TIDMMTRO

RNS Number : 7247G

Metro Bank PLC

28 July 2021

Metro Bank PLC

Interim results

Trading Update H1 2021

28 July 2021

Metro Bank PLC (LSE: MTRO LN)

Interim results for half year ended 30 June 2021

Summary

 
  --   Strategic plan remains on track. The liability-led strategy, supplemented 
        by an acceleration of asset mix shift, has reduced cost of deposits 
        and increased lending yield. 
  --   Remain focused on executing the plan and returning to profitable growth, 
        meeting the bank's strategic objectives and supporting our colleagues, 
        customers and communities. 
  --   Total underlying revenue at GBP179.8 million (H1 2020: GBP153.3 million) 
        demonstrates the recovery of a significant portion of the income foregone 
        from the mortgage disposal in December 2020. Adjusting for the disposal, 
        revenue improved 47% YoY and 14% HoH. 
  --   Cost of Deposits at 0.31% in H1 2021 (H1 2020: 0.82%) reflects continuing 
        mix improvement, pricing action taken as well as the Base rate decrease 
        in March 2020. 
  --   Underlying loss before tax of GBP110.0 million (H1 2020: loss of GBP183.4 
        million) largely reflects a reduction in ECL expense YoY. Adjusting 
        for the disposal, underlying loss improved 49% YoY and 6% HoH. 
  --   Statutory loss before tax of GBP138.9 million (H1 2020: loss of GBP240.6 
        million) includes one-off items such as intangible impairment and remediation 
        costs. Adjusting for the disposal, statutory loss before tax improved 
        46% YoY and 10% HoH. 
 

Key Financials:

 
                             30       31 December   Change from      30       Change from 
   GBP in millions           June         2020        FY 2020        June       H1 2020 
                             2021                                    2020 
 
 Assets                   GBP23,013   GBP 22,579        2%        GBP22,134       4% 
 Loans                    GBP12,325   GBP 12,090        2%        GBP14,857      (17%) 
 Deposits                 GBP16,620   GBP 16,072        3%        GBP15,577       7% 
 Loan to deposit ratio       74%         75 %         (1pps)         95%        (21pps) 
 
 CET1 capital ratio        13.9 %       15.0 %       (110bps)       14.5%       (60bps) 
 Total capital ratio 
  (TCR)                     17.2%        18.1%        (90bps)       17.3%       (10bps) 
 MREL ratio                21.7 %       22.4 %        (70bps)       21.3%        40bps 
 Liquidity coverage 
  ratio                     309 %        187 %        122pps        226%         83pps 
                         ----------  ------------  ------------  ----------  ------------ 
 
 
                                    H1          H2       Change from       H1       Change from 
  GBP in millions                  2021         2020       H2 2020        2020        H1 2020 
 
 Total underlying revenue(1)     GBP179.8    GBP187.6       (4)%        GBP153.3        17% 
 Adjusted total underlying 
  revenue(2)                     GBP179.4    GBP158.0        14%        GBP121.8        47% 
 Underlying loss before         (GBP110.0)   (GBP88.4)                 (GBP183.4) 
  tax(3) 
 Statutory loss before          (GBP138.9)   (GBP71.0)                 (GBP240.6) 
  tax 
 Net interest margin              1.28%        1.28%        0 bps        1.15%        13 bps 
 
 Underlying EPS                  (65.1 p)     (42.9p)                   (108.8p) 
                               -----------  ----------  ------------  -----------  ------------ 
 

1. Underlying revenue excludes grant income recognised relating to the Capability & Innovation fund and the gain on the mortgage portfolio sale

2. Adjusted total underlying revenue and loss before tax adjusts underlying numbers on a like for like basis by excluding loan income from the mortgage portfolio disposal announced December 2020

3. Underlying loss before tax excludes the FSCS levy (for half year figures only), Listing Share Awards, impairment and write-off of property, plant & equipment (PPE) and intangible assets, net BCR costs, transformation costs, remediation costs, business acquisition and integration costs and mortgage portfolio sale. Statutory loss after tax is included in the Profit and Loss Account.

Daniel Frumkin, Chief Executive Officer at Metro Bank, said:

"In a challenging environment, Metro Bank has continued to deliver on its strategic priorities. As a community bank our colleagues have gone above and beyond for our customers and we've enhanced product offerings to meet more of our customers' needs. Financial performance reflects where we are in our turnaround plan, as well as the impact of national lockdowns. We are encouraged by the momentum we have achieved, including delivering on higher yielding mortgage products, lower cost of deposits and meaningful entry into the personal lending market. Looking ahead, we remain focused on executing the plan and returning to profitable growth, meeting the bank's strategic objectives and supporting our colleagues, customers and communities."

   A presentation for investors and analysts will be held at 8.30AM   (UK time) on 28 July 2021. 

The presentation will be webcast on:

https://onlinexperiences.com/Launch/QReg/ShowUUID=D164D86C-B29F-4220-B6F2-A6F1472D95F5

For those wishing to dial-in:

From the UK dial: 0800 358 9473

From the US dial: +1 855 85 70686

Participant Pin: 87111112#

URL for other international dial in numbers:

https://events-ftp.arkadin.com/ev/docs/NE_W2_TF_Events_International_Access_List.pdf

Progress on strategic plan

 
 Metro Bank continues to successfully deliver transformational change against 
  all five pillars of the strategic plan set out in February 2020, despite 
  significant headwinds presented by the pandemic. 
  --   Balance sheet optimisation: Decisive action taken in response to the 
        changing environment. The mortgage disposal and RateSetter back book 
        acquisition accelerated the shift to higher yielding assets along with 
        enhancements to existing mortgage products. Repositioning commercial 
        lending towards full relationship trading businesses and exiting transactional 
        real estate lending is ongoing. 
  --   Revenue: More products launched in store including RateSetter loans 
        and insurance offerings. Government backed lending through the Bounce 
        Back Loan Scheme (BBLS) top-up and the Recovery Loan Scheme (RLS) to 
        support communities. Investment in digital capability improves the 
        multi-channel presence, launching online products such as MFLOW to 
        support SME customers. 
  --    Cost: Investment in automation, IT platforms and the customer service 
         proposition provides greater efficiency and scalability. Agreed the 
         acquisition of three further store freeholds at attractive yields, 
         reducing costs and providing greater flexibility, expected to complete 
         in H2. Successfully disposed of some of our central London office property 
         (already exited, as previously announced). 
  --   Infrastructure : The enhancements to IT, regulatory reporting and 
        financial crime all improve the resilience of the bank. The investment 
        in digital channels improves the customer journey and enables more 
        FANs to take advantage of the enhanced customer proposition. Delivery 
        of the change agenda is exceeding plan. 
  --   Internal and external communications: Continue support for customers, 
        colleagues and communities through the pandemic with a range of bank 
        wide and local initiatives, as well as launching an SME marketing campaign 
        showcasing our FANs. 
 
 

Financial performance for the half year ended 30 June 2021

Deposits

 
 GBP in millions                     30                  31           Change from      30          Change from 
                                     June             December          FY 2020        June           H1 2020 
                                     2021               2020                           2020 
 
 Demand: current accounts         GBP6,749           GBP 6,218            9%        GBP5,274           28% 
 Demand: savings accounts         GBP7,402           GBP 6,430            15%       GBP5,982           24% 
 Fixed term: savings 
  accounts(4)                     GBP2,469           GBP 3,424           (28%)      GBP4,321          (43%) 
                              ----------------  -------------------  ------------  ----------  ------------------- 
 Deposits from customers          GBP16,620          GBP 16,072           3%        GBP15,577           7% 
                              ----------------  -------------------  ------------  ----------  ------------------- 
 
 Deposits from 
  customers includes: 
 Retail customers (excl. 
  retail partnerships)            GBP6,964           GBP 7,364           (5%)       GBP7,355           (5%) 
 SMEs                             GBP4,605           GBP 4,420            4%        GBP4,093           13% 
                              ----------------  -------------------  ------------  ----------  ------------------- 
                                  GBP11,569          GBP 11,784          (2%)       GBP11,448           1% 
                              ----------------  -------------------  ------------  ----------  ------------------- 
 Retail partnerships              GBP1,697           GBP 1,596            6%        GBP1,705            - 
 Commercial customers 
  (excluding SMEs(5) 
  )                               GBP3,354           GBP 2,692            25%       GBP2,424           38% 
                                  GBP5,051           GBP 4,288            18%       GBP4,129           22% 
                              ----------------  -------------------  ------------  ----------  ------------------- 
 
 4. Comprised of personal/business: June 2021 82%/18%; December 2020 85%/15%; 
  and June 2020 86%/14% 
  5. SME defined as enterprises which employ fewer than 250 persons and 
  which have an annual turnover not exceeding EUR50 million, and/or an annual 
  balance sheet total not exceeding EUR43 million, and have aggregate deposits 
  less than EUR1 million. 
 
 
 
  --   Total deposits grew by over GBP0.5 billion in the first six months 
        to GBP16,620 million as at 30 June 2021 (31 December 2020: GBP16,072 
        million) , despite fixed term deposit (FTD) accounts falling by GBP1.0 
        billion following continued action to reduce prices. Growth largely 
        resulted from an increase in commercial deposits, reflecting customers' 
        preference for increased liquidity as well as higher balances held 
        by Conveyancing/Legal firms following elevated completion volumes towards 
        the end of June. 
 
        Following higher than anticipated growth in the first half and transitory 
        nature of some commercial and BBLS-related deposits, outturn in the 
        second half will be somewhat dependent on customer behaviour. Focus 
        will remain on maintaining a high-quality mix of relationship-driven 
        customer deposits. 
  --   Cost of deposits was 31bps in the first half, a decrease of 18bps 
        compared to 49bps in 2H20, reflecting the managed roll-off of higher 
        cost FTD accounts with a corresponding mix improvement in favour of 
        non-interest-bearing current accounts and demand savings accounts. 
        Cost of deposits improved throughout the period and the beneficial 
        effects of repricing are expected to continue into the second half 
        of 2021, although at a slower pace than H1. 
  --   Customer account growth of 0.2 million (H2 2020: 0.1 million) in the 
        last six months to 2.4 million, reflects incremental growth from the 
        RateSetter back book acquisition, with an otherwise stable level of 
        accounts owing to the managed reduction in fixed term deposits. 
 

Loans

 
 GBP in millions                   30-Jun       31-Dec      Change from    30-Jun     Change from 
                                    2021          2020        FY 2020        2020       HY 2020 
 
 Gross Loans and advances 
  to customers                   GBP12,491    GBP 12,244        2%        GBP15,002      (17%) 
 Less: allowance for                           (GBP 154 
  impairment                     (GBP 166)         )            8%        (GBP145)        14% 
                                -----------  ------------  ------------  ----------  ------------ 
 Net Loans and advances 
  to customers                   GBP12,325    GBP 12,090        2 %       GBP14,857      (17%) 
                                -----------  ------------  ------------  ----------  ------------ 
 
 Gross loans and advances 
  to customers consists 
  of: 
                                -----------  ------------  ------------  ----------  ------------ 
 Commercial lending(6)            GBP3,416     GBP3,681        (7%)       GBP3,834       (11%) 
 Government-backed lending(7)     GBP1,556     GBP1,467         6%         GBP780         99% 
 Retail mortgages                 GBP6,815     GBP 6,892       (1%)       GBP10,190      (33%) 
 Consumer lending                  GBP704       GBP 204        245%        GBP198        256% 
                                -----------  ------------  ------------  ----------  ------------ 
 6. Includes CLBILS (GBP39 million at 30 June 2021) 
  7. BBLS and CBILS 
 
 
  --   Total net loans as at 30 June 2021 were GBP12,325 million, up 2% from 
        GBP12,090 million at 31 December 2020 primarily reflecting the acquisition 
        of the GBP337m RateSetter consumer back book in April, together with 
        strong organic growth in consumer lending supported by the integration 
        of the RateSetter platform, offset by the attrition of lower-yielding 
        residential mortgages and commercial term loans. Total net loans are 
        expected to increase in the second half of the year, with continuing 
        mix shift towards higher yielding assets. 
  --   Commercial loans (excluding BBLS and CBILS) decreased by 7% during 
        H1 to GBP3,416 million at 30 June 2021 and are 11% below a year earlier 
        following the attrition of lower-yielding commercial and commercial 
        real estate term loans. 
  --   Government backed lending increased GBP89 million in the first half 
        to GBP1,556 million at 30 June 2021 and up GBP776 million from a year 
        earlier. Growth in 1H 2021 was primarily driven by BBLS top-up applications. 
        The bank has recently become an accredited lender for the RLS. 
  --   Retail mortgages remained the largest component of the lending book 
        at 55%, with mortgage applicants benefitting from enhancements to the 
        existing mortgage offering and the launch of further specialist mortgage 
        products during the first half of the year. 
  --   Consumer lending increased to 6% of the of the loan book from 2% at 
        31 December 2020 , resulting from the strong increase in organic lending 
        as the RateSetter platform was rolled-out across all of Metro Bank's 
        channels and the completion of the RateSetter back book acquisition. 
        Consumer originations averaged more than GBP50 million per month during 
        1H 2021 compared to less than GBP2 million per month a year earlier. 
  --   Loan to deposit ratio was marginally lower at 74% (31 December 2020: 
        75%) reflecting the impact of the mortgage portfolio disposal in December 
        and deposit inflows in the period. 
  --   Annualised cost of risk at 0.24% (2H 2020: 0.20%) included recognition 
        of ECL expense associated with organic and inorganic growth in consumer 
        lending. Non-performing loans increased marginally to 2.52% (31 December 
        2020: 2.10%) reflecting a limited number of single name commercial 
        exposures. The loan portfolio remains highly collateralised with average 
        debt to value (DTV) of the residential mortgage book at 56% (31 December 
        2020: 56%), while DTV in the commercial book was 59% (31 December 2020: 
        56%). 
 

Profit and Loss Account

 
 --   Net interest margin (NIM) at 1.28% was in line with the preceding 
       six month period , with lower cost of deposits, improved lending mix 
       and higher lending yield, offset by the impact of the mortgage portfolio 
       disposal in December and higher than expected deposits. 
 
       Continued reduction in cost of deposits combined with a favourable 
       asset mix shift is expected to improve NIM performance in H2 compared 
       to H1. 
 --   Underlying net interest income was broadly flat at GBP133.6 million 
       (H2 2020: GBP134.1 million), despite the mortgage portfolio disposal 
       in H2 2020. Adjusting for the sale net interest income increased 27% 
       HoH. 
 --   Underlying net fee and other income decreased 7% sequentially to GBP46.7 
       million (H2 2020: GBP50.2 million), as customer activity remained subdued 
       because of COVID-19 lockdowns and other social restrictions. The outlook 
       for H2 2021 will be significantly dependent on the pace of recovery 
       as the country continues its path out of lockdown. 
 --   Underlying cost:income ratio increased to 153 % in 2020 from 139% 
       in the prior six months , largely reflecting a combination of fee income 
       headwinds, the non-repeat of an underlying net gain on sale in H2 2020 
       and operating cost dynamics outlined below. 
       'Run the Bank' (RTB) cost growth was less than 2% sequentially on a 
       like for like basis, adjusting for the RateSetter acquisition or 4% 
       in total. 'Change the Bank' (CTB) expenditure increased to GBP40.0 
       million plus GBP20.3 million of amortisation, compared to GBP37.6 million 
       plus GBP17.4 million of amortisation in the preceding six months, in 
       line with previous guidance. 
       Cost focus will continue, with low to mid-single digit percentage growth 
       in RTB in H2 2021 compared to H1. 
 --   Underlying loss before tax was GBP110.0 million, an increase from 
       the GBP88.4 million loss in H2 2020 , reflecting the mortgage book 
       disposal, reduced fee and other income, inorganic cost expansion following 
       the RateSetter platform acquisition and higher CTB investment. Adjusting 
       for the disposal, underlying loss improved 49% YoY and 6% HoH. 
 --   Statutory loss before tax of GBP138.9 million in H1 2021 (H2 2020: 
       loss of GBP71.0 million) includes remediation costs primarily related 
       to sanctions (GBP25.4 million) and the impairment of RateSetter peer-to-peer 
       intangible assets (GBP7.5 million), partially offset by the residual 
       gain on sale of the mortgage portfolio (GBP8.4 million). Adjusting 
       for the mortgage disposal, statutory loss before tax improved 46% YoY 
       and 10% HoH. 
 --   Statutory loss after tax of GBP 141.1 million in H1 2021 (H2 2020: 
       loss of GBP62.4 million) after a GBP 2.2 million corporation tax charge. 
 

Capital, Funding and Liquidity

 
 --   Strong liquidity and funding position maintained , supported by the 
       settlement of the mortgage portfolio disposal in February and continuing 
       deposit growth. As a result, the Bank's Liquidity Coverage Ratio (LCR) 
       was elevated at 309% as of 30 June 2021 (30 December 2020: 187%). Whilst 
       NIM dilutive, this excess liquidly is earnings neutral and provides 
       flexibility and optionality at a time of macroeconomic uncertainty. 
 
       In H1 2021 a further GBP2.1 billion of maturing Term Funding Scheme 
       (TFS) drawings were rolled into Term Funding Scheme with additional 
       incentives for SMEs (TFSME). The Bank has capacity to roll all of its 
       TFS drawings into TFSME. 
 --   CET1 capital of GBP1,052 million as at 30 June 2021 (31 December 2020: 
       GBP1,192) was 13.9% of RWA (31 December 2020: 15.0%) this compares 
       to our minimum CET1 requirement of 9.3%(8) . 
 
       The Bank's capital includes GBP86 million of relief provided through 
       the EBA's treatment of software assets, equivalent to 1.0% of CET1. 
       As expected, the PRA announced in July that software will return to 
       being fully deducted from 1 January 2022 and therefore this benefit 
       is not considered when making capital decisions. 
 --   Total capital as a percentage of RWA was 17.2% reflecting the statutory 
       loss reported in the period. MREL resources were GBP1,643 million with 
       an MREL ratio of 21.7% of RWA at 30 June 2021, this compares to our 
       minimum interim requirement of 20.5%(8) and current end-state requirement 
       of 20.7%(8) . MREL resources may fall below the sum of the firm's MREL 
       requirement and buffers (the loss absorbing capacity) for a period 
       of time. 
 
       We note the Bank of England's Consultation Paper on MREL. 
 --   Total RWA as at 30 June 2021 was GBP7,563 million (31 December 2020: 
       GBP7,957 million). The reduction in H1 reflects the settlement of the 
       mortgage portfolio in February, partially offset by organic and inorganic 
       growth in consumer lending. The result is a loan risk weight density 
       of 47% as at 30 June 2021 (31 December 2020: 47%). 
 --   Regulatory leverage ratio was 4.9%. 
 8. Based on current capital requirements including P2A requirement of 
  1.11% (of which 0.8% must be met with Tier 1) , excluding any confidential 
  PRA buffer, if applicable. 
 

Metro Bank PLC

Summary Balance Sheet and Profit & Loss Account

(Unaudited)

 
 Balance Sheet                      YoY change        30-Jun        31-Dec        30-Jun 
                                                        2021          2020          2020 
                                                 GBP'million   GBP'million   GBP'million 
 Assets 
 Loans and advances to customers      (17%)           12,325        12,090        14,857 
 Treasury assets(9)                                    9,474         6,406         6,101 
 Assets classified as held                                 -           295             - 
  for sale 
 Other assets(10)                                      1,214         3,788         1,176 
                                                ------------  ------------  ------------ 
 Total assets                           4%            23,013        22,579        22,134 
                                                ------------  ------------  ------------ 
 
 Liabilities 
 Deposits from customers                7%            16,620        16,072        15,577 
 Deposits from central banks                           3,800         3,808         3,801 
 Debt securities                                         596           600           599 
 Other liabilities                                       850           810           810 
                                                ------------  ------------  ------------ 
 Total liabilities                                    21,866        21,290        20,787 
                                                ------------  ------------  ------------ 
 Total shareholder's equity                            1,147         1,289         1,347 
                                                ------------  ------------  ------------ 
 Total equity and liabilities                         23,013        22,579        22,134 
                                                ------------  ------------  ------------ 
 
   9.     Comprises investment securities and cash & balances with the Bank of England 

10. Comprises property, plant & equipment, intangible assets and other assets. Other assets at 31 December 2020 include GBP2.6 billion receivable from NatWest. This was received post year-end upon the completion of the transaction.

 
                                         YoY change               Half year ended 
 Profit & Loss Account                                     30-Jun        31-Dec        30-Jun 
                                                             2021          2020          2020 
                                                      GBP'million   GBP'million   GBP'million 
 
 Underlying net interest income             15%             133.6         134.1         116.2 
 Underlying net fee and other 
  income                                                     46.7          50.2          36.1 
 Underlying net gains/(losses) 
  on sale of assets                                         (0.5)           3.3           1.0 
                                                     ------------  ------------  ------------ 
 Total underlying revenue                   17%             179.8         187.6         153.3 
                                                     ------------  ------------  ------------ 
 
 'Run the Bank' costs                                     (214.9)       (206.3)       (184.1) 
 'Change the Bank' costs(11)                               (60.3)        (55.0)        (40.6) 
                                                     ------------  ------------  ------------ 
 Underlying operating costs                 22%           (275.2)       (261.3)       (224.7) 
 Expected credit loss expense                              (14.6)        (14.7)       (112.0) 
 
 Underlying loss before tax                (40%)          (110.0)        (88.4)       (183.4) 
                                                     ------------  ------------  ------------ 
 
 FSCS levy                                                      -             -         (0.2) 
 Listing Share Awards                                           -           0.4         (0.2) 
 Impairment and write-off of 
  property plant & equipment 
  and intangible assets                                     (7.5)        (14.0)        (26.6) 
 Net BCR costs                                              (0.3)             -             - 
 Transformation costs                                       (1.8)         (4.3)        (12.4) 
 Remediation costs                                         (25.4)        (23.0)        (17.8) 
 Business acquisition and integration 
  costs                                                     (2.3)         (5.4)             - 
 Gain on mortgage portfolio 
  sale (net of costs)                                         8.4          63.7             - 
 
 Statutory loss before tax                 (42%)          (138.9)        (71.0)       (240.6) 
                                                     ------------  ------------  ------------ 
 
 Statutory taxation                                         (2.2)           8.6           1.1 
 
                                                                         ( 62.4 
 Statutory loss after tax                  (41%)          (141.1)             )       (239.5) 
                                                     ------------  ------------  ------------ 
 
 
 
                                           Half year ended 
 Key metrics                          30-Jun    31-Dec     30-Jun 
                                        2021      2020       2020 
 Underlying earnings per share - 
  basic and diluted                  (65.1p)   (42.9p)   (108.8p) 
 Number of shares                     172.4m    172.4m     172.4m 
 Net interest margin (NIM)             1.28%     1.28%      1.15% 
 Cost of deposits                      0.31%     0.49%      0.82% 
 Cost of risk                          0.24%     0.20%      1.55% 
 Underlying cost:income ratio           153%      139%       147% 
 
 
   11.    Change the Bank costs consists of investment spend, including amortisation 

For more information, please contact:

Metro Bank PLC Investor Relations

Jo Roberts

+44 (0) 20 3402 8900

jo.roberts@metrobank.plc.uk

Metro Bank PLC Media Relations

Tina Coates / Mona Patel

+44 (0) 7811 246016 / +44 (0) 7815 506845

pressoffice@metrobank.plc.uk

Teneo

Charles Armitstead / Haya Herbert Burns

+44 (0)7703 330269 / +44 (0) 7342 031051

Metrobank@teneo.com

S

About Metro Bank

Metro Bank services 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 and best for service in-store for personal customers, and best for service in-store for business customers 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, received Gold Award in the Armed Forces Covenant's Employer Recognition Scheme 2021 and won Best Open Banking Partnership - Commercial at the inaugural Open Banking Expo 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, 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.

METRO BANK PLC

INTERIM REPORT

30 June 2021

Forward-looking statements

This document contains forward-looking statements. Forward-looking statements are not historical facts but are based on certain assumptions of management regarding our present and future business strategies and the environment in which we will operate, which the Group believes to be reasonable but are inherently uncertain, and describe the Group's future operations, plans, strategies, objectives, goals and targets and expectations and future developments in the markets. Forward-looking statements typically use terms such as "believes", "projects", "anticipates", "expects", "intends", "plans", "may", "will", "would", "could" or "should" or similar terminology. Any forward-looking statements in this presentation are based on the Group's current expectations and, by their nature, forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond the Group's control, that could cause the Group's actual results and performance to differ materially from any expected future results or performance expressed or implied by any forward-looking statements. As a result, you are cautioned not to place undue reliance on such forward-looking statements. Past performance should not be taken as an indication or guarantee of future results, and no representation or warranty, express or implied, is made regarding future performance. The Group undertakes no obligation to release the results of any revisions to any forward-looking statements in this presentation that may occur due to any change in its expectations or to reflect events or circumstances after the date of this presentation and the parties named above disclaim any such obligation.

Company Information

 
 About Metro Bank 
  Metro Bank is celebrated for its exceptional customer experience. It is 
  the highest rated high street bank for overall service quality and best 
  for service in-store for personal customers, and best for service in-store 
  for business customers 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. 
 
  Offering retail, business, commercial and private banking services, it 
  prides itself on giving customers the choice to bank however, whenever 
  and wherever they choose. Whether that's through its network of stores; 
  on the phone through its UK-based contact centres; or online through its 
  internet banking or award-winning mobile app: the Bank offers customers 
  real choice. 
  The Bank employs over 4,000 colleagues and is headquartered in Holborn, 
  London. 
------------------------------------------------------------------------------------ 
 Board of Directors                             Registered Office 
 
 Chair                                          One Southampton Row 
                                                 London 
                                                 WC1B 5HA 
 Robert Sharpe (N) 
 
 Non-Executive Directors                        Independent Auditors 
 Catherine Brown (N,) (O, R)                    PricewaterhouseCoopers LLP 
                                                 Chartered Accountants and Statutory 
                                                 Auditors 
                                                 7 More London Riverside 
                                                 London 
                                                 SE1 2RT 
 Sally Clark (A, R) 
 Anne Grim (R) 
 Ian Henderson (A, O) 
 Monique Melis (A, N) 
 Sir Michael Snyder (N) 
 Paul Thandi (N,) (R)                           Registered Number 
 Michael Torpey (A) (, O)                       6419578 
 Nicholas Winsor (O) 
                                                www.metrobankonline.co.uk 
 (A) Member of the audit committee 
  (N) Member of the nomination committee 
  (O) Member of the risk oversight committee 
  (R) Member of the remuneration committee 
  Chair of the committee 
 
 Executive Directors 
 Daniel Frumkin - Chief Executive Officer 
 David Arden - Chief Financial Officer 
 
 Company Secretary 
 Melissa Conway 
 
 
   Metro Bank PLC. Registered in England and Wales. Company number: 6419578. 
   Registered office: One Southampton Row, London, WC1B 5HA. 'Metrobank' 
   is the registered trade mark 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. 
 
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sumMarised interim results

 
                                             Half year to      Half year to       Change    Half year to     Change 
                                              30 June 2021    31 December 2020               30 June 2020 
 Profit and loss 
 Underlying loss before tax(1)                (GBP110.0m)       (GBP88.4m)         24%       (GBP183.4m)     (40%) 
 Statutory loss before tax                    (GBP138.9m)       (GBP71.0m)         96%       (GBP240.6m)     (42%) 
 Total income (statutory)(2)                   GBP196.3m         GBP263.5m        (26%)       GBP168.9m       16% 
 Total operating expenses (Statutory)          GBP320.6m         GBP319.8m          0%        GBP297.5m        8% 
 Net interest margin                             1.28%             1.28%          0 bps         1.15%        13 bps 
 Average cost of deposits                        0.31%             0.49%         (18 bps)       0.82%       (51 bps) 
 
                                             30 June 2021    31 December 2020     Change    30 June 2020     Change 
 Balance sheet 
 Customer deposits                            GBP16,620m        GBP16,072m          3%       GBP15,577m        7% 
 Customer loans                               GBP12,325m        GBP12,090m          2%       GBP14,857m      (17%) 
 Loan to deposit ratio                            74%               75%          (1 pps)         95%        (21 pps) 
 Total assets                                 GBP23,013m        GBP22,579m          2%       GBP22,134m        4% 
 
 Asset quality 
 Coverage ratio                                  1.33%             1.30%          3 bps         0.96%        37 bps 
 Cost of risk (annualised)                       0.24%             0.20%          4 bps         1.55%       (131bps) 
 
 Capital ratios 
 Common Equity Tier 1 (CET1) ratio               13.9%             15.0%                        14.5% 
 Regulatory leverage ratio                       4.9%              5.6%                         5.8% 
 Total regulatory capital plus MREL ratio        21.7%             22.4%                        21.3% 
 
 Customer metrics 
 Customer accounts                               2.4m              2.0m                         2.1m 
 Stores                                           77                77                           77 
 
 

1. Underlying loss before tax is an alternative performance measure and excludes Listing Share Awards, impairment and write-off of property, plant & equipment (PPE) and intangible assets, net Banking Competition Remedies Limited (BCR) costs, transformation costs, remediation costs, business acquisition and integration costs and net income resulting from the mortgage portfolio sale when comparing to our statutory loss.

2. Statutory income in the six months to 31 December 2020 includes GBP69 million gain on sale of residential mortgage portfolio.

Business review

The first six months of 2021 have shown encouraging progress as we continue to deliver our strategy. While our operating environment remains challenging, economic indicators are beginning to show signs of improvement. The outlook is undoubtedly more positive compared to the full year, primarily due to the UK's successful vaccination programme and the gradual lifting of restrictions, but it remains unclear if and how the recovery will develop and as such we remain cautious in our approach.

The business performance is in line with that envisaged in our turnaround plan, even with the additional headwinds and capital drain caused by COVID-19 and we remain on track with the delivery of our strategy. The first half of the year has begun to show real momentum with underlying revenue up 14% over the preceding six months, when adjusted for the mortgage sale. The discipline of driving returns is starting to show early signs of success with a much lower cost of deposits, improving lending yield as a percentage of risk weighted assets and the lending and deposit mix shift all being indicators of progress.

2021 has seen the Bank continue to deliver on what we promised, both in respect of fixing the basics and focusing on addressing the additional challenges arising from the COVID-19 pandemic. In many areas the rapid acceleration of changes brought on by COVID-19 has created opportunities which we continue to capitalise on, building on the early positive indicators we have seen emerge in the first half of the year.

Net interest margin (NIM) has remained flat since the second half of last year, despite the mortgage sale and the excess liquidity we are carrying from the proceeds of that sale, as well as higher than anticipated deposit inflows in the first half. Our lending yields are continuing to accrete and our cost of deposits are continuing to reduce. Our diversification of lending streams to focus more on consumer lending, government backed support schemes and an expanded range of mortgages is allowing us to generate a greater return on risk-weighted assets.

Operationally the business is performing well and we have returned our stores to seven-day a week opening. Whilst our head office colleagues remain almost entirely home-based, we are aiming for a gradual return to the office from September 2021, with a hybrid working approach that follows extensive consultation with our colleagues. We are confident this approach is in the best interest of our colleagues and will continue to engage with them as we evolve our flexible working approach.

Review of strategic priorities

We recognised an underlying loss before tax of GBP110.0 million during the period (six months to 30 June 2020: GBP183.4 million, six months to 31 December 2020: GBP88.4 million) which reflects the cost of addressing legacy challenges, where we are in our turnaround plan and the ongoing impact of lockdowns.

Revenue

Whilst revenue was slightly down in the first six months of the year, this is a reflection of lower customer activity in line with national lockdowns impacting fee income. The fall in income arising from the mortgage sale at the end of last year was largely offset by a disciplined approach to deposit pricing, reducing cost of deposits, and the contribution from growth in consumer lending. Adjusting for the mortgage disposal, revenue increased 14% half on half. On front book pricing we are seeing strong growth in yields as we focus on achieving the right balance between risk and return and we concentrate our attention on areas of the lending market where we can compete effectively.

We have continued to rebalance our lending mix, with consumer lending making up a greater percentage of overall lending. This is mainly due to the acquisition of the RateSetter platform last year, which has provided a strong brand and enhanced capability in this area.

Alongside consumer lending we have bolstered our mortgage range to target underserved areas of the market. This has translated into higher average mortgage lending yields, despite the broader mortgage market remaining highly competitive.

By focusing on the right type of lending, whilst at the same time working to lower the price we pay for deposits, we are driving positive interest income jaws. Cost of deposits have fallen to 0.31%, from 0.49% in the second half of 2020 and are continuing to fall, demonstrating our business model is working and that we do not have to compete on price in order to win deposits. Indeed, pricing is now in line with the larger high street banks.

Fee and other income has remained subdued owing to the continuation of lockdown measures and travel restrictions. We continue to invest in this area as it provides an opportunity for capital efficient income growth and we are optimistic that the work we have undertaken in this segment of our business will mean it returns to growth as restrictions are lifted. New products, including our recently launched insurance partnerships, are areas that will assist in this, with initiatives such as our pet insurance product building on our strong customer proposition.

Costs

We continue to focus on costs, with underlying Run the Bank cost growth contained below 2% from the second half of 2020 to GBP214.9 million (six months to 31 December 2020: GBP206.3m million) after adjusting for the integration of RateSetter, which is now largely complete. Going forward we will be looking to realise the longer-term cost savings and additional synergies through this integration.

Infrastructure

We continue to develop our two new stores in Bradford and Leicester, these both remain large and attractive markets and present an opportunity to bolster our franchise. We have worked with new architects and have ensured our new stores are more sustainable, flexible and cost efficient than previous locations, whilst not compromising on the unique Metro Bank look and feel.

We have also agreed the further freehold purchase of three stores, all of which will complete in the second half of the year. These were secured at an attractive yield with a strong capital payback. Our strategy of purchasing the freeholds where the price is right allows us to buy ourselves out of long leases, providing greater flexibility over the sites, as well as being able to reduce costs.

In June we opened a new AMAZE Direct call centre in Bristol, utilising excess space above our store. The call centre underlines our focus on delivering exceptional service whether that be in store, on the phone, or digitally. As well as creating new roles to service our expanding customer base, the call centre also rationalised some of the existing smaller sites in central London which were set up earlier in our history and were no longer practical in terms of size and location for the next stage of our growth.

We have continued to invest in digital capabilities, namely in back office systems, and particularly in relation to regulatory compliance, including financial crime. We have also opened our business account online to a greater range of businesses, providing a simple and efficient way to open an account with us.

In addition to our back-office investments, we have also continued to launch new customer facing features. These include the addition of in-app invoicing technology for our small business accounts, helping customers keep track of their finances.

Balance sheet optimisation

We have continued to deliver on our promise of optimising our Balance Sheet to ensure greater capital efficiency.

2021 started with the completion of the sale of the residential mortgage portfolio and this was swiftly followed by the purchase of the RateSetter back book, which helped redeploy some of the capital and liquidity released though the sale. We are an accredited provider for the government-backed Recovery Loan Scheme, the latest government-backed business support programme. The scheme will be 80% government-backed, via the British Business Bank, and like the earlier schemes, provides both a strong return on capital as well as reduced risk lending.

Over the course of the first six months of the year we have also continued to shift our asset mix, with a clear focus on risk adjusted returns on regulatory capital. This has seen us grow our unsecured lending portfolio as well as specialist mortgage offering whilst at the same time letting older and higher risk weighted commercial loans attrite. This approach is now seeing us generate an increased level of lending income as a proportion of risk weighted assets.

Internal and External Communications

In June we launched our first small business advertising campaign centred around three talented entrepreneurs and showcased our award-winning small business banking offering. The campaign forms part of our updated brand strategy and focus on "people-people banking" - the philosophy that whatever happens in the future of banking, people need people and value human relationships.

Colleagues

We continue to invest in our colleagues and in April we were delighted to celebrate the first cohort of 14 colleagues to complete the Masters-level apprenticeship for senior banking professionals from Cranfield School of Management. The course is a fully funded Masters programme and the UK's first Masters-level apprenticeship for senior banking professionals funded by the Apprenticeship Levy. We have two further cohorts currently on the programme and look forward to enabling more colleagues to take advantage of this opportunity in the years ahead.

Capital management

Following the mortgage portfolio sale, we do not anticipate the need to issue debt capital in the second half of the year. W e continue to take a portfolio view of balance sheet optimisation and MREL issuance, and we will take actions to optimise where needed. As in 2020, MREL resources may fall below the sum of the firm's MREL requirement and buffers (the loss absorbing capacity) for a period of time.

Outlook

We continue to deliver the strategy outlined in February 2020, with a focus on cost, revenue, infrastructure, balance sheet optimisation and internal and external communications. This strategy aims to return the Bank to sustainable profitability and provide adequate returns to shareholders.

It has been pleasing in the first half of 2021 to see the early stages of this strategy come through in our financial performance with the shift in lending mix, reduced cost of deposit, improved lending yield over base rate and higher lending income as a percentage of risk weighted assets all visible proof points.

I continue to be humbled by the phenomenal effort and energy my colleagues display every day to look after our customers, engage in our local communities and deliver on our purpose of creating fans. Our turnaround is driven by our exceptional colleagues and as we continue to execute our strategy, it will be their continued dedication that will allow us to become the UK's best community bank.

Daniel Frumkin

Chief Executive Officer

27 July 2021

Finance review

Our results for the first six months of 2021 reflect where we are in our strategic turnaround, although also show momentum within the business and positive signs that the approach adopted is working.

We recognised a statutory loss before tax for the period of GBP138.9 million, up from the GBP71.0 million recognised in the second half of 2020, with the increase primarily due to the GBP69.0 million gain relating to the GBP3.1 billion mortgage sale.

On an underlying basis the loss for the period of GBP110.0 million was an increase of 24% (six months to 31 December 2020: GBP88.4 million). This has been driven by c.GBP30 million of lost income in the first half of the year as the resulting liquidity freed up from the sale only started to be significantly deployed halfway through the period. Adjusting for this impact both interest income and profitability have increased half-on-half.

2021 has seen us continue to focus on shifting our deposit mix, which has led to the costs of deposits falling from 0.49% to 0.31% from the second half of 2020. Alongside this we have delivered an increasing lending yield and our approach of optimising the balance sheet is now seeing us generate a greater level of interest income as a proportion of risk weighted assets.

We ended the period with CET 1 capital ratio of 13.9% and an MREL ratio of 21.7%. These compare to the regulatory minima (excluding any confidential buffer) of 9.3% and 20.5% respectively. We continue to take a measured approach to capital management and are focused on building a greater risk adjusted return on regulatory capital.

Our primary focus remains the transformation of the Bank and in doing so we are taking a prudent approach in our assessment of the pace of economic recovery. We recognised an expected credit loss expense of GBP14.6 million for the period which is broadly flat half-on-half (six months to 31 December 2020: GBP14.7 million).

Income statement review

Table 1: Summary income statement

 
                                        Half year      Half year       Half year 
                                               to             to              to 
                                                     31 December 
                                     30 June 2021           2020    30 June 2020 
                                      (unaudited)    (unaudited)     (unaudited) 
                                                     GBP'million                   Year-on-year 
                                      GBP'million                    GBP'million         growth 
---------------------------------  --------------  -------------  --------------  ------------- 
 Net interest income                        133.3          133.8           115.9            15% 
 Net fee, commission and other 
  income                                     54.8           57.6            52.0 
 Net gains on sale of assets                  8.2           72.1             1.0 
---------------------------------  --------------  -------------  --------------  ------------- 
 Total income                               196.3          263.5           168.9            16% 
---------------------------------  --------------  -------------  --------------  ------------- 
 General operating expenses               (272.8)        (268.2)         (234.1)            17% 
 Depreciation and amortisation             (40.3)         (37.6)          (36.8) 
 Impairment and write-off of PPE 
  and intangible assets                     (7.5)         (14.0)          (26.6) 
 Expected credit loss expense              (14.6)         (14.7)         (112.0) 
---------------------------------  --------------  -------------  --------------  ------------- 
 Loss before tax                          (138.9)         (71.0)         (240.6)          (42%) 
---------------------------------  --------------  -------------  --------------  ------------- 
 Taxation                                   (2.2)            8.6             1.1 
---------------------------------  --------------  -------------  --------------  ------------- 
 Loss after tax                           (141.1)         (62.4)         (239.5)          (41%) 
---------------------------------  --------------  -------------  --------------  ------------- 
 

Net interest income

Net interest income increased 15% year-on-year to GBP133.3 million (six months to 30 June 2020: GBP115.9 million), despite the GBP3.1 billion mortgage book sale, reflecting increased front book yields, including our meaningful entry into the personal lending market, combined with actions we have taken to reduce cost of deposits. Interest income was slightly reduced from the second half of 2020 (six months to 31 December 2020: GBP133.8 million) primarily due to the sale of the mortgage portfolio that completed at the start of the year. Adjusting for the mortgage portfolio sale, net interest income increased 57% year on year and 27% half on half.

NIM remained flat from the second half of 2020 at 1.28% (six months to 31 December 2020: 1.28%) and up from 1.15% in the first six months of 2020. The preservation of NIM was achieved despite continued strong deposit inflows and the excess liquidity arising from the mortgage sale.

Fee, commission and other income

Fee commission and other income remain below pre-pandemic levels as the lockdowns at the start of 2021 continued to constrain activity. As restrictions started to be lifted at the end of the period, we have seen an uptick in activity, particularly in areas such as foreign exchange, where volumes had been significantly depressed throughout the pandemic.

Fees and commission remains an area where we believe that we can deliver strong capital efficient returns by building on our expanding account base and leading customer service.

Operating expenses

Operating expenses grew to GBP275.2 million on an underlying basis during the first six months from GBP224.7 million in the same period for 2020 and GBP261.3 million for the last six months of 2020. The year-on-year increase is impacted by several factors, including store growth late in the first half of 2020 and the acquisition of RateSetter which occurred in September 2020. When compared to the final six months of 2020, which is a more representative comparison, cost growth was contained to 5%; 3% once adjusted for the timing of the RateSetter acquisition. On that adjusted basis, Run the Bank cost growth was less than 2%, in line with the guidance we provided at the start of the year.

On a statutory basis total operating expenses remained broadly flat at GBP272.8 million compared to GBP268.2 million for the second half of 2020 as the absorption of the additional RateSetter running costs was offset by lower transformation and integration expenditure.

Remediation issues continue to be a significant expense with associated costs of GBP25.4 million recognised in the period (six months to 31 December 2020: GBP23.0 million, six months to 30 June 2020: GBP17.8 million). We are continuing to work closely with the regulators in these investigations.

Expected credit loss expense

Although the macroeconomic environment has improved in 2021, the net charge of GBP14.6 million ( six months to 30 June 2020: GBP112.0 million, six months to 31 December 2020: GBP14.7 million) recognised for the period reflects the continued uncertainty, particularly in respect of new COVID variants and the speed and sustainability of lifted restrictions; during the period we added a fourth macroeconomic scenario to help capture this cautious outlook. We have also continued to develop our provisioning models to capture a greater range of factors, and to apply a material level of post model overlays to capture factors that are not easily reflected in the scenarios. These reflect additional uncertainty arising from the withdrawal of pandemic support measures, including the jobs retention scheme, stamp duty holiday and payment deferrals. These also capture newer risks, including the impact on certain property valuations due to the incidence of cladding.

Our expected credit losses also represent the changes in our lending mix during the start of the year as unsecured consumer lending now constitutes a greater proportion of our balance sheet, following the mortgage portfolio sale in December 2020 and the increase in unsecured lending delivered via RateSetter; whilst moving into unsecured lending generates higher yields, by its nature it also leads to a higher cost of risk. We continue to manage our unsecured lending within a defined risk appetite, with a focus on prime and near prime segments, underpinned by strong credit scoring criteria to ensure we limit losses, which to date remain low.

Balance sheet review

Table 2: Summary balance sheet

 
                                                                31 December 
                                                30 June 2021           2020 
                                                 (unaudited)      (audited) 
                                                 GBP'million    GBP'million   Growth 
---------------------------------------------  -------------  -------------  ------- 
 Assets 
 Cash and balances with the Bank of England            5,111          2,993 
 Loans and advances to customers                      12,325         12,090       2% 
 Investment securities held at fair value 
  through other comprehensive income (FVOCI)           1,198            773 
 Investment securities held at amortised 
  cost                                                 3,165          2,640 
 Financial assets held at fair value through 
  profit and loss                                          5             30 
 Property, plant and equipment                           786            806 
 Intangible assets                                       253            254 
 Prepayments and accrued income                           75             77 
 Assets classified as held for sale                        -            295 
 Other assets                                             95          2,621 
---------------------------------------------  -------------  -------------  ------- 
 Total assets                                         23,013         22,579       2% 
---------------------------------------------  -------------  -------------  ------- 
 Liabilities 
 Deposits from customers                              16,620         16,072       3% 
 Deposits from central banks                           3,800          3,808 
 Debt securities                                         596            600 
 Financial liabilities held at fair value 
  through profit and loss                                  -             30 
 Repurchase agreements                                   212            196 
 Derivative financial liabilities                          8              8 
 Lease liabilities                                       310            327 
 Deferred grant                                           22             28 
 Provisions                                                5             11 
 Deferred tax liability                                   13             12 
 Other liabilities                                       280            198 
---------------------------------------------  -------------  -------------  ------- 
 Total liabilities                                    21,866         21,290 
---------------------------------------------  -------------  -------------  ------- 
 Total equity                                          1,147          1,289 
---------------------------------------------  -------------  -------------  ------- 
 

Deposits

Deposits grew by 3% from 31 December 2020 to GBP16,620 million at 30 June 2021 (31 December 2020: GBP16,072 million). The increase was primarily driven by commercial and SME customers which were up 25% and 4% respectively from the start of the year.

Current account balances grew by 9% during the first half of the year and make up 41% of total customer deposits as at 30 June 2021 (31 December 2020: 39%). We continue to see customer preference moving towards having instant access to funds, leading to growth of current accounts and instant access savings accounts, whilst at the same time we have proactively let higher cost fixed term deposits roll off as we continue to manage cost of deposits down.

Deposit growth in the second half will be influenced by customer behaviour, as cash balances are utilised as the economy recovers from the impacts of the pandemic, combined within the unwinding of government support measures. Focus will remain on maintaining a high-quality mix of relationship-driven customer deposits.

Lending

Net lending ended the period at GBP12,325 million, up 2% from GBP12,090 million at 31 December 2020. The GBP235 million increase has been driven by a cGBP500 million growth in consumer lending, offset by a moderate reduction in the commercial loans and retail mortgage books. The growth in consumer lending is a result of both organic origination through the RateSetter platform, and the purchase of the GBP337 million back book from peer-to-peer investors. Our investment in consumer lending, including integrating the RateSetter lending capabilities in store, provides a strong base on which we can capitalise as the economy opens and we are ready to serve a consumer-led recovery.

Retail mortgages remained the largest component of the lending book at 55% of gross lending (31 December 2020: 56%), down GBP77 million to GBP6,815 million at 30 June 2021 from GBP6,892 million at 31 December 2020. The decrease reflects the attrition of older loans, offset by our continued penetration into underserved areas of the mortgage market, which has replaced some of these balances.

Commercial loans, which now comprise 40% of our lending, saw a GBP176 million reduction from GBP5,148 million at 31 December 2020. The decrease is down to older term loans repaying combined with a slowdown in new government-backed lending in the first half of the year. We have now started to participate in the new government-backed Recovery Loan Scheme and therefore expect to see the return of some growth in this area. The second half of the year will also see the repayments of BBLS loans as the customer, rather than the government, starts to pay interest on these loans.

Property, plant & equipment and intangibles

Non-current assets have decreased during the period, driven by a reduction in our PPE balance, reflecting the scaling back of our store opening programme. We continue to work on sites in Leicester and Bradford and we have no further stores in the pipeline once these are open.

We have also recently agreed the purchase of a further three freeholds which will complete in the second half of 2021; once completed a third of our store estate will be freehold. By trading right of use assets for freeholds at attractive prices we can both reduce costs and gain flexibility for minimal additional risk weighted assets.

Intangibles remained flat over the first six months of the year as continued investment, albeit at a slower rate, was offset by amortisation and impairment charges.

Capital

Our CET1, Tier 1 and MREL ratios at 30 June 2021 were 13.9 %, 13.9% and 21.7 % respectively, compared to the regulatory minimum of 7.6%, 9.3 % and 20.5 %, respectively, (excluding any confidential PRA buffer). MREL resources may fall below the sum of our MREL requirement and buffers (the loss absorbing capacity) for a period of time.

Risk weighted assets ended the period down 5% to GBP7,563 million (31 December 2020: GBP7,957 million) reflecting our change in asset mix and our focus on improving return on regulatory capital. The reduction was also supported by the settlement of the final tranche of the mortgage portfolio in February 2021.

Liquidity

Our liquidity position continues to be strong owing to the liquidity freed up from the mortgage portfolio sale. We ended 30 June 2021 with a Liquidity Coverage Ratio (LCR) of 309 %. We will continue to prudently manage our investments and to invest in high quality securities while maintaining a strong cash position.

Going concern

These condensed consolidated interim financial statements are prepared on a going concern basis, as the Directors are satisfied that the Group has the resources to continue to operate for a period of at least twelve months from when the interim financial statements are authorised for issue. In making this assessment, the Directors considered a wide range of information relating to present and future conditions, including future projections of profitability, liquidity and capital resources as well as factoring in the uncertainties relating to the economic outlook.

David Arden

Chief Financial Officer

27 July 2021

risk review

As at 30 June 2021, there had been no significant change to the business model, risk management framework or risk appetites we outlined in our 2020 Annual Report and Accounts. We have reassessed 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. The principal risk categories remain similar to those outlined in the 2020 Annual Report and Accounts, with changes relating to the identification of legal risk as a principal risk.

A detailed description of our principal risks and uncertainties to which we are exposed, along with our approach to mitigating these risk, is set out in the risk report which can be found on pages 15 to 22 of our 2020 Annual Report and Accounts. These risks consist of:

Credit risk - The risk of financial loss should our borrowers or counterparties fail to fulfil their contractual obligations in full and on time.

Operational risk - The risk that events 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.

Liquidity and Funding risk - The risk that we fail to meet our short-term obligations as they fall due or 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).

Market risk - The risk of loss arising from movements in market prices. Market risk is the risk posed to earnings, economic value or capital that arises from changes in interest rates, market prices or foreign exchange rates.

Financial crime - The risk of financial 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.

Regulatory Compliance risk - The risk 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 or failing to meet regulatory deadlines; or obstructing the regulator.

Conduct risk - The risk of treating customers 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 our FANS, reputational damage, regulatory and/or legal action.

Model risk - The risk of potential loss and regulatory non-compliance due to decisions that could be principally based on the output of models, due to errors in the development, implementation or use of such models.

Capital risk - The risk that we fail to meet minimum regulatory capital (and MREL) requirements. Management of capital is essential to the appropriate 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.

Legal risk - The risk of loss, including to reputation, that can result from lack of awareness or misunderstanding of, ambiguity in, or reckless indifference to, the way law applies to the directors, the business, its relationships, processes, products and services.

Further information on credit risk, liquidity and operational risk are outlined below.

Credit risk

COVID-19 continues to disrupt the economy and has had a material impact on customers. We reacted quickly to this by offering payment deferral, and other temporary support options, across both retail and commercial lending and we continue to provide customer support through government lending schemes and forbearance measures. In addition, the Bank has retained prudency in the estimation of expected credit losses (ECL) across all portfolios, including the use of management overlays, and continues to assess the validity of these estimates to ensure an appropriate level of coverage is maintained.

The effectiveness of government support during the pandemic has somewhat muted the emergence of defaults and impairments, resulting in a half year impairment charge GBP14.6 million. Arrears have remained broadly stable in the first six months of 2021 after most customers rolled off payment deferrals. The majority of payment deferral customers have now returned to contractual payments (with some requiring additional support) and this has led to an improvement in mix across IFRS 9 stages with customers transitioning from stage 2 back to stage 1. Whilst we do expect migrations to stage 2 and 3 to increase, particularly as government support ceases, we are holding an appropriate level of ECL, including COVID-19 related management overlays, to account for the anticipated deterioration.

The macroeconomic outlook has improved as the roll out of the vaccine continues and lock down measures are relaxed. However, there remains an unprecedented level of uncertainty with furlough ending in September, and as payments become due on Government backed loans schemes. We continue to monitor and assess the impact of COVID-19 on customers and the performance of our credit portfolios through these challenging times.

We continue to shift the balance sheet in line with our strategic objectives. The integration of RateSetter into our unsecured consumer finance division has supported higher growth in this area. This has been managed within a Board approved risk appetite and appropriate controls are in place to manage credit risk including the modelling of future losses, appropriate credit policy and referral to specialist manual underwriters where necessary.

Expected credit losses

We have increased the ECL level slightly during the half year of 2021 to GBP166 million (31 December 2020: GBP154 million) resulting in an overall coverage level of 1.33% (31 December 2020: 1.30%). This increase was predominately driven by the origination of new consumer loans, the purchase of the RateSetter back book, and a small number of individually assessed impairments on larger commercial loans.

This has been partly offset by the reduction in management overlays to reflect customers with previous payment deferrals options resuming contractual payments, implementation of the new loss given default (LGD) model and portfolio reductions primarily driven by the run-off of the legacy consumer unsecured lending portfolio.

Table 3: Expected credit expense movements

 
                                          Six months      Six months         Change 
                                                  to              to    GBP'million 
                                        30 June 2021    30 June 2020 
                                         GBP'million     GBP'million 
------------------------------------  --------------  --------------  ------------- 
 Retail mortgages                               (11)             (8)            (3) 
 Commercial lending                                8              20           (12) 
 Consumer lending                                 17               3             14 
------------------------------------  --------------  --------------  ------------- 
 Total expected credit loss expense               15              15              - 
------------------------------------  --------------  --------------  ------------- 
 

COVID support for customers

We participated in all three of the Government's key lending support programmes and have also become an accredited lender for the Recovery Loan Scheme (RLS). As at 30 June 2021 there is a total of GBP1.6 billion of government loans outstanding with GBP1.4 billion of BBLS, GBP162 million of CBILS and GBP39 million CLBILS.

We have proactively offered support measures to both retail customers, mainly in the form of payment deferrals, and commercial customers, in the form of capital repayment holidays, interest roll up, covenant suspensions and increases in working capital facilities. As at 30 June 2021 we have less than 1% of the overall book still requiring this support.

Alongside this, we have provided further support to households through waiving certain account fees as well as suspending interest on overdrafts.

We have provided an on-line portal enabling our BBLS customers to select from Pay as You Grow (PAYG) options to extend the term of their loan, take a six-month payment holiday or take a six-month interest only payment period. As at 30 June 2021 approximately five and half thousand customers have applied for one for above options which represents 14.9% of all BBLS granted.

Residential mortgage lending

The majority of our lending comprises residential mortgages, typically issued by ourselves with a loan to value of less than 95% and with strong collateral providing mitigation to withstand economic stress and therefore minimise our credit losses.

The average debt to value (DTV) of our residential mortgage book as at 30 June 2021 was 56% (31 December 2020: 56%).

We have taken advantage of opportunities to lend to customers with strong credit ratings for greater than 80% DTV, although the property price growth on back book lending has meant that the DTV profile has remained largely unchanged.

Asset quality and the standard of lending remain strong. However, COVID-19 and lockdown will continue to place strain on customers' financial circumstances. An increase in arrears was observed at the end of last year primarily driven by those customers rolling off support schemes, such as payment deferrals, but who continued to face financial difficulties. Since then arrears levels have been broadly stable.

Table 4: Residential mortgage lending by DTV banding

 
                                    30 June 2021 (unaudited)                        31 December 2020 (audited) 
                      ---------------------------------------------------  ------------------------------------------- 
                               Retail           Retail              Total         Retail         Retail          Total 
                                owner       buy-to-let             retail          owner     buy-to-let         retail 
                             occupied      GBP'million          mortgages       occupied    GBP'million      mortgages 
                          GBP'million                         GBP'million    GBP'million                   GBP'million 
--------------------                                                                      -------------  ------------- 
 Less than 50%                  1,852              504              2,356          1,855            502          2,357 
 51-60%                           795              401              1,196            842            390          1,232 
 61-70%                           971              586              1,557            836            533          1,369 
 71-80%                           951              291              1,242          1,084            407          1,491 
 81-90%                           377                1                378            359              4            363 
 91-100%                           80                -                 80             74              -             74 
 More than 100%                     2                4                  6              1              5              6 
--------------------  ---------------  ---------------  -----------------  -------------  -------------  ------------- 
 Total retail 
 mortgage lending               5,028            1,787              6,815          5,051          1,841          6,892 
--------------------  ---------------  ---------------  -----------------  -------------  -------------  ------------- 
 

Table 5: Residential mortgage lending by repayment type

 
                                       30 June 2021 (unaudited)                     31 December 2020 (audited) 
                             --------------------------------------------  ------------------------------------------- 
                                    Retail          Retail          Total         Retail         Retail          Total 
                                     owner      buy-to-let         retail          owner     buy-to-let         retail 
                                  occupied     GBP'million      mortgages       occupied    GBP'million      mortgages 
                               GBP'million                    GBP'million    GBP'million                   GBP'million 
---------------------------                                                               -------------  ------------- 
 Interest                            2,221           1,703          3,924          2,337          1,751          4,088 
 Capital and interest                2,807              84          2,891          2,714             90          2,804 
---------------------------  -------------  --------------  -------------  -------------  -------------  ------------- 
 Total retail mortgage 
  lending                            5,028           1,787          6,815          5,051          1,841          6,892 
---------------------------  -------------  --------------  -------------  -------------  -------------  ------------- 
 

Table 6: Residential mortgage lending by geographic exposure

 
                                     30 June 2021 (unaudited)                       31 December 2020 (audited) 
                                Retail           Retail             Total         Retail         Retail          Total 
                                 owner       buy-to-let            retail          owner     buy-to-let         retail 
                              occupied      GBP'million         mortgages       occupied    GBP'million      mortgages 
                           GBP'million                        GBP'million    GBP'million                   GBP'million 
----------------------                                                                    -------------  ------------- 
 Greater London                  2,157            1,115             3,272          2,213          1,147          3,360 
 South East                      1,172              295             1,467          1,157            309          1,466 
 South West                        430               87               517            433             91            524 
 East of England                   303               71               374            298             73            371 
 North West                        259               61               320            265             63            328 
 West Midlands                     185               60               245            179             58            237 
 Yorkshire and the 
  Humber                           140               36               176            139             37            176 
 East Midlands                     137               25               162            131             25            156 
 Wales                             105               20               125            102             21            123 
 North East                         62               10                72             62             10             72 
 Scotland                           78                7                85             72              7             79 
----------------------  --------------  ---------------  ----------------  -------------  -------------  ------------- 
 Total retail mortgage 
  lending                        5,028            1,787             6,815          5,051          1,841          6,892 
----------------------  --------------  ---------------  ----------------  -------------  -------------  ------------- 
 

Commercial lending

Table 7: Summary of commercial lending

 
                                                     30 June    31 December 
                                                        2021           2020 
                                                 (unaudited)      (audited) 
                                                 GBP'million    GBP'million 
---------------------------------------------  -------------  ------------- 
 Professional buy-to-let                               1,037          1,117 
 Other term loans                                      1,963          2,138 
---------------------------------------------  -------------  ------------- 
 Non-Government backed commercial term loans           3,000          3,255 
---------------------------------------------  -------------  ------------- 
 Bounce back loans                                     1,394          1,353 
 Coronavirus business interruption loans                 162            114 
 Government backed commercial term loans               1,556          1,467 
 Total commercial term loans                           4,556          4,722 
 Overdrafts and revolving credit facilities              133            149 
 Credit cards                                              3              3 
 Asset and invoice finance                               280            274 
 Total commercial lending                              4,972          5,148 
---------------------------------------------  -------------  ------------- 
 

Total commercial lending has decreased over the first half of 2021 to GBP5.0 billion. New lending principally reflects government support schemes. Repayment of professional buy-to-let and commercial term loans has also led to a reduction in the commercial portfolio.

Our commercial lending remains largely comprised of secured term loans and Government backed lending, with the remaining balance consisting of term loans and facilities secured by other forms of collateral (such as debentures) and asset and invoice finance.

As at 30 June 2021 the average DTV of our total commercial term loan book was 59% (31 December 2020: 56%).

DTV greater than 100% includes loans which benefit from additional forms of collateral which are not included in the DTV figure (such as debentures or unsupported guarantees) which provide an additional level of mitigation not accounted for in the calculation of expected credit loss. Our DTV profile primarily reflects the value of property collateral supporting our term loans and does not include any value from government guarantees provided to support CBILS and CLBILS lending. DTV greater than 100% has increased over the first half of 2021 primarily due to COVID impacts on the asset values of a small number of larger commercial loans.

Table 8: Commercial term lending (exc. BBLS) by DTV banding

 
                                     30 June 2021 (unaudited)                       31 December 2020 (audited) 
                        -------------------------------------------------  ------------------------------------------- 
                                                                    Total                                        Total 
                           Professional           Other        commercial   Professional          Other     commercial 
                             buy-to-let      term loans        term loans     buy-to-let     term loans     term loans 
                            GBP'million     GBP'million       GBP'million    GBP'million    GBP'million    GBP'million 
----------------------                                                                    -------------  ------------- 
 Less than 50%                      321             789             1,110            353            876          1,229 
 51-60%                             257             473               730            261            546            807 
 61-70%                             312             221               533            351            255            606 
 71-80%                             129              64               193            133            100            233 
 81-90%                               8              91                99              9             51             60 
 91-100%                              6              10                16              6             13             19 
 More than 100%                       4             477               481              4            411            415 
----------------------  ---------------  --------------  ----------------  -------------  -------------  ------------- 
 Total commercial term 
 lending                          1,037           2,125             3,162          1,117          2,252          3,369 
----------------------  ---------------  --------------  ----------------  -------------  -------------  ------------- 
 

Table 9: Commercial term lending (exc. BBLS) by industry exposure

 
                                      30 June 2021 (unaudited)                      31 December 2020 (audited) 
                                                                    Total                                        Total 
                            Professional          Other        commercial   Professional          Other     commercial 
                              buy-to-let     term loans        term loans     buy-to-let     term loans     term loans 
                             GBP'million    GBP'million       GBP'million    GBP'million    GBP'million    GBP'million 
-------------------------                                                                 -------------  ------------- 
 Real estate (rent, buy 
  and sell)                        1,037            889             1,926          1,117          1,032          2,149 
 Legal, Accountancy & 
  Consultancy                          -            207               207              -            208            208 
 Health & Social Work                  -            226               226              -            248            248 
 Hospitality                           -            370               370              -            376            376 
 Retail                                -            100               100              -            107            107 
 Real estate (management 
  of)                                  -             10                10              -             60             60 
 Construction                          -             72                72              -             36             36 
 Recreation, cultural and 
  sport                                -             84                84              -             53             53 
 Investment and unit 
  trusts                               -             13                13              -              9              9 
 Education                             -             25                25              -             30             30 
 Real estate 
  (development)                        -             36                36              -             60             60 
 Other                                 -             93                93              -             83             83 
-------------------------  -------------  -------------  ----------------  -------------  -------------  ------------- 
 Total commercial term 
  lending                          1,037          2,125             3,162          1,117          2,252          3,369 
-------------------------  -------------  -------------  ----------------  -------------  -------------  ------------- 
 

The sector profile for commercial term lending is broadly consistent with the position as at 31 December 2020. There has been a reduction in commercial real estate and professional buy-to-let of c.10%.

We have observed that some sectors have been more severely impacted by COVID-19 lockdowns. Hospitality and leisure sectors have experienced a more significant reduction in income than other sectors, and as a consequence we have seen higher levels of COVID-19 support required by these customers. We have provisioned for higher levels of expected credit losses in these sectors to reflect the risk of higher default rate.

Commercial customers are managed through early warning categorisation where there have been some 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.

Total lending in early warning categories has stabilised over the first six months of 2021, after the increases driven by COVID-19 over 2020. The majority of customers in early warning categories have received temporary COVID-19 support including payment holidays or government backed loans. We are now observing that many off these customers no longer require COVID-19 support, but we remain cautious in our provision approach in respect of them. There is a risk of increasing default levels as government support measures come to an end including furlough, VAT deferral, and moratorium on landlord action, and repayments fall due on BBLS and CBILS loans.

Therefore, we consider that credit risk remains heightened. We continue to maintain a cautious approach to impairments until the vaccine deployment programme is completed, vaccines prove effective against new COVID-19 variants and the economic recovery takes hold. We have maintained impairment levels to accommodate expected increasing default levels over the remainder of 2021.

Table 10: Commercial term lending (exc. BBLS) by repayment type

 
                                       30 June 2021 (unaudited)                     31 December 2020 (audited) 
                             --------------------------------------------  ------------------------------------------- 
                                                                    Total                                        Total 
                               Professional          Other     commercial   Professional          Other     commercial 
                                 buy-to-let     term loans     term loans     buy-to-let     term loans     term loans 
                                GBP'million    GBP'million    GBP'million    GBP'million    GBP'million    GBP'million 
---------------------------                                                               -------------  ------------- 
 Interest                               979            231          1,210          1,058            281          1,339 
 Capital and interest                    58          1,894          1,952             59          1,971          2,030 
---------------------------  --------------  -------------  -------------  -------------  -------------  ------------- 
 Total commercial term 
  lending                             1,037          2,125          3,162          1,117          2,252          3,369 
---------------------------  --------------  -------------  -------------  -------------  -------------  ------------- 
 

Table 11: Commercial term lending (exc. BBLS) by geographic exposure

 
                                    30 June 2021 (unaudited)                        31 December 2020 (audited) 
                       --------------------------------------------------  ------------------------------------------- 
                                                                    Total                                        Total 
                          Professional            Other        commercial   Professional          Other     commercial 
                            buy-to-let       term loans        term loans     buy-to-let     term loans     term loans 
                           GBP'million      GBP'million       GBP'million    GBP'million    GBP'million    GBP'million 
---------------------  ---------------  ---------------  ----------------  -------------  -------------  ------------- 
 Greater London                    723            1,254             1,977            780          1,358          2,138 
 South East                        189              386               575            205            399            604 
 South West                         29              151               180             31            156            187 
 East of England                    46               67               113             48             67            115 
 North West                         19              144               163             20            146            166 
 West Midlands                       9               66                75             10             66             76 
 Yorkshire and the 
  Humber                             3               13                16              3             13             16 
 East Midlands                      10               13                23             11             18             29 
 Wales                               5                9                14              5             10             15 
 North East                          3               21                24              3             18             21 
 Northern Ireland                    1                -                 1              1              -              1 
 Scotland                            -                1                 1              -              1              1 
---------------------  ---------------  ---------------  ----------------  -------------  -------------  ------------- 
 Total commercial 
  term lending                   1,037            2,125             3,162          1,117          2,252          3,369 
---------------------  ---------------  ---------------  ----------------  -------------  -------------  ------------- 
 

Consumer lending

The acquisition of RateSetter has driven improved capability to lend in the unsecured consumer loans market, with RateSetter loans now accounting for 80% of unsecured consumer lending. Performance of new lending is in line with expectations.

Overall asset quality remains strong, although arrears performance since the onset of COVID-19 has been muted by the payment deferrals scheme and the government furlough support schemes.

Non-performing loans

Table 12: Non-performing loans

 
                                                                         31 December 2020 
                                         30 June 2021 (unaudited)           (unaudited) 
                                       ---------------------------  ------------------------- 
                                                  NPLs   NPL ratio           NPLs   NPL ratio 
                                           GBP'million           %    GBP'million           % 
-------------------------------------  ---------------  ----------  -------------  ---------- 
 Retail mortgages                                  110       1.61%            118       1.70% 
 Consumer lending (incl. RateSetter)                18       2.57%             13       6.13% 
 Commercial lending (including asset 
  and invoice finance)                             187       3.76%            127       2.48% 
-------------------------------------  ---------------  ----------  -------------  ---------- 
 Total                                             315       2.52%            258       2.10% 
-------------------------------------  ---------------  ----------  -------------  ---------- 
 

Total Non-Performing Loans (NPLs) increased to GBP315 million (31 December 2020: GBP258 million). This increase was primarily driven by commercial customers who have previously sought COVID-19 support measures, and now require further forbearance support. The increase in NPL has been dampened by the government support measures still in place and there is a risk this will increase further in the second half of 2021.

NPLs for consumer customers have decreased to 2.57% (31 December 2020 6.13%) driven by the increase in overall lending, facilitated by RateSetter in the first half of the year as well as the run off of legacy consumer loans.

Cost of risk

Cost of risk (CoR) is credit impairment expense expressed as a percentage of average gross lending. The overall CoR has decreased to 0.24% in the first half of the year (2020: 0.86%) due to the significant charges taken in 2020 in response to COVID-19, compared to the relatively smaller charge movements observed in H1 2021.

Table 13: Cost of risk

 
                                                              Half year 
                                                                     to      Full year 
                                                           30 June 2021    31 December 
                                                             annualised           2020 
                                                            (unaudited)    (unaudited) 
                                                                      %              % 
-------------------------------------------------------  --------------  ------------- 
 Retail mortgages                                               (0.32%)          0.19% 
 Consumer lending                                                 7.16%          5.97% 
 Commercial lending (including asset, invoice finance, 
  CBLS, BBLS)                                                     0.32%          1.99% 
-------------------------------------------------------  --------------  ------------- 
 Total                                                            0.24%          0.86% 
-------------------------------------------------------  --------------  ------------- 
 

The decrease in the retail mortgage CoR to -0.32% (2020: 0.19%) is primarily driven by in the reduction in management overlays for customers benefiting from payment deferrals, as customers have returned to contractual monthly payments and implementation of a new LGD model.

The increase in Consumer lending CoR to 7.16% (2020: 5.97%) is driven by the purchase of the RateSetter back book. The day one ECL charge for the acquired loans has artificially inflated the CoR for the period, as the portfolio was acquired half way through the period. This means that the average consumer lending balances, which the charge for the period is divided by to calculate CoR, only reflects the back book balance for roughly half the period.

The decrease in Commercial lending CoR to 0.32% (2020: 1.99%) is driven by a smaller GBP10m impairment charge compared to the significant charge taken in 2020 in response to the onset of COVID-19.

Liquidity and funding risk

Liquidity

O ur liquidity position continues to be strong, with our LCR standing at 309% as at 30 June 2021 (31 December 2020: 187%). Our strong liquidity position was strengthened by the completion of the mortgage sale at the start of the year and greater than expected deposit inflows.

We ended the period with a loan to deposit ratio of 74% (31 December 2020: 75%) and we continue to be deposit funded with no reliance on the wholesale markets.

We continue to have access to, and have made use of, the Bank of England's TFS and TFSME, both of which provide us with additional cost-efficient source of liquidity although are not reliant on this as a primary source of funding.

Capital

We manage capital in accordance with prudential rules issued by the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA), in line with the European Union (EU) Capital Requirements Directive and we are committed to maintaining a strong capital base, under both existing and future regulatory requirements.

Our CET1 capital ratio decreased to 13.9% at 30 June 2020 from 15.0% as at 31 December 2020. This was primarily due to the losses incurred during the period.

The minimum CET1, Tier 1 and Total Capital Ratio requirements, excluding any confidential PRA buffers, were 7.6%, 9.3% and 11.6%% respectively at 30 June 2021.

We continue to apply the IFRS 9 regulatory transitional arrangements, which allows us to add back to our capital base a portion of the IFRS 9 impairment charges during the transitional period, and our capital ratios are presented on a transitional basis after the application of this arrangement.

The CET1 capital ratio at 30 June 2021 includes a c.1.0% benefit related to software assets which are exempt from the deduction requirement for intangibles assets from CET1. The PRA has consulted on a proposal to revert this treatment and on 9 July 2021 a policy statement was published confirming the requirement for CET1 deduction of intangible software assets will be fully implemented on 1 January 2022.

In 2021 we are subject to an interim MREL requirement of 18% of risk-weighted assets plus buffers, which equates to 20.5% of risk-weighted assets (excluding any confidential PRA buffers). We ended the period with an MREL ratio of 21.7% (31 December 2020: 22.4%). MREL remains the binding constraint on the Bank and our MREL resources may fall below the sum of our MREL requirement plus buffers for a period of time.

Table 14: Capital resources

 
                                                 31 December 
                                 30 June 2021           2020 
                                  (unaudited)      (audited) 
                                  GBP'million    GBP'million 
------------------------------  -------------  ------------- 
 Ordinary share capital                     -              - 
 Share premium                          1,964          1,964 
 Retained earnings                      (835)          (694) 
 Other reserves                            18             19 
 Intangible assets                      (253)          (254) 
 Other regulatory adjustments             158            157 
------------------------------  -------------  ------------- 
 Total Tier 1 capital (CET1)            1,052          1,192 
------------------------------  -------------  ------------- 
 Debt securities (Tier 2)                 249            249 
------------------------------  -------------  ------------- 
 Total Tier 2 capital                     249            249 
------------------------------  -------------  ------------- 
 Total regulatory capital               1,301          1,441 
------------------------------  -------------  ------------- 
 

Operational risk

Impact of COVID-19

In response to the pandemic, it was necessary to implement new ways of working and adapt operational processes in 2020, the associated risks of which continue to be actively assessed for mitigation or acceptance as appropriate and process improvements made and embedded as business as usual. Our overall operational risk profile has remained relatively stable but is subject to ongoing review as the situation unfolds and the longer-term impacts of COVID-19 are fully understood. We continue to plan for, and respond to, ongoing developments to ensure continuity of service, minimise the impact on the risk profile, keep our colleagues and customers safe, and comply with UK Government guidance. While the roll-out of COVID-19 vaccines is underway, it will be some time before this materially reduces the impact of the pandemic on our day-to-day operations.

Fraud risk

We continue to work hard in a constantly evolving environment to minimise the impact of fraud. The level of fraud-related losses has increased but this is in proportion to the increase seen across the industry, particularly in relation to scams on our customers, to which we remain vigilant. Our round-the-clock operation reacts quickly to the fraudsters' changing tactics, minimising the impact to customers, and we continue to invest in system defences, and we provide regular communication and training to our colleagues and customers to ensure that we maintain a strong position in the industry. We are also one of nine firms which have signed up to the Lending Standards Board's Contingent Reimbursement Model voluntary code and we are fully committed to its principles.

Cyber threat

The impact which a successful cyber attack could have on our customers remains a very significant focus of attention, as we both manage our current IT systems and plan to deliver new technology for the future, recognising the changing cyber landscape and the increased focus on digital capabilities. This is mitigated by ongoing investment in our cyber and information security infrastructure, enabling us to make constant improvements to our monitoring, control and response capabilities to protect customer data and minimise the risk of disruption.

Operational resilience

In order to continue to proactively prevent, respond to, recover and learn from operational disruptions, we are investing in measures to enhance our operational resilience in line with increased regulatory requirements, including improving the management of our use of third party suppliers.

Emerging risks

Within our 2020 annual report we outlined several emerging risks. An update to these is provided below where appropriate. We have not identified any new emerging risks in the first half of 2021.

 
 Emerging risk   Change from full year 
--------------  ------------------------------------------------------------------ 
 Macroeconomic   The full extent of the economic impacts from COVID-19 is 
  environment     yet to be seen. The duration and depth of the downturn continues 
                  to remain uncertain due to the emergence of new variants 
                  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. 
                  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. 
                  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. 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. 
                  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 being undertaken 
                  in 2021. 
--------------  ------------------------------------------------------------------ 
 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. 
                  The Bank's strategy had always been predicated on new and 
                  exciting digital propositions, with the implications of the 
                  pandemic 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. 
--------------  ------------------------------------------------------------------ 
 

STATEMENT OF DIRECTOR's RESPONSIBILITIES

The directors confirm to the best of their knowledge these condensed interim financial statements have been prepared in accordance with UK adopted International Accounting Standard 34, 'Interim Financial Reporting' and that the interim management report includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely:

-- An indication of important events that have occurred during the first six months ended 30 June 2021 and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

-- Material related-party transactions in the first six months ended 30 June 2021 and any material changes in the related-party transactions described in the last annual report.

Signed on its behalf by:

 
 Daniel Frumkin            David Arden 
 Chief Executive Officer   Chief Financial Officer 
 27 July 2021              27 July 2021 
 

Independent review report to Metro Bank PLC

Report on the condensed consolidated interim financial statements

Our conclusion

We have reviewed Metro Bank PLC's condensed consolidated interim financial statements (the "interim financial statements") in the interim report of Metro Bank PLC for the 6 month period ended 30 June 2021 (the "period").

Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with UK adopted International Accounting Standard 34, 'Interim Financial Reporting' and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

What we have reviewed

The interim financial statements comprise:

   --      The consolidated balance sheet as at 30 June 2021; 
   --      The consolidated statement of comprehensive income for the period then ended; 
   --      The consolidated cash flow statement for the period then ended; 
   --      The consolidated statement of changes in equity for the period then ended; and 
   --      The explanatory notes to the interim financial statements. 

The interim financial statements included in the interim report of Metro Bank PLC have been prepared in accordance with UK adopted International Accounting Standard 34, 'Interim Financial Reporting' and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

Responsibilities for the interim financial statements and the review

Our responsibilities and those of the directors

The interim report, including the interim financial statements, is the responsibility of, and has been approved by the directors. The directors are responsible for preparing the interim report in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

Our responsibility is to express a conclusion on the interim financial statements in the interim report based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

What a review of interim financial statements involves

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim financial statements.

PricewaterhouseCoopers LLP

Chartered Accountants

London

28 July 2021

Consolidated statement of comprehensive income (unaudited)

 
                                                              Half year      Half year      Half year 
                                                                     to             to             to 
                                                                30 June    31 December        30 June 
                                                                   2021           2020           2020 
                                                    Note    GBP'million    GBP'million    GBP'million 
-------------------------------------------------  -----  -------------  -------------  ------------- 
 Interest income                                     2            194.2          208.6          217.7 
 Interest expense                                    2           (60.9)         (74.8)        (101.8) 
-------------------------------------------------  -----  -------------  -------------  ------------- 
 Net interest income                                              133.3          133.8          115.9 
-------------------------------------------------  -----  -------------  -------------  ------------- 
 Net fee and commission income                                     32.7           36.4           23.5 
 Net gains on sale of assets                                        8.2           72.1            1.0 
 Other income                                                      22.1           21.2           28.5 
-------------------------------------------------  -----  -------------  -------------  ------------- 
 Total income                                                     196.3          263.5          168.9 
-------------------------------------------------  -----  -------------  -------------  ------------- 
 
 General operating expenses                          3          (272.8)        (268.2)        (234.1) 
 Depreciation and amortisation                      7,8          (40.3)         (37.6)         (36.8) 
 Impairment and write offs of PPE and intangible 
  assets                                            7,8           (7.5)         (14.0)         (26.6) 
-------------------------------------------------  -----  -------------  -------------  ------------- 
 Total operating expenses                                       (320.6)        (319.8)        (297.5) 
 Expected credit loss expense                                    (14.6)         (14.7)        (112.0) 
-------------------------------------------------  -----  -------------  -------------  ------------- 
 Loss before tax                                                (138.9)         (71.0)        (240.6) 
-------------------------------------------------  -----  -------------  -------------  ------------- 
 Tax (expense)/credit                                5            (2.2)            8.6            1.1 
-------------------------------------------------  -----  -------------  -------------  ------------- 
 Loss for the period                                            (141.1)         (62.4)        (239.5) 
-------------------------------------------------  -----  -------------  -------------  ------------- 
 
 Other comprehensive (expense)/ income 
  for the period 
-------------------------------------------------  -----  -------------  -------------  ------------- 
 Items which will be reclassified subsequently 
  to profit or loss where specific conditions 
  are met: 
 Movements in respect of investment securities 
  held at fair value through other comprehensive 
  income (net of tax): 
   - changes in fair value                                        (1.2)            2.4            3.2 
   - changes in fair value transferred to 
    the income statement on disposal                              (0.4)            0.1          (0.2) 
-------------------------------------------------  -----  -------------  -------------  ------------- 
 Total other comprehensive (expense)/ income                      (1.6)            2.5            3.0 
-------------------------------------------------  -----  -------------  -------------  ------------- 
 
 Total comprehensive loss for the period                        (142.7)         (59.9)        (236.5) 
-------------------------------------------------  -----  -------------  -------------  ------------- 
 
 Earnings per share 
 Basic earnings per share (pence)                    12          (81.8)         (36.2)        (138.9) 
 Diluted earnings per share (pence)                  12          (81.8)         (36.2)        (138.9) 
-------------------------------------------------  -----  -------------  -------------  ------------- 
 

For the half year to 30 June 2021

Consolidated balance sheet (unaudited)

 
                                                            30 June    31 December        30 June 
                                                               2021           2020           2020 
                                                Note    GBP'million    GBP'million    GBP'million 
---------------------------------------------  -----  -------------  -------------  ------------- 
 Assets 
 Cash and balances with the Bank of England                   5,111          2,993          3,080 
 Loans and advances to customers                 6           12,325         12,090         14,857 
 Investment securities held at FVOCI                          1,198            773            444 
 Investment securities held at amortised 
  cost                                                        3,165          2,640          2,577 
 Financial assets held at fair value through 
  profit and loss                                                 5             30              - 
 Property, plant and equipment                   7              786            806            821 
 Intangible assets                               8              253            254            202 
 Prepayments and accrued income                                  75             77             70 
 Assets classified as held for sale                               -            295              - 
 Other assets                                                    95          2,621             83 
---------------------------------------------  -----  -------------  -------------  ------------- 
 Total assets                                                23,013         22,579         22,134 
---------------------------------------------  -----  -------------  -------------  ------------- 
 Liabilities 
 Deposits from customers                                     16,620         16,072         15,577 
 Deposits from central banks                                  3,800          3,808          3,801 
 Debt securities                                                596            600            599 
 Financial liabilities held at fair value                         -             30              - 
  through profit and loss 
 Repurchase agreements                                          212            196            211 
 Derivative financial liabilities                                 8              8             12 
 Lease liabilities                               9              310            327            340 
 Deferred grants                                 10              22             28             31 
 Provisions                                                       5             11             12 
 Deferred tax liabilities                        5               13             12             15 
 Other liabilities                                              280            198            189 
---------------------------------------------  -----  -------------  -------------  ------------- 
 Total liabilities                                           21,866         21,290         20,787 
---------------------------------------------  -----  -------------  -------------  ------------- 
 Equity 
 Called up share capital                         11               -              -              - 
 Share premium account                           11           1,964          1,964          1,964 
 Retained earnings                                            (835)          (694)          (632) 
 Other reserves                                                  18             19             15 
---------------------------------------------  -----  -------------  -------------  ------------- 
 Total equity                                                 1,147          1,289          1,347 
---------------------------------------------  -----  -------------  -------------  ------------- 
 
 Total equity and liabilities                                23,013         22,579         22,134 
---------------------------------------------  -----  -------------  -------------  ------------- 
 

As at 30 June 2021

The notes below form part of the condensed consolidated interim financial statements.

These condensed consolidated interim financial statements were approved and authorised for issue by the Board of Directors on 27 July 2021 and were signed on its behalf by:

 
 Robert Sharpe   Daniel Frumkin            David Arden 
 Chairman        Chief Executive Officer   Chief Financial Officer 
 

Consolidated cash flow STATEMENT ( unaudited)

For the half year to 30 June 2021

 
                                                                        Half      Half year           Half 
                                                                        year             to           year 
                                                                          to    31 December             to 
                                                                     30 June           2020        30 June 
                                                                        2021    GBP'million           2020 
                                                         Note    GBP'million                   GBP'million 
------------------------------------------------------  -----  -------------  -------------  ------------- 
 Reconciliation of loss before tax to net cash 
  flows from operating activities: 
 Loss before tax                                                       (139)           (71)          (241) 
 Adjustments for: 
 Impairment and write offs of property, plant 
  and equipment and intangible assets                    7,8               8             14             27 
 Interest on lease liabilities                            9                9             10              9 
 Depreciation and amortisation                           7,8              40             37             37 
 Share option award charges                               4                1              1              1 
 Grant income recognised in the income statement                         (7)            (8)           (16) 
 Amounts provided for                                                      -              3              5 
 Gain on sale of assets                                                  (8)           (72)            (1) 
 Accrued interest on and amortisation of investment 
  securities                                                               1              5            (2) 
 Changes in operating assets and liabilities 
 Changes in loans and advances to customers                            (235)          2,767          (176) 
 Changes in deposits from customers                                      548            495          1,100 
 Changes in operating assets                                           2,817        (2,809)           (11) 
 Changes in operating liabilities                                         77            (2)           (61) 
------------------------------------------------------  -----  -------------  -------------  ------------- 
 Net cash inflows from operating activities                            3,112            370            671 
------------------------------------------------------  -----  -------------  -------------  ------------- 
 Cash flows from investing activities 
 Net (purchase)/sale of investment securities                          (953)          (391)          (454) 
 Purchase of property, plant and equipment                                 -           (19)           (10) 
 Purchase and development of intangible assets            8             (26)           (28)           (53) 
 Acquisition of subsidiary, net of cash acquired                           -            (1)              - 
------------------------------------------------------  -----  -------------  -------------  ------------- 
 Net cash outflows from investing activities                           (979)          (439)          (517) 
------------------------------------------------------  -----  -------------  -------------  ------------- 
 Cash flows from financing activities 
 Grants repaid                                            10               -              -           (50) 
 Repayment of capital element of leases                   9             (15)           (18)           (13) 
 Net cash outflows from financing activities                            (15)           (18)           (63) 
------------------------------------------------------  -----  -------------  -------------  ------------- 
 
 Net increase/(decrease) in cash and cash equivalents                  2,118           (87)             91 
 Cash and cash equivalents at start of period                          2,993          3,080          2,989 
------------------------------------------------------  -----  -------------  -------------  ------------- 
 Cash and cash equivalents at end of period                            5,111          2,993          3,080 
------------------------------------------------------  -----  -------------  -------------  ------------- 
 
 Loss before tax includes: 
------------------------------------------------------  -----  -------------  -------------  ------------- 
 Interest received                                                       203            290            217 
 Interest paid                                                            74             69            107 
------------------------------------------------------  -----  -------------  -------------  ------------- 
 

Consolidated statement of changes in EQUITY ( unaudited)

For the half year to 30 June 2021

 
                                  Called-up                                                       Share 
                                      Share          Share       Retained          FVOCI         option          Total 
                                    capital        premium       earnings        reserve        reserve         equity 
                                GBP'million    GBP'million    GBP'million    GBP'million    GBP'million    GBP'million 
 Balance at 1 January 2021                -          1,964          (694)              3             16          1,289 
---------------------------  --------------  -------------  -------------  -------------  -------------  ------------- 
 Loss for the period                      -              -          (141)              -              -          (141) 
 Other comprehensive 
  expense 
  (net of tax) relating to 
  investment 
  securities designated at 
  fair 
  value through other 
  comprehensive 
  income                                  -              -              -            (2)              -            (2) 
---------------------------  --------------  -------------  -------------  -------------  -------------  ------------- 
 Total comprehensive 
  expense                                 -              -          (141)            (2)              -          (143) 
 Net share option movements               -              -              -              -              1              1 
---------------------------  --------------  -------------  -------------  -------------  -------------  ------------- 
 Balance at 30 June 2021                  -          1,964          (835)              1             17          1,147 
---------------------------  --------------  -------------  -------------  -------------  -------------  ------------- 
 
 Balance at 1 July 2020                   -          1,964          (632)              -             15          1,347 
---------------------------  --------------  -------------  -------------  -------------  -------------  ------------- 
 Loss for the period                      -              -           (62)              -              -           (62) 
 Other comprehensive income 
  (net of tax) relating to 
  investment 
  securities designated at 
  fair 
  value through other 
  comprehensive 
  income                                  -              -              -              3              -              3 
---------------------------  --------------  -------------  -------------  -------------  -------------  ------------- 
 Total comprehensive 
  (expense)/income                        -              -           (62)              3              -           (59) 
 Net share option movements               -              -              -              -              1              1 
---------------------------  --------------  -------------  -------------  -------------  -------------  ------------- 
 Balance at 31 December 
  2020                                    -          1,964          (694)              3             16          1,289 
 
 Balance at 1 January 2020                -          1,964          (392)            (3)             14          1,583 
---------------------------  --------------  -------------  -------------  -------------  -------------  ------------- 
 Loss for the period                      -              -          (240)              -              -          (240) 
 Other comprehensive income 
  (net of tax) relating to 
  investment 
  securities designated at 
  fair 
  value through other 
  comprehensive 
  income                                  -              -              -              3              -              3 
---------------------------  --------------  -------------  -------------  -------------  -------------  ------------- 
 Total comprehensive 
  (expense)/income                        -              -          (240)              3              -          (237) 
 Net share option movements               -              -              -              -              1              1 
---------------------------  --------------  -------------  -------------  -------------  -------------  ------------- 
 Balance at 30 June 2020                  -          1,964          (632)              -             15          1,347 
---------------------------  --------------  -------------  -------------  -------------  -------------  ------------- 
 
 
 

Notes to the condensed consolidated interim financial statements (unaudited)

   1.   Basis of preparation and accounting policies 
   1          General information 

Metro Bank PLC ("our" or "we") provides retail and commercial banking services in the UK, is a public limited liability company incorporated and domiciled in England and Wales and is listed on the London Stock Exchange (LON:MTRO). The address of its registered office is: One Southampton Row London WC1B 5HA.

   2          Basis of preparation 

The condensed consolidated interim financial statements of Metro Bank and its subsidiaries for the six months ended 30 June 2021 were authorised for issue in accordance with a resolution of the Directors on 27 July 2021.

These condensed consolidated interim financial statements for the six months ended 30 June 2021 have been prepared on the basis of the policies set out in the 2020 annual financial statements and in accordance with UK adopted IAS 34 and the Disclosure Guidance and Transparency Rules sourcebook of the UK's Financial Conduct Authority, and should be read in conjunction with the annual consolidated financial statements for the year ended 31 December 2020 which were prepared in accordance with IFRS in conformity with the requirements of the Companies Act 2006 and IFRS adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.

In the year to 31 December 2021 our annual financial statements will be prepared in accordance with IFRS as adopted by the UK Endorsement Board. This change in basis of preparation is required by UK company law for the purposes of financial reporting as a result of the UK's exit from the EU on 31 January 2020 and the cessation of the transition period on 31 December 2020.This change does not constitute a change in accounting policy but rather a change in framework which is required to ground the use of IFRS in company law. There is no impact on recognition, measurement or disclosure between the two frameworks in the period reported.

The comparative financial information as at and for the periods ending 31 December 2020 and 30 June 2020 do not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for the year ended 31 December 2020 has been delivered to the Registrar of Companies.

The auditor's report on those accounts was not qualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report and did not contain statements under section 498(2) or (3) of the Companies Act 2006.

Going concern

The Directors consider that it is appropriate to continue to adopt the going concern basis of accounting in preparing the condensed consolidated interim financial statements. In reaching this assessment, the Directors have considered projections for our capital and funding position. The Directors also considered the key assumptions and uncertainties that feed into these projections and the mitigants that are available should actual performance differ to these projections. Under all scenarios considered, the Directors believe the Group to remain a going concern on the basis that it maintains sufficient resources (including liquidity and capital) to be able to continue to operate for a period of at least twelve months from when the interim financial statements are authorised for issue. The Directors did not deem there to be any material uncertainties with regards to the assessment on going concern.

   3          Accounting policies 

Except as described below, the accounting policies applied in these condensed consolidated interim financial statements are the same as those applied in the Group's consolidated financial statements as at and for the year ended 31 December 2020.

IBOR transition

During the period we have adopted Interest Rate Benchmark Reform Phase 2 - Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 (the Phase 2 amendments).

The only impact on our financial statements is in relation to our hedging arrangements, which have transitioned from being based on LIBOR to SONIA. The Phase 2 amendments have allowed us to amend the designation of our hedging relationships and the associated hedge documentation to reflect these changes without discontinuing the hedging relationships. Our accounting policies in respect of hedging remain unchanged and continue to be applied.

The impact of the changes does not have a significant impact on these condensed consolidated interim financial statements.

Future accounting developments

There are no known future accounting developments that are likely to have a material impact on the Group.

   4          Critical accounting judgements 

In our 2020 Annual Report and Accounts we identified the following critical accounting judgements:

   --      Recognition of provisions 
   --      Measurement of the expected credit loss allowance -significant increase in credit risk 

-- Measurement of the expected credit loss allowance -use of post model overlays and adjustments

Further details on these critical accounting judgements is set out below. No new critical accounting judgements have been identified during the period.

Recognition of provisions

We are currently subject to several regulatory investigations. A key area of judgement applied in the preparation of these financial statements is deciding whether a provision should be made for the outcome of these matters. Specifically, judgement is applied in determining whether a present obligation exists and where one does, in estimating the probability, timing and amount of any outflows. In determining whether a provision needs to be made and whether it can be reliably estimated, we consult relevant professional experts and reassess our judgements on an ongoing basis as facts change. Because of the complex nature of the legal and regulatory matters we are subject to, it is typically the case that it is not possible to reliably estimate the outcome and in these cases we do not provide for their outcome, however we do provide further disclosures outlining the matters in further detail.

Additional information about legal and regulatory matters which constitute contingent liabilities is available in note 14.

Measurement of the expected credit loss allowance -significant increase in credit risk

IFRS 9 requires a higher level of expected credit loss to be recognised for underperforming loans as a lifetime ECL is recognised compared to a 12-month ECL for performing loans. This is considered based on a staging approach. Financial assets that have had no significant increase in credit risk since initial recognition, or that have low credit risk at the reporting date, are considered to be performing loans and are classified as 'Stage 1'. Losses are calculated based on our expectation of losses expected on defaults which may occur within the next 12 months. Assets which are considered to have experienced a significant increase in credit risk since initial recognition, but that do not have objective evidence of impairment, are classified as 'Stage 2'. Losses are calculated based on defaults which may occur at any point in the asset's lifetime.

Judgement is required to determine when a significant increase in credit risk has occurred. An assessment of whether credit risk has increased significantly since initial recognition, resulting in transfer to Stage 2.

As a response to the COVID-19 pandemic, we introduced the ability for our customers to request payment deferrals as a result of the COVID-19 pandemic. The use of a payment deferral is not in itself considered to be trigger of a significant increase in credit risk and as such the granting of a COVID-19 related payment deferral does not in itself result in a transfer between stages for the purposes of IFRS 9. Payment deferral is however a potential indicator of an increase risk and has been reflected via a post model overlay.

Measurement of the expected credit loss allowance -use of post model overlays and adjustments

We use Post Model Adjustments (PMAs) and Post Model Overlays (PMOs) in the assessment of ECL. PMAs supplement the models to account for where there are limitations in model methodology or data inputs and PMOs accounts for downsides risks which are not fully captured through the economic scenarios.

The appropriateness of PMAs and PMOs is subject to rigorous review and challenge, including review by the Bank's Model Governance Committee, Impairment Committee and Audit Committees.

Post model adjustments (PMAs) 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.

As at 30 June 2021, only one PMA remains, as models have been implemented into production and previously held PMAs have been released. The remaining PMA reflects the temporary over-estimation of the amortisation profile of customers with payment deferral options (30 June 2021: -GBP1.4 million; 31 December 2020: GBP23.0 million).

Post model overlays (PMOs) 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).

Given the continued economic uncertainty, government support and lock down restrictions and further uncertainty on how the pandemic will unfold, we continue to maintain appropriate levels of PMOs. Given the reduction in PMAs, the total percentage of ECL stock comprised of PMAs/PMOs has reduced to 34% (31 December 2020: 50%).

PMOs make up GBP56.6 million of the ECL stock for the half year ended 30 June 2021 (31 December 2020: GBP54.0 million) and comprise:

-- An overlay to reflect the introduction of a fourth more severe downside scenario - to reflect a wider range of macroeconomic scenarios (30 June 2021: GBP3.9 million; 31 December 2020: GBPnil). This has been incorporated as a PMO pending completion of formal model validation.

-- An overlay to reflect the existing payment deferrals provided to customers - for mortgages and consumer lending a portfolio level overlay has been maintained to reflect the increased risk for customers currently benefiting from COVID-19 payment deferrals (30 June 2021: GBP2.6 million; 31 December 2020: GBP10.9 million). This overlay has been reduced during the first half of 2021 as customers have demonstrated consistent repayments following the end of the deferral period. We expect this to continue to reduce during H2 2021.

-- Uncertainties to economic forecast - to reflect the additional uncertainty not captured in the scenarios used. The latest Commercial portfolio macroeconomic scenarios include a favourable view of GDP which reflects the benefits of the easing of lock-down restrictions. Further, government support schemes have artificially delayed default emergence. The Commercial economic forecasts have been lagged, to capture the future default risk expected to emerge, as Government support schemes come to an end in the second half of the year. (30 June 2021: GBP9.6 million; 31 December 2020: GBPnil).

-- An expert judgement overlay for the Commercial portfolio - to reflect additional downside risks as a result of COVID-19 and associated severe economic scenarios, including additional stress on commercial property values, sector based stress for customers benefiting from temporary COVID-19 support, and a contagion overlay to reflect cross default risk (30 June 2021: GBP14.9 million; 31 December 2020: GBP10.6 million).

-- An expert judgement overlay for the Mortgage portfolio - to reflect additional downside risks as a result of COVID-19 and associated severe economic scenarios, and potential impact of cladding on property values (30 June 2021: GBP13.1 million; 31 December 2020: GBP14.6 million).

-- An overlay for losses in respect of government backed lending schemes - this covers the potential cost to recover for BBLS (30 June 2021: GBP9.6 million; 31 December 2020: GBP7.5 million).

-- An overlay for the RateSetter portfolio - to reflect the difference in ECL estimated using the newly developed models and the current approach (30 June 2021: GBP1.9 million; 31 December 2020: GBPnil). This has been incorporated as a PMO pending completion of formal model validation.

   5          Critical accounting estimates 

In our 2020 Annual Report and Accounts we identified one critical accounting estimate relating to the formulation and incorporation of multiple forward-looking economic scenarios into the measurement of the expected credit loss allowance. We continue to consider this to be a critical accounting estimate.

The ECL recognised in the financial statements reflects the effect on expected credit losses of a range of possible outcomes, calculated on a probability-weighted basis, based on a number of economic scenarios and including management overlays where required. These scenarios are representative of our view of forecast economic conditions, sufficient to calculate unbiased ECL, and are designed to capture material 'non-linearities' (i.e. where the increase in credit losses if conditions deteriorate, exceeds the decrease in credit losses if conditions improve).

In line with Metro Bank's approved IFRS 9 models, macroeconomic scenarios provided by Moody's Analytics are used in the assessment of provisions. The use of an independent supplier for the provision of scenarios helps to ensure that the estimates are unbiased.

A fourth more severe downside macroeconomic scenario has been introduced as at 30 June 2020 across all portfolios to ensure the set of scenarios adequately reflect a wider range of downside risks which have been previously included within management overlays. Scenarios and probability weights are as follows:

 
                       Half year      Half year   Half year 
                              to             to          to 
                         30 June    31 December     30 June 
 Scenario weighting         2021           2020        2020 
--------------------  ----------  -------------  ---------- 
 Baseline                    40%            40%         40% 
 Upside                      20%            30%         30% 
 Downside                    30%            30%         30% 
 Severe Downside             10%              -           - 
--------------------  ----------  -------------  ---------- 
 

The macroeconomic scenarios reflect the current macroeconomic environment as follows:

 
 Baseline scenario (40%         Reflects the projection of the median, or "50%" 
  weight)                        scenario, meaning that in the assessment there 
                                 is an equal probability that the economy might 
                                 perform better or worse than the baseline forecast. 
-----------------------------  ----------------------------------------------------- 
 Upside scenario (20% weight)   This above-baseline scenario is designed so there 
                                 is a 90% probability the economy will perform 
                                 better than in this scenario, broadly speaking, 
                                 and a 10% probability it will perform worse. 
-----------------------------  ----------------------------------------------------- 
 Downside scenario (30%         In this recession scenario, in which a deep downturn 
  weight)                        develops, there is a 10% probability the economy 
                                 will perform better, broadly speaking, and a 90% 
                                 probability it will perform worse. 
-----------------------------  ----------------------------------------------------- 
 Severe Downside scenario       In this recession scenario, in which a deep downturn 
  (10% weight)                   develops, there is a 4% probability the economy 
                                 will perform better, broadly speaking, and a 96% 
                                 probability it will perform worse. 
-----------------------------  ----------------------------------------------------- 
 

Key assumptions underpinning the baseline June 2021 scenarios:

-- The Delta variant of COVID-19 is the dominant strain in the UK and new cases are increasing.

-- The existing vaccines are effective against the new variant, and the death rate remains low.

-- A fourth lockdown is prevented, but the last restriction measures remain for a longer period.

-- The unemployment rate spikes in the last quarter of 2021 as a result of the end of the Coronavirus Job Retention Scheme, which was extended to the end of September, and the recovery remains fragile in the second half of the year.

-- Inflation remains contained for several quarters still, weighed down by the decline in demand. It reaches the 2% target by the start of 2022.

-- The government continues to support the economy through massive fiscal stimulus during the first half of 2021, while the Bank of England keeps monetary policy extremely loose for several quarters.

-- The EU and the U.K. sign a new financial services agreement, and the U.K. continues operating in European markets.

The following variables are the key drivers of ECL:

   --      UK interest rate (five-year mortgage rate) 
   --      UK unemployment rate 
   --      UK HPI change, year-on-year (adjusted in the downside scenarios for regional concentration) 
   --      UK GDP change, year-on-year 

Macroeconomic scenarios impact the ECL calculation through varying the Probability of Default (PD) and Loss Given Default (LGD). We use UK HPI to index mortgage collateral which has a direct impact on LGD. A wide range of potential metrics were initially considered, representing drivers which capture trends in the economy at large, and may indicate economic trends which will impact UK borrowers. This included variables which impact economic output, interest rates, inflation, stock prices, borrower income and the UK housing market. Statistical methods were then used to choose the subset of drivers which had the greatest significance and predictive fit to our data.

 
 Macroeconomic variable         Scenario            2021      2022      2023    2024 
-----------------------------  -----------------  --------  --------  -------  ----- 
 UK five year mortgage 
  interest rates (%)            Baseline            2.5%      2.8%      3.2%    3.7% 
-----------------------------  -----------------  --------  --------  -------  ----- 
  Upside                                            2.8%      3.1%      3.5%    4.2% 
 -----------------------------------------------  --------  --------  -------  ----- 
  Downside                                          2.1%      2.3%      2.6%    2.9% 
 -----------------------------------------------  --------  --------  -------  ----- 
  Severe Downside                                   2.1%      2.0%      2.5%    2.8% 
 -----------------------------------------------  --------  --------  -------  ----- 
 Unemployment (%)               Baseline            6.7%      6.0%      5.3%    5.0% 
-----------------------------  -----------------  --------  --------  -------  ----- 
  Upside                                            6.3%      4.9%      4.3%    4.2% 
 -----------------------------------------------  --------  --------  -------  ----- 
  Downside                                          7.4%      8.2%      7.6%    7.0% 
 -----------------------------------------------  --------  --------  -------  ----- 
  Severe Downside                                   7.5%      9.1%      8.2%    7.8% 
 -----------------------------------------------  --------  --------  -------  ----- 
 House price index (YoY%)(1)    Baseline           (1.4%)     3.2%      6.3%    5.2% 
-----------------------------  -----------------  --------  --------  -------  ----- 
  Upside                                            3.8%      10.2%     6.9%    3.9% 
 -----------------------------------------------  --------  --------  -------  ----- 
  Downside                                         (6.3%)    (12.0%)   (2.0%)   6.6% 
 -----------------------------------------------  --------  --------  -------  ----- 
  Severe Downside                                  (12.8%)   (18.1%)   (2.2%)   6.7% 
 -----------------------------------------------  --------  --------  -------  ----- 
 UK GDP (YoY%)                  Baseline            6.4%      4.6%      2.9%    1.3% 
-----------------------------  -----------------  --------  --------  -------  ----- 
  Upside                                            9.3%      4.5%      2.3%    1.3% 
 -----------------------------------------------  --------  --------  -------  ----- 
  Downside                                          2.4%      4.0%      4.2%    2.1% 
 -----------------------------------------------  --------  --------  -------  ----- 
  Severe Downside                                   1.3%      3.3%      3.9%    2.0% 
 -----------------------------------------------  --------  --------  -------  ----- 
 

The period-end assumptions used for the ECL estimate as at 31 December 2020 are as follows:

 
 Macroeconomic variable      Scenario     2021     2022     2023   2024 
--------------------------  ----------  -------  --------  -----  ----- 
 UK five year mortgage 
  interest rates (%)         Baseline     2.2%     2.8%     3.3%   3.6% 
--------------------------  ----------  -------  --------  -----  ----- 
  Upside                                  2.4%     2.9%     3.7%   4.2% 
 -------------------------------------  -------  --------  -----  ----- 
  Downside                                1.7%     2.3%     2.6%   2.7% 
 -------------------------------------  -------  --------  -----  ----- 
 Unemployment (%)            Baseline     7.4%     6.8%     5.9%   5.5% 
--------------------------  ----------  -------  --------  -----  ----- 
  Upside                                  6.4%     5.6%     5.0%   4.8% 
 -------------------------------------  -------  --------  -----  ----- 
  Downside                                9.2%     9.3%     8.3%   7.6% 
 -------------------------------------  -------  --------  -----  ----- 
 House price index (YoY%)    Baseline    (5.0%)    3.2%)    5.7%   5.8% 
--------------------------  ----------  -------  --------  -----  ----- 
  Upside                                 (1.1%)    7.6%     7.4%   5.5% 
 -------------------------------------  -------  --------  -----  ----- 
  Downside                               (9.8%)   (1.95%)   4.7%   6.8% 
 -------------------------------------  -------  --------  -----  ----- 
 UK GDP (YoY%)               Baseline     6.8%     5.4%     2.7%   1.0% 
--------------------------  ----------  -------  --------  -----  ----- 
  Upside                                 10.7%     3.9%     2.4%   1.1% 
 -------------------------------------  -------  --------  -----  ----- 
  Downside                                1.8%     7.0%     3.0%   1.0% 
 -------------------------------------  -------  --------  -----  ----- 
 

1. For the six months ended 30 June 2021 the HPI economic forecast has been stressed on the downside and more severe downside scenarios to reflect Metro Bank's geographical concentration risk.

Following the initial four-year projection period, the Upside, Downside and Severe Downside scenarios converge to the Baseline scenario. The rate of convergence varies based on the macroeconomic factor, but at a minimum convergence takes place three years from the initial four-year projection period.

 
                                         Variance to reported 
                                   ECL           weighted ECL 
 Scenario                  GBP'million        at 30 June 2021 
-----------------  -------------------  --------------------- 
 Weighted                          166                   100% 
 Baseline                          153                   (8%) 
 Upside                            146                  (12%) 
 Downside                          182                    10% 
 Severe Downside                   208                    26% 
-----------------  -------------------  --------------------- 
 

We note that the sensitivities disclosed above represent example scenarios and may not represent actual scenarios which occur in the future. If one of these scenarios did arise then at that time the ECL would not equal the amount disclosed above, as the amounts disclosed do not take account of the alternative possible scenarios which would be considered at that time. We also note that the sensitivities disclosed above do not take into account movements in impairment stage allocations that would result under the different scenarios.

   6          Operating segments 

We provide retail and commercial banking services. The Board considers the results of the Group as a whole when assessing the performance of the business and allocating resources. Accordingly, we have only a single operating segment.

We operate solely in the UK and as such no geographical analysis is required

   2.   Net interest income 

Interest income

 
                                                       Half year      Half year      Half year 
                                                              to             to             to 
                                                         30 June    31 December        30 June 
                                                            2021           2020           2020 
                                                     GBP'million    GBP'million    GBP'million 
-------------------------------------------------  -------------  -------------  ------------- 
 Cash and balances held with the Bank of England             2.3            1.2            4.9 
 Loans and advances to customers                           182.2          201.6          191.7 
 Investment securities held at amortised cost                9.1            5.3           19.5 
 Investment securities held at FVOCI                         0.6            0.5            1.6 
-------------------------------------------------  -------------  -------------  ------------- 
 Total interest income                                     194.2          208.6          217.7 
-------------------------------------------------  -------------  -------------  ------------- 
 

Interest expense

 
                                   Half year      Half year      Half year 
                                          to             to             to 
                                     30 June    31 December        30 June 
                                        2021           2020           2020 
                                 GBP'million    GBP'million    GBP'million 
-----------------------------  -------------  -------------  ------------- 
 Deposits from customers                25.5           38.8           60.3 
 Deposits from central banks             1.9            1.9            6.8 
 Repurchase agreements                   1.1            1.1            1.2 
 Debt securities                        23.6           23.6           24.2 
 Lease liabilities                       8.8            9.4            9.3 
 Total interest expense                 60.9           74.8          101.8 
-----------------------------  -------------  -------------  ------------- 
 
   3.   General operating expenses 
 
                                                    Half year      Half year      Half year 
                                                           to             to             to 
                                                      30 June    31 December        30 June 
                                                         2021           2020           2020 
                                                  GBP'million    GBP'million    GBP'million 
----------------------------------------------  -------------  -------------  ------------- 
 People costs                                           121.5          108.8           88.7 
 Information technology costs                            27.3           26.6           21.7 
 Occupancy expenses                                      16.2           17.1           17.2 
 Money transmission and other banking related 
  costs                                                  33.6           32.4           13.5 
 Transformation costs                                     1.8            4.2           12.4 
 Remediation costs                                       25.4           22.9           17.8 
 Capability & Innovation fund (C&I) costs                 5.8            6.4           15.1 
 Legal and Regulatory fees                                3.4            3.1            2.3 
 Professional Fees                                       27.4           32.3           21.7 
 Contractor costs                                         2.1            2.7            2.8 
 Printing, postage and stationery costs                   2.4            3.0            3.1 
 Travel costs                                             0.5            0.5            1.3 
 Marketing and advertising costs                          1.5            2.8            3.6 
 Business acquisition and integration costs               2.3            5.4              - 
 Other                                                    1.6              -           12.9 
 Total general operating expenses                       272.8          268.2          234.1 
----------------------------------------------  -------------  -------------  ------------- 
 
   4.   People costs 
 
                                           Half year      Half year      Half year 
                                                  to             to             to 
                                             30 June    31 December        30 June 
                                                2021           2020           2020 
                                         GBP'million    GBP'million    GBP'million 
-------------------------------------  -------------  -------------  ------------- 
 Wages and salaries                            103.1           92.2           74.6 
 Social security costs                          11.2           10.0            7.9 
 Pension costs                                   6.5            5.8            5.0 
 Equity-settled share based payments             0.7            0.8            1.2 
 Total people costs                            121.5          108.8           88.7 
-------------------------------------  -------------  -------------  ------------- 
 
   5.   Taxation 

Tax (expense)/credit for the period

The components of tax (expense)/credit for the six months ended 30 June 2021, 31 December 2020 and 30 June 2020 are:

 
                                                         Half year      Half year      Half year 
                                                                to             to             to 
                                                           30 June    31 December        30 June 
                                                              2021           2020           2020 
                                                       GBP'million    GBP'million    GBP'million 
---------------------------------------------------  -------------  -------------  ------------- 
 Current tax 
 Current tax                                                     -          (0.7)            0.6 
 Adjustment in respect of prior years                        (0.1)          (0.5)              - 
---------------------------------------------------  -------------  -------------  ------------- 
 Total current tax (expense)/credit                          (0.1)          (1.2)            0.6 
---------------------------------------------------  -------------  -------------  ------------- 
 Deferred tax 
 Origination and reversal of temporary differences             2.3            4.9          (1.3) 
 Effect of changes in tax rates                              (4.4)            0.3            1.8 
 Adjustment in respect of prior periods                          -            4.6              - 
---------------------------------------------------  -------------  -------------  ------------- 
 Total deferred tax (expense)/credit                         (2.1)            9.8            0.5 
---------------------------------------------------  -------------  -------------  ------------- 
 Total tax (expense)/credit                                  (2.2)            8.6            1.1 
---------------------------------------------------  -------------  -------------  ------------- 
 

Reconciliation of the total tax (expense)/credit

The tax expense shown in the income statement differs from the tax expense that would apply if all accounting profits had been taxed at the UK corporation tax rate.

A reconciliation between the tax expense and the accounting profit multiplied by the UK corporation tax rate for the half year ended 30 June 2021, 31 December 2020 and 30 June 2020 are as follows:

 
                                                Half                                                  Half 
                                                year                       Half                       year 
                                                  to                    year to   Effective             to 
                                             30 June   Effective    31 December         tax        30 June   Effective 
                                                2021    tax rate           2020        rate           2020    tax rate 
                                         GBP'million           %    GBP'million           %    GBP'million           % 
-------------------------------------  -------------  ----------  -------------  ----------  -------------  ---------- 
 Loss before tax                             (138.9)                     (70.9)                    (240.6) 
-------------------------------------  -------------  ----------  -------------  ----------  -------------  ---------- 
 Tax credit at statutory income tax 
  rate of 19%                                   26.4       19.0%           13.5       19.0%           45.7       19.0% 
-------------------------------------  -------------  ----------  -------------  ----------  -------------  ---------- 
 
 Tax effects of: 
 Non-deductible expenses - 
  depreciation 
  on non-qualifying fixed assets               (0.8)      (0.6%)          (1.0)      (1.4%)          (1.4)      (0.6%) 
 Non-deductible expenses - investment 
  property impairment                              -           -          (3.2)      (4.5%) 
 Non-deductible expenses - PPE 
  impairment                                       -           -              -           -          (2.2)      (0.9%) 
 Non-deductible expenses - 
  remediation                                  (4.6)      (3.3%)          (3.6)      (5.1%)          (3.0)      (1.3%) 
 Non-deductible expenses - other               (0.1)      (0.1%)          (0.2)      (0.3%)          (0.5)      (0.2%) 
 Impact of intangible asset 
  impairment 
  on R&D deferred tax liability                  1.9        1.4%            0.2        0.3%              -           - 
 Share based payments                          (0.2)      (0.1%)              -           -          (0.2)      (0.1%) 
 Adjustment in respect of prior years          (0.1)           -            4.1        5.8%              -           - 
 Losses for the period for which no 
  deferred tax asset has been 
  recognised                                  (20.3)     (14.6%)          (3.7)      (5.2%)         (39.1)     (16.3%) 
 Derecognition of tax losses arising               -           -              -           -              -           - 
  in prior years 
 Effect of changes in tax rates                (4.4)      (3.2%)            0.3        0.4%            1.8        0.8% 
-------------------------------------  -------------  ----------  -------------  ----------  -------------  ---------- 
 Tax (expense) / credit reported in 
  the consolidated income statement            (2.2)      (1.5%)            6.4        9.0%            1.1        0.4% 
-------------------------------------  -------------  ----------  -------------  ----------  -------------  ---------- 
 

Effective tax rate

The effective tax rate for half year to 30 June 2021 is (1.5)% (half year to 31 December 2020: 0.4%; half year to 30 June 2020: 9.0%). This has been calculated by applying the effective tax rate which is expected to apply for the six months ended 30 June 2021 using rates substantively enacted by 30 June 2021 as required by IAS34 'Interim Financial Reporting'.

Effect of changes in tax rates

This relates to the remeasurement of deferred tax rates following a change to the main UK corporation tax rate. A reduction in the UK corporation tax rate from 19% to 17% (effective 1 April 2020) was substantively enacted on 6 September 2016. The March 2020 Budget announced that a rate of 19% would continue to apply with effect from 1 April 2020, and this change was substantively enacted on 17 March 2020.

An increase in the UK corporation rate from 19% to 25% (effective 1 April 2023) was substantively enacted on 24 May 2021. This will increase the company's future current tax charge accordingly. The deferred tax liability at 30 June 2021 has been calculated based on these rates, reflecting the expected timing of temporary differences.

Deferred tax

A deferred tax asset must be regarded as recoverable and therefore recognised only when, on the basis of all available evidence, it can be regarded as more likely than not there will be suitable tax profits from which the future of the underlying timing differences can be deducted. Further information on the details of the judgements taken around deferred tax are discussed in note 1.

The following table shows deferred tax recorded in the statement of financial position and changes recorded in the tax expense:

 
                                         Investment                         Property, 
                        Unused tax     securities &      Share based          plant &        Intangible 
                            losses      impairments         payments        equipment            assets          Total 
                       GBP'million      GBP'million      GBP'million      GBP'million       GBP'million    GBP'million 
----------------  ----------------  ---------------  ---------------  ---------------  ----------------  ------------- 
 30 June 2021 
 Deferred tax 
  assets                        13                3                -                -                 -             16 
 Deferred tax 
  liabilities                    -                -                -             (21)               (8)           (29) 
----------------  ----------------  ---------------  ---------------  ---------------  ----------------  ------------- 
 Deferred tax 
  liabilities 
  (net)                         13                3                -             (21)               (8)           (13) 
----------------  ----------------  ---------------  ---------------  ---------------  ----------------  ------------- 
 
 At 1 January 
  2021                          12                2                -             (16)              (10)           (12) 
 Income 
  statement                      1                -                -              (5)                 2            (2) 
 Other 
  comprehensive 
  income                         -                1                -                -                 -              1 
----------------  ----------------  ---------------  ---------------  ---------------  ----------------  ------------- 
 At 30 June 2021                13                3                -             (21)               (8)           (13) 
----------------  ----------------  ---------------  ---------------  ---------------  ----------------  ------------- 
 
 31 December 
 2020 
 Deferred tax 
  assets                        12                3                -                -                 -             15 
 Deferred tax 
  liabilities                    -              (1)                -             (16)              (10)           (27) 
----------------  ----------------  ---------------  ---------------  ---------------  ----------------  ------------- 
 Deferred tax 
  liabilities 
  (net)                         12                2                -             (16)              (10)           (12) 
----------------  ----------------  ---------------  ---------------  ---------------  ----------------  ------------- 
 
 At 1 July 2020                  -                3                -             (14)               (4)           (15) 
 Income 
  statement                     12                -                -              (2)                 -             10 
 Other 
  comprehensive 
  income                         -              (1)                -                -                 -            (1) 
 Acquisition                     -                -                -                -               (6)            (6) 
----------------  ----------------  ---------------  ---------------  ---------------  ----------------  ------------- 
 At 31 December 
  2020                          12                2                -             (16)              (10)           (12) 
----------------  ----------------  ---------------  ---------------  ---------------  ----------------  ------------- 
 
 30 June 2020 
----------------  ----------------  ---------------  ---------------  ---------------  ----------------  ------------- 
 Deferred tax 
  assets                         -                5                -                -                 -              5 
 Deferred tax 
  liabilities                    -              (2)                -             (14)               (4)           (20) 
----------------  ----------------  ---------------  ---------------  ---------------  ----------------  ------------- 
 Deferred tax 
  liabilities 
  (net)                          -                3                -             (14)               (4)           (15) 
----------------  ----------------  ---------------  ---------------  ---------------  ----------------  ------------- 
 
 At 1 January 
  2020                           -                4                -             (15)               (4)           (15) 
 Income 
  statement                      -              (1)                -                1                 -              - 
 At 30 June 2020                 -                3                -             (14)               (4)           (15) 
----------------  ----------------  ---------------  ---------------  ---------------  ----------------  ------------- 
 
   6.   Loans and advances to customers 
 
                                                          30 June 2021 
                                         ---------------------------------------------- 
                                          Gross carrying                   Net carrying 
                                                  amount   ECL allowance         amount 
                                             GBP'million     GBP'million    GBP'million 
---------------------------------------  ---------------  --------------  ------------- 
 Retail mortgages                                  6,815            (15)          6,800 
 Consumer lending                                    704            (42)            662 
 Commercial lending                                4,972           (109)          4,863 
---------------------------------------  ---------------  --------------  ------------- 
 Total loans and advances to customers            12,491           (166)         12,325 
---------------------------------------  ---------------  --------------  ------------- 
 
 
                                                        31 December 2020 
                                         ---------------------------------------------- 
                                          Gross carrying                   Net carrying 
                                                  amount   ECL allowance         amount 
                                             GBP'million     GBP'million    GBP'million 
---------------------------------------  ---------------  --------------  ------------- 
 Retail mortgages                                  6,892            (26)          6,866 
 Consumer lending                                    204            (25)            179 
 Commercial lending                                5,148           (103)          5,045 
---------------------------------------  ---------------  --------------  ------------- 
 Total loans and advances to customers            12,244           (154)         12,090 
---------------------------------------  ---------------  --------------  ------------- 
 
 
                                                          30 June 2020 
                                         ---------------------------------------------- 
                                          Gross carrying                   Net carrying 
                                                  amount   ECL allowance         amount 
                                             GBP'million     GBP'million    GBP'million 
---------------------------------------  ---------------  --------------  ------------- 
 Retail mortgages                                 10,190            (40)         10,150 
 Consumer lending                                    198            (22)            176 
 Commercial lending                                4,614            (83)          4,531 
---------------------------------------  ---------------  --------------  ------------- 
 Total loans and advances to customers            15,002           (145)         14,857 
---------------------------------------  ---------------  --------------  ------------- 
 

Loans and advances to customers by category

 
                                                    30 June    31 December        30 June 
                                                       2021           2020           2020 
                                                GBP'million    GBP'million    GBP'million 
--------------------------------------------  -------------  -------------  ------------- 
 Residential owner occupied                           5,028          5,051          8,310 
 Retail buy-to-let                                    1,787          1,841          1,880 
--------------------------------------------  -------------  -------------  ------------- 
 Total retail mortgages                               6,815          6,892         10,190 
--------------------------------------------  -------------  -------------  ------------- 
 Overdrafts                                              71             73             73 
 Credit cards                                            11             10             10 
 Term loans                                             622            121            115 
--------------------------------------------  -------------  -------------  ------------- 
 Total consumer lending                                 704            204            198 
--------------------------------------------  -------------  -------------  ------------- 
 Total retail lending                                 7,519          7,096         10,388 
--------------------------------------------  -------------  -------------  ------------- 
 Professional buy-to-let                              1,037          1,117          1,167 
 Bounce back loans                                    1,394          1,353            730 
 Coronavirus business interruption loans                162            114             50 
 Other term loans                                     1,963          2,138          2,222 
 Commercial term loans                                4,556          4,722          4,169 
 Overdrafts and revolving credit facilities             133            149            185 
 Credit cards                                             3              3              3 
 Asset and invoice finance                              280            274            257 
 Total commercial lending                             4,972          5,148          4,614 
--------------------------------------------  -------------  -------------  ------------- 
 Total gross loans to customers                      12,491         12,244         15,002 
--------------------------------------------  -------------  -------------  ------------- 
 

Included within the consumer term loan figure is the portfolio back book of loans purchased from the RateSetter peer-to-peer investors in April for GBP337 million.

Credit risk exposures

The following tables show the loans for each of our portfolios by days past due along with their corresponding staging. Where payment deferrals have been given as a result of COVID-19 the days past due figure exclude the deferral period. Overall COVID-19 has impacted a number of our customers, and this is reflected in the deterioration in the proportion of loans which are past due. We have provisioned for higher levels of expected credit losses to reflect this risk.

Retail mortgages

 
                                                           30 June 2021 
                          ------------------------------------------------------------------------------ 
                                     Stage 1             Stage 2             Stage 3             POCI(1) 
                                    12 month            Lifetime            Lifetime            Lifetime 
                             ECL GBP'million     ECL GBP'million     ECL GBP'million     ECL GBP'million 
------------------------  ------------------  ------------------  ------------------  ------------------ 
 Up to date                            5,917                 751                  32                   - 
 1 to 29 days past due                     1                  17                  10                   - 
 30 to 89 days past due                    -                  18                  17                   - 
 90+ days past due                         -                   -                  52                   - 
------------------------  ------------------  ------------------  ------------------  ------------------ 
 Gross carrying amount                 5,918                 786                 111                   - 
------------------------  ------------------  ------------------  ------------------  ------------------ 
 
   1.     Purchase or originated credit impaired 
 
                                                         31 December 2020 
                          ------------------------------------------------------------------------------ 
                                     Stage 1             Stage 2             Stage 3                POCI 
                                    12 month            Lifetime            Lifetime            Lifetime 
                             ECL GBP'million     ECL GBP'million     ECL GBP'million     ECL GBP'million 
------------------------  ------------------  ------------------  ------------------  ------------------ 
 Up to date                            5,911                 802                  47                   - 
 1 to 29 days past due                     -                  18                   8                   - 
 30 to 89 days past due                    -                  43                  13                   - 
 90+ days past due                         -                   -                  50                   - 
------------------------  ------------------  ------------------  ------------------  ------------------ 
 Gross carrying amount                 5,911                 863                 118                   - 
------------------------  ------------------  ------------------  ------------------  ------------------ 
 
 
                                                           30 June 2020 
                          ------------------------------------------------------------------------------ 
                                     Stage 1             Stage 2             Stage 3                POCI 
                                    12 month            Lifetime            Lifetime            Lifetime 
                             ECL GBP'million     ECL GBP'million     ECL GBP'million     ECL GBP'million 
------------------------  ------------------  ------------------  ------------------  ------------------ 
 Up to date                            9,382                 680                  33                   - 
 1 to 29 days past due                     -                  14                   7                   - 
 30 to 89 days past due                    -                  29                  11                   - 
 90+ days past due                         -                   -                  34                   - 
------------------------  ------------------  ------------------  ------------------  ------------------ 
 Gross carrying amount                 9,382                 723                  85                   - 
------------------------  ------------------  ------------------  ------------------  ------------------ 
 

Consumer lending

 
                                                           30 June 2021 
                          ------------------------------------------------------------------------------ 
                                     Stage 1             Stage 2             Stage 3                POCI 
                                    12 month            Lifetime            Lifetime            Lifetime 
                             ECL GBP'million     ECL GBP'million     ECL GBP'million     ECL GBP'million 
------------------------  ------------------  ------------------  ------------------  ------------------ 
 Up to date                              641                  34                   1                   - 
 1 to 29 days past due                     1                   1                   -                   - 
 30 to 89 days past due                    -                   8                   1                   - 
 90+ days past due                         -                   -                  16                   1 
------------------------  ------------------  ------------------  ------------------  ------------------ 
 Gross carrying amount                   642                  43                  18                   1 
------------------------  ------------------  ------------------  ------------------  ------------------ 
 
 
                                                         31 December 2020 
                          ------------------------------------------------------------------------------ 
                                     Stage 1             Stage 2             Stage 3                POCI 
                                    12 month            Lifetime            Lifetime            Lifetime 
                             ECL GBP'million     ECL GBP'million     ECL GBP'million     ECL GBP'million 
------------------------  ------------------  ------------------  ------------------  ------------------ 
 Up to date                              149                  38                   -                   - 
 1 to 29 days past due                     -                   3                   -                   - 
 30 to 89 days past due                    -                   2                   -                   - 
 90+ days past due                         -                   -                  12                   - 
------------------------  ------------------  ------------------  ------------------  ------------------ 
 Gross carrying amount                   149                  43                  12                   - 
------------------------  ------------------  ------------------  ------------------  ------------------ 
 
 
                                                           30 June 2020 
                          ------------------------------------------------------------------------------ 
                                     Stage 1             Stage 2             Stage 3                POCI 
                                    12 month            Lifetime            Lifetime            Lifetime 
                             ECL GBP'million     ECL GBP'million     ECL GBP'million     ECL GBP'million 
------------------------  ------------------  ------------------  ------------------  ------------------ 
 Up to date                              177                   -                   -                   - 
 1 to 29 days past due                     2                   1                   -                   - 
 30 to 89 days past due                    -                   7                   -                   - 
 90+ days past due                         -                   -                  11                   - 
------------------------  ------------------  ------------------  ------------------  ------------------ 
 Gross carrying amount                   179                   8                  11                   - 
------------------------  ------------------  ------------------  ------------------  ------------------ 
 

Commercial lending

 
                                                           30 June 2021 
                          ------------------------------------------------------------------------------ 
                                     Stage 1             Stage 2             Stage 3                POCI 
                                    12 month            Lifetime            Lifetime            Lifetime 
                             ECL GBP'million     ECL GBP'million     ECL GBP'million     ECL GBP'million 
------------------------  ------------------  ------------------  ------------------  ------------------ 
 Up to date                            3,985                 765                 165                   - 
 1 to 29 days past due                     1                   8                   2                   - 
 30 to 89 days past due                    -                  27                  10                   - 
 90+ days past due                         -                   -                   9                   - 
------------------------  ------------------  ------------------  ------------------  ------------------ 
 Gross carrying amount                 3,986                 800                 186                   - 
------------------------  ------------------  ------------------  ------------------  ------------------ 
 
 
                                                         31 December 2020 
                          ------------------------------------------------------------------------------ 
                                     Stage 1             Stage 2             Stage 3                POCI 
                                    12 month            Lifetime            Lifetime            Lifetime 
                             ECL GBP'million     ECL GBP'million     ECL GBP'million     ECL GBP'million 
------------------------  ------------------  ------------------  ------------------  ------------------ 
 Up to date                            4,115                 863                  96                   - 
 1 to 29 days past due                     -                  21                   2                   - 
 30 to 89 days past due                    -                  22                  11                   - 
 90+ days past due                         -                   -                  18                   - 
------------------------  ------------------  ------------------  ------------------  ------------------ 
 Gross carrying amount                 4,115                 906                 127                   - 
------------------------  ------------------  ------------------  ------------------  ------------------ 
 
 
                                                           30 June 2020 
                          ------------------------------------------------------------------------------ 
                                     Stage 1             Stage 2             Stage 3                POCI 
                                    12 month            Lifetime            Lifetime            Lifetime 
                             ECL GBP'million     ECL GBP'million     ECL GBP'million     ECL GBP'million 
------------------------  ------------------  ------------------  ------------------  ------------------ 
 Up to date                            4,353                   2                  43                   - 
 1 to 29 days past due                     2                  39                   1                   - 
 30 to 89 days past due                    -                  97                  16                   - 
 90+ days past due                         -                   -                  61                   - 
------------------------  ------------------  ------------------  ------------------  ------------------ 
 Gross carrying amount                 4,355                 138                 121                   - 
------------------------  ------------------  ------------------  ------------------  ------------------ 
 

Loss allowance

The following tables explain the changes in both the gross carrying amount and loss allowances of our loans and advances during the period.

Retail mortgages

 
                             Gross carrying amount                      Loss allowance                      Net carrying amount 
                     -------------------------------------  -------------------------------------  ------------------------------------- 
 GBP'million          Stage   Stage   Stage   POCI   Total   Stage   Stage   Stage   POCI   Total   Stage   Stage   Stage   POCI   Total 
                        1       2       3                      1       2       3                      1       2       3 
-------------------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------ 
 Balance at 
  1 January 
  2021                5,911     863     118      -   6,892     (5)    (17)     (4)      -    (26)   5,906     846     114      -   6,866 
 Transfers 
  to/from stage 
  1(1)                  369   (352)    (17)      -       -     (7)       6       1      -       -     362   (346)    (16)      -       - 
 Transfers 
  to/from stage 
  2(1)                (280)     288     (8)      -       -       1     (1)       -      -       -   (279)     287     (8)      -       - 
 Transfers 
  to/from stage 
  3(1)                  (9)    (21)      30      -       -       -       1     (1)      -       -     (9)    (20)      29      -       - 
 Net remeasurement 
  due to 
  transfers(2)            -       -       -      -       -       6       -       -      -       6       6       -       -      -       6 
 New lending(3)         545      77       -      -     622     (1)     (1)       -      -     (2)     544      76       -      -     620 
 Repayments, 
  additional 
  drawdowns 
  and interest 
  accrued              (92)    (11)     (1)      -   (104)       -       -       -      -       -    (92)    (11)     (1)      -   (104) 
 Derecognitions(4)    (526)    (58)    (11)      -   (595)       1       1       -      -       2   (525)    (57)    (11)      -   (593) 
  Changes 
   to 
   assumptions(5)         -       -       -      -       -       1       5     (1)      -       5       1       5     (1)      -       5 
-------------------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------ 
 Balance at 
  30 June 2021        5,918     786     111      -   6,815     (4)     (6)     (5)      -    (15)   5,914     780     106      -   6,800 
-------------------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------ 
 
 
                            Gross carrying amount                        Loss allowance                        Net carrying amount 
                  -----------------------------------------  -------------------------------------  ----------------------------------------- 
 GBP'million        Stage    Stage   Stage   POCI    Total    Stage   Stage   Stage   POCI   Total    Stage    Stage   Stage   POCI    Total 
                      1        2       3                        1       2       3                       1        2       3 
----------------  --------  ------  ------  -----  --------  ------  ------  ------  -----  ------  --------  ------  ------  -----  -------- 
 Balance at 
  1 July 2020        9,382     723      85      -    10,190    (21)    (11)     (8)      -    (40)     9,361     712      77      -    10,150 
 Transfers 
  to/from stage 
  1                   (18)      20     (2)      -         -       -       -       -      -       -      (18)      20     (2)      -         - 
 Transfers 
  to/from stage 
  2                  (176)     177     (1)      -         -       -       -       -      -       -     (176)     177     (1)      -         - 
 Transfers 
  to/from stage 
  3                   (31)     (8)      39      -         -       -       1     (1)      -       -      (31)     (7)      38      -         - 
 Net 
  remeasurement 
  due to 
  transfers              -       -       -      -         -       1     (3)       2      -       -         1     (3)       2      -         - 
 New lending           262      44       1      -       307     (1)     (3)       -      -     (4)       261      41       1      -       303 
 Repayments, 
  additional 
  drawdowns 
  and interest 
  accrued                5     (6)       -      -       (1)       -       -       -      -       -         5     (6)       -      -       (1) 
 Transfer 
  to held for 
  sale(6)            (289)     (7)       -      -     (296)       1       -       -      -       1     (288)     (7)       -      -     (295) 
 Derecognitions    (3,224)    (80)     (4)      -   (3,308)       3       1       1      -       5   (3,221)    (79)     (3)      -   (3,303) 
  Changes 
   to 
   assumptions           -       -       -      -         -      12     (2)       2      -      12        12     (2)       2      -        12 
----------------  --------  ------  ------  -----  --------  ------  ------  ------  -----  ------  --------  ------  ------  -----  -------- 
 Balance at 
  31 December 
  2020               5,911     863     118      -     6,892     (5)    (17)     (4)      -    (26)     5,906     846     114      -     6,866 
----------------  --------  ------  ------  -----  --------  ------  ------  ------  -----  ------  --------  ------  ------  -----  -------- 
 
 
                           Gross carrying amount                      Loss allowance                       Net carrying amount 
                  --------------------------------------  -------------------------------------  -------------------------------------- 
 GBP'million       Stage   Stage   Stage   POCI   Total    Stage   Stage   Stage   POCI   Total   Stage   Stage   Stage   POCI   Total 
                     1       2       3                       1       2       3                      1       2       3 
----------------  ------  ------  ------  -----  -------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------- 
 Balance at 
  1 January 
  2020             9,874     502      54      -   10,430       -     (3)     (5)      -     (8)   9,874     499      49      -   10,422 
 Transfers 
  to/from stage 
  1                  127   (126)     (1)      -        -     (1)       1       -      -       -     126   (125)     (1)      -        - 
 Transfers 
  to/from stage 
  2                (383)     383       -      -        -       -       -       -      -       -   (383)     383       -      -        - 
 Transfers 
  to/from stage 
  3                 (24)    (14)      38      -        -       -       -       -      -       -    (24)    (14)      38      -        - 
 Net 
  remeasurement 
  due to 
  transfers            -       -       -      -        -       -     (5)     (3)      -     (8)       -     (5)     (3)      -      (8) 
 New lending         260       4       -      -      264     (2)       -       -      -     (2)     258       4       -      -      262 
 Repayments, 
  additional 
  drawdowns 
  and interest 
  accrued          (127)     (5)       -      -    (132)       -       -       -      -       -   (127)     (5)       -      -    (132) 
 Derecognitions    (345)    (21)     (6)      -    (372)       -       -       -      -       -   (345)    (21)     (6)      -    (372) 
 Changes to 
  assumptions          -       -       -      -        -    (18)     (4)       -      -    (22)    (18)     (4)       -      -     (22) 
----------------  ------  ------  ------  -----  -------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------- 
 Balance at 
  30 June 2020     9,382     723      85      -   10,190    (21)    (11)     (8)      -    (40)   9,361     712      77      -   10,150 
----------------  ------  ------  ------  -----  -------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------- 
 
   2.     Represents the stage transfers prior to any ECL remeasurement 

3. Represents the remeasurement between the twelve month and lifetime ECL due to stage transfer, including any changes to the model assumptions and forward looking information

4. Represents the increase in balances resulting from loans and advances that have been newly originated, purchased or renewed

5. Represents the decrease in balances resulting from loans and advances that have been fully repaid, disposed of or written off

6. Represents the change in loss allowances resulting from changes to assumptions notably forward looking macro-economic information and changes in the customer's risk profile

7. Represents the decrease in balances resulting from the reclassification of loans and advances that as at the reporting date are treated as held for sale

Consumer lending

 
                          Gross carrying amount                      Loss allowance                      Net carrying amount 
                  -------------------------------------  -------------------------------------  ------------------------------------- 
 GBP'million       Stage   Stage   Stage   POCI   Total   Stage   Stage   Stage   POCI   Total   Stage   Stage   Stage   POCI   Total 
                     1       2       3                      1       2       3                      1       2       3 
----------------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------ 
 Balance at 
  1 January 
  2021               149      43      12      -     204     (6)     (9)    (10)      -    (25)     143      34       2      -     179 
 Transfers 
  to/from stage 
  1                   14    (14)       -      -       -     (2)       2       -      -       -      12    (12)       -      -       - 
 Transfers 
  to/from stage 
  2                  (4)       4       -      -       -       -       -       -      -       -     (4)       4       -      -       - 
 Transfers 
  to/from stage 
  3                  (1)     (2)       3      -       -       -       2     (2)      -       -     (1)       -       1      -       - 
 Net 
  remeasurement 
  due to 
  transfers            -       -       -      -       -       1       -     (1)      -       -       1       -     (1)      -       - 
 New lending         512      24       5      1     542    (17)     (3)     (3)      -    (23)     495      21       2      1     519 
 Repayments, 
  additional 
  drawdowns 
  and interest 
  accrued           (11)     (6)     (1)      -    (18)       -       -       -      -       -    (11)     (6)     (1)      -    (18) 
 Derecognitions     (17)     (6)     (1)      -    (24)       -       1       1      -       2    (17)     (5)       -      -    (22) 
  Changes 
   to 
   assumptions         -       -       -      -       -       4       2     (2)      -       4       4       2     (2)      -       4 
----------------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------ 
 Balance at 
  30 June 2021       642      43      18      1     704    (20)     (5)    (17)      -    (42)     622      38       1      1     662 
----------------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------ 
 
 
                          Gross carrying amount                      Loss allowance                      Net carrying amount 
                  -------------------------------------  -------------------------------------  ------------------------------------- 
 GBP'million       Stage   Stage   Stage   POCI   Total   Stage   Stage   Stage   POCI   Total   Stage   Stage   Stage   POCI   Total 
                     1       2       3                      1       2       3                      1       2       3 
----------------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------ 
 Balance at 
  1 July 2020        179       8      11      -     198     (8)     (4)    (10)      -    (22)     171       4       1      -     176 
 Transfers 
  to/from stage 
  1                  (1)       1       -      -       -       -       -       -      -       -     (1)       1       -      -       - 
 Transfers 
  to/from stage 
  2                 (54)      54       -      -       -       -       -       -      -       -    (54)      54       -      -       - 
 Transfers 
  to/from stage 
  3                  (2)     (1)       3      -       -       -       -       -      -       -     (2)     (1)       3      -       - 
 Net 
  remeasurement 
  due to 
  transfers            -       -       -      -       -       -     (6)     (2)      -     (8)       -     (6)     (2)      -     (8) 
 New lending          47       1       -      -      48     (2)       -       -      -     (2)      45       1       -      -      46 
 Repayments, 
  additional 
  drawdowns 
  and interest 
  accrued             11    (20)     (1)      -    (10)       -       -       -      -       -      11    (20)     (1)      -    (10) 
 Derecognitions     (31)       -     (1)      -    (32)       -       -       1      -       1    (31)       -       -      -    (31) 
  Changes 
   to 
   assumptions         -       -       -      -       -       4       1       1      -       6       4       1       1      -       6 
----------------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------ 
 Balance at 
  31 December 
  2020               149      43      12      -     204     (6)     (9)    (10)      -    (25)     143      34       2      -     179 
----------------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------ 
 
 
                          Gross carrying amount                      Loss allowance                      Net carrying amount 
                  -------------------------------------  -------------------------------------  ------------------------------------- 
 GBP'million       Stage   Stage   Stage   POCI   Total   Stage   Stage   Stage   POCI   Total   Stage   Stage   Stage   POCI   Total 
                     1       2       3                      1       2       3                      1       2       3 
----------------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------ 
 Balance at 
  1 January 
  2020               223       -      10      -     233     (3)     (1)     (9)      -    (13)     220     (1)       1      -     220 
 Transfers 
  to/from stage 
  1                    1     (1)       -      -       -       -       -       -      -       -       1     (1)       -      -       - 
 Transfers 
  to/from stage 
  2                  (8)       8       -      -       -       1     (1)       -      -       -     (7)       7       -      -       - 
 Transfers 
  to/from stage 
  3                  (1)       -       1      -       -       -       -       -      -       -     (1)       -       1      -       - 
 Net 
  remeasurement 
  due to 
  transfers            -       -       -      -       -       -     (1)     (1)      -     (2)       -     (1)     (1)      -     (2) 
 New lending           8       1       -      -       9       -       -       -      -       -       8       1       -      -       9 
 Repayments, 
  additional 
  drawdowns 
  and interest 
  accrued           (25)       -       -      -    (25)       -       -       -      -       -    (25)       -       -      -    (25) 
 Derecognitions     (19)       -       -      -    (19)       -       -       -      -       -    (19)       -       -      -    (19) 
  Changes 
   to 
   assumptions         -       -       -      -       -     (6)     (1)       -      -     (7)     (6)     (1)       -      -     (7) 
----------------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------ 
 Balance at 
  30 June 2020       179       8      11      -     198     (8)     (4)    (10)      -    (22)     171       4       1      -     176 
----------------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------ 
 

Commercial lending

 
                          Gross carrying amount                      Loss allowance                      Net carrying amount 
                  -------------------------------------  -------------------------------------  ------------------------------------- 
 GBP'million       Stage   Stage   Stage   POCI   Total   Stage   Stage   Stage   POCI   Total   Stage   Stage   Stage   POCI   Total 
                     1       2       3                      1       2       3                      1       2       3 
----------------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------ 
 Balance at 
  1 January 
  2021             4,115     906     127      -   5,148    (19)    (44)    (40)      -   (103)   4,096     863      86      -   5,045 
 Transfers 
  to/from stage 
  1                  126   (121)     (5)      -       -     (5)       5       -      -       -     121   (116)     (5)      -       - 
 Transfers 
  to/from stage 
  2                (124)     130     (6)      -       -       1     (2)       1      -       -   (123)     128     (5)      -       - 
 Transfers 
  to/from stage 
  3                 (18)    (78)      96      -       -       -       2     (2)      -       -    (18)    (76)      94      -       - 
 Net 
  remeasurement 
  due to 
  transfers            -       -       -      -       -       4     (4)    (11)      -    (11)       4     (4)    (11)      -    (11) 
 New lending         267      59       5      -     331     (3)     (6)       -      -     (9)     264      53       5      -     322 
 Repayments, 
  additional 
  drawdowns 
  and interest 
  accrued          (141)     (9)    (13)      -   (163)       -       -       -      -       -   (141)     (9)    (13)      -   (163) 
 Derecognitions    (239)    (87)    (18)      -   (344)       2       4       4      -      10   (237)    (83)    (14)      -   (334) 
  Changes 
   to 
   assumptions         -       -       -      -       -     (1)       8     (3)      -       4     (1)       8     (3)      -       4 
----------------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------ 
 Balance at 
  30 June 2021     3,986     800     186      -   4,972    (21)    (37)    (51)      -   (109)   3,965     764     134      -   4,863 
----------------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------ 
 
 
                          Gross carrying amount                      Loss allowance                      Net carrying amount 
                  -------------------------------------  -------------------------------------  ------------------------------------- 
 GBP'million       Stage   Stage   Stage   POCI   Total   Stage   Stage   Stage   POCI   Total   Stage   Stage   Stage   POCI   Total 
                     1       2       3                      1       2       3                      1       2       3 
----------------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------ 
 Balance at 
  1 July 2020      4,355     138     121      -   4,614    (48)     (9)    (26)      -    (83)   4,307     129      95      -   4,531 
 Transfers 
  to/from stage 
  1                  (7)       5       2      -       -       -       -       -      -       -     (7)       5       2      -       - 
 Transfers 
  to/from stage 
  2                (571)     572     (1)      -       -       -       -       -      -       -   (571)     572     (1)      -       - 
 Transfers 
  to/from stage 
  3                 (18)     (1)      19      -       -       -       1     (1)      -       -    (18)       -      18      -       - 
 Net 
  remeasurement 
  due to 
  transfers            -       -       -      -       -       -    (22)     (9)      -    (31)       -    (22)     (9)      -    (31) 
 New lending         643     197       7      -     847     (4)    (13)     (3)      -    (20)     639     184       4      -     827 
 Repayments, 
  additional 
  drawdowns 
  and interest 
  accrued           (89)       1     (6)      -    (94)       -       -       -      -       -    (89)       1     (6)      -    (94) 
 Derecognitions    (198)     (6)    (15)      -   (219)       1       1       1      -       3   (197)     (5)    (14)      -   (216) 
  Changes 
   to 
   assumptions         -       -       -      -       -      32     (1)     (3)      -      28      32     (1)     (3)      -      28 
----------------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------ 
 Balance at 
  31 December 
  2020             4,115     906     127      -   5,148    (19)    (44)    (40)      -   (103)   4,096     863      86      -   5,045 
----------------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------ 
 
 
                          Gross carrying amount                      Loss allowance                      Net carrying amount 
                  -------------------------------------  -------------------------------------  ------------------------------------- 
 GBP'million       Stage   Stage   Stage   POCI   Total   Stage   Stage   Stage   POCI   Total   Stage   Stage   Stage   POCI   Total 
                     1       2       3                      1       2       3                      1       2       3 
----------------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------ 
 Balance at 
  1 January 
  2020             3,929      72      51      -   4,052     (6)     (1)     (6)      -    (13)   3,923      71      45      -   4,039 
 Transfers 
  to/from stage 
  1                   20    (16)     (4)      -       -       -       -       -      -       -      20    (16)     (4)      -       - 
 Transfers 
  to/from stage 
  2                (107)     107       -      -       -       -       -       -      -       -   (107)     107       -      -       - 
 Transfers 
  to/from stage 
  3                 (66)    (19)      85      -       -       -       -       -      -       -    (66)    (19)      85      -       - 
 Net 
  remeasurement 
  due to 
  transfers            -       -       -      -       -       -     (6)    (21)      -    (27)       -     (6)    (21)      -    (27) 
 New lending         919       2       2      -     923     (2)       -       -      -     (2)     917       2       2      -     921 
 Repayments, 
  additional 
  drawdowns 
  and interest 
  accrued          (112)       -     (3)      -   (115)       -       -       -      -       -   (112)       -     (3)      -   (115) 
 Derecognitions    (228)     (8)    (10)      -   (246)       -       -       1      -       1   (228)     (8)     (9)      -   (245) 
 Changes to 
  assumptions          -       -       -      -       -    (40)     (2)       -      -    (42)    (40)     (2)       -      -    (42) 
----------------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------ 
 Balance at 
  30 June 2020     4,355     138     121      -   4,614    (48)     (9)    (26)      -    (83)   4,307     129      95      -   4,531 
----------------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------ 
 
   7.   Property, plant and equipment 
 
                                                  Freehold       Fixtures                         Right 
                  Investment      Leasehold         land &       fittings                        of use 
                    property   improvements      buildings    & equipment    IT hardware         assets          Total 
                 GBP'million    GBP'million    GBP'million    GBP'million    GBP'million    GBP'million    GBP'million 
--------------  ------------  -------------  -------------  -------------  -------------  -------------  ------------- 
 Cost 
 1 January 
  2021                    18            292            298             25             11            330            974 
 Additions                 -              8            (8)              -              -              -              - 
 30 June 2021             18            300            290             25             11            330            974 
--------------  ------------  -------------  -------------  -------------  -------------  -------------  ------------- 
 Accumulated 
 depreciation 
 1 January 
  2021                    12             66             21             15              7             47            168 
 Charge for 
  the period               1              6              2              3              1              7             20 
 30 June 2021             13             72             23             18              8             54            188 
--------------  ------------  -------------  -------------  -------------  -------------  -------------  ------------- 
 Net book 
  value at 
  30 June 2021             5            228            267              7              3            276            786 
--------------  ------------  -------------  -------------  -------------  -------------  -------------  ------------- 
 
 Cost 
 1 July 2020              18            315            266             26             11            335            971 
 Additions                 -              3             14              2              -              1             20 
 Recognised in 
  business 
  combinations             -              1              -              -              1              3              5 
 Disposals                 -              -              -              -              -            (9)            (9) 
 Write-offs                -            (9)              -            (3)            (1)              -           (13) 
 Transfers                 -           (18)             18              -              -              -              - 
--------------  ------------  -------------  -------------  -------------  -------------  -------------  ------------- 
 31 December 
  2020                    18            292            298             25             11            330            974 
--------------  ------------  -------------  -------------  -------------  -------------  -------------  ------------- 
 Accumulated 
 depreciation 
 1 July 2020              10             64             16             14              6             40            150 
 Charge for 
  the period               -              5              3              3              2              7             20 
 Recognised in 
  business 
  combinations             -              1              -              -              -              -              1 
 Write-offs                -            (2)              -            (2)            (1)              -            (5) 
 Transfers                 -            (2)              2              -              -              -              - 
 Impairments               2              -              -              -              -              1              3 
 Disposals                 -              -              -              -              -            (1)            (1) 
--------------  ------------  -------------  -------------  -------------  -------------  -------------  ------------- 
 31 December 
  2020                    12             66             21             15              7             47            168 
--------------  ------------  -------------  -------------  -------------  -------------  -------------  ------------- 
 Net book 
  value at 
  31 December 
  2020                     6            226            277             10              4            283            806 
--------------  ------------  -------------  -------------  -------------  -------------  -------------  ------------- 
 
 
 Cost 
 1 January 
  2020                    18            314            262             26             10            332            962 
 Additions                 -              3              4              1              2              3             13 
 Write-offs                -            (2)              -            (1)            (1)              -            (4) 
--------------  ------------  -------------  -------------  -------------  -------------  -------------  ------------- 
 30 June 2020             18            315            266             26             11            335            971 
--------------  ------------  -------------  -------------  -------------  -------------  -------------  ------------- 
 Accumulated 
 depreciation 
 1 January 
  2020                    10             49             14             12              5             16            106 
 Charge for 
  the period               -              6              2              2              2              9             21 
 Write-offs                -              -              -            (1)            (1)              -            (2) 
 Impairments               -              9              -              1              -             15             25 
--------------  ------------  -------------  -------------  -------------  -------------  -------------  ------------- 
 30 June 2020             10             64             16             14              6             40            150 
--------------  ------------  -------------  -------------  -------------  -------------  -------------  ------------- 
 Net book 
  value at 
  30 June 2020             8            251            250             12              5            295            821 
--------------  ------------  -------------  -------------  -------------  -------------  -------------  ------------- 
 
   8.   Intangible assets 
 
                                            Goodwill         Brands       Software           Total 
                                         GBP'million    GBP'million    GBP'million     GBP'million 
-------------------------------------  -------------  -------------  -------------  -------------- 
 Cost 
 1 January 2021                                   10              2            328             340 
 Additions                                         -              -             26              26 
 Deferred grant (see note 
  10)                                              -              -              1               1 
-------------------------------------  -------------  -------------  -------------  -------------- 
 30 June 2021                                     10              2            355             367 
-------------------------------------  -------------  -------------  -------------  -------------- 
 Accumulated amortisation 
 1 January 2021                                    -              -             86              86 
 Charge for the period                             -              -             20              20 
 Impairment                                        -              -              8               8 
-------------------------------------  -------------  -------------  -------------  -------------- 
 30 June 2021                                      -              -            114             114 
-------------------------------------  -------------  -------------  -------------  -------------- 
 Net book value at 30 June 
  2021                                            10              2            241             253 
 
 Cost 
 1 July 2020                                       4              -            268             272 
 Additions                                         -              -             28              28 
 Recognised in business combinations               6              2             32              40 
 Write-offs                                        -              -            (4)             (4) 
 Deferred grant (see note 
  10)                                              -              -              4               4 
-------------------------------------  -------------  -------------  -------------  -------------- 
 31 December 2020                                 10              2            328             340 
-------------------------------------  -------------  -------------  -------------  -------------- 
 Accumulated amortisation 
 1 July 2020                                       -              -             70              70 
 Charge for the period                             -              -             17              17 
 Write-offs                                        -              -            (1)             (1) 
-------------------------------------  -------------  -------------  -------------  -------------- 
 31 December 2020                                  -              -             86              86 
-------------------------------------  -------------  -------------  -------------  -------------- 
 Net book value at 31 December 
  2020                                            10              2            242             254 
-------------------------------------  -------------  -------------  -------------  -------------- 
 
 Cost 
 1 January 2020                                    4              -            224             228 
 Additions                                         -              -             53              53 
 Write-offs                                        -              -            (6)             (6) 
 Deferred grant (see note 
  10)                                              -              -            (3)             (3) 
 30 June 2020                                      4              -            268             272 
-------------------------------------  -------------  -------------  -------------  -------------- 
 Accumulated amortisation 
 1 January 2020                                    -              -             60              60 
 Charge for the period                             -              -             16              16 
 Write-offs                                        -              -            (6)             (6) 
 30 June 2020                                      -              -             70              70 
-------------------------------------  -------------  -------------  -------------  -------------- 
 Net book value at 30 June 
  2020                                             4              -            198             202 
-------------------------------------  -------------  -------------  -------------  -------------- 
 
   9.   Lease liabilities 
 
                                          Half year      Half year      Half year 
                                                 to             to             to 
                                            30 June    31 December        30 June 
                                               2021           2020           2020 
                                        GBP'million    GBP'million    GBP'million 
------------------------------------  -------------  -------------  ------------- 
 At beginning of the period                     327            340            341 
 Additions and modifications                      -              1              3 
 Recognised in business combination               -              3              - 
 Disposals                                     (11)            (9)              - 
 Lease payments made                           (15)           (18)           (13) 
 Interest on lease liabilities                    9             10              9 
------------------------------------  -------------  -------------  ------------- 
 At the end of the period                       310            327            340 
------------------------------------  -------------  -------------  ------------- 
 

10. Deferred grants

 
                                                    Half year      Half year       Half year 
                                                           to             to              to 
                                                      30 June    31 December         30 June 
                                                         2021           2020            2020 
                                                  GBP'million    GBP'million     GBP'million 
----------------------------------------------  -------------  -------------  -------------- 
 At beginning of the period                                28             31              50 
 Released to the income statement                         (7)            (7)            (16) 
 Offset against capital expenditure (see note 
  8)                                                        1              4             (3) 
 At the end of the period                                  22             28              31 
----------------------------------------------  -------------  -------------  -------------- 
 

Our only deferred grant relates to amounts awarded in relation to the Capability and Innovation Fund which formed part of the RBS alternative remedies programme. The programme was aimed to increase competition in the UK business banking marketplace.

As part of the grant we are subject to delivering a number of public commitments. These commitments can be found on BCR's (the awarding body) website. As at 30 June 2021 we are currently on track with the delivery of these commitments.

11. Share capital

As at 30 June 2021 we had 172.4 million ordinary shares of 0.0001 pence (31 December 2020: 172.4 million, 30 June 2020: 172.4 million) in issue.

Called up ordinary share capital (issued and fully paid)

 
                                   Half year      Half year      Half year 
                                          to             to             to 
                                     30 June    31 December        30 June 
                                        2021           2020           2020 
                                 GBP'million    GBP'million    GBP'million 
---------------------------    -------------  -------------  ------------- 
 At beginning of the period                -              -              - 
 At end of the period                      -              -              - 
---------------------------    -------------  -------------  ------------- 
 

Share premium

 
                                   Half year      Half year      Half year 
                                          to             to             to 
                                     30 June    31 December        30 June 
                                        2021           2020           2020 
                                 GBP'million    GBP'million    GBP'million 
----------------------------   -------------  -------------  ------------- 
 At beginning of the period            1,964          1,964          1,964 
 At end of the period                  1,964          1,964          1,964 
-----------------------------  -------------  -------------  ------------- 
 

12. Earnings per share

Basic earnings per share (EPS) is calculated by dividing the (loss)/profit attributable to our ordinary equity holders by the weighted average number of ordinary shares in issue during the year.

 
                                                   Half year      Half year   Half year 
                                                          to             to          to 
                                                     30 June    31 December     30 June 
                                                        2021           2020        2020 
------------------------------------------------  ----------  -------------  ---------- 
 (Loss) attributable to ordinary equity holders 
  (GBP'million)                                      (141.1)         (62.4)     (239.5) 
 Weighted average number of ordinary shares 
  in issue (thousands)                               172,420        172,420     172,420 
------------------------------------------------  ----------  -------------  ---------- 
 Basic earnings per share (pence)                     (81.8)         (36.2)     (138.9) 
------------------------------------------------  ----------  -------------  ---------- 
 

Diluted EPS has been calculated by dividing the loss attributable to our ordinary equity holders by the weighted average number of ordinary shares in issue during the year plus the weighted average number of ordinary shares that would be issued on the conversion to shares of options granted to colleagues. As we were loss making during the six month periods to 30 June 2021, 31 December 2020 and 30 June 2020, the share options would be antidilutive, as they would reduce the loss per share. Therefore, all the outstanding options have been disregarded in the calculation of dilutive EPS.

 
                                                  Half year      Half year   Half year 
                                                         to             to          to 
                                                    30 June    31 December     30 June 
                                                       2021           2020        2020 
-----------------------------------------------  ----------  -------------  ---------- 
 (Loss)/profit attributable to ordinary equity 
  holders (GBP'million)                             (141.1)         (62.4)     (239.5) 
 Weighted average number of ordinary shares 
  in issue (thousands)                              172,420        172,420     172,420 
-----------------------------------------------  ----------  -------------  ---------- 
 Diluted earnings per share (pence)                  (81.8)         (36.2)     (138.9) 
-----------------------------------------------  ----------  -------------  ---------- 
 

13. Fair value of financial instruments

 
                                                          Quoted                      With significant 
                                                          market   Using observable       unobservable 
                                                           price             inputs             inputs 
                                         Carrying          Level              Level              Level          Total 
                                            value              1                  2                  3     fair value 
                                      GBP'million    GBP'million        GBP'million        GBP'million    GBP'million 
----------------------------------  -------------  -------------  -----------------  -----------------  ------------- 
 30 June 2021 
 Assets 
 Loan and advances to customers            12,325              -                  -             12,287         12,287 
 Investment securities held 
  at FVOCI                                  1,198          1,198                  -                  -          1,198 
 Investment securities held 
  at amortised cost                         3,165          1,480              1,632                 64          3,176 
 Financial assets held at FVTPL                 5              -                  -                  5              5 
----------------------------------  -------------  -------------  -----------------  -----------------  ------------- 
 Liabilities 
 Deposits from customers                   16,620              -                  -             16,663         16,663 
 Deposits from central banks                3,800              -                  -              3,800          3,800 
 Debt securities                              596            503                  -                  -            503 
 Derivative financial liabilities               8              -                  -                  8              8 
 Repurchase agreements                        212              -                  -                212            212 
----------------------------------  -------------  -------------  -----------------  -----------------  ------------- 
 
 31 December 2020 
 Assets 
 Loan and advances to customers            12,090              -                  -             11,892         11,892 
 Investment securities held 
  at FVOCI                                    773            723                 50                  -            773 
 Investment securities held 
  at amortised cost                         2,640          1,021              1,567                 66          2,654 
 Financial assets held at FVTPL                30              -                  -                 30             30 
 Liabilities 
 Deposits from customers                   16,072              -                  -             16,147         16,147 
 Deposits from central banks                3,808              -                  -              3,808          3,808 
 Debt securities                              600            483                  -                  -            483 
 Financial liabilities held 
  at FVTPL                                     30              -                  -                 30             30 
 Derivative financial liabilities               8              -                  8                  -              8 
 Repurchase agreements                        196              -                  -                196            196 
----------------------------------  -------------  -------------  -----------------  -----------------  ------------- 
 30 June 2020 
 Assets 
 Loan and advances to customers            14,857              -                  -             14,975         14,975 
 Investment securities held 
  at FVOCI                                    444            444                  -                  -            444 
 Investment securities held 
  at amortised cost                         2,577            850              1,753                  -          2,603 
----------------------------------  -------------  -------------  -----------------  -----------------  ------------- 
 Liabilities 
 Deposits from customers                   15,577              -                  -             15,559         15,559 
 Deposits from central banks                3,801              -                  -              3,801          3,801 
 Debt securities                              599            460                  -                  -            460 
 Repurchase agreements                        211              -                  -                211            211 
----------------------------------  -------------  -------------  -----------------  -----------------  ------------- 
 

Information on how fair values are calculated for the financial assets and liabilities noted above are explained below:

Loans and advances to customers

Fair value is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the balance sheet date, adjusted for future credit losses and prepayments, if considered material.

Investment securities

The fair value of investment securities is based on either observed market prices for those securities that have an active trading market (fair value level 1 assets),or using observable inputs (in the case of fair value level 2 assets).

Deposits from customers

Fair values are estimated using discounted cash flows, applying current rates offered for deposits of similar remaining maturities. The fair value of a deposit repayable on demand is approximated by its carrying value.

Debt securities

Fair values are determined using the quoted market price at the balance sheet date.

Deposits from central banks/repurchase agreements

Fair values are estimated using discounted cash flows, applying current rates. Fair values approximate carrying amounts as their balances are generally short dated.

14. Legal proceedings and regulatory matters

As part of the normal course of business we are subject to legal and regulatory matters, the majority of which are not considered to have a material impact on the business.

The contingent liabilities detailed below are those which could potentially have a material impact, although their inclusion does not constitute any admission of wrongdoing or legal liability. The outcome and timing of these matters is inherently uncertain. Based on the facts currently known, it is not possible at the moment to predict the outcome of any of these matters or reliably estimate any financial impact. As such, at the reporting date no provision has been made for any of these cases within the financial statements.

PRA and FCA investigations into RWA Adjustment and AIRB Accreditation

We are currently subject to enforcement investigations by both the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA).

-- The PRA's investigation relates to potential breaches of the PRA's Fundamental Rules 2 and 6. The PRA is investigating whether there were failures to conduct regulatory reporting with due skill, care and diligence, to remedy an issue identified by the PRA in a timely fashion and/or to provide effective oversight and control to comply with its regulatory reporting obligations. These issues relate to our assessment and reporting of our risk-weighted assets. We are cooperating with the PRA's investigation. At this stage it is not practicable to identify the likely outcome or estimate the potential financial impact with any certainty.

-- The current scope of the FCA's investigation concerns potential breaches of articles 15 and 17 of the Market Abuse Regulation (EU 596/2014), Principle 11 of the FCA's Principles for Business, and Listing Principle 1, Premium Listing Principle 6 and Rule 1.3.3 of the Listing Rules, in the period between 1 June 2017 and 26 February 2019. The investigations relate to the announcements made on 23 January 2019 and 26 February 2019 in relation to risk-weighted assets and AIRB accreditation respectively and the impact these announcements had on our share price. We are cooperating with the FCA's investigation. At this stage it is not practicable to identify the likely outcome or estimate the potential financial impact with any certainty.

Financial Crime

In 2017 and 2019 initial disclosures were made to the United State's Office of Foreign Assets Control (OFAC) in relation to Cuba and Iran. We are continuing a review in respect of these matters, together with a review of our sanctions screening and transaction monitoring systems and controls, with the support of external advisers. We continue to engage and fully co-operate with our regulators in relation to these matters. At this stage it is not practicable to identify the likely outcome or estimate the potential financial impact with any certainty.

15. Post balance sheet events

There have been no material post balance sheet events.

END OF the condensed consolidated interim financial statements

Reconciliation of statutory to underlying results (unaudited)

Underlying loss represents an adjusted measure, excluding the effect of certain items that are considered to distort year-on-year comparisons, in order to provide readers with a better and more relevant understanding of the underlying trends in the business. Details of the item that are considered to be non-underlying and their reasons for exclusion can be found on page 234 of our 2020 Annual Report and Accounts.

A reconciliation from our statutory to underlying results for the period is set out below:

 
                               Impairment 
                                and write                                                     Business 
                              offs of PPE                                                  acquisition 
                                      and                                                          and      Mortgage 
                  Statutory    intangible       Net BCR   Transformation    Remediation    integration     portfolio    Underlying 
 Half year to         basis        assets         costs            costs          costs          costs          sale         basis 
 30 June 2021   GBP'million   GBP'million   GBP'million      GBP'million    GBP'million    GBP'million   GBP'million   GBP'million 
-------------                ------------  ------------  ---------------  -------------  -------------  ------------ 
 Interest 
  income              194.2             -             -                -              -              -             -         194.2 
 Interest 
  expense            (60.9)             -           0.3                -              -              -             -        (60.6) 
-------------  ------------  ------------  ------------  ---------------  -------------  -------------  ------------  ------------ 
 Net interest 
  income              133.3             -           0.3                -              -              -             -         133.6 
-------------  ------------  ------------  ------------  ---------------  -------------  -------------  ------------ 
 Net fee and 
  commission 
  income               32.7             -             -                -              -              -             -          32.7 
 Net gains on 
  sale of 
  assets                8.2             -             -                -              -              -         (8.7)         (0.5) 
 Other income          22.1             -         (6.7)                -              -              -         (1.4)          14.0 
-------------  ------------  ------------  ------------  ---------------  -------------  -------------  ------------  ------------ 
 Total income         196.3             -         (6.4)                -              -              -        (10.1)         179.8 
-------------  ------------  ------------  ------------  ---------------  -------------  -------------  ------------ 
                                                                                                                                 - 
General 
 operating 
 expenses           (272.8)             -           6.5              1.8           25.4            2.3           1.7       (235.1) 
Depreciation 
 and 
 amortisation        (40.3)             -           0.2                -              -              -             -        (40.1) 
Impairment 
 and write 
 offs of 
 property, 
 plant & 
 equipment 
 and 
 intangible 
 assets               (7.5)           7.5             -                -              -              -             -             - 
 Total 
  operating 
  expenses          (320.6)           7.5           6.7              1.8           25.4            2.3           1.7       (275.2) 
 Expected 
  credit loss 
  expense            (14.6)                                                                                                 (14.6) 
-------------  ------------  ------------  ------------  ---------------  -------------  -------------  ------------  ------------ 
 Loss before 
  tax               (138.9)           7.5           0.3              1.8           25.4            2.3         (8.4)       (110.0) 
-------------  ------------  ------------  ------------  ---------------  -------------  -------------  ------------  ------------ 
Taxation              (2.2)             -             -                -              -              -             -         (2.2) 
Loss after 
 tax                (141.1)           7.5           0.3              1.8           25.4            2.3         (8.4)       (112.2) 
               ------------                                                                                           ------------ 
 

Details of our other alternative performance measures including the methodology used to calculating them can be found on page 233 of our 2020 Annual Report and Accounts.

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