51
------------- ------- ----------------- ------------- ------- -----------------
Construction - 36 36 - 35 35
------------- ------- ----------------- ------------- ------- -----------------
Education - 30 30 - 30 30
------------- ------- ----------------- ------------- ------- -----------------
Real estate (management
of) - 10 10 - 11 11
------------- ------- ----------------- ------------- ------- -----------------
Investment and
unit trusts - 9 9 - 8 8
------------- ------- ----------------- ------------- ------- -----------------
Other - 83 83 - 68 68
------------- ------- ----------------- ------------- ------- -----------------
Total commercial
term loans 1,117 2,252 3,369 1,219 2,327 3,546
------------- ------- ----------------- ------------- ------- -----------------
Geographic exposure
We also manage our lending exposure by region. Our current
residential mortgage and commercial term lending is concentrated
within London and the South East, which is broadly representative
of our current customer base and store footprint. We are expanding
our footprint over time to reduce geographical concentration of
lending. All of our current loans' exposures are secured on
UK-based collateral. A geographic analysis of the location of
retail mortgage collateral and commercial term loan (excluding
BBLS) collateral is set out below:
Table 6: Retail mortgages by geographic exposure
Audited 31 December 2020 31 December 2019
GBP'million GBP'million
--------------------------------------- ---------------------------------------------
Retail Retail Total retail Retail Retail Total retail
owner buy-to-let mortgages owner occupied buy-to-let mortgages
occupied
---------- ------------ ------------- ---------------- ------------ -------------
Region
---------- ------------ ------------- ---------------- ------------ -------------
Greater London 2,213 1,147 3,360 3,424 1,197 4,621
---------- ------------ ------------- ---------------- ------------ -------------
South East 1,157 309 1,466 2,094 337 2,431
---------- ------------ ------------- ---------------- ------------ -------------
South West 433 91 524 738 97 835
---------- ------------ ------------- ---------------- ------------ -------------
East of England 298 73 371 570 76 646
---------- ------------ ------------- ---------------- ------------ -------------
North West 265 63 328 482 66 548
---------- ------------ ------------- ---------------- ------------ -------------
West Midlands 179 58 237 340 62 402
---------- ------------ ------------- ---------------- ------------ -------------
Yorkshire and the Humber 139 37 176 275 37 312
---------- ------------ ------------- ---------------- ------------ -------------
East Midlands 131 25 156 243 26 269
---------- ------------ ------------- ---------------- ------------ -------------
Wales 102 21 123 169 21 190
---------- ------------ ------------- ---------------- ------------ -------------
North East 62 10 72 93 11 104
---------- ------------ ------------- ---------------- ------------ -------------
Scotland 72 7 79 65 7 72
---------- ------------ ------------- ---------------- ------------ -------------
Total retail mortgage
lending 5,051 1,841 6,892 8,493 1,937 10,430
---------- ------------ ------------- ---------------- ------------ -------------
Table 7: Commercial term loans by geographic exposure (excluding
BBLS)
Audited 31 December 2020 31 December 2019
GBP'million GBP'million
----------------------------------------- -----------------------------------------
Professional Other Total commercial Professional Other Total commercial
buy-to-let term term loans buy-to-let term term loans
loans loans
------------- ------- ----------------- ------------- ------- -----------------
Region
------------- ------- ----------------- ------------- ------- -----------------
Greater London 780 1,358 2,138 850 1,414 2,264
------------- ------- ----------------- ------------- ------- -----------------
South East 205 399 604 224 424 648
------------- ------- ----------------- ------------- ------- -----------------
South West 31 156 187 52 156 208
------------- ------- ----------------- ------------- ------- -----------------
East of England 48 67 115 35 104 139
------------- ------- ----------------- ------------- ------- -----------------
North West 20 146 166 21 115 136
------------- ------- ----------------- ------------- ------- -----------------
West Midlands 10 66 76 11 49 60
------------- ------- ----------------- ------------- ------- -----------------
Yorkshire and
the Humber 3 13 16 11 26 37
------------- ------- ----------------- ------------- ------- -----------------
East Midlands 11 18 29 5 12 17
------------- ------- ----------------- ------------- ------- -----------------
Wales 5 10 15 4 10 14
------------- ------- ----------------- ------------- ------- -----------------
North East 3 18 21 4 9 13
------------- ------- ----------------- ------------- ------- -----------------
Scotland 1 - 1 1 3 4
------------- ------- ----------------- ------------- ------- -----------------
Northern Ireland - 1 1 1 5 6
------------- ------- ----------------- ------------- ------- -----------------
Total commercial
term loans 1,117 2,252 3,369 1,219 2,327 3,546
------------- ------- ----------------- ------------- ------- -----------------
Investment securities
As well as our loans and advances, the other main area where we
are exposed to credit risk is within our Treasury portfolio. At 31
December 2020 we held GBP3.4 billion (31 December 2019: GBP2.6
billion) of investment securities, which are used for balance sheet
and liquidity management purposes, of which GBP3.4 billion (31
December 2019: GBP2.4 billion) is eligible as collateral at the
BoE.
We hold investment securities at amortised cost or fair value
through other comprehensive income depending on our intentions
regarding each asset. We do not hold investment securities at fair
value through profit and loss.
Table 8: Investment securities by credit rating
31 December 2020 31 December 2019
GBP'million GBP'million
----------------------------------- ----------------------------------
Audited Investment Investment Total Investment Investment Total
securities securities securities securities
held at held at held at held at
amortised FVOCI amortised FVOCI
cost cost
------------ ------------ ------- ------------ ------------ ------
Credit rating
------------ ------------ ------- ------------ ------------ ------
AAA 2,184 385 2,569 1,943 156 2,099
------------ ------------ ------- ------------ ------------ ------
AA- to AA+ 456 388 844 144 255 399
------------ ------------ ------- ------------ ------------ ------
A- to A+ - - - 67 - 67
------------ ------------ ------- ------------ ------------ ------
Lower than A- - - - - - -
------------ ------------ ------- ------------ ------------ ------
Total 2,640 773 3,413 2,154 411 2,565
------------ ------------ ------- ------------ ------------ ------
We have a robust securities investment policy which requires us
to invest in high-quality liquid debt instruments. At 31 December
2020, 75% of our investment securities were rated as AAA (31
December 2019: 82%) with a further 25% (31 December 2019: 16%)
rated AA- or higher.
Additionally, we hold GBP3.0 billion (31 December 2019: GBP3.0
billion) in cash balances, which is either held by ourselves or at
the BoE, where there is minimal credit exposure.
Oversight
Credit risk is overseen by the Chief Risk Officer (supported by
the Chief Credit Officer), Executive Risk Committee and Risk
Oversight Committee.
The Credit Risk function reports to the Chief Risk Officer and
is led by the Chief Credit Officer. It is responsible for:
-- Recommending and overseeing credit risk appetite limits.
-- Maintaining credit risk policies and standards.
-- Overseeing credit risk strategies in accordance with policies and risk appetite.
-- Providing an independent review of individual commercial
credit proposals and renewals of loan facilities.
-- Monitoring credit risk performance and reporting to the
Executive Risk Committee and Risk of Committee.
-- Developing and monitoring credit risk models.
-- Ensuring appropriate IFRS 9 credit provisions.
-- Developing and overseeing of retail collections and recoveries strategies.
-- Managing commercial collections and recoveries strategy and activities.
In addition, our Treasury Risk team, which is led by the
Director of Prudential Risk and reports to the Chief Risk Officer,
supports the development and implementation of applicable policies
and procedures and monitors the credit risk aspects of the Treasury
portfolio.
Measurement
Economic weightings
We measure credit quality for impairment purposes under IFRS 9.
We have taken a cautious approach to assessing our impairment
provisions in order to set aside appropriate portfolio provision
coverage for the anticipated economic deterioration and increase in
credit losses that is expected over the coming period.
Our IFRS9 models utilise a blend of several economic scenarios
provided by Moody's Analytics. The weightings of these scenarios
reflect the UK economic outlook arising from COVID-19 and Brexit.
The macroeconomic assumptions applied can be found on page 208. Our
credit risk models are subject to internal model governance
including independent validation. We undertake annual model reviews
and have regular model performance monitoring in place.
The impairment provisions recognised during the year reflect our
best estimate of the level of provisions required for future credit
losses as calibrated under our conservative weighted economic
assumptions and following the application of expert credit risk
judgement overlays.
Use of Post Model Adjustments and Post Model Overlays
To supplement the models, we also applied expert credit risk
judgement through post model adjustments and post model
overlays.
Post Model Adjustments refer to increases/decreases in ECL to
address known model limitations, either in model methodology or
model inputs. These rely on analysis of model inputs and parameters
to determine the change required to improve model accuracy. These
may be applied at an aggregated level, however they will usually be
applied at account level.
Post Model Overlays reflect management judgement. These rely
more heavily on expert judgement and will usually be applied at an
aggregated level. For example, where recent changes in market and
economic conditions have not yet been captured in the macroeconomic
factor inputs to models (e.g. industry specific stress event).
The appropriateness of post model adjustments and post model
overlays is subject to rigorous review and challenge, including
review by the Audit Committee (see page 94).
Further details on our use of post model adjustments and post
model overlays can be found on page 210.
Regulatory measurement
As of 31 December 2020, all exposures are measured under the
standardised approach for credit risk for regulatory capital. We
are parallel-running the AIRB rating system for residential
mortgages and have rolled out use of commercial rating and slotting
models during 2020.
Monitoring
We monitor credit risk performance through a suite of reports
covering performance against risk appetite limits and key credit
risk metrics, including: new business flow; portfolio quality;
early warning indicators; arrears and recovery performance; sector
and geographical concentration; and exceptions to lending policy.
Reports are provided to ERC, the ROC and the Board on a monthly
basis. Credit risk performance is supported by portfolio reviews
and deep dives on material portfolios and key credit risk
themes.
Early Warning and Non-performing loans
In line with IFRS 9, we allocate all loans into Stages 1, 2 and
3 to reflect likelihood of loss.
-- Stage 1 includes those loans where the credit risk has not
increased significantly since the loan was originally agreed.
-- Stage 2 includes those loans where the credit risk has
increased significantly, but which are not impaired.
-- Stage 3 includes loans which are non-performing.
The risk of loss increases through these stages. Under IFRS 9,
the potential for a loan to default is calculated on a 12-month
horizon at Stage 1, and a lifetime horizon at Stages 2 and 3.
COVID-19 has been a significant factor in customers' ability to
make payments. We have worked with customers to assist with how
best to manage repayments, and have provided payment deferral
options as an option, in line with regulatory guidance. This
customer support package has kept arrears lower, and is expected to
make return to repayment easier for most customers - a trend we
have seen as customers have begun to roll off payment holidays.
We expect to see increasing numbers of customers experiencing
financial difficulties, as restrictions continue to impact trading,
liquidity is used up, and repayments start to fall due on
government support loans. Commercial customers are managed through
early warning categorisation where there are early signs of
financial difficulty. The overriding objective is to identify, at
an early stage, those customers for whom we believe repayment
difficulties may develop, thereby allowing timely engagement and
appropriate corrective action to be taken. Early Warning
categorisation supports IFRS 9 Stage Allocation.
In Retail, we monitor for early signs of financial difficulty to
enable appropriate customer support.
COVID-19 has also materially impacted the volume of lending in
Early Warning categories over 2020. The main sector exposures
within Early Warning categories reflect the key commercial term
lending industry sectors: Real Estate; Hospitality; Recreation,
Cultural and Sport are particularly affected. The majority of
customers in Early Warning categories have received COVID-19
support including payment holidays or government backed loans, and
we anticipate an increase in the number of customers requiring
further COVID support.
Non-performing loans
Non-performing loans are loans that have more than three
instalments unpaid (90+ days past due) or where the debtor is
assessed as unlikely to pay our credit obligations in full without
recourse to legal action to recover the debts in full, regardless
of the existence of any past-due amount or of the number of days
past due. All non-performing loans are included within Stage 3.
Where a debtor is facing difficulties meeting financial
commitments, Metro Bank is able to offer forbearance. Forbearance
is a concession either through a change to the terms and conditions
of the loan, or a refinance of the loan. To be forborne, the
customer is in or is about to face financial difficulties. Loans
which have been renegotiated within existing credit policy where
the customer is not in financial difficulties are not forborne. All
forborne loans are included within Stage 3. Customers who have
sought COVID support in the form of payment deferrals or temporary
conversion to interest only payments are not considered forborne,
by virtue of having sought that support. However, this may be a
contributing factor for an account to be allocated in Stage 2.
Commercial loans in Stage 3 are individually assessed with
consideration for the collateral provided against the loan.
Provisions are reported and overseen through Impairment Committee
to Executive Risk Committee.
COVID
COVID-19 has and will continue to materially impact the volume
of lending classified as Stage 2 and Stage 3. In anticipation of
this, a number of model adjustments have been put in place to
reflect those losses, the full extent of which has yet to
materialise.
Table 9: Non-performing loans
Group 31 December 2020 31 December 2019
------------------------------------ ------------------------------------
Non-performing Non-performing Non-performing Non-performing
loans GBP'million loan ratio loans GBP'million loan ratio
------------------- --------------- ------------------- ---------------
Retail-residential mortgages 118 1.70% 25 0.24%
------------------- --------------- ------------------- ---------------
Retail-consumer and other 13 6.13% 10 4.30%
------------------- --------------- ------------------- ---------------
Commercial (including asset
and invoice finance) 127 2.48% 42 1.12%
------------------- --------------- ------------------- ---------------
Total 258 2.10% 77 0.53%
------------------- --------------- ------------------- ---------------
The deterioration of the non-performing loan ratio from 31
December 2019 to 31 December 2020 for all portfolios is primarily
driven by customers who have received temporary COVID-19 support
measures and now require further forbearance support which has been
classified as unlikeliness to pay criteria in the definition of
default.
Cost of risk
Cost of risk is credit impairment charges expressed as a
percentage of average gross lending. The increase has been
primarily driven by COVID-19. There has been a significant
deterioration in macroeconomic scenarios as well as increases in
arrears and forbearance. This has driven an overall increase in the
ECL expense.
Table 10: Cost of risk
Group 2020 2019
Retail-residential mortgages 0.19% 0.00%
------ ------
Retail-consumer and other 5.97% 1.92%
------ ------
Commercial (including asset and invoice finance) 1.99% 0.11%
------ ------
Average cost of risk 0.86% 0.08%
------ ------
Regulatory and Government support schemes
We have remained focused on supporting customers through
COVID-19 and have participated in the various Government support
schemes. Payment deferrals and temporary payment conversion to
interest-only for loans, interest-free overdrafts, and extensions
of credit have all been made available.
We have provided BBLS to our customers with loans of between
GBP2,000 and GBP50,000. These are available for up to 10 years,
with no repayments due in the first year, at a fixed rate. Changes
made as part of the 'Pay as you Grow' scheme allow customers to
apply for an interest only payment period of six months (up to a
maximum of three periods) with an additional payment deferral
period, for both capital and interest, also up to six months. These
loans are 100% guaranteed by the government.
CBILS allows for loans of over GBP50,000 to a maximum of GBP5
million. These have been made available at variable rates of
lending with no arrangement fees and 0% interest for the first 12
months. The Government has guaranteed 80% of the loss and pays the
fees as well as the interest for the first 12 months. The maximum
term of these loans is six years.
CLBILS provides loans of over GBP50,000, up to a maximum of
GBP200 million. These have also been made available at a variable
rate of lending, with terms ranging between three months and three
years. The government guarantees 80% of any loss on these
loans.
At 31 December 2020 we have GBP1.35 billion of loans for BBLS,
GBP114 million (with a further GBP19 million approved) in CBILS and
GBP27 million (with further GBP3 million approved) in CLBILS.
Whilst these loans are guaranteed by the government, costs to
collect are expected, and the risks associated from these loans is
being closely monitored and reassessed where necessary,
particularly as new government guidance is made available.
Table 11: COVID-19 Government Backed Loans
Group Number of Drawn Balance Average
Customers GBP'million Loan Amount
GBP'000
BBLS 36,139 1,353 37
----------- -------------- -------------
CBILS 277 114 411
----------- -------------- -------------
CLBILS 3 27 9,122
----------- -------------- -------------
Total 36,419 1,494 41
----------- -------------- -------------
COVID-19 support measures
COVID-19 support measures including payment deferrals and
temporary payment conversions to interest only have been made
available as part of our commitment to support our customers
through COVID-19.
Less than 1% of mortgage customers currently have part or full
payment deferrals. 22% of all mortgage customers have been granted
deferrals in 2020 and 1% of customers remain. Of those customers
who took a payment deferral, 90% have returned to full contractual
payments with only 6% moving into arrears or requiring additional
support.
7% of commercial customers currently have COVID-19 support
measures in place, predominantly capital and interest payment
holidays. 75% of commercial customers who have previously been
granted COVID-19 support have now returned to full contractual
terms.
Of our retail unsecured customers, 1% of customers have
currently been granted payment deferral; 8% have taken a payment
deferral over 2020 with 85% of those returning to contractual
payments. Of those that have returned, 33% have moved into arrears
or require additional support.
Table 12: COVID-19 support
Granted to Date 31 December 2020
---------------------------- ----------------------------
Group Total Balances % of Total Total Balances % of Total
GBP'million Balances GBP'million Balances
--------------- ----------- --------------- -----------
Retail Mortgages 1,540 22% 68 1%
--------------- ----------- --------------- -----------
Commercial Lending 1,011 29% 251 7%
--------------- ----------- --------------- -----------
Retail Unsecured 13 8% 2 1%
--------------- ----------- --------------- -----------
Total 2,564 24% 321 3%
--------------- ----------- --------------- -----------
2. Operational risk
Definition Change since 2019:
Operational risk is the risk that events Increased
arising from inadequate or failed internal
processes, people and systems, or from external
events cause regulatory censure, reputational
damage, financial loss, service disruption
and/or detriment to our FANS.
-------------------
Appetite
We maintain a low appetite for Operational Risk. We aim to
minimise incidents and losses arising from operational risk issues
by maintaining a resilient infrastructure, including robust
systems, employing and training the right colleagues, minimising
the impact of external events and having a framework in place to
ensure that operational risks are captured, monitored and
mitigated.
Mitigation
Policies
We have detailed policies, procedures and controls in place that
are designed to mitigate operational risks both through minimising
impacts suffered in the normal course of business (expected losses)
and to avoid or reduce the likelihood of suffering a large extreme
(or unexpected) loss.
Cyber and information security
Our Chief Information Security Officer (CISO) is responsible for
ensuring robust cyber and information security. We continuously
invest in our cyber and information security infrastructure in
order to improve services, protect customer data and minimise the
risk of disruption. We also take pre-emptive actions to safeguard
the end-to-end resilience of critical processes. We continue to
enhance the control environment, recognising the changing cyber
landscape and the increased focus on digital capabilities and
reliance on home working, as well as the changing risk profile of
the business.
Operational resilience
Operational resilience is demonstrated in the mitigation of
risks that impact our people, technology, third parties, and
premises. By identifying critical end-to-end processes, focus can
be given to those processes and the controls in place, including
management of the technology upon which they rely, to minimise
disruption. The need for strong operational resilience is inherent
in the provision of services to customers. As customer expectations
and use of services evolves we will need to maintain focus on the
resilience of services. COVID-19 highlights the ongoing exposure to
external risks and threats that can be unpredictable in nature and
widespread in impact. Our response to COVID-19 to date has ensured
that critical services have continued in the safest manner possible
for both customers and colleagues. The ongoing nature of the
pandemic will continue to present risks to our resilience and these
are monitored continually.
Culture and training
As we evolve, we aim to do so safely through continued
investment in training our colleagues. This enables them to deliver
the right outcomes to our FANS, whilst maintaining a safe, reliable
and resilient banking operation.
Measurement
Material operational risk events are identified, reviewed and
escalated in line with criteria set out in the Risk Management
Framework. Root cause analysis is undertaken and action plans are
implemented. Losses may result from both internal and external
events, and are categorised using risk categories aligned to Basel
II. We also measure operational risk using a number of quantitative
metrics. These KRIs are defined, reported against and escalated to
the Business Risk Committees, Executive Risk Committee and Risk
Oversight Committee.
We also develop and maintain a suite of operational risk
scenarios using internal and external data. These scenarios provide
insights into the stresses the business could be subject to given
extreme circumstances. Scenarios cover all material operational
risks including execution of change, failures to core processes or
contagion risk from a third party. Scenarios are owned by senior
management custodians with review and challenge provided by the
Risk function, Executive Risk Committee and Risk Oversight
Committee, as part of the ICAAP process.
Monitoring
We have built detection capabilities to monitor and alert us
about system attacks and we use incident management procedures and
playbooks to respond to attacks accordingly.
We continuously develop and embed our approach to the management
of operational risks, with the aim of maintaining robust
operational processes, systems and controls, including conducting
Risk and Control Self-Assessments across the Bank.
Operational risk is overseen by the CRO, Business Risk
Committees, Executive Risk Committee and Risk Oversight
Committee.
3. Liquidity and funding risk
Definition Change since 2019:
Liquidity Risk is the risk that we fail Decreased
to meets our short-term obligations as they
fall due.
Funding Risk is the risk that we cannot
fund assets that are difficult to monetise
at short notice (i.e. illiquid assets) with
funding that is behaviourally or contractually
long term (i.e. stable funding).
-------------------
Appetite
We have a moderate appetite for Liquidity Risk and Funding Risk.
We shall be able to survive a combined name-specific and
market-wide liquidity stress event for at least three months, at a
level of severity determined by our internal stress test, utilising
our Liquidity Pool. Equally, we shall maintain a prudent funding
profile by using stable funding to fund illiquid assets, without
reliance
on wholesale funding markets, whilst ensuring that funding is
not inappropriately concentrated by customer, sector, or term,
as identified during our liquidity stress testing.
Mitigation
Deposit-funded approach
We aim to attract deposits that are diverse and are low cost,
which are less sensitive to competition within the deposit market.
At 31 December 2020, 44.3% of our deposits came from commercial
customers (31 December 2019: 40%) with the remaining 56% (31
December 2019: 60%) coming from retail customers. Additionally, 39%
of deposits at year end (31 December 2019: 29%) were
in the form of current accounts, with the remainder split
between a combination of instant access and fixed-term savings
products. In 2020 our cost of deposits was 0.65% (2019: 0.78%).
Our deposit base during the year and at year end remains stable
and resilient throughout the pandemic, with retail deposits forming
a higher portion of our balance sheet than commercial deposits.
Liquidity management
We continue to hold a prudent level of liquidity to cover
unexpected outflows, ensuring that we are able to meet financial
commitments for an extended period. We recognise the potential
difficulties in monetising certain assets, so set higher-quality
targets for liquid assets for the earlier part of a stress period.
We have assessed the level of liquidity necessary to cover both
systemic and idiosyncratic risks and maintain an appropriate
liquidity buffer at all times. Our Liquidity Coverage Ratio
ensures
that we comply with our own risk appetite as well as regulatory
requirements.
Our liquidity portfolio consists of cash and balances at the BoE
as well as high-quality liquid assets (HQLAs) that are available to
monetise in the event of stress.
The tables on page 41 set out the maturity structure of our
financial assets and liabilities by their earliest possible
contractual maturity date; this differs from the behavioural
maturity characteristics in both normal and stressed conditions.
The behavioural maturity of customer deposits is much longer than
their contractual maturity. On a contractual basis, these are
repayable on demand or at short notice; however, in reality, they
are static in nature and provide long-term stable funding for our
operations and liquidity. Equally, our loans and advances to
customers - specifically mortgages - are lent on longer contractual
terms; however, are often redeemed or remortgaged earlier.
The total balances depicted in the analysis do not reconcile
with the carrying amounts as disclosed in the Consolidated Balance
Sheet. This is because the maturity analysis incorporates all the
expected future cash flows (including interest), on an undiscounted
basis.
Recovery planning
The Recovery Plan details a series of indicators that would tend
to suggest a stress event may be in train. It assigns
responsibilities and actions to key individuals, specifies
timeframes, and establishes the Recovery Committee chaired by the
CFO, which sits as required in the event of a liquidity stress.
Term Funding Scheme repayments
Term Funding Scheme (TFS) closed to further drawdowns in
February 2018. Our drawdowns of GBP3,801 million will mature in
2020, 2021 and 2022 in the amounts of GBP543 million, GBP2,778
million and GBP480 million respectively. In March 2020, the Bank of
England announced a revised TFS with additional incentives for
SMEs. In December 2020, TFSME drawdowns were undertaken for GBP550
million with an expected maturity of 2024. We intend to continue to
utilise the TFSME scheme in 2021 while our existing TFS drawings
will be repaid using a combination of excess liquidity and by
utilising TFSME.
Table 13: Contractual maturity
Audited Carrying Repayable Up to 3-6 months 6-12 months 1-5 years Over 5 No Total
value on demand 3 months GBP'million GBP'million GBP'million years contractual GBP'million
GBP'million GBP'million GBP'million maturity
GBP'million
31 December
2020
---------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Cash and
balances
with the
Bank of
England 2,993 2,993 - - - - - - 2,993
---------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Loans and
advances
to
customers 12,385 - 332 281 634 4,551 11,424 284 17,506
---------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Investment
securities 3,413 - 87 233 221 2,768 140 59 3,508
---------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Other assets 3,788 - 2,568 - - - - 1,220 3,788
---------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Total assets 22,579 2,993 2,987 514 855 7,319 11,564 1,563 27,795
---------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Deposits
from
customers (16,072) (12,550) (641) (864) (1,233) (702) - (119) (16,109)
---------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Deposits
from
central
banks (3,808) - (692) (588) (1,500) (1,033) - - (3,813)
---------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Debt
securities (600) - - (23) (24) (719) - - (766)
---------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Repurchase
agreements (196) - - - (49) (155) - - (204)
---------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Lease
Liabilities (327) - (7) (7) (15) (115) (273) - (417)
---------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Other
liabilities (287) - - - - - - (287) (287)
---------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Total
liabilities (21,290) (12,550) (1,340) (1,482) (2,821) (2,724) (273) (406) (21,596)
---------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Equity (1,289) - - - - - - (1,289) (1,289)
---------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Total Equity
and
liabilities (22,579) (12,550) (1,340) (1,482) (2,821) (2,724) (273) (1,695) (22,885)
---------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Derivative
cashflows - (3) (3) (2) - -
---------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Cumulative
liquidity
gap (9,557) (7,913) (8,882) (10,851) (6,258) 5,033
---------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Audited Carrying Repayable Up to 3-6 months 6-12 months 1-5 years Over 5 No Total
value on demand 3 months GBP'million GBP'million GBP'million years contractual GBP'million
GBP'million GBP'million GBP'million maturity
GBP'million
---------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
31 December
2019
---------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Cash and
balances
with the
Bank of
England 2,989 2,989 - - - - - - 2,989
---------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Loans and
advances
to
customers 14,681 - 349 317 584 4,191 16,893 395 22,729
---------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Investment
securities 2,565 - 209 229 74 1,924 215 60 2,711
---------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Other assets 1,165 - - - - - - 1,165 1,165
---------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Total assets 21,400 2,989 558 546 658 6,115 17,108 1,620 29,594
---------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Deposits
from
customers (14,477) (9,720) (601) (1,102) (1,838) (1,178) - (115) (14,554)
---------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Deposits
from
central
banks (3,801) - (6) (7) (556) (3,274) - - (3,843)
---------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Debt
securities (591) - - (23) (23) (766) - - (812)
---------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Repurchase
agreements (250) - (54) - - (204) - - (258)
---------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Lease
Liabilities (341) - (7) (7) (14) (119) (329) - (476)
---------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Other
liabilities (357) - - - - - - (357) (357)
---------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Total
liabilities (9,720) (668) (1,139) (2,431) (5,541) (329) (472) (20,300)
---------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Equity (1,583) - - - - - - (1,583) (1,583)
---------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Total Equity
and
liabilities (21,400) (9,720) (668) (1,139) (2,431) (5,541) (329) (2,055) (21,883)
---------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Derivative
cashflows - (2) (2) (9) - -
---------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Cumulative
liquidity
gap (6,731) (6,843) (7,437) (9,212) (8,647) 8,132
---------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Measurement
Our asset and liability management system is used to capture all
positions across the Bank and evaluate their liquidity. We
calculate our LCR and performs stress testing of our liquidity
daily. Forward-looking short-range forecasts are produced at least
monthly.
Early warning indicators are set out in the Recovery Plan.
Colleagues monitor these on a regular basis and bump-up any
triggers.
A cost of funds model is used to help colleagues account for
liquidity, capital and interest rate risk in pricing.
We perform an ILAAP every year for the identification,
measurement, management and monitoring of liquidity, having due
regard for the PRA Rulebook section 'Internal Liquidity Adequacy
Assessment'. The Treasury team seeks ILAAP input from a range of
teams including Finance, Risk, and Products, before taking the
ILAAP through a robust governance process.
The conclusions of the ILAAP are reviewed and approved by the
Board, assisting in: identification of our material liquidity
risks; deciding the management of material liquidity risks; and
determining the Board's risk appetite.
For liquidity risk, we assess against internal and external
requirements. The chief external requirement is the LCR, and a
series of internal requirements are set and maintained through our
ILAAP.
Monitoring
The Treasury function has responsibility for our compliance with
liquidity policy and strategy. We have a dedicated Treasury Risk
team who monitor our liquidity and funding risk including ensuring
compliance with the policies we have development. The Regulatory
Reporting team also monitors compliance with LCR.
The Asset & Liability Committee is responsible for liquidity
and funding risk. Liquidity and funding cannot be considered in
isolation, and we have regard to liquidity risk, profitability and
capital optimisation when considering funding sources. Our LCR has
remained strong throughout the year, ending 2020 at 187% (2019:
197%).
4. Market risk
Definition Change since 2019:
Market risk is the risk of loss arising from No change
movements in market prices. It is the risk
posed to earnings, economic value or capital
that arises from changes in interest rates,
market prices or foreign exchange rates.
-------------------
Appetite
We have a moderate appetite for Market Risk, and do not have a
trading book. Market Risk arises naturally as a result of taking
deposits from customers and lending to customers. Market Risk is
closely monitored and managed to ensure the level of risk remains
within appetite, with key metrics reported to senior management and
the Board.
Mitigation
Interest rate risk
We benefit from natural offsetting between certain assets and
liabilities, which may be based on both the contractual and
behavioural characteristics of these positions. Where natural
hedging is insufficient, we hedge net interest rate risk exposures
appropriately, including, where necessary, with the use of interest
rate derivatives. We enter into derivatives only for hedging
purposes and not as part of customer transactions or for
speculative purposes.
Our Treasury and Treasury Risk teams work closely together to
ensure that risks are managed appropriately - and that we are
well-positioned to avoid losses outside our appetite, in the event
of unexpected market moves.
We have hedge accounting solutions in place to reduce the
volatility in the income statement arising from these hedging
activities.
Foreign exchange exposure
We have very limited exposure to foreign exchange risk. Foreign
exchange assets and liabilities are matched off closely in each of
the currencies we operate and less than 5% of our assets and
liabilities are in currencies other than pounds sterling. We do not
have any operations outside the United Kingdom. We offer currency
accounts and foreign exchange facilities to facilitate basic
customer requirements only.
Measurement
We measure interest rate risk exposure using methods including
the following:
-- Economic value sensitivity: calculating repricing mismatches
across our assets and liabilities and then evaluating the change in
value arising from a change in the yield curve. Our risk appetite
scenario is based on a parallel rate movement of 2% to all interest
rates, but we evaluate based on a series of other parallel and
non-parallel rate changes. The scenarios are designed to replicate
severe but plausible economic events and to have regard to risks
that would not be evident through the use of parallel
shocks alone.
-- Interest income sensitivity: the impact on 12-month future
income arising from various interest rate shifts. Our risk appetite
scenarios are based on parallel rate movements of 2% and of
divergences of up to 1.15% between BoE base rate and LIBOR against
a constant balance sheet. We also evaluate a series of other
parallel, non-parallel and non-instantaneous rate changes.
-- Interest rate gaps: calculating the net difference between
total assets and total liabilities across a range of time
buckets.
The frequency of calculating and reporting each measure varies
from daily to quarterly, appropriate to each risk type.
We use an integrated ALM system, which consolidates all our
positions and enables the measurement and management of interest
rate repricing profiles for the entire Bank. The model takes into
account behavioural assumptions as specified in our Market Risk
Policy. Material assumptions can be updated more frequently at the
request of business areas, in response to changing market
conditions or customer behaviours. The model also takes into
account future contracted or expected growth in lending and
deposits.
We measure and monitor our exposures to foreign exchange risk
daily and do not maintain net exposures overnight in any currency
other than pounds sterling, above 5% of our total assets and
liabilities.
Monitoring
Interest rate risk
Interest rate risk measures have limits set against them through
the Market Risk Policy, and these are monitored on a regular basis
by the Treasury Risk team. Measures close to the limits are
escalated to Treasury in order to ensure prompt action and limit
excesses are escalated to the Asset & Liability Committee. A
digest of interest rate risk measures and details of any excesses
are presented monthly at the Asset & Liability Committee.
Internal Asset & Liability Committee Limits are set for the
economic value of equity and net interest income based on the worse
of a +200bps or -200bps instantaneous symmetrical parallel shock to
interest rates. The economic value of equity and net interest
income limits are monitored daily by risk. Performance against
limits is reported monthly to the Asset & Liability Committee
(with exceptions communicated by email) and more regularly to
senior management, as well as being noted by the ROC and the
Board.
Furthermore, limits are set for a set of asymmetrical movements
between LIBOR and the BoE base rate. Our Treasury Risk function
runs a series of other interest rate risk simulations on a monthly
basis to ensure that the Asset & Liability Committee is kept
updated of any other risks not captured by the policy measures.
We enter into hedging arrangements when the natural hedging in
our book is insufficient to enable us to remain within our
limits.
All derivatives are entered into macro or micro fair value hedge
accounting arrangements in order to minimise volatility in the
profit and loss account.
The tables on page 44 set out the interest rate risk repricing
gaps of our balance sheet in the specified time buckets, indicating
how much of each type of asset and liability reprices in the
indicated periods, after applying expected non-contractual and
out-of-course early repayments in line with the Market Risk Policy.
During 2020 we have updated the tables to better reflect our
behavioural assumptions on deposits and equity as well as to
provide increased granularity. The comparative tables for 2019 have
also been updated to reflect these changes.
Table 14: Repricing analysis
31 December Up to 3-6 months 6-12 months 1-5 years Over 5 Non-interest Total
2020 3 months GBP'million GBP'million GBP'million years bearing GBP'million
GBP'million GBP'million GBP'million
Cash and
balances
with the
Bank
of England 2,913 - - - - 80 2,993
------------ ------------- ------------- ------------- ------------- ------------- -------------
Loans and
advances
to
customers1 4,665 538 1,083 5,924 175 - 12,385
------------ ------------- ------------- ------------- ------------- ------------- -------------
Investment
securities 2,343 65 - 910 95 - 3,413
------------ ------------- ------------- ------------- ------------- ------------- -------------
Other assets 2,568 - - - - 1,220 3,788
------------ ------------- ------------- ------------- ------------- ------------- -------------
Total assets 12,489 603 1,083 6,834 270 1,300 22,579
------------ ------------- ------------- ------------- ------------- ------------- -------------
Deposits from
customers (8,761) (1,091) (1,657) (4,563) - - (16,072)
------------ ------------- ------------- ------------- ------------- ------------- -------------
Deposits from
central
banks
and
repurchase
agreements (3,808) - (47) (149) - - (4,004)
------------ ------------- ------------- ------------- ------------- ------------- -------------
Debt
securities - - - (600) - - (600)
------------ ------------- ------------- ------------- ------------- ------------- -------------
Other
liabilities2 - - - - - (614) (614)
------------ ------------- ------------- ------------- ------------- ------------- -------------
Equity (886) (40) (79) (284) - - (1,289)
------------ ------------- ------------- ------------- ------------- ------------- -------------
Total equity
and
liabilities (13,455) (1,131) (1,783) (5,596) - (614) (22,579)
------------ ------------- ------------- ------------- ------------- ------------- -------------
Interest rate
derivatives 389 (125) - (264) - -
------------ ------------- ------------- ------------- ------------- ------------- -------------
Interest rate
sensitivity
gap (577) (653) (700) 974 270 686 -
------------ ------------- ------------- ------------- ------------- ------------- -------------
Cumulative
gap (577) (1,230) (1,930) (956) (686) - -
------------ ------------- ------------- ------------- ------------- ------------- -------------
31 December Up to 3-6 months 6-12 months 1-5 years Over 5 Non-interest Total
2019 3 months GBP'million GBP'million GBP'million years bearing GBP'million
GBP'million GBP'million GBP'million
------------ ------------- ------------- ------------- ------------- ------------- -------------
Cash and
balances
with the
Bank
of England 2,989 - - - - - 2,989
------------ ------------- ------------- ------------- ------------- ------------- -------------
Loans and
advances
to customers 4,565 639 1,506 7,962 9 - 14,681
------------ ------------- ------------- ------------- ------------- ------------- -------------
Investment
securities 2,068 - 3 472 22 - 2,565
------------ ------------- ------------- ------------- ------------- ------------- -------------
Other assets - - - - - 1,165 1,165
------------ ------------- ------------- ------------- ------------- ------------- -------------
Total assets 9,622 639 1,509 8,434 31 1,165 21,400
------------ ------------- ------------- ------------- ------------- ------------- -------------
Deposits from
customers (6,462) (1,212) (2,066) (4,737) - - (14,477)
------------ ------------- ------------- ------------- ------------- ------------- -------------
Deposits from
central
banks
and
repurchase
agreements (3,855) - - (196) - - (4,051)
------------ ------------- ------------- ------------- ------------- ------------- -------------
Debt
securities - - - (591) - - (591)
------------ ------------- ------------- ------------- ------------- ------------- -------------
Other
liabilities2 - - - - - (698) (698)
------------ ------------- ------------- ------------- ------------- ------------- -------------
Equity (634) (50) (100) (799) - - (1,583)
------------ ------------- ------------- ------------- ------------- ------------- -------------
Total equity
and
liabilities (10,951) (1,262) (2,166) (6,323) - (698) (21,400)
------------ ------------- ------------- ------------- ------------- ------------- -------------
Interest rate
derivatives 964 (90) (245) (628) -
------------ ------------- ------------- ------------- ------------- ------------- -------------
Interest rate
sensitivity
gap (365) (713) (902) 1,483 30 467 -
------------ ------------- ------------- ------------- ------------- ------------- -------------
Cumulative
gap (365) (1,078) (1,980) (497) (467) - -
------------ ------------- ------------- ------------- ------------- ------------- -------------
1. Loans and advances to customers at 31 December 2020 includes
the GBP295 million of loans and advances classified as held for
sale.
2. Other liabilities includes lease liabilities which are shown
as non-interest bearing category. Whilst interest expense is
recognised on these liabilities within the income statement this
interest is not paid like other financial liabilities. The
maturities of the lease liabilities shown on the balance sheet are
set out below:
Lease liability maturity profile
Audited Up to 3-6 months 6-12 months 1-5 years Over 5 Total
3 months GBP'million GBP'million GBP'million years GBP'million
GBP'million GBP'million
31 December 2020 (7) (7) (15) (102) (196) (327)
------------- ------------- ------------- ------------- ------------- -------------
31 December 2019 (7) (7) (14) (101) (212) (341)
------------- ------------- ------------- ------------- ------------- -------------
A positive interest rate sensitivity gap exists when more assets
than liabilities reprice during a given period. A positive gap
position tends to benefit net interest income in an environment
where interest rates are rising; however, the actual effect will
depend on multiple factors, including actual repayment dates and
interest rate sensitivities within the banding periods. The
converse is true for a negative interest rate sensitivity gap.
The table below shows the sensitivity arising from the standard
scenario of a +200bps and -200bps parallel interest rate shock upon
projected net interest income for a one-year forecasting
period.
Table 15: Interest rate sensitivity
Sensitivity of projected net interest income to 200bps 200bps
parallel interest rate shock for a one-year forecasting increase decrease
period GBP'million (not floored
at zero)
GBP'million
31 December 2020 19.8 (20.1)
------------- --------------
31 December 2019 8.1 (8.2)
------------- --------------
5. Financial crime risk
Definition Change since 2019:
Financial crime risk is the risk of financial Decreased
loss or reputational damage due to regulatory
fines, restriction or suspension of business,
or cost of mandatory corrective action as a
result of failing to comply with prevailing
legal and regulatory requirements relating
to financial crime.
-------------------
Appetite
We have no appetite for establishing or maintaining customer
relationships or executing transactions that facilitate financial
crime and have no appetite for sanctions breaches. Relationships
with customers where it is felt that the financial crime risks are
too great to manage effectively will be ended and continual
investment is made in our expertise, partnerships and systems to
improve our management of risk in this area. We will not tolerate
any deliberate breach of financial crime laws and regulations that
apply to our business and the transactions we undertake.
Mitigation
Investment in our systems and controls
We continue to conduct horizon scanning activity to identify
emerging trends and typologies as well as to identify and prepare
for new legislation and regulation. This includes participating in
key industry forums (or associations) such as those hosted by UK
Finance. As required, we will update our control framework to
ensure emerging risks are identified and mitigated. We updated all
our Financial Crime policies and standards in 2020 to ensure
alignment with regulatory obligations.
Our Financial Crime Improvement Programme, which was mobilised
in 2019, continued to deliver enhancements to our business-wide
financial crime systems and controls throughout 2020. This
programme will continue to deliver a Bank-wide framework to ensure
Financial Crime controls are designed in line with regulatory
requirements and build new capability to manage financial crime
risk into 2021.
Resourcing and training
Resourcing continues to be a significant focus for the Bank to
ensure the Financial Crime Framework is implemented effectively.
Headcount has increased across all lines of defence and we have
recruited additional specialist resource in 2020 to support
operational teams in the first line of defence and to bolster
second line Financial Crime Policy, Advisory and Assurance
functions. We continue to invest in our colleagues' development to
improve their capabilities through industry-recognised financial
crime qualifications. All colleagues receive financial crime
training, which is updated to reflect new requirements, ensuring
our colleagues are able to meet their personal regulatory
obligations and assist us in achieving our risk appetite and
financial crime obligations.
Sanctions compliance
We continue to review our sanctions compliance framework with
the support of external advisers, following our notifications to
regulators on the sanctions matters discovered in 2017 and
2019.
The Financial Crime Improvement Programme has delivered multiple
enhancements to our sanctions compliance capabilities in 2020 and
will continue to do so throughout 2021.
Anti-money laundering and combating terrorist financing
prevention
We comply with all relevant UK Anti-Money Laundering and
Combating Terrorist Financing legislation. The Financial Crime
Improvement Programme continues to deliver enhancements to our
customer due diligence capabilities, transaction monitoring,
customer and payment screening capabilities. The programme ensures
we continue to effectively prevent, detect and treat potential
out-of-appetite financial crime activities.
Anti-bribery and corruption and anti-tax evasion compliance
We comply with the UK Bribery Act 2010 and have zero tolerance
for undertaking and/or facilitating bribery and/or corruption and
will always avoid giving or receiving improper financial or other
benefits in our business operations. We also comply with the
Criminal Finances Act 2017 and have a zero tolerance approach to
any facilitation of tax evasion. We are committed to acting
professionally, fairly and with integrity in all our business
dealings and relationships.
Fraud prevention
We have continued to invest in fraud prevention tools and
further capability in 2020. This, in addition to historic
investment,
has resulted in significant savings by preventing attempted
frauds against our customers and the Bank itself.
During the pandemic, we have seen fraudsters continue to target
customers through authorised and unauthorised payment fraud
attempts. Alongside this we have also seen an increase in the use
of social engineering techniques to attempt to obtain customers'
personal and security details, using reasons related to COVID-19
and scams topical to the pandemic, including pets, vaccines and
personal protective equipment. We have continued to share fraud
prevention trends and best practice via our various communication
channels to help our customers protect against such attacks.
We have supported our customers during these difficult times by
providing government-funded schemes and we have implemented fraud
capabilities to limit attempted fraud against these schemes. We
have worked closely with the British Business Bank, other banks,
network operators and law enforcement to identify and reduce the
fraud risk in relation to BBLS applications.
In 2021, we will continue to work closely with stakeholders to
help prevent and protect our customers from fraud.
Measurement
The Financial Crime Risk team own our control framework with
accountability for execution owned by our colleagues across the
first line. The Risk team defines our risk appetite and recommends
this to the Board for approval. In order to monitor the
effectiveness of our control framework and the alignment with our
risk appetite, KPIs are defined, reported against and escalated
through to the ROC. We report monthly on our Bank-wide account
opening pass rates, fraud volumes and associated operational losses
through this process.
Monitoring
Our policy framework also sets out key requirements which must
be complied with consistently to manage our various risks.
We have risk-based audit and assurance plans to monitor the
effectiveness of our controls. Dedicated and skilled resources are
in place to complete these reviews, with findings and
recommendations tracked through our financial crime governance
structure.
We maintain policies and compliance standards, aligned to our
legal and regulatory obligations, which also articulate our risk
appetite.
Each year we complete a financial crime risk assessment to
ensure that our financial crime control framework is commensurate
and robust to manage our inherent business risks across each
financial crime area.
We participate in external industry forums, including being an
active member of the Cyber Defence Alliance and liaise with
government bodies such as UK Finance, the Home Office, HMRC, the
Financial Conduct Authority and law enforcement to support our
identification of new and evolving risks.
6. Regulatory and compliance risk
Definition Change since 2019:
Regulatory and compliance risk is the risk No change
of failing to understand and comply with relevant
laws and regulatory requirements; not keeping
regulators informed of relevant issues; not
responding effectively to information requests
nor meeting regulatory deadlines; or obstructing
the regulator.
-------------------
Appetite
We have no appetite for actions that result in breaches of
regulation or for inaction to address systemic process and control
failures leading to material non-compliance. Notwithstanding the
complexity and volume of the regulatory agenda, we ensure that all
mandatory requirements are prioritised with sufficient resources to
implement within required timescales in a customer-focused
manner.
Mitigation
The following controls and procedures help to mitigate
regulatory and compliance risk:
-- A clearly defined compliance policy statement (with
supporting policy standards) and Regulatory Appetite Statements
signed off by the Board.
-- Ongoing development, maintenance and reporting of risk
appetite measures for regulatory and compliance risk to the
Executive Risk Committee and the Board.
-- Maintenance of proactive and coordinated engagement with our key regulators.
-- Continual assessment of evolving regulatory requirements,
including regulatory business plans and thematic reviews.
-- Consideration of regulatory requirements in the context of
product and proposition development and associated appropriate
governance.
-- Oversight of key regulatory implementations, including PSD2.
-- Oversight of regulatory and compliance risks and issues in relevant governance bodies.
-- Ongoing review and tracking of known regulatory and
compliance issues and remediation actions being taken.
-- A risk-based assurance framework, designed to monitor
compliance with regulation and assess customer outcomes.
Our Board, Risk Oversight Committee and Executive Committee (via
the Executive Risk Committee) continue to monitor and oversee our
focus on maintaining regulatory compliance. This includes periodic
reporting on regulatory themes, regulatory changes on the horizon
and the regulatory environment, alongside supporting key risk
measures and Board-approved policies and standards.
Measurement
Regulatory and compliance risks are measured against a defined
set of Board-approved risk appetite metrics relating to regulatory
breaches, and past due regulatory implementations and actions.
Thresholds are set and form part of the Board-approved Risk
Appetite Statement.
Monitoring
Regulatory and compliance risk is considered by all three lines
of defence as part of their oversight and assurance activities. A
risk assurance plan, approved by the Executive Risk Committee on an
annual basis, independently assesses areas of the control framework
underpinning compliance with laws and regulations.
7. Conduct risk
Definition Change since 2019:
Conduct risk is the risk of treating customers Increased
unfairly and delivering poor outcomes that
lead to customer detriment, such as financial
loss and/or distress and inconvenience. This
can also result in wider adverse impacts,
for example, loss of customers, reputational
damage, regulatory investigations and/or legal
action.
-------------------
Appetite
We have no appetite for conduct risks that knowingly deliver
inappropriate customer outcomes, which may lead to customer
detriment. Where inappropriate outcomes are identified, these are
remediated quickly to minimise risk and reduce harm to our
customers.
Mitigation
Our simple, transparent and fairly-priced products and
activities continue to help ensure that conduct risk is minimised.
Our colleagues are fully-trained in all relevant products and
services and these are delivered with exceptional levels of service
to customers through all channels, with openness and transparency,
supported by robust management controls and quality assurance
measures. Our products are reviewed regularly to ensure they
continue to meet customer needs and perform as expected. We are
committed to ensuring communications are clear, fair and not
misleading. We do not use sales incentives in stores, nor is there
a perception amongst colleagues that they exist in any unofficial
manner.
Make every wrong right
Our service-led business model gives us an inherent advantage
over peers. We are committed to doing the right thing for our
customers and to making any wrongs right. Where conduct risks are
identified, resources and expertise are dedicated to swift
remediation action to appropriately mitigate any issues, avoid
recurrence and, if detriment has occurred, the scale of the harm is
quantified to address this with impacted customers. This is
possible because of our clear risk framework which includes defined
first line ownership, review stages and challenge by the second
line, and assurance from the third line.
In 2019, we made a provision of GBP12 million for customer
remediation, which predominately related to non-compliance with
certain requirements to provide SMS warning alerts to customers
regarding overdraft charges. The error was subsequently corrected
and the Competition and Markets Authority was informed. We pride
ourselves on providing exceptional levels of service and we regret
the impact on customers. All customers have now been contacted and
the remediation project has been completed.
Measurement
We measure conduct risk through Risk Appetite Metrics which are
centred around product governance, compliance monitoring, analysis
of expressions of dissatisfaction, root cause analysis, 'Voice of
the Customer' surveys and reporting through customer treatment
forums. Key Risk Indicators are also defined, reported against and
escalated to the Risk Oversight Committee. We view the effective
management of conduct risk as being evidenced by low levels of poor
customer outcomes and evidence of robust controls, meaning that the
right internal processes are being followed to deliver these
outcomes.
Monitoring
As well as monitoring the trends in the metrics outlined above,
we analyse the root cause of complaints and any underlying trends,
to identify opportunities to improve service provision while
delivering consistently fair outcomes for customers.
8. Model risk
Definition Change since 2019:
Model risk can be defined as the potential Increased
loss that we may incur, as a consequence of
decisions that could be principally based on
the output of models, due to errors in the
development, implementation or use of such
models. Model risk can lead to financial loss,
poor business and strategic decisions, and
reputational damage. Model risk covers all
models and is not limited to credit risk models.
-------------------
Appetite
We have only a moderate appetite for risk due to errors in the
development, implementation or use of models, which we mitigate via
effective governance over the specification and design,
implementation and running of our models and over model input
data.
Mitigation
Governance
The main mitigant to model risk is the robust governance process
we have established. This includes two dedicated
model committees:
-- Model Oversight Committee - which is the designated committee
for the management of model risk.
-- Model Governance Committee - which is the technical committee
overseeing the model risk life cycle.
Material models are presented to the Model Oversight Committee
for approval via the Model Governance Committee, ahead of
implementation or model changes.
The Model Oversight Committee defines and approves standards
relevant to model risk and recommends policies and model risk
appetite to the Risk Oversight Committee for approval on an annual
basis. The Model Governance Committee owns the minimum standards
and target operating models to mitigate model risk. It also defines
roles and responsibilities, with clear ownership
and accountability.
The Model Governance function maintains a model inventory, which
records key features of models including ownership and review
schedules. The Model Governance function also tracks model risk and
actions from both the Model Oversight Committee and Model
Governance Committee.
Independent review
We have established an independent Model Validation team, which
is part of our Prudential Risk function. This is managed by
a team of experts, independent from model development. This team
is responsible for reviewing model development submissions and
maintains a model validation action log to track model risk
remediation plans. Models are also subject to internal and external
audit as well as regulatory reviews.
Measurement
We measure model risk using a set of model performance
indicators which form part of our Key Risk Indicators are regularly
reported and discussed at the Model Governance Committee, Model
Oversight Committee, Risk Oversight Committee and Board. On a
monthly basis, the Model Governance Committee reviews any material
validation actions and tracks their closure.
Monitoring
A dedicated Model Monitoring team is responsible for assessing
the ongoing performance of credit risk models against pre-specified
tolerances approved by the Model Governance Committee as part of
model monitoring standards.
Model performance is regularly monitored, and results are
discussed both at the Model Governance Committee and Model
Oversight Committee, where actions are agreed and tracked to
completion. Non-credit risk models are also subject to monitoring
according to metrics and a schedule agreed at Model Governance
Committee, however, this monitoring is undertaken by the
appropriate user areas rather than by the Model Monitoring
team.
9. Capital risk
Definition Change since 2019:
Capital Risk is the risk that we fail to meet No change
minimum regulatory capital (and MREL) requirements.
Management of capital is essential to the
prudent management of our balance sheet, ensuring
our resilience under stress and the maintenance
of the confidence of our current and potential
creditors (including bondholders, the bond
market, and customers) and key stakeholders
in the pursuit of our business strategy.
-------------------
Appetite
We have a low appetite for Capital Risk and our aim is to
maintain a surplus of capital resources above regulatory
requirements.
Mitigation
We manage our capital risk via our Capital Adequacy Framework
which includes policies, strategy, limit setting, continuous
monitoring and stress testing. Our ICAAP is a key component of this
framework and is used to analyse material risks and assess our
strategy and objectives under various stress scenarios. Capital
ratios continued to be maintained within Board risk appetite and
regulatory requirements throughout 2020.
Sustainable profit growth
The main mitigation to capital risk is the sustainable
generation of additional capital through the accumulation of
profits. The Board and Executive Committee are focused on ensuring
the successful delivery of the strategic plan to ensure the return
to sustainable profitability.
Balance sheet optimisation
Another key mitigation that we can use to manage capital risk is
the efficient deployment of our existing capital resources. One of
our strategic priorities is improving our balance sheet
optimisation to ensure we maximise our risk-adjusted returns whilst
remaining above regulatory requirements. As part of this approach
we executed a sale of a portfolio of residential mortgages in
December 2020 which increased our MREL resources, through a
combination of reducing our RWAs and the recognition of a gain on
sale.
Raising of additional capital
As we grow we need to raise additional regulatory capital to
support lending growth. The ability to raise additional capital, as
well as the associated cost, is dependent upon market conditions
and perceptions. The sale of the mortgage portfolio removed the
need for us to raise additional capital in the near term.
Measurement
We measure our capital resources in line with regulatory
requirements. In order to appropriately manage our capital
resources, we produce regular reports on the current and forecasted
level of capital for the Board and the Executive Leadership Team.
This includes the undertaking of routine stress testing on an
ongoing basis.
The key assumptions and risk drivers used to create the stress
tests are regularly monitored and reported, and are used in
determining how we will evolve our capital resources and ensure
they are appropriate for growth.
The ICAAP is used to assess the adequacy and efficiency of our
capital resources required to support our business model.
Monitoring
We consider both short-term forecasts and medium-term plans, and
our overall agreed risk appetite.
We also develop appropriate strategies under market stress
conditions to manage those risks to capital and consider both past
events and customer behaviour to inform our analysis, and to
validate our robustness. This process is used to ensure that we
apply appropriate management buffers to regulatory capital
requirements in line with risk appetite.
We manage and monitor capital in accordance with prudential
rules issued by the PRA and FCA, in line with the EU Capital
Requirements Directive, in addition to our own internal reporting
measures. We are committed to maintaining a strong capital base
under both existing and future regulatory requirements.
We are working to ensure we are compliant with the incoming CRD
V / CRR 2 requirements, which were published in June 2019; and the
recent PRA consultation CP17/20 (CRD V: Further Implementation)
detailing the transitional changes in the UK regulatory framework
required as a result of the exit from the European Union.
Table 16: Capital resources
Audited 31 December 31 December
2020 2019
GBP'million GBP'million
Ordinary share capital - -
------------- -------------
Share premium 1,964 1,964
------------- -------------
Retained earnings (694) (392)
------------- -------------
Other reserves 19 11
------------- -------------
Intangible assets (254) (168)
------------- -------------
Other regulatory adjustments 157 12
------------- -------------
Total Tier 1 capital (CET1) 1,192 1,427
------------- -------------
Debt securities (Tier 2) 249 249
------------- -------------
Total Tier 2 capital 249 249
------------- -------------
Total regulatory capital 1,441 1,676
------------- -------------
Emerging risks
In addition to our principals, we monitor other potentially
significant emerging risks.
We consider emerging risks to be evolving threats which cannot
yet be quantified, with the potential to significantly impact the
Bank's strategy, financial performance, operational resilience
and/or reputation. The emerging risks are continually assessed and
reviewed through a horizon scanning process, with escalation and
reporting to the Board as necessary. The horizon scanning process
fully considers all relevant internal and external factors and is
designed to capture those risks which are present but have not yet
fully crystallised, as well as those which are expected to
crystallise in the future.
Macroeconomic environment
The full extent of the economic impacts from COVID-19 are yet to
be seen. The duration and depth of the downturn is uncertain and
risks to credit and margin performance are expected, with
significant disruption to both supply and demand already occurring.
Increasing levels of unemployment could impact customers' ability
to repay their lending. The efficacy of monetary and fiscal policy,
and the speed and ability with which the UK can return to 'normal'
operating conditions, will determine the overall economic impact
for the UK.
Mitigating actions
We continue to monitor economic and political developments in
light of the ongoing uncertainty, considering potential
consequences for our customers, products and operating model. We
actively monitor our credit portfolios and undertake robust
internal stress testing to identify sectors that may come under
stress as a result of an economic slowdown in the UK.
Climate risk
There is significant uncertainty around the time horizon over
which climate risks will materialise, as well as the exact way in
which they will occur. Climate risk is classified as a
cross-cutting risk type that manifests through other principal
risks - primarily strategic risk, credit risk and operational risk.
We are exposed to physical, transition and reputation risks arising
from climate change.
Our mortgage portfolio represents a significant proportion of
our customer lending. Increases in extreme variability in weather
patterns may lead to increased incidence and severity of physical
risks which, in addition to the disruption felt by customers, can
lead to a decrease in the valuations of property taken as
collateral to mitigate credit risk. In addition, tightening minimum
energy efficiency standards for domestic buildings could impact the
value of mortgaged properties or the ability of borrowers to
service debt. We have low levels of lending to carbon-related
assets, however, we may be exposed to future transition risks
through the business portfolio.
Mitigating actions
The Chief Risk Officer has Senior Manager Responsibility for our
approach to managing financial risks from climate change. We
continue to consider climate change in our Risk Management
Framework, in line with our plan to align to regulatory
expectations. The Executive Risk Committee has responsibility for
overseeing our exposures and approach to managing the financial
risks from climate change. The Committee will receive regular
updates on progress against the plan through the Bank Risk Report
and special papers.
Analysis of current river and sea flood risk to properties
within the mortgage portfolio has been undertaken as an initial
step in assessing the physical risk to our lending. Scenario
analysis work will be undertaken to consider the longer-term
impacts, as well as the high degree of uncertainty. Transition risk
within the mortgage portfolio will also be considered with an
assessment of the energy efficiency of properties and we intend to
use this information to support our customers to 'green' their
homes. An assessment of sectors (and sub -- sectors) that may have
a higher likelihood of being impacted by transition risks from
moving to a lower carbon environment has been performed, to
increase understanding of the possible risks facing our customers,
and support prioritisation of areas where further analysis is
required. Building scenario analysis capability is a key component
of work planned for 2021.
Regulatory change
The suite of government support measures introduced in reaction
to the economic pressures created by COVID-19 are complex and
nuanced. Any sudden
or unexpected change to the rules and regulations governing the
measures
could create material market disruption, requiring large-scale
prioritisation decisions in a fast-paced environment. Beyond
COVID-19, there is continued evolution of the regulatory landscape
and the requirement to respond to ongoing prudential and conduct
driven initiatives.
Mitigating actions
We continue to monitor emerging regulatory initiatives to
identify potential impacts on our business model and ensure we are
well placed to respond with effective regulatory change management.
We continue to work with regulators to ensure we meet all
regulatory obligations, with identified implications of upcoming
regulatory activity incorporated into the strategic planning
cycle.
Digitisation
COVID-19 has accelerated the digitisation of the banking
industry in the space of a few months and is likely to lead to
rapid change over the coming years as the industry rapidly adapts
to customers' evolving behaviours. This is spurring an acceleration
of investment and delivery by both incumbent banks and neo-banks to
provide enhanced digital propositions to customers in both the
consumer and business markets.
Mitigating actions
The Bank's strategy had always been predicated on new and
exciting digital propositions, with the implications of the
pandemic both supporting that ambition, but also accelerating the
timeframe for delivery. Our rapid response to the pandemic has
demonstrated our ability to implement change and digital solutions
swiftly. We are therefore continuously evaluating the timetable and
investment profile of our strategy. We are continuing with our
investment and digital development in the near term to position us
for the future.
SIGNIFICANT EVENTS
In September 2020, as part of our strategy to enhance returns
and ambition to grow unsecured lending, we acquired Retail Money
Market Ltd (RateSetter). RateSetter's originating and underwriting
capability will enable us to rapidly accelerate this ambition via
an existing, scalable platform.
In December 2020 we announced the sale of a portfolio of owner
occupied residential mortgages, the transaction completed in
February 2021. The portfolio had a gross book value of GBP3,044
million resulting in a total cash consideration of GBP3,127
million.
RELATED PARTIES
Key management personnel
Our key management personnel, and persons connected with them,
are considered to be related parties. Key management personnel are
defined as those persons having authority and responsibility for
planning, directing and controlling the activities of the Group.
The Directors and members of the Executive Leadership Team are
considered to be the key management personnel for disclosure
purposes.
Key management compensation
Total compensation cost for key management personnel for the
year by category of benefit was as follows:
Group 2020 2019
GBP'million GBP'million
Short-term benefits 5.3 5.8
Post-employment benefits 0.1 -
Share-based payment costs 0.7 1.7
------------- -------------
Total compensation for key management personnel 6.1 7.5
------------- -------------
Short-term employee benefits include salary, medical insurance,
bonuses and cash allowances paid to key management personnel. The
share-based payment cost represents the IFRS 2 charge for the year
which includes awards granted in prior years that have not yet
vested.
Banking transactions with key management personnel
We provide banking services to Directors and other key
management personnel and persons connected to them. Loan
transactions during the year and the balances outstanding at 31
December were as follows:
Group 2020 2019
GBP'million GBP'million
Loans outstanding at 1 January 0.7 3.8
Loans relating to persons and companies 1.8 -
newly considered related parties
Loans relating to persons and companies
no longer considered related parties (0.6) (3.1)
Loans issued during the year - 0.2
Loan repayments during the year - 0.2
------------- -------------
Loans outstanding as at 31 December 1.9 0.7
------------- -------------
Interest expense on loans payable to the
Group (GBP'000) 34 90
------------- -------------
There were three (31 December 2019: five) loans outstanding at
31 December 2020 totalling GBP1.9 million (31 December 2019:GBP0.7
million). Of these, two are residential mortgages secured on
property and one is an asset finance loan; all loans were provided
on our standard commercial terms.
In addition to the loans detailed above, we have issued credit
cards and granted overdraft facilities on current accounts to
Directors and key management personnel.
Credit card balances outstanding at 31 December were as
follows:
Group 2020 2019
GBP'000 GBP'000
Credit cards outstanding as at 31 December 22 16
--------- ---------
Deposit balances outstanding at 31 December were as follows:
Group 2020 2019
GBP'million GBP'million
Deposits held at 1 January 3.3 4.5
Deposits relating to persons and companies
newly considered related parties 0.2 2.1
Deposits relating to persons and companies
no longer considered related parties (0.3) (1.8)
Net amounts withdrawn (1.1) (1.5)
------------- -------------
Deposits outstanding as at 31 December 2.1 3.3
------------- -------------
Transactions with Group companies
Details of transactions with Group companies can be found within
note 39.
Other transactions with related parties
During the year, architecture, design and branding services were
provided to us by InterArch, Inc., ('InterArch') a firm which is
owned by Shirley Hill, the wife of Vernon W. Hill II. Vernon W.
Hill II was Chairman until 23 October 2019 and a Board member until
17 December 2019 when he stepped down.
He retains an honorary role as Chairman Emeritus. By virtue of
his previous position in the Bank, as well as status of founder,
InterArch continues to be considered a related party. The creative
and brand services contract and architectural design service
contract ended on 27 February 2020. In order to ensure the smooth
transition to new providers, we entered into a short agreement with
InterArch to support the transition until the end of June 2020.
This process has now fully completed.
The following transactions were carried out with InterArch
during the year:
Group 2020 2019
GBP'000 GBP'000
Architectural design services 388 4,885
Creative and brand services 333 428
--------- ---------
Total purchase of services with entities
connected to key management personnel 721 5,313
--------- ---------
Amounts outstanding as at 31 December owed
by Metro Bank - 82
--------- ---------
STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE
FINANCIAL STATEMENTS
Our directors are responsible for preparing the Annual Report
and the financial statements in accordance with applicable law and
regulation.
Company law requires the directors to prepare financial
statements for each financial year. Under that law the directors
have prepared the group financial statements in accordance with
international accounting standards in conformity with the
requirements of the Companies Act 2006 and international financial
reporting standards adopted pursuant to Regulation (EC) no
1606/2002 as it applies in the European Union and parent company
financial statements in accordance with international accounting
standards in conformity with the requirements of the Companies Act
2006.
Under company law, directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and parent company and of
the profit or loss of the Group for that period. In preparing the
financial statements, the directors are required to:
-- select suitable accounting policies and then apply them consistently;
-- state whether applicable international accounting standards
in conformity with the requirements of the Companies Act 2006 and
international financial reporting standards adopted pursuant to
Regulation (EC) no 1606/2002 as it applies in the European Union
have been followed for the group financial statements and
international accounting standards in conformity with the
requirements of the Companies Act 2006 have been followed for the
parent company financial statements, subject to any material
departures disclosed and explained in the financial statements;
-- make judgements and accounting estimates that are reasonable and prudent; and
-- prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Group and parent
company will continue in business.
The directors are also responsible for safeguarding the assets
of the Group and parent company and hence for taking reasonable
steps for the prevention and detection of fraud and other
irregularities.
The directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Group's and
parent company's transactions and disclose with reasonable accuracy
at any time the financial position of the Group and parent company
and enable them to ensure that the financial statements and the
directors' Remuneration Report comply with the companies Act
2006.
The directors are responsible for the maintenance and integrity
of the information included on our website. Legislation in the
United Kingdom governing the preparation and dissemination of
financial statements may differ from legislation in other
jurisdictions.
Directors' confirmations
The directors consider that the annual report and accounts,
taken as a whole, is fair, balanced and understandable and provides
the information necessary for shareholders to assess the Group's
and parent company's position and performance, business model and
strategy.
Each of the directors, whose names and functions are listed in
pages 78 and 79 confirm that, to the best of their knowledge:
-- the Group financial statements, which have been prepared in
accordance with international accounting standards in conformity
with the requirements of the companies Act 2006 and international
financial reporting standards adopted pursuant to Regulation (EC)
no 1606/2002 as it applies in the European Union, give a true and
fair view of the assets, liabilities, financial position and loss
of the Group;
-- the parent company financial statements, which have been
prepared in accordance with international accounting standards in
conformity with the requirements of the Companies Act 2006, give a
true and fair view of the assets, liabilities, financial position
and loss of the parent company; and
-- the strategic Report includes a fair review of the
development and performance of the business and the position of the
Group and parent company, together with a description of the
principal risks and uncertainties that it faces.
Statement of disclosure of information to auditors
Each director in office at the date of this report, and whose
name is listed on pages 78 and 79, confirms that to the best of
their knowledge:
-- there is no relevant audit information of which the Group and
parent company's auditors are unaware; and
-- all reasonable steps that they ought to have taken as a
director to make themselves aware of any relevant audit
information, and to establish that the Group and parent company's
auditors are aware of the information, have been taken.
The confirmation is given and should be interpreted in
accordance with the provisions of section 418 of the Companies Act
2006.
About Metro Bank
Metro Bank serves more than two million customer accounts and is
celebrated for its exceptional customer experience. It is the
highest rated high street bank for overall service quality for
personal and business customers and the number one bank for service
in stores in the Competition and Market Authority's Service Quality
Survey in February 2021. It was recognised as 'Bank of the Year' at
the 2020 MoneyAge Awards and 'Banking Brand of The Year' at the
Moneynet Personal Finance Awards 2021.
The community bank offers retail, business, commercial and
private banking services, and prides itself on giving customers the
choice to bank however, whenever and wherever they choose, and
supporting the customers and communities it serves. Whether that's
through its network of 77 stores open seven days a week, early
until late, 362 days a year; on the phone through its UK-based 24/7
contact centres; or online through its internet banking or
award-winning mobile app: the bank offers customers real
choice.
Metro Bank PLC. Registered in England and Wales. Company number:
6419578. Registered office: One Southampton Row, London, WC1B 5HA.
'Metrobank' is the registered trademark of Metro Bank PLC.
It is authorised by the Prudential Regulation Authority and
regulated by the Financial Conduct Authority and Prudential
Regulation Authority. Most relevant deposits are protected by the
Financial Services Compensation Scheme. For further information
about the Scheme refer to the FSCS website www.fscs.org.uk .
All Metro Bank products are subject to status and approval.
Metro Bank PLC is an independent UK bank - it is not affiliated
with any other bank or organisation (including the METRO newspaper
or its publishers) anywhere in the world. Please refer to Metro
Bank using the full name.
This information is provided by RNS, the news service of the
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END
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