TIDMMTRO

RNS Number : 0026U

Metro Bank PLC

28 July 2022

Metro Bank PLC

Interim results

Trading update H1 2022

28 July 2022

Metro Bank PLC (LSE: MTRO LN)

Interim results for half year ended 30 June 2022

Highlights

 
  --   Strategic plan remains on track and monthly breakeven expected 
        during Q1 2023(1) . The liability-led strategy and accelerated 
        asset mix shift has successfully widened margins, further 
        supported by the rising rate environment. 
  --   Total underlying revenue grew 31% YoY to GBP236.2 million 
        (H1 2021: GBP179.8 million ), demonstrating margin expansion 
        and continued momentum in revenue growth as lending is optimised 
        for return on regulatory capital. 
  --   Total underlying operating expenses fell 3% YoY to GBP266.3 
        million (H1 2021: GBP275.2 million) reflecting cost actions 
        taken to reduce run-rate in the near term and limit future 
        cost growth. 
  --   Cost of deposits reduced 17bps YoY to 0.14% (H1 2021: 0.31%) 
        with the impact of rate rises offset by the continued focus 
        on mix improvement, 47% of deposits are current accounts 
        (H1 2021: 41%). 
  --   Underlying loss before tax of GBP48.0 million (H1 2021: 
        loss of GBP110.0 million ) reflects the significant growth 
        in revenue and actions taken to reduce cost, offset marginally 
        by increased expected credit loss provisions. 
  --   Statutory loss before tax of GBP60.2 million (H1 2021: 
        loss of GBP138.9 million) includes one off items relating 
        to capital neutral intangible asset write downs and remediation 
        costs. Remediation costs of GBP3.0m (H1 2021: GBP25.4m) 
        have reduced significantly as programs successfully conclude. 
  --   Announced appointment of James Hopkinson as CFO. 
 
   1.     Assuming no material deterioration in the macro-economic environment. 

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

"We have delivered a strong first-half performance and I am encouraged by the continued momentum we are seeing across the bank. Initiatives we have put in place have helped us to improve NIM and lending yield, and drive record revenue growth. We have also maintained our cost discipline and improved our cost to income ratio, with the focus on generating greater earnings from our capital base. As a result, we have built a sustainable business and we now expect to reach monthly breakeven during Q1 2023.

"All of this has been made possible by focusing on our turnaround strategy over the past two years. We also retain, at our core, fantastic colleagues delivering highly-rated customer service and we remain committed to being the UK's best community bank. Collectively, we remain resolutely focused on continuing to execute our strategy and supporting our customers in the face of an increasingly complex macroeconomic environment."

Key Financials:

 
                             30       31 December    Change        30        Change 
   GBP in millions           June         2021         from        June        from 
                             2022                    FY 2021       2021      H1 2021 
 
 Assets                   GBP22,555    GBP22,587        -       GBP23,013     (2%) 
 Loans                    GBP12,364    GBP12,290       1%       GBP12,325       - 
 Deposits                 GBP16,514    GBP16,448        -       GBP16,620     (1%) 
 Loan to deposit ratio       75%          75%           -          74%        1 pps 
 CET1 capital ratio         10.6%        12.6%      (2.0 pps)     13.9%     (3.3 pps) 
 Total capital ratio 
  (TCR)                     13.8%        15.9%      (2.1 pps)     17.2%     (3.4 pps) 
 MREL ratio                 18.3%        20.5%      (2.2 pps)     21.7%     (3.4 pps) 
 Liquidity coverage 
  ratio                     257%         281%       (24 pps)      309%      (52 pps) 
                         ----------  ------------  ----------  ----------  ---------- 
 
 
                               H1          H2         Change        H1         Change 
                                                       from                     from 
   GBP in millions            2022         2021       H2 2021       2021       H1 2021 
 
 Total underlying 
  revenue(2)               GBP236.2     GBP218.1       8%        GBP179.8       31% 
 Underlying loss before 
  tax(3)                   (GBP48.0)   (GBP61.3)      (22%)     (GBP110.0)     (56%) 
 Statutory loss before 
  tax                      (GBP60.2)   (GBP106.2)     (43%)     (GBP138.9)     (57%) 
 Net interest margin         1.73%       1.51%       22 bps       1.28%       45 bps 
 Underlying EPS             (28.5p)     (36.0p)       (21%)      (65.1p)       (56%) 
                          ----------  -----------  ----------  -----------  ---------- 
 

2. Underlying revenue excludes grant income recognised relating to the Capability & Innovation fund.

3. Underlying loss before tax is an alternative performance measure and excludes 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.

Financial performance for the half year ended 30 June 2022

Deposits

 
 GBP in millions                       30       31 December     Change       30         Change 
                                      June          2021         from        June        from 
                                      2022                      FY 2021      2021       H1 2021 
 
 Demand: current accounts           GBP7,770      GBP7,318        6%      GBP6,749       15% 
 Demand: savings accounts           GBP7,817      GBP7,684        2%      GBP7,402        6% 
 Fixed term: savings 
  accounts                           GBP927       GBP1,446      (36%)     GBP2,469      (62%) 
                                  -----------  -------------  ---------  ----------  ----------- 
 Deposits from customers           GBP16,514     GBP16,448        -       GBP16,620      (1%) 
                                  -----------  -------------  ---------  ----------  ----------- 
 
 Deposits from customers includes: 
 Retail customers (excluding 
  retail partnerships)              GBP6,267      GBP6,713       (7%)     GBP6,964      (10%) 
 SMEs(4)                            GBP4,892      GBP4,764        3%      GBP4,605        6% 
                                  -----------  -------------  ---------  ----------  ----------- 
                                   GBP11,159     GBP11,477       (3%)     GBP11,569      (4%) 
                                  -----------  -------------  ---------  ----------  ----------- 
 Retail partnerships                GBP1,871      GBP1,814        3%      GBP1,697       10% 
 Commercial customers 
  (excluding SMEs(4) 
  )                                 GBP3,484      GBP3,157       10%      GBP3,354        4% 
                                    GBP5,355      GBP4,971        8%      GBP5,051        6% 
                                  -----------  -------------  ---------  ----------  ----------- 
 
 4. 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 held broadly flat in the first six months 
            at GBP16,514 million as at 30 June 2022 (31 December 2021: 
            GBP16,448 million ), focus remained on mix improvement as 
            current accounts increased by GBP452 million and fixed term 
            deposit (FTD) accounts fell by GBP519 million. 
  --       Cost of deposits was 14bps in the first half, a decrease 
            of 3bps compared to 17bps in H2 2021 despite the rising 
            rate environment, the reduction continues to reflect the 
            managed roll-off of higher cost FTD accounts and focus on 
            mix improvement in favour of non-interest-bearing current 
            accounts and demand savings accounts. 
  --       Customer account growth of 0.1 million (H2 2021: 0.1 million) 
            in the last six months to 2.6 million, reflects stable growth 
            in account openings and incremental growth from the RateSetter 
            acquisition offset by the roll-off of FTDs. 
 
 

Loans

 
 GBP in millions                        30       31 December     Change       30          Change 
                                       June          2021         from        June         from 
                                       2022                      FY 2021      2021        H1 2021 
 
 Gross loans and advances           GBP12,535     GBP12,459        1%      GBP12,491        - 
  to customers 
 Less: allowance for 
  impairment                         (GBP171)      (GBP169)        1%      (GBP166)         3% 
                                   -----------  -------------  ---------  ----------  ------------- 
 Net loans and advances 
  to customers                      GBP12,364     GBP12,290        1%      GBP12,325        0% 
                                   -----------  -------------  ---------  ----------  ------------- 
 
 Gross loans and advances 
  to customers consists 
  of: 
                                   -----------  -------------  ---------  ----------  ------------- 
 Commercial lending(5)               GBP2,993      GBP3,220       (7%)     GBP3,416       (12%) 
 Government-backed lending(6)        GBP1,488      GBP1,626       (8%)     GBP1,556        (4%) 
 Retail mortgages                    GBP6,785      GBP6,723        1%      GBP6,815         - 
 Consumer lending                    GBP1,269       GBP890        43%       GBP704         80% 
                                   -----------  -------------  ---------  ----------  ------------- 
 
       5. Includes CLBILS. 
        6. BBLS, CBILS and RLS. 
    --     Total net loans as at 30 June 2022 were GBP12,364 million, 
            broadly flat from GBP12,290 million at 31 December 2021 
            reflecting continued growth in consumer lending and specialist 
            mortgages, offset by the attrition of lower-yielding residential 
            mortgages and commercial term loans including commercial 
            real estate. Total net loans are expected to increase in 
            the second half of the year, with continuing mix shift towards 
            higher yielding assets. 
    --     Commercial loans including commercial real estate (excluding 
            BBLS, CBILS and RLS) decreased by 7% during H1 to GBP2,993 
            million at 30 June 2022 and are 12% below a year earlier 
            following the attrition of lower-yielding commercial and 
            commercial real estate term loans that provide a lower return 
            on regulatory capital. 
    --     Retail mortgages remained the largest component of the 
            lending book at 54%, with lower-yielding residential mortgages 
            rolling off and focus shifting to specialist mortgages as 
            part of the balance sheet optimisation strategy. Mortgage 
            application volumes in Q2 2022 were 87% higher than Q1 and 
            133% higher than Q4 2021. 
    --     Consumer lending increased to 10% of the loan book from 
            7% at 31 December 2021 , resulting from continued growth 
            across all channels. Consumer originations averaged GBP105 
            million per month during H1 2022 and this trajectory is 
            expected to continue. An approval rate of less than a third 
            (29%) during the period shows the focus on selective credit 
            quality. 
    --     Loan to deposit ratio remained stable at 75% (31 December 
            2021: 75%) reflecting the mix improvements in deposits and 
            actions taken to optimise the balance sheet for accretive 
            new lending despite current capital constraints. 
    --     Government-backed lending decreased 8% in the first half 
            to GBP1,488 million at 30 June 2022 and is down 4% from 
            a year earlier. 
    --     Annualised cost of risk at 0.29% (2H 2021: 0.12%) included 
            recognition of ECL expense associated with organic growth 
            in consumer lending. Non-performing loans reduced to 2.76% 
            (31 December 2021: 3.71%) reflecting an improvement in Commercial 
            single name exposures. The loan portfolio remains highly 
            collateralised with average debt to value (DTV) of the residential 
            mortgage book at 56% (31 December 2021: 55%), while DTV 
            in the commercial book was 55% (31 December 2021: 57%). 
 
 

Profit and Loss Account

 
 --   Net interest margin (NIM) at 1.73% has increased 22 bps 
       in the first half , reflecting the impact of lower cost 
       of deposits, improved lending mix and higher lending yields. 
 --   Underlying net interest income increased 12% in H1 2022 
       to GBP180.9 million (H2 2021: GBP162.1 million), and increased 
       35% YoY, highlighting the strong momentum in revenue following 
       improvements in lending mix and the impact of rate rises. 
 --   Underlying net fee and other income increased 1% sequentially 
       to GBP55.3 million (H2 2021: GBP54.8 million) driven by 
       growth in Safe Deposit Boxes, Services Charges and Interchange 
       partially offset by a reduction in FX, gains and other. 
       Fees are expected to continue recovering. 
 --   Underlying cost:income ratio reduced to 113% in the first 
       half of 2022, from 125% in the prior six months , reflecting 
       the actions taken to reduce costs as well as the momentum 
       gained in underlying revenue. 
 --   Underlying loss before tax was GBP48.0 million, a reduction 
       of 22% from the GBP61.3 million loss in H2 2021 and a reduction 
       of 56% from the GBP110.0 million loss in H1 2021 , highlighting 
       the trajectory towards sustainable profitability. 
 --   Statutory loss before tax of GBP60.2 million in H1 2022 
       (H2 2021: loss of GBP106.2 million) includes the capital 
       neutral impairment of intangible assets (GBP8.2 million) 
       and remediation costs (GBP3.0 million). Remediation costs 
       have sharply reduced as we continue to close out legacy 
       issues. For example, we concluded the matter with US Office 
       of Foreign Assets Control (OFAC) in relation to Cuba and 
       Iran without fine or penalty. 
 --   Statutory loss after tax of GBP61.7 million in H1 2022 
       (H2 2021: loss of GBP107.1 million) after a GBP1.5 million 
       corporation tax charge. 
 

Capital, Funding and Liquidity

 
 --   Strong liquidity and funding position maintained, the 
       Bank's Liquidity Coverage Ratio (LCR) remains elevated 
       at 257% as of 30 June 2022 (31 December 2021: 281%). Whilst 
       NIM dilutive, this excess liquidly is earnings neutral 
       and provides flexibility and optionality. 
 --   Common Equity Tier 1 (CET1) ratio of 10.6% as at 30 June 
       2022 (31 December 2021: 12.6%) compares to a minimum CET1 
       requirement of 4.8%(7) and minimum Tier 1 requirement of 
       6.4%(7) . 
 --   Total capital ratio of 13.8% as at 30 June 2022 (31 December 
       2021: 15.9%) compares to a minimum requirement of 8.5%(7) 
       . 
 --   MREL ratio of 18.3% as at 30 June 2022 (31 December 2021: 
       20.5%) compares to a minimum requirement of 17.0%(7) . 
 --        The PRA reduced the Bank's Pillar 2A capital requirement 
            from 1.11% to 0.50% effective as of 27 June 2022. The Resolution 
            Directorate of the Bank of England also agreed that the 
            Bank's binding MREL applicable from 27 June 2022 shall 
            be equal to the lower of: 
 
            i) 18% of the Bank's RWAs; or 
            ii) Two times the sum of the Bank's Pillar 1 and Pillar 
            2A 
 
            Therefore the Bank's minimum MREL requirement(7) has been 
            reduced to 17.0%. 
 --   Total RWA as at 30 June 2022 was GBP7,702 million (31 
       December 2021: GBP7,454 million). The increase reflects 
       the mix improvement towards higher yielding assets. The 
       result is a loan risk weight density of 49% as at 30 June 
       2022 (31 December 2021: 48%). 
 --   Regulatory leverage ratio(8) was 4.3%. 
 7. Minimum capital requirement excluding buffers. 
  8. The PRA Policy Statement 21/21 took affect from 1 January 
  2022 which required the exclusion of certain central bank 
  claims from the total exposure measure. Had the central bank 
  exposures been included the Leverage Ratio would have been 
  3.8%. 
 

Outlook and Guidance

 
 
  --   The path to profitability is supported by the continued 
        mix improvements and balance sheet growth alongside ongoing 
        cost control and benefits from rate rises. 
        Profitability: Monthly breakeven is expected during Q1 
        2023, assuming no material deterioration in the macroeconomic 
        environment. 
  --   Momentum continues towards profitability as margins widen:                     FY21    FY21 Exit Rate   H1 2022 
         Cost of deposits    0.24%       0.15%         0.14% 
         Lending yield       3.07%       3.19%         3.40% 
         Net interest 
          margin             1.40%       1.56%         1.73% 
 
 
  --   Guidance provided in February 2021 for 2022 full year, as 
        set out below, is re-affirmed although we remain cognisant 
        of the potential for unexpected adverse macroeconomic developments, 
        which may impact our ability to deliver on guidance. Loan 
        growth expectations are now higher for the year as the Bank 
        continues to optimise balance sheet growth within capital 
        constraints. 
        Balance sheet: Higher growth than 2021 (2021: 2%) with 
        continued focus on mix improvement. 
        Margin: A 1.56% FY21 exit NIM holds us in good stead for 
        2022 with continued focus on lending mix and improved yields 
        as a result of the base rate rises, potentially tempered 
        by higher cost of deposits. 
        Fees: Transaction-driven revenue streams influenced by 
        the pace of recovery. 
        Costs: Low single digit % reduction in total underlying 
        operating expenses. Non-underlying items are expected to 
        be less than 20% of 2021 (2021: GBP73.8 million) as remediation 
        costs fall away. 
        Capital: As previously stated we are comfortable operating 
        in buffers and remain above regulatory minima (currently 
        17.0% for MREL). The Bank's AIRB application is progressing. 
        Alternative capital actions remain available. 
 

A presentation for investors and analysts will be held at 8.30AM (UK time) on 28 July 2022. The presentation will be webcast on:

https://webcast.openbriefing.com/metrobank22/

For those wishing to dial-in:

From the UK dial: 0800 640 6441

From the US dial: +1 855 9796 654

Access code: 828004

Metro Bank PLC

Summary Balance Sheet and Profit & Loss Account

(Unaudited)

 
 Balance Sheet                     YoY change       30-Jun        31-Dec         30-Jun 
                                                      2022          2021           2021 
                                                  GBP'million   GBP'million    GBP'million 
 Assets 
 Loans and advances to customers       -           GBP12,364     GBP12,290      GBP12,325 
 Treasury assets(9)                                GBP9,036      GBP9,142       GBP9,474 
 Other assets(10)                                  GBP1,155      GBP1,155       GBP1,214 
                                                 ------------  ------------  -------------- 
 Total assets                         (2%)         GBP22,555     GBP22,587      GBP23,013 
                                                 ------------  ------------  -------------- 
 
 Liabilities 
 Deposits from customers              (1%)         GBP16,514     GBP16,448      GBP16,620 
 Deposits from central banks                       GBP3,800      GBP3,800       GBP3,800 
 Debt securities                                    GBP577        GBP588         GBP596 
 Other liabilities                                  GBP695        GBP716         GBP850 
                                                 ------------  ------------  -------------- 
 Total liabilities                     -           GBP21,586     GBP21,552      GBP21,866 
                                                 ------------  ------------  -------------- 
 Total shareholder's equity                         GBP969       GBP1,035       GBP1,147 
                                                 ------------  ------------  -------------- 
 Total equity and liabilities                      GBP22,555     GBP22,587      GBP23,013 
                                                 ------------  ------------  -------------- 
 
   9.     Comprises investment securities and cash & balances with the Bank of England. 
   10.    Comprises property, plant & equipment, intangible assets and other assets. 
 
                                          YoY                 Half year ended 
                                         change 
 Profit & Loss Account                              30-Jun        31-Dec        30-Jun 
                                                      2022          2021          2021 
                                                  GBP'million   GBP'million   GBP'million 
 
 Underlying net interest income           35%      GBP180.9      GBP162.1      GBP133.6 
 Underlying net fee and other             18%       GBP55.3       GBP54.8       GBP46.7 
  income 
 Underlying net gains/(losses)                         -          GBP1.2       (GBP0.5) 
  on sale of assets 
                                                 ------------  ------------  ------------ 
 Total underlying revenue                 31%      GBP236.2      GBP218.1      GBP179.8 
                                                 ------------  ------------  ------------ 
 
 Underlying operating costs              (3%)     (GBP266.3)    (GBP271.6)    (GBP275.2) 
 Expected credit loss expense                      (GBP17.9)     (GBP7.8)      (GBP14.6) 
 
 Underlying loss before tax              (56%)     (GBP48.0)     (GBP61.3)    (GBP110.0) 
                                                 ------------  ------------  ------------ 
 
 Impairment and write-off of property              (GBP8.2)      (GBP17.4)     (GBP7.5) 
  plant & equipment and intangible 
  assets 
 Net BCR costs                                         -          GBP0.3       (GBP0.3) 
 Transformation costs                              (GBP1.0)      (GBP7.1)      (GBP1.8) 
 Remediation costs                                 (GBP3.0)      (GBP20.5)     (GBP25.4) 
 Business acquisition and integration                  -         (GBP0.1)      (GBP2.3) 
  costs 
 Mortgage portfolio sale                               -         (GBP0.1)       GBP8.4 
 
 Statutory loss before tax               (57%)     (GBP60.2)    (GBP106.2)    (GBP138.9) 
                                                 ------------  ------------  ------------ 
 
 Statutory taxation                                (GBP1.5)      (GBP0.9)      (GBP2.2) 
 
 Statutory loss after tax                (56%)     (GBP61.7)    (GBP107.1)    (GBP141.1) 
                                                 ------------  ------------  ------------ 
 
 
                                            Half year ended 
 Key metrics                         30-Jun    31-Dec    30-Jun 
                                       2022      2021      2021 
 Underlying earnings per share - 
  basic and diluted                  (28.5p)   (36.0p)   (65.1p) 
 Number of shares                    172.4m    172.4m    172.4m 
 Net interest margin (NIM)            1.73%     1.51%     1.28% 
 Cost of deposits                     0.14%     0.17%     0.31% 
 Cost of risk                         0.29%     0.12%     0.24% 
 Underlying cost:income ratio         113%      125%      153% 
 
 

For more information, please contact:

Metro Bank PLC Investor Relations

Jo Roberts

+44 (0) 20 3402 8900

IR@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 2.6 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 bank for service in-store for personal and business customers, in the Competition and Market Authority's Service Quality Survey in February 2022. This year it has been awarded "Best Mortgage Provider of the Year" in 2022 MoneyAge Mortgage Awards, "Best Business Credit Card" in 2022 Moneynet Personal Finance Awards and "Best Current Account for Overseas Use" by Forbes 2022. It was "Banking Brand of The Year" at the Moneynet Personal Finance Awards 2021 and received the Gold Award in the Armed Forces Covenant's Employer Recognition Scheme 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 76 stores open seven days a week, 362 days a year; 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.

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

Six months ended 30 June 2022

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 services 2.6 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 bank for service 
  in-store for personal and business customers, in the Competition 
  and Market Authority's Service Quality Survey in February 2022. This 
  year it has been awarded "Best Mortgage Provider of the Year" in 
  2022 MoneyAge Mortgage Awards, "Best Business Credit Card" in 2022 
  Moneynet Personal Finance Awards and "Best Current Account for Overseas 
  Use" by Forbes 2022. It was "Banking Brand of The Year" at the Moneynet 
  Personal Finance Awards 2021 and received the Gold Award in the Armed 
  Forces Covenant's Employer Recognition Scheme 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 76 stores open seven days a week, 362 days a year; 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. 
------------------------------------------------------------------------------------ 
 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 
 Monique Melis (A N) 
 Paul Thandi (N R) 
 Ian Henderson (A O*) 
 Anne Grim (R) 
 Nick Winsor (O) 
 Michael Torpey (A*) (O)                        Registered Number 
                                                6419578 
 
 (A) Member of the audit committee              www.metrobankonline.co.uk 
  (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 
 
 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. 
 
   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. 
 

sumMarised interim results

 
                              Half year     Half year     Change       Half        Change 
                                  to            to                      year 
                                30 June     31 December                  to 
                                 2022          2021                   30 June 
                                                                        2021 
 Profit and loss 
 Underlying loss before 
  tax(1)                      (GBP48.0m)    (GBP61.3m)     (22%)    (GBP110.0m)    (56%) 
 Statutory loss before 
  tax                         (GBP60.2m)   (GBP106.2m)     (43%)    (GBP138.9m)    (57%) 
 Total income (statutory)     GBP236.5m     GBP222.2m       6%       GBP196.3m      20% 
 Total operating expenses 
  (statutory)                 GBP278.8m     GBP320.6m      (13%)     GBP320.6m     (13%) 
 Net interest margin            1.73%         1.51%       22 bps       1.28%       45 bps 
 Average cost of deposits       0.14%         0.17 %      (3 bps)      0.31%      (17 bps) 
 
                               30 June     31 December    Change      30 June      Change 
                                 2022          2021                     2021 
 Balance sheet 
 Customer deposits            GBP16,514m    GBP16,448m      0%      GBP16,620m      (1%) 
 Customer loans               GBP12,364m    GBP12,290m      1%      GBP12,325m       0% 
 Loan to deposit ratio           75%           75%         0 pps        74%        1 pps 
 Total assets                 GBP22,555m    GBP22,587m      0%      GBP23,013m      (2%) 
 
 Asset quality 
 Coverage ratio                 1.36%         1.36%        0 bps       1.33%       3 bps 
 Cost of risk (annualised)      0.29%         0.12%       17 bps       0.24%       5 bps 
 
 Capital ratios 
 Common Equity Tier 
  1 (CET1) ratio                10.6%         12.6%                    13.9% 
 Regulatory leverage 
  ratio(2)                       4.3%          4.4%                    4.9% 
 MREL ratio                     18.3%         20.5%                    21.7% 
 
 Customer metrics 
 Customer accounts               2.6m          2.5m                    2.4m 
 Stores                           76            78                      77 
 
 

1. Underlying loss before tax is an alternative performance measure and excludes 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. The PRA Policy Statement 21/21 took affect from 1 January 2022 which required the exclusion of certain central bank claims from the total exposure measure. Had the central bank exposures been included the Leverage Ratio would have been 3.8%.

BUSINESS review

The first six months of 2022 mark a turning point in our transformation journey. The delivery of our strategic priorities over the past two years combined with a slow return towards a more normalised interest rate environment are seeing us meaningfully advance toward achieving sustainable profitability.

This progress clearly demonstrates the value of our proposition and underlines our commitment to becoming the UK's best community bank. Our continued reign as the highest rated high street bank for service combined with our low cost and stable deposit base shows that even in a rising rate environment our model continues to resonate; with customers willing to trade price for service. This approach continues to set us apart from our peers and will see us deliver long term value for all stakeholders.

Progress against strategic priorities

During the six month period to 30 June 2022 we recognised an underlying loss before tax of GBP48.0 million (half year to 30 June 2021: loss of GBP110.0 million, half year to 31 December 2021: loss of GBP61.3 million) which reflects the continued momentum in revenue as well as our disciplined approach to costs. We have also made strong progress in reducing statutory loss before tax for the period, which fell to GBP60.2 million (half year to 30 June 2021: loss of GBP138.9 million, half year to 31 December 2021: loss of GBP106.2 million) as we addressed legacy challenges and continue to finalise our transformation programme.

Revenue

Underlying revenue for the first six months continued its upwards trend to GBP236.2 million from GBP218.1 million in the second half of 2021 (half year to 30 June 2021: GBP179.8 million) as a result of the rebalancing of our lending portfolio as well as higher interest rates over the first six months of the year.

The Metro Bank business model has always been built for a normalised interest rate environment and the continued rise in the Bank of England base rates to 1.25% now sees it at a level we have not seen in our 12 year history. On lending, we are seeing these increases flow through to our front book pricing as well as variable rates, and this trend will continue as older fixed rate balances continue to attrite. At the same time as increasing lending yields we have held cost of deposits broadly flat, as current accounts make up 47% of our deposit base and higher yielding fixed rate balances continue to fall. These factors have driven a 45bps increase in net interest margin to 1.73% (half year to 30 June 2021: 1.28%, half year to 31 December 2021: 1.51%).

The rebalancing of our lending portfolio continued over the first half of 2022 and strong originations of RateSetter personal loans saw our gross consumer term lending exceed GBP1 billion for the first time. Credit standards are set high given our focus on prime customers leading to non-performing loans comprising only 2.75% of the portfolio. Consumer lending now makes up 10% of our portfolio and is a larger component of book than professional buy-to-let mortgages. Whilst residential mortgage lending remained broadly flat over the first six months of the year it remains the largest constituent of our lending at 54% (31 December 2021: 54%) and the first six months of the year has seen us replace older balances with higher-yielding specialist products.

Alongside this we continued to issue government backed lending schemes, growing Recovery Loan Scheme balances by GBP200 million since the start of the year. These continue to provide a strong return on risk-adjusted returns in line with our wider strategy as well as supporting our customers during this uncertain period.

Our revenue for the period has also benefited from an increase in investment yields, particularly noticeable in gilt pricing. This is allowing us to generate an increased return from the excess liquidity we carry. This additional liquidity also affords us the opportunity to quickly accelerate mortgage lending in the future, post successful AIRB accreditation, without having to aggressively grow deposits.

Fee income remained flat as customer activity was impacted by lockdowns and other social restrictions earlier in the year, with moderate customer accounts growth of 0.1 million during the first six months of the year. We continue to invest in initiatives to expand fee income and aim to see growth in the second half of 2022, although we are mindful of the economic outlook and the effects this has on consumer confidence which is a driver.

Costs

Underlying operating expenses fell 3% year-on-year to GBP266.3 million (half year to 30 June 2021: GBP275.2 million; half year to 31 December 2021: GBP271.6 million) despite inflationary pressures, reflecting the actions we have taken over the past couple of years to reduce both short term run-rate and longer-term growth. Our underlying cost income remains on a clear downward trajectory, reducing to 113% for the period, down from 125% in the half year to 31 December 2021 and 153% for the half year to 30 June 2021. On a statutory basis we are also seeing a reduction in costs following the conclusion of a large number of transformation initiatives and closure of legacy remediation issues. For example, we concluded the matter with US Office of Foreign Assets Control (OFAC) in relation to Cuba and Iran without fine or penalty.

We recognised an expected credit loss expense of GBP17.9 million for the period, which largely reflects the change in the shape of our lending towards unsecured. Although this shift naturally incurs a higher cost of risk than some other areas of lending, we remain focused on the prime segments of the market and our observed levels of losses remain low. We do however continue to adopt a cautious economic outlook given that 2022 has seen heightened levels of global insecurity including the Russian invasion of Ukraine. As a solely focused UK bank we have no direct exposure to Ukraine or Russia, however like the majority of the customers and communities we serve, we are exposed to second order impacts, noticeably the increase in inflation that has in part resulted from the conflict. We have applied management overlays to our expected credit loss calculation to reflect these risks, offsetting the release of COVID-19 related adjustments.

The current inflationary environment is the highest we have witnessed in a generation however a tight cost discipline has helped us weather this headwind. A clear example of this is the action we have undertaken over the past couple of years to take advantage of the depressed commercial property market to buy the freeholds to a number of our stores. This saw us buy out the majority of our inflation linked leases with us now having only two sites remaining where rent is subject to inflation linked increases. The total number of freehold stores is now 28 representing 37% of our portfolio.

The largest increased in costs we have encountered is in relation to wage price inflation with the market for talent remaining fiercely competitive in particular in head-office and customer facing roles, and we provided colleagues on average with an above inflation increase in our pay review, effective 1 April 2022. This increase was offset by a reduction in change spend which as guided fell back during the period.

Infrastructure

The first half of 2022 has continued to see us develop our physical and digital infrastructure, although the pace has slowed as we return to normalised levels from the elevated investment we undertook in the first two years of our turnaround plan. The focus of change continues to be centred on enhancing our propositions and expanding our capacity to allow us to absorb the anticipated rate of balance sheet growth we envisage over the coming years.

The start of the year saw us open our newest store in Leicester, which is trading in line with expectations. We have also seen the continued recovery of the rest of our stores post-pandemic as footfall returns to the high street. It has been particularly pleasing to see the strong performance of our store in Bradford which we opened during 2021; this was designed with a significantly lower build cost than our previous stores, although retains distinct Metro Bank characteristics. The fact it is performing both in line with the rest of the estate demonstrates that significant savings can be achieved without compromising what our customers love about us. This should therefore allow us to deliver a significantly higher return on investment for future stores as we look to grow into new markets.

Alongside our physical footprint, we continue to invest in expanding our product offering with investment in building our motor finance proposition, which will be launched later in the year under the RateSetter brand. This builds upon the strong demand for prime unsecured lending and continues to leverage the skills and capabilities of the RateSetter acquisition.

As well as customer facing investments we are continuing to invest in back office infrastructure, with noticeable investments in financial crime. Protecting our customers and our communities from financial crime will continue to be an area of investment as we seek to remain ahead of this evolving landscape.

The first six months of the year saw continued progress on our AIRB application for residential mortgages. This remains a key strategic priority for us as it provides the potential to gain greater capital efficiencies and allow us to be more competitive in the mortgage market. We continue to engage with the PRA in respect of the application with the ambition of achieving accreditation in the near term, although the timing of any approval remains uncertain.

Balance Sheet optimisation

The balance sheet optimisation actions we have taken to date, noticeable our shift in lending mix, are now starting to bear fruit, with the effects clearly showing in our revenue growth.

Following the successful entry into the consumer unsecured market through RateSetter, we believe the motor finance product can also generate strong risk adjusted returns. However, given the uncertain economic outlook we retain a cautious approach to our roll-out and, as with our unsecured lending, will ensure that we target the prime end of the market.

Our RateSetter proposition has been highly effective in allowing to quickly and efficiently transition into higher yielding assets. The quick turnover of balances due to the short duration of lending also allows us to take advantage of rising interest rates as old balances attrite and are replaced with higher yielding front book loans. This approach will also allow us to quickly pivot back toward a focus on mortgage lending should rates to return to more normalised levels and appropriate risk-adjusted returns be made following successful AIRB accreditation.

Internal and External Communications

2022 has seen a positive start to the year in respect of our continued communications agenda. We undertook a brand campaign targeted at small businesses which showcased our incredible colleagues. The campaign was highly targeted, focused on Cardiff, Kingston, Clapham, Oxford and Manchester allowing us to maximise our impact in these important markets whilst containing costs. We have been able to track and measure the success of the campaign and have been pleased with the impact we have seen this deliver.

Colleagues and leadership

The key to our success remains our colleagues. The start of 2022 has seen the market for talent remain fiercely competitive and as such we remain focused on retaining and attracting colleagues through ensuring Metro Bank is a place that people want to join and can thrive whilst here.

In June we had the opportunity to celebrate colleagues from around the business at our AMAZE award ceremony; the first time we have been able to host the event since 2018 due to the pandemic. This provided a fantastic platform for us to be able to remind ourselves of the great work we undertake in serving our communities and how we go above and beyond to ensure we create and maintain FANS.

We also announced early this month that we have appointed James Hopkinson as our new Chief Financial Officer. James will be joining us in early September and we look forward to welcoming him at this exciting juncture. James joins us from ClearBank where he was Chief Financial Officer for the past few years and before that he spent almost 20 years at Standard Chartered in a variety of senior roles.

During the second half of the year, executive committee members Richard Lees, Cheryl McCuaig and Jessica Myers will be leaving the Bank. I would like to take the opportunity to extend my thanks to them for all their efforts and their contribution to my leadership team. They have provided immense support in helping get us to this stage of our turnaround journey and I wish them all the best in their future endeavours.

The first six months also saw Sally Clarke step down from the Board to pursue other opportunities and I thank her for her contribution over the past two years. Nick Winsor will become the designated NED for workforce engagement, a crucial role in helping maintain our colleague centric approach. Over the coming months our Chair, Robert Sharpe, will evaluate whether any further changes are required to committee compositions as a result of Sally's departure to maintain a strong and robust governance structure.

Capital

Capital remains the largest constraint on the business and we continue to utilise regulatory buffers. As we advance towards profitability this will allow us to return to growing our risk weighted assets, utilise some of our excess liquidity and maintain our positive momentum on income growth.

In June 2022 the PRA reduced our Pillar 2A requirements from 1.11% to 0.50% and the Resolution Directorate of the Bank of England agreed for our binding MREL requirement to be set as the lower of 18% and two times the sum of Pillar 1 and Pillar 2A. These changes had the effect of reducing our minimal MREL requirements (excluding buffers) to 17.0%, and reflect the credit quality of our lending portfolio as well as the strength of our balance sheet.

We are currently working on the implementation of a holding company which we are required to have in place by 26 June 2023, which is in line with the call date of our Tier 2 bond. Under the terms of the Bank of England's December 2021 MREL Policy Statement, the operating company issued Tier 2 bond will lose MREL eligibility upon the holding company implementation. Management will work with regulators, debt holders and advisers with a view to addressing this MREL eligibility aspect before the implementation of the holding company. Our Senior Non-Preferred bond includes an option for the issuer to be substituted to the holding company once it is established and so will remain fully MREL eligible.

Outlook

Thanks to the hard work of our colleagues through unprecedented times, we have reached an inflection point and can clearly demonstrate our trajectory back towards profitability. Although we continue to have significant work to do, with the momentum in the business I expect to achieve monthly breakeven during the first quarter of 2023.

We remain resolutely focused on the delivery of our strategic priorities and I would like to thank all of our stakeholders - our customers, colleagues, shareholders and regulators - for their continued support.

Daniel Frumkin

Chief Executive Officer

27 July 2022

Finance review

The continued momentum we have seen in the business is reflected in our results for the first six months of the year with underlying loss before tax decreasing from GBP110.0 million to GBP48.0 million from the same period in 2021 (half year to 31 December 2021: GBP61.3 million). On a statutory basis losses before tax reduced to GBP60.2 million for the same period (half year to 30 June 2021: GBP138.9 million, half year to 31 December 2021: GBP106.2 million) as a result of the continued reduction in non-underlying items as we close out legacy remediation projects and finalise our transformation agenda.

The results were underpinned by strong income growth combined with a reduction in costs helping to drive positive operating jaws. Net interest income grew to GBP180.8 million (half year to 30 June 2021: GBP133.3 million, half year to 31 December 2021: GBP162.0 million) driven by actions taken on lending mix, rising base rates and a continued low-cost deposit base. Net interest Margin of 1.73% (half year to 30 June 2021: 1.28%, half year to 31 December 2021: 1.51%) also continued to increase as a result of these factors although it remains diluted by the excess liquidity we continue to hold.

We ended the period with CET1 capital ratio of 10.6% and an MREL ratio of 18.3%. These compare to the regulatory minima including buffers (excluding any confidential buffer) of 7.3% for CET1, 8.9% for Tier 1 and 19.5% for MREL.

Income statement review

Table 1: Summary income statement

 
                                                           Half           Half 
                                            Half           year           year 
                                         year to             to             to 
                                         30 June    31 December        30 June 
                                            2022           2021           2021 
                                     (unaudited)    (unaudited)    (unaudited)   Year-on-year 
                                     GBP'million    GBP'million    GBP'million         growth 
---------------------------------  -------------  -------------  -------------  ------------- 
 Net interest income                       180.8          162.0          133.3            36% 
 Net fee, commission and other 
  income                                    55.7           59.0           54.8 
 Net gains on sale of assets                   -            1.2            8.2 
---------------------------------  -------------  -------------  -------------  ------------- 
 Total income                              236.5          222.2          196.3            20% 
---------------------------------  -------------  -------------  -------------  ------------- 
 General operating expenses              (233.2)        (263.3)        (272.8)          (15%) 
 Depreciation and amortisation            (37.4)         (39.9)         (40.3) 
 Impairment and write-off of PPE 
  and intangible assets                    (8.2)         (17.4)          (7.5) 
 Expected credit loss expense             (17.9)          (7.8)         (14.6) 
---------------------------------  -------------  -------------  -------------  ------------- 
 Loss before tax                          (60.2)        (106.2)        (138.9)          (57%) 
---------------------------------  -------------  -------------  -------------  ------------- 
 Taxation                                  (1.5)          (0.9)          (2.2) 
---------------------------------  -------------  -------------  -------------  ------------- 
 Loss after tax                           (61.7)        (107.1)        (141.1)          (56%) 
---------------------------------  -------------  -------------  -------------  ------------- 
 

Net interest income

Net interest income for the period was GBP180.8 million up from GBP162.0 million in the second half of 2021 and GBP133.3 million for the same period last year. This has been driven by increasing yield on our front book lending and repricing of variable rate products as base rates continued to rise alongside the continued rebalancing of our lending portfolio as we continue to execute on our strategic priorities.

2022 has seen four base rate rises, from 0.25% to 1.25%, following the increase from the historic low of 0.1% in December 2021. Further base rates are expected in the second half of the year and although the market remains fiercely competitive we should continue to see a strong pass through of these increases into our front book loan pricing.

At the same time our focus on retail and business current accounts should help to insulate the impact of these rate rises on our costs of deposits. Cost of deposits for the first six months of 2022 was 0.14%, three basis points down from the cost in the second half of 2021 (half year to 30 June 2021: 0.31%, half year to 31 December 2021: 0.17%).

Net interest income has also benefited from increases in the returns from the treasury portfolio where the impact of rate rises often filters through more quickly than in our lending portfolio, noticeably through the balances we hold at the Bank of England.

Finally, we have continued to see the incremental impacts of the actions we have taken in respect of our store lease portfolio to reduce the interest expense we recognise on IFRS 16 lease liabilities. The interest expense on lease liabilities has fallen from GBP8.8 million in the six months to 30 June 2021 to GBP8.3 million for the same period this year. This is largely as a result of the continued actions we took last year to purchase the freeholds of some of our stores. Alongside this, the disposal of our lease on a site at the Old Bailey, previous remeasurement of lease liabilities in respect of the stores announced for closure, the slowed pace of new store growth and continued maturation of the existing lease portfolio should all continue to push this expense down going forward.

Fee, commission and other income

Subdued customer activity in the first half of the year led underlying net fee and other income to remain broadly flat at GBP55.3 million (half year to 30 June 2021: GBP46.7 million, half year to 31 December 2021: GBP54.8 million). Growth in service charges, driven by continued current account growth, offset depressed foreign exchange volumes, with income from safe deposit boxes, interchange fees and ATMs remaining stable.

Operating expenses

Underlying operating expenses slightly decreased to GBP266.3 million from GBP271.6 million in the second half of 2021 and down from GBP275.2 million in the first six months of 2021. The reduction reflects the benefits realised from our transformation programme aided by a reduction in change expenditure, offset slightly by an increase from wage inflation.

Statutory costs also were down, falling 12% to GBP233.2 million from GBP263.3 million in the final six months of 2021 (half year to June 2021: GBP272.8 million), as a result of a marked reduction in transformation costs, reflecting where we are in our journey. Similarly, remediation costs have sharply reduced as we continue to close out legacy issues. Offsetting this was a GBP8.2 million write-off on intangible assets, although this item was capital neutral.

Expected credit loss expense

We recognised an expected credit loss expense of GBP17.9 million for the period (half year to 30 June 2021: GBP14.6 million, half year to 31 December 2021: GBP7.8 million), reflecting the change in make-up of the lending portfolio as well as our cautious macroeconomic outlook. Despite the worsening economic outlook, the credit performance of our portfolio during the first half of 2022 has remained stable with both non-performing loans and arrears both reducing in the first half of the year.

Whilst the portfolio continues to be resilient, we continue to adopt a cautious outlook given the macro-economic uncertainties and as such retain a material level of management overlay within our expected credit loss assessment.

Balance sheet review

Table 2: Summary balance sheet

 
                                                      30 June     31 December 
                                                         2022            2021 
                                                  (unaudited)       (audited) 
                                                  GBP'million     GBP'million    Growth 
---------------------------------------------  --------------  --------------  -------- 
 Assets 
 Cash and balances with the Bank of England             2,862           3,568     (20%) 
 Loans and advances to customers                       12,364          12,290        1% 
 Investment securities held at fair value 
  through other comprehensive income                      781             798      (2%) 
 Investment securities held at amortised 
  cost                                                  5,393           4,776       13% 
 Financial assets held at fair value through 
  profit and loss                                           2               3     (33%) 
 Property, plant and equipment                            749             765      (2%) 
 Intangible assets                                        227             243      (7%) 
 Prepayments and accrued income                            80              68       18% 
 Other assets                                              97              76       28% 
---------------------------------------------  --------------  --------------  -------- 
 Total assets                                          22,555          22,587         - 
---------------------------------------------  --------------  --------------  -------- 
 Liabilities 
 Deposits from customers                               16,514          16,448         - 
 Deposits from central banks                            3,800           3,800         - 
 Debt securities                                          577             588      (2%) 
 Repurchase agreements                                    166             169      (2%) 
 Derivative financial liabilities                           8              10     (20%) 
 Lease liabilities                                        264             269      (2%) 
 Deferred grant                                            19              19         - 
 Provisions                                                14              15      (7%) 
 Deferred tax liability                                    12              12         - 
 Other liabilities                                        212             222      (5%) 
---------------------------------------------  --------------  --------------  -------- 
 Total liabilities                                     21,586          21,552         - 
---------------------------------------------  --------------  --------------  -------- 
 Total equity                                             969           1,035      (7%) 
---------------------------------------------  --------------  --------------  -------- 
 

Deposits

Deposits of GBP16,514 million at 30 June 2022 were broadly flat compared to GBP16,448 million at 31 December 2021. Given the amount of excess liquidity we carry we have continued to focus on deposit quality and pricing rather than volume. This manifested itself in the high proportion of current accounts, which made up 47% of total customer deposits as at 30 June 2022 (31 December 2021: 44%).

Lending

Net lending remained flat during the first six months ending the period at GBP12,364 million (31 December 2021: GBP12,290 million). However, we continued to shift our lending mix as legacy balances ran off and capital was redeployed into more capital efficient lending. Consumer lending, primarily in the form of term lending delivered under the RateSetter brand, now makes up 10% of total lending balances up from 6% a year ago and 7% at year end. Term lending now makes up a larger proportion of lending than professional buy-to-let mortgages, reflecting our transition away from this area of the market to focus on lending which is more relationship driven.

We also continued to grow Recovery Loan Scheme lending during the first six months of the year to over GBP357 million, up from GBP157 million at last year end. This lending benefits from an 80% guarantee and as such aligns with our aim of improving returns on regulatory capital at the same time as being able to support small and medium sized trading businesses during a difficult time. Balances on the closed government backed lending schemes continued to attrite, reflecting the maturity of this portfolio; the majority of these loans are now entering the second year of their five year term.

Property, plant & equipment and intangibles

Non-current assets and intangible asset balances continued to decrease during the period. Property, plant and equipment ended the first half of the year at GBP749 million, down from GBP765 million at year end, as additions continue to fall. The opening of our store in Leicester was the only planned store opening of the year and as such we should continue to see asset balances decrease in the second half.

Intangible assets also continued to decrease reflecting the slowing pace of investment, which was lower than amortisation charges recognised, reflecting where we are in our transformation journey. Although the rate of intangible additions has slowed, we continue to invest in enhancing our proposition and expanding our capacity to allow us to efficiently scale the balance sheet in the years ahead. This has seen us focus on such areas as our AIRB application and continued investment in financial crime as well as new propositions including auto-financing.

Capital

Our CET1, Tier 1 and MREL ratios at 30 June 2022 were 10.6%, 10.6% and 18.3% respectively, compared to the regulatory minimum of 4.8%, 6.4% and 17.0%, respectively, (excluding buffers). The MREL requirement of 17.0% reflects the reduction of our Pillar 2A requirements from 1.11% to 0.50% and the move to our binding MREL requirement being the lower of 18% and two times the sum of Pillar 1 and Pillar 2A, which were announced in June 2022. Including buffers (excluding any confidential buffer, where applicable) our CET1, Tier 1 and MREL requirements are 7.3%, 8.9% and 19.5% respectively.

Our capital ratios were impacted in 2022 from changes in relation to the capital treatment of software assets. On 1 January 2022 the capital treatment of software assets reverted to the previous treatment of being deducted from capital, following changes implemented by the PRA.

We continue to operate within our publicly disclosed MREL buffers and will continue to do so for a period of time. The continued delivery of our strategic priorities will expect us to see a return above these requirements in the medium term.

Risk weighted assets ended the period at GBP7,702 million (31 December 2021: GBP7,454 million) reflecting the continued change in asset mix. We continue to optimise our risk weighted assets to ensure we are maximising our return on regulatory capital and remain committed to achieving AIRB accreditation which would free up risk-weighted assets and allow us to grow lending further.

Liquidity and wholesale funding

Our liquidity position continues to be strong, owing to our conservative lending approach. We ended 30 June 2022 with a Liquidity Coverage Ratio (LCR) of 257%, which continues to be significantly in excess of regulatory requirements. This is also reflected in the maintenance of a robust loan to deposit ratio which remained stable at 75% as at 30 June 2022 (31 December 2021: 75%). As we grow our regulatory capital, these elevated levels of liquidity will allow us to continue to grow lending without having to aggressively expand our deposit base.

We maintained our level under the Bank of England's Term Funding Scheme (TFSME) at GBP3.8 billion, also contributing to our liquidity. As this cost of funding is linked to the base rate, this has led to a noticeable increase in the cost of this funding during the period, rising from GBP2.1 million in the second half of 2021 to GBP13.1 million in the first half of this year (half year to 30 June 2021: GBP1.9 million). The cost of servicing the TFSME now exceeds the total interest expense paid on customer deposits. Although the use of this funding source is NIM dilutive, however, it is still overall income accretive as it is deployed into high quality securities which have also seen an increase in yield, in addition to the liquidity benefit it provides.

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.

RISK review

As at 30 June 2022, there had been no significant change to the business model, risk management framework or risk appetites we outlined in our 2021 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 the same to those outlined in the 2021 Annual Report and Accounts.

A detailed description of our principal risks and uncertainties to which we are exposed, along with our approach to mitigating these risks, is set out in the Risk Report which can be found on pages 52 to 92 of our 2021 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 risk - The risk of regulatory sanction, financial 
       loss and reputational damage as a result of failing to comply 
       with relevant regulatory requirements. 
 --   Conduct risk - The risk that our behaviours or actions 
       result in unfair outcomes or detriment to customers and/ 
       or undermines market integrity. 
 --   Model risk - The risk of potential loss, poor strategic 
       decision making and regulatory non-compliance due to decisions 
       that could be principally based on the output of models, 
       due to errors in the assumptions, development, implementation 
       or use of such models. 
 --   Capital risk - The risk that we fail to meet minimum regulatory 
       capital (and MREL) requirements. 
 --   Strategic risk - The risk of having an insufficiently defined, 
       flawed or poorly implemented strategy, a strategy that does 
       not adapt to political, environmental, business and other 
       developments and/or a strategy that does not meet the requirements 
       and expectations of our stakeholders. 
 --   Legal risk - The risk of loss, including to reputation, 
       which 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, liquidity, operational and conduct risks are outlined below.

Credit risk

Despite the challenging economic environment, the credit performance of our portfolio during the first half of 2022 has remained stable. Non-performing loans and early arrears have both reduced in the first half of the year and we have observed a reduction in commercial exposures under our Early Warning and Close Monitoring processes. We have observed modest growth in the balance sheet overall with originations in retail mortgages offsetting the reduction in our legacy acquired portfolios, and strong organic growth in consumer lending through the RateSetter platform. Whilst the portfolio continues to show resilience, we have retained a prudent level of management overlay within our expected credit loss assessment, reflecting the high level of macroeconomic uncertainty, following the Russian invasion of Ukraine, and the high inflation environment and cost of living pressures.

Total loans and advances to customers have increased by GBP76 million to GBP12.5 billion during the first half of 2022. This is reflective of our strategic focus with 43% growth in consumer balances which now contributes to 10.0% of total loans and advances to customers (31 December 2021: 7.0%). Retail mortgages and commercial balances remained relatively unchanged. However, whilst net commercial balances are relatively stable, there has been a change in composition which reflects our strategic growth of asset finance and invoice finance and new RLS lending, offset by repayments in BBLS and commercial real estate.

Expected credit losses

The below table provides a breakdown of IFRS 9 Expected credit losses (ECL) stock in the period by portfolio.

Table 3: Expected credit loss allowances

 
                                          30 June 2022    31 December         Change 
                                           GBP'million           2021    GBP'million 
                                                          GBP'million 
---------------------------------------  -------------  -------------  ------------- 
 Retail mortgages                                   18             19            (1) 
 Consumer lending                                   56             42             14 
 Commercial lending                                 97            108           (11) 
---------------------------------------  -------------  -------------  ------------- 
 Total expected credit loss allowances             171            169              2 
---------------------------------------  -------------  -------------  ------------- 
 

Expected credit losses (ECL) have increased during the year by GBP2 million to GBP171 million (2021: GBP169 million, 2020: GBP154 million) predominantly driven by originations in consumer lending, offset by repayments in commercial, particularly on some large single named cases. Management overlays are broadly flat compared to year end due the addition of overlays to reflect continued macroeconomic uncertainty following the Russian invasion of Ukraine and the high inflation and cost of living pressures offsetting releases of those relating to COVID-19 uncertainty.

Non-performing loans

The below table provides information on non-performing loans by portfolio.

Table 4: Non-performing loans

 
                                                        31 December 2021 
                        30 June 2022 (unaudited)           (unaudited) 
                      ---------------------------  ------------------------- 
                                 NPLs   NPL ratio           NPLs   NPL ratio 
                          GBP'million           %    GBP'million           % 
--------------------  ---------------  ----------  -------------  ---------- 
 Retail mortgages                 101       1.50%            114       1.70% 
 Consumer lending                  32       2.53%             21       2.36% 
 Commercial lending               212       4.73%            327       6.75% 
--------------------  ---------------  ----------  -------------  ---------- 
 Total                            345       2.75%            462       3.71% 
--------------------  ---------------  ----------  -------------  ---------- 
 

NPLs have reduced to GBP345 million (2021: GBP462 million). This decrease is primarily driven by repayments and write-offs in commercial, particularly on a small number of large commercial single name cases, and BBLS where the bank has successfully claimed against the government guarantee. NPLs for mortgages have also moderately reduced primarily driven by customers returning to contractual repayments. The NPL ratio for consumer lending has increased slightly to 2.5% (2021: 2.4%) driven by maturation of the portfolio, in line with expectations, following strong growth through the RateSetter platform.

Cost of risk

The below table provides information on the Cost of Risk (CoR). CoR is the credit impairment charge expressed as a percentage of average gross lending.

Table 5: Cost of risk

 
                      Half year 
                             to      Full year 
                   30 June 2022    31 December 
                     annualised           2021 
                    (unaudited)    (unaudited) 
                              %              % 
--------------  ---------------  ------------- 
 Cost of risk             0.29%          0.18% 
--------------  ---------------  ------------- 
 

The change in overall cost of risk (CoR) is primarily driven by increased lending in consumer lending which now equates to 10% of the bank's portfolio and carries a higher CoR than retail mortgages and commercial. The decrease in CoR for consumer lending is the result of new originations through the RateSetter platform and the reduction in the legacy consumer portfolio.

In retail mortgages, the increase in CoR is driven by the deterioration in the majority of the macroeconomic factors feeding into the IFRS 9 models offset by improvements in the HPI forecast reflecting the continued increase in observed house prices. The increase in CoR for commercial is also driven by deterioration in macroeconomic scenarios.

Retail mortgage lending

Mortgage balances have increased slightly in the first six months of 2022 to GBP6,785 million (31 December 2021: GBP6,723 million) with originations offsetting the reduction in our legacy acquired portfolios.

Despite the challenging economic environment, the credit performance of the portfolio during the first half of 2022 has remained stable. DTV has increased slightly by 1% to 56% as at 30 June 2022 (31 December 2021: 55%) and the total ECL stock position has reduced by GBP1 million to GBP18 million (31 December 2021: GBP19 million). Arrears are stable with a moderate improvement observed in non-performing loans (30 June 2022: 1.5%; 31 December 2021: 1.7%).

Origination volumes have been strong in the first half of the year at GBP675 million in (half year to 31 December 2021: GBP510 million) and we have continued to adjust our credit policy and lending criteria in late 2021 and early 2022. Additional controls have been implemented to support these changes to ensure the credit risk profile remains within appetite.

Table 6: Retail mortgage lending by DTV banding

 
                                  30 June 2022 (unaudited)                    31 December 2021 (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%                  1,863            536          2,399          1,907            524          2,431 
 51-60%                           787            416          1,203            767            415          1,182 
 61-70%                         1,112            607          1,719          1,092            564          1,656 
 71-80%                           806            241          1,047            805            188            993 
 81-90%                           362              2            364            400              3            403 
 91-100%                           47              3             50             51              3             54 
 More than 100%                     -              3              3              -              4              4 
----------------------  -------------  -------------  -------------  -------------  -------------  ------------- 
 Total retail mortgage 
  lending                       4,977          1,808          6,785          5,022          1,701          6,723 
----------------------  -------------  -------------  -------------  -------------  -------------  ------------- 
 

Table 7: Residential mortgage lending by repayment type

 
                                   30 June 2022 (unaudited)                    31 December 2021 (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                        2,017          1,723          3,740          2,113          1,620          3,733 
 Capital and interest            2,960             85          3,045          2,909             81          2,990 
-----------------------  -------------  -------------  -------------  -------------  -------------  ------------- 
 Total retail mortgage 
  lending                        4,977          1,808          6,785          5,022          1,701          6,723 
-----------------------  -------------  -------------  -------------  -------------  -------------  ------------- 
 

Table 8: Residential mortgage lending by geographic exposure

 
                                      30 June 2022 (unaudited)                    31 December 2021 (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                     1,802          1,035          2,837          2,130          1,048          3,178 
 South East                         1,251            338          1,589          1,157            283          1,440 
 South West                           432             83            515            434             82            516 
 East of England                      470            120            590            309             69            378 
 North West                           238             60            298            264             62            326 
 West Midlands                        204             67            271            190             61            251 
 Yorkshire and the Humber             170             31            201            139             34            173 
 East Midlands                        152             39            191            140             25            165 
 Wales                                100             17            117            110             20            130 
 North East                            62              9             71             62             10             72 
 Scotland                              96              9            105             87              7             94 
--------------------------  -------------  -------------  -------------  -------------  -------------  ------------- 
 Total retail mortgage 
  lending                           4,977          1,808          6,785          5,022          1,701          6,723 
--------------------------  -------------  -------------  -------------  -------------  -------------  ------------- 
 

The geographic distribution of our retail mortgages customer balances is set out above. All of our loan exposures which are secured on property are secured on UK-based assets. Our current retail mortgages portfolio is concentrated within London and the South-East, which is representative of our original customer base and store footprint. We are expanding our footprint over time which will reduce the geographical concentration of lending.

Consumer lending

Consumer balances have increased to GBP1.27 billion as at June 2022 (31 December 2021: GBP890 million) driven by strong growth through the RateSetter platform.

The majority (84%) of the portfolio now comprises new lending through the RateSetter platform. The performance of this portfolio is aligned with expectations, with moderate increases in arrears and non-performing loans in line with the growth of the book and normal portfolio maturation.

The total stock position has increased in 2022 by GBP14.6m to GBP56.0 million as at 30th June 2022. This relates to the new originations through the RateSetter platform and the expected maturation of the book, partially offset by the reduction in the legacy portfolio, and a post model overlay to reflect the uncertainty due to high inflation.

The total ECL coverage position for consumer has reduced slightly to 4.4% as a result of the continued growth in new lending in the first half of the year (31 December 2021: 4.7%).

Commercial lending

Table 9: Summary of commercial lending

 
                                                      30 June    31 December 
                                                         2022           2021 
                                                  (unaudited)      (audited) 
                                                  GBP'million    GBP'million 
---------------------------------------------  --------------  ------------- 
 Professional buy-to-let                                  853            950 
 Other term loans                                       1,638          1,791 
---------------------------------------------  --------------  ------------- 
 Non-Government backed commercial term loans            2,491          2,741 
---------------------------------------------  --------------  ------------- 
 Bounce back loans                                        984          1,304 
 Coronavirus business interruption loans                  145            165 
 Recovery loan scheme                                     357            157 
 Government backed commercial term loans                1,486          1,626 
 Total commercial term loans                            3,977          4,367 
 Overdrafts and revolving credit facilities               110            156 
 Credit cards                                               4              3 
 Asset and invoice finance                                390            320 
 Total commercial lending                               4,481          4,846 
---------------------------------------------  --------------  ------------- 
 

Our commercial lending remains largely comprised of term loans secured against property and Government supported lending. In addition, commercial lending includes facilities secured by other forms of collateral (such as debentures and guarantees), and Asset Finance and Invoice Finance.

Our commercial balances have decreased from GBP4,846 million to GBP4,481 million in the first six months of 2022. This reflects the business strategy to reduce our Portfolio Buy to Let and Real Estate lending, and reductions in bounce back loans. New commercial business over 2022 includes RLS lending to support customers impacted by COVID-19, with government supported RLS lending balances increasing to GBP357 million as of 30 June 2022.

Commercial customers are managed through an early warning categorisation where there are early signs of financial difficulty, thereby allowing timely engagement and appropriate corrective action to be taken. Early Warning categories support our IFRS 9 stage classification. Total lending in Early Warning categories has fallen since December 2021.

Table 10: Commercial term lending (exc. BBLS) by DTV banding

 
                                  30 June 2022 (unaudited)                    31 December 2021 (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%                    295            836          1,131            306            770          1,076 
 51-60%                           209            377            586            232            483            715 
 61-70%                           242            193            435            282            158            440 
 71-80%                            86             51            137            112             63            175 
 81-90%                             9             37             46              8             30             38 
 91-100%                            6             29             35              6             27             33 
 More than 100%                     6            617            623              4            582            586 
----------------------  -------------  -------------  -------------  -------------  -------------  ------------- 
 Total commercial term 
  lending                         853          2,140          2,993            950          2,113          3,063 
----------------------  -------------  -------------  -------------  -------------  -------------  ------------- 
 

As of June 2022, 76% of property secured lending had a DTV of 80% or less, reflecting the prudent risk appetite historically applied. Lending with DTV >100% includes loans which benefit from additional forms of collateral, such as debentures. The value of this additional collateral is not included in the DTV or the estimation of expected credit losses but does provide an additional level of credit risk mitigation. The guarantees supporting CBILS and RLS lending is not included in the debt to value assessment, and DTV >100% also includes government backed lending where the facility does not also benefit from property collateral. The increase in DTV>100% in 2022 reflects the increase in lending under the government's recovery loan scheme.

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

 
                                        30 June 2022 (unaudited)                    31 December 2021 (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)                             853            807          1,660            950            837          1,787 
 Hospitality                              -            359            359              -            361            361 
 Health & Social Work                     -            243            243              -            225            225 
 Legal, Accountancy & 
  Consultancy                             -            208            208              -            206            206 
 Retail                                   -            139            139              -            136            136 
 Real estate (management 
  of)                                     -              8              8              -             46             46 
 Construction                             -             94             94              -             88             88 
 Recreation, cultural and 
  sport                                   -             87             87              -             85             85 
 Investment and unit trusts               -             12             12              -             17             17 
 Education                                -             19             19              -              9              9 
 Real estate (development)                -              8              8              -              6              6 
 Other                                    -            156            156              -             97             97 
----------------------------  -------------  -------------  -------------  -------------  -------------  ------------- 
 Total commercial term 
  lending                               853          2,140          2,993            950          2,113          3,063 
----------------------------  -------------  -------------  -------------  -------------  -------------  ------------- 
 

We manage credit risk concentration to individual borrowing entities and sectors. Our credit risk appetite includes limits for individual sectors where we have higher levels of exposure.

The sector profile for commercial term lending is broadly consistent with the position as at 31 December 2021. There has been an overall reduction in commercial real estate of approximately 7%.

Table 12: Commercial term lending (exc. BBLS) by repayment type

 
                                   30 June 2022 (unaudited)                    31 December 2021 (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                          809            259          1,068            897            230          1,127 
 Capital and interest               44          1,881          1,925             53          1,883          1,936 
-----------------------  -------------  -------------  -------------  -------------  -------------  ------------- 
 Total commercial term 
  lending                          853          2,140          2,993            950          2,113          3,063 
-----------------------  -------------  -------------  -------------  -------------  -------------  ------------- 
 

Table 13: Commercial term lending (exc. BBLS) by geographic exposure

 
                                       30 June 2022 (unaudited)                     31 December 2021 (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                       554            1,102          1,656            676          1,186          1,862 
 South East                           169              365            534            160            390            550 
 South West                            24              159            183             28            151            179 
 East of England                       58              150            208             39             71            110 
 North West                            18              168            186             18            150            168 
 West Midlands                          9               96            105              9             84             93 
 Yorkshire and the Humber               3               23             26              3             17             20 
 East Midlands                         11               34             45              9             27             36 
 Wales                                  3               12             15              4             12             16 
 North East                             3               20             23              3             17             20 
 Northern Ireland                       1                3              4              1              2              3 
 Scotland                               -                8              8              -              6              6 
--------------------------  -------------  ---------------  -------------  -------------  -------------  ------------- 
 Total commercial term 
  lending                             853            2,140          2,993            950          2,113          3,063 
--------------------------  -------------  ---------------  -------------  -------------  -------------  ------------- 
 

Liquidity and funding risk

Our liquidity position continues to be strong, with our LCR standing at 257% as at 30 June 2022 (31 December 2021: 281%). This reflects our capital position and our conservative approach to lending.

We ended the period with a loan to deposit ratio of 75% (31 December 2021: 75%) and we continue to be deposit funded with no reliance on the wholesale markets although we continue to have access to, and have made use of, the Bank of England's TFSME both of which provide us with additional cost-efficient liquidity without creating reliance as a primary source of funding. Although the use of this funding is NIM dilutive, it is still overall income accretive as it is deployed into high quality securities which have also seen an increase in yield, in addition to the liquidity benefit it provides.

Capital risk

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

Our CET1 capital ratio decreased to 10.6% at 30 June 2021 from 12.6% as at 31 December 2021. This was primarily due to the losses incurred during the period as well as the changes in relation to the capital treatment of software assets. On 1 January 2022 the capital treatment of software assets reverted to the previous treatment of being deducted from capital, following changes implemented by the PRA.

Capital remains the largest constraint on the business and we continue to operate within our publicly disclosed MREL buffers and will continue to do so for a period of time. The continued delivery of our strategic priorities and a return to profitability will allow us to return above these requirements in the medium term.

In June 2022 the PRA reduced our Pillar 2A requirements from 1.11% to 0.50% and the Resolution Directorate of the Bank of England agreed for our binding MREL requirement to be set as the lower of 18% and two times the sum of Pillar 1 and Pillar 2A. These changes had the effect of reducing our minimal MREL requirements (excluding buffers) to 17.0%, and reflect the credit quality of our lending portfolio as well as the strength of our balance sheet.

We are currently working on the implementation of a holding company which we are required to have in place by 26 June 2023, which is in line with the call date of our Tier 2 bond. Under the terms of the Bank of England's December 2021 MREL Policy Statement, the operating company issued Tier 2 bond will lose MREL eligibility upon the holding company implementation. Management will work with regulators, debt holders and advisers with a view to addressing this MREL eligibility aspect before the implementation of the holding company. Our Senior Non-Preferred bond includes an option for the issuer to be substituted to the holding company once it is established and so will remain fully MREL eligible.

Risk weighted assets ended the period at GBP7,702 million (31 December 2021: GBP7,454 million) reflecting the continued change in asset mix. We continue to optimise our risk weighted assets to ensure we are maximising our return on regulatory capital and remain committed to achieving AIRB accreditation which would free up risk-weighted assets and allow us to grow lending further.

Table 14: Capital resources

 
                                                  31 December 
                                  30 June 2022           2021 
                                   (unaudited)      (audited) 
                                   GBP'million    GBP'million 
------------------------------  --------------  ------------- 
 Ordinary share capital                      -              - 
 Share premium                           1,964          1,964 
 Retained earnings                     (1,004)          (942) 
 Other reserves                              9             13 
 Intangible assets                       (227)          (243) 
 Other regulatory adjustments               74            144 
------------------------------  --------------  ------------- 
 Total Tier 1 capital (CET1)               816            936 
------------------------------  --------------  ------------- 
 Debt securities (Tier 2)                  249            249 
------------------------------  --------------  ------------- 
 Total Tier 2 capital                      249            249 
------------------------------  --------------  ------------- 
 Total regulatory capital                1,065          1,184 
------------------------------  --------------  ------------- 
 

Operational risk

Fraud risk

We continue to work hard in a constantly evolving environment to minimise the impact of fraud. Across the industry there has been a notable increase in Authorised Push Payment fraud which has driven a significant rise in fraud losses. The overall level of fraud-related losses has increased but this is in proportion to the increase seen across the industry. Across the entire fraud landscape, we have taken significant steps to mitigate the risk to both the Bank and our customers, including but not limited to; enhanced fraud screening capability, implementation of Secure Customer Authentication and changes to core fraud detection tools to help better identify scams. We are also providing support to vulnerable customers who have been victims of fraud and are seeking to raise customer awareness of evolving fraud tactics via a range of initiatives as well as training our front-line colleagues.

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. We have refined our objectives and principles and realigned our work plan to the global standard NIST Cyber Security Framework (CSF), allowing us to measure our maturity and benchmark more easily against peer organisations. The outcomes observed from simulated cyber-attacks undertaken by our cybersecurity teams provided further indication of improvements.

Operational resilience

We have identified and mapped our Important Business Services, set impact tolerances for the disruption of each service, carried out preliminary scenario testing to identify vulnerabilities and prepared a self-assessment of our resilience. Work to address our vulnerabilities and show that we can meet impact tolerances for each Important Business Service is well underway. Additionally, we have identified and assessed the materiality of our third party relationships and continue to apply this increased emphasis on operational resilience when assessing these relationships. All material supplier contracts since 1st April 2021 are compliant with the PRA requirements. This will enhance our capability to proactively prevent, respond to, recover and learn from operational resilience events and to minimise the impact to customers where these do occur.

Conduct risk

We continue to focus on the steps being taken to consistently demonstrate and evidence the consideration of customer outcomes as a key part of decision-making processes. We have taken significant steps to begin to address areas of conduct risk (particularly where there is elevated risk of customer detriment) and continue to invest funding and resource into these areas, including the identification and ongoing management of vulnerable customers, complaints management and retail arrears management.

Emerging risks

We consider emerging risks to be evolving threats which cannot yet be quantified, with the potential to significantly impact our strategy, financial performance, operational resilience and/or reputation. The emerging risks are continually assessed and reviewed through a horizon scanning process, with escalation and reporting to the Risk Oversight Committee and Board as necessary. The horizon scanning process fully considers all relevant internal and external factors and is designed to capture those risks which are present but have not yet fully crystallised, as well as those which are expected to crystallise in the future.

The emerging risk classifications reported in our 2021 Annual Report and Accounts have been retained. Talent has been added as an emerging risk, reflecting the importance of training and retaining a resilient talent pool. Additionally, the emerging risks relating digitalisation and climate change have already been shaping the future regulatory environment prior to the pandemic, but the pandemic has accelerated them - the former by increasing regulators' expectations around the need for resilient systems and controls in the face of a faster adoption of digitised solutions. And the latter around new obligations concerning reporting, disclosures and governance on all aspects of sustainability, where the pandemic has been a catalyst for the awareness of the importance of sustainable - or resilient - operations.

 
 Emerging              trend    description                         mitigating actions 
  risks 
--------------------  -------  ----------------------------------  ------------------------------ 
 ExternaL 
 MACROECONOMIC         ì   Along with COVID-19's               We continue to monitor 
  ENVIRONMENT                    long-term effects and               economic and political 
                                 scope, the recent geopolitical      developments in light 
                                 tensions in Europe due              of the ongoing uncertainty, 
                                 to the Russia-Ukraine               considering potential 
                                 conflict has had a substantial      consequences for our 
                                 impact on both domestic             customers, products 
                                 and international markets.          and operating model. 
                                 There is also the spectre           We actively monitor 
                                 of rising ransomware                our credit portfolios 
                                 attacks emanating from              and undertake robust 
                                 Russian State-sponsored             internal stress testing 
                                 cyber-criminals targeting           to identify sectors 
                                 UK infrastructure.                  that may come under 
                                 Inflation and the gradually         stress as a result 
                                 rising interest rates               of an economic slowdown 
                                 have also had a significant         in the UK. 
                                 impact on the cost of 
                                 living in the UK. 
                                 Furthermore, there is 
                                 lingering uncertainty 
                                 over the ability of economies 
                                 and society to adapt 
                                 to future variants of 
                                 existing viruses or new 
                                 strains. An increase 
                                 in restrictions could, 
                                 therefore, pose a range 
                                 of social, economic, 
                                 and technological risks. 
 Regulatory            è   The regulatory landscape            We continue to monitor 
  change                         continues to evolve,                emerging regulatory 
                                 with the requirement                initiatives to identify 
                                 to respond to ongoing               potential impacts 
                                 prudential and conduct              on our business model 
                                 driven initiatives.                 and ensure we are 
                                                                     well placed to respond 
                                                                     with effective regulatory 
                                                                     change management. 
                                                                     We continue to work 
                                                                     with regulators to 
                                                                     ensure we meet all 
                                                                     regulatory obligations, 
                                                                     with identified implications 
                                                                     of upcoming regulatory 
                                                                     activity incorporated 
                                                                     into the strategic 
                                                                     planning cycle. 
 Digitalisation        ì   COVID-19 has accelerated            Our strategy is now 
                                 the digitalisation of               predicated on new 
                                 the banking industry                and exciting digital 
                                 and will continue to                propositions, with 
                                 lead to rapid change                the implications of 
                                 over the coming years               the pandemic both 
                                 as the industry rapidly             supporting that ambition, 
                                 adapts to customers'                but also accelerating 
                                 evolving behaviours.                the timeframe for 
                                 This is spurring an acceleration    delivery. Our rapid 
                                 of investment and delivery          response to the pandemic 
                                 by both incumbent banks             has demonstrated our 
                                 and neo-banks to provide            ability to implement 
                                 enhanced digital propositions       change and digital 
                                 to customers in both                solutions swiftly. 
                                 the consumer and business           We are continuing 
                                 markets.                            with our investment 
                                                                     and digital development 
                                                                     in the near term to 
                                                                     position us for the 
                                                                     future. 
 CLIMATE CHANGE        ì   Unlike in the past where            Work continues to 
  & ESG                          this risk revolved mainly           build our capability 
                                 around climate risk,                and enhance our policies 
                                 the current, broader                and processes to ensure 
                                 definition of ESG risk              these risks are identified, 
                                 acknowledges the uncertainty        measured, monitored 
                                 around the exact nature             and managed. We are 
                                 and impact of climate               committed to working 
                                 change on our strategy,             together with customers, 
                                 performance, and operating          colleagues and communities 
                                 model, as well as capturing         to support the transition 
                                 the increased focus on              to a Net Zero economy 
                                 how we report the impact            by 2050, in line with 
                                 of its activities on                the UK government's 
                                 the environment and on              ambitions and actions. 
                                 social challenges as                We have also set a 
                                 well as the broader governance      target to make our 
                                 surrounding such risks.             own operations Net 
                                                                     Zero by 2030 and to 
                                                                     build our own resilience 
                                                                     by embedding climate-related 
                                                                     impacts in lending 
                                                                     and investment decisions. 
 INTERNAL 
 Technology            è   COVID-19 has highlighted            Our IT resilience 
  & CYBER Resilience             the extent to which technology      programme has continued 
                                 underpins our ability               to deliver strategic 
                                 to serve its customers,             enhancements throughout 
                                 as well as promoting                2022. We are investing 
                                 a hybrid approach to                in flexible, resilient 
                                 work for our employees.             cloud-based solutions 
                                 Progressive deployment              and working with our 
                                 of new technologies will            strategic technology 
                                 change our risk profile,            partners to simplify 
                                 including increased supplier        and streamline. Where 
                                 risks, evolved data risks,          technology disruption 
                                 and enhanced cost risks             does arise, we continue 
                                 where new technologies              to undertake detailed 
                                 are running in parallel             analysis of the underlying 
                                 with existing architecture.         causes and rapidly 
                                 Due to digital asset                take action to prevent 
                                 and transaction innovation,         recurrence. We continue 
                                 future digital customer             to invest in our cyber 
                                 proposition and market              security and resilience 
                                 landscape will become               capabilities in response 
                                 more competitive and                to these rapidly evolving 
                                 uncertain.                          threats. Key areas 
                                                                     of focus relate to 
                                                                     access controls, network 
                                                                     security, disruptive 
                                                                     technology and the 
                                                                     denial of service 
                                                                     capability. Progress 
                                                                     has continued in patching 
                                                                     and upgrading our 
                                                                     IT platforms and we 
                                                                     operate advanced technology 
                                                                     solutions to detect 
                                                                     and prevent criminal 
                                                                     attacks. We actively 
                                                                     participate in the 
                                                                     sharing of threat 
                                                                     information with other 
                                                                     organisations, helping 
                                                                     to ensure the continued 
                                                                     availability of our 
                                                                     exceptional service 
                                                                     offering whilst also 
                                                                     making banking safer 
                                                                     for all. 
 TALENT                ì   Technological change,               We are investing sensibly 
                                 coupled with fast-changing          in talent acquisition 
                                 customer requirements,              and retention, together 
                                 places inordinate pressure          with more learning 
                                 on the resilience of                and development programmes 
                                 our personnel as well               to keep colleagues' 
                                 as its system, further              skills in line with 
                                 exacerbated by the transition       the demands of the 
                                 to digitalisation.                  marketplace and give 
                                                                     them the time to take 
                                                                     advantage of those 
                                                                     opportunities. 
                                                                     We are also looking 
                                                                     at new, flexible work 
                                                                     arrangements, location 
                                                                     strategies, and different 
                                                                     ways of measuring 
                                                                     colleague contributions 
                                                                     to the success of 
                                                                     the Bank. 
 

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' giving a true and fair view of the assets, liabilities, financial position and profit or loss as and as required by DTR 4.2.7R and DTR 4.2.8R, namely:

 
 --   An indication of important events that have occurred during 
       the first six months ended 30 June 2022 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 2022 and any material changes in the related-party 
       transactions described in the last annual report. 
 

Signed on its behalf by:

 
 Robert Sharpe   Daniel Frumkin 
 Chairman        Chief Executive Officer 
 

INDEPENT 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 2022 (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.

The interim financial statements comprise:

   --    the Condensed consolidated balance sheet as at 30 June 2022; 
   --    the Condensed consolidated statement of comprehensive income for the period then ended; 
   --    the Condensed consolidated cash flow statement for the period then ended; 
   --    the Condensed 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.

Basis for conclusion

We conducted our review in accordance with International Standard on Review Engagements (UK) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Financial Reporting Council 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.

Conclusions relating to going concern

Based on our review procedures, which are less extensive than those performed in an audit as described in the Basis for conclusion section of this report, nothing has come to our attention to suggest that the directors have inappropriately adopted the going concern basis of accounting or that the directors have identified material uncertainties relating to going concern that are not appropriately disclosed. This conclusion is based on the review procedures performed in accordance with this ISRE. However, future events or conditions may cause the group to cease to continue as a going concern.

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. In preparing the interim report, including the interim financial statements, the directors are responsible for assessing the group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or to cease operations, or have no realistic alternative but to do so.

Our responsibility is to express a conclusion on the interim financial statements in the interim report based on our review. Our conclusion, including our Conclusions relating to going concern, is based on procedures that are less extensive than audit procedures, as described in the Basis for conclusion paragraph of this report. 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.

PricewaterhouseCoopers LLP

Chartered Accountants

London

27 July 2022

CONDENSED Consolidated statement of comprehensive income (unaudited)

For the half year to 30 June 2022

 
                                                              Half year      Half year      Half year 
                                                                     to             to             to 
                                                                30 June    31 December        30 June 
                                                                   2022           2021           2021 
                                                    Note    GBP'million    GBP'million    GBP'million 
-------------------------------------------------  -----  -------------  -------------  ------------- 
 Interest income                                     2            239.7          211.5          194.2 
 Interest expense                                    2           (58.9)         (49.5)         (60.9) 
-------------------------------------------------  -----  -------------  -------------  ------------- 
 Net interest income                                              180.8          162.0          133.3 
-------------------------------------------------  -----  -------------  -------------  ------------- 
 Net fee and commission income                                     39.5           36.9           32.7 
 Net gains on sale of assets                                          -            1.2            8.2 
 Other income                                                      16.2           22.1           22.1 
-------------------------------------------------  -----  -------------  -------------  ------------- 
 Total income                                                     236.5          222.2          196.3 
-------------------------------------------------  -----  -------------  -------------  ------------- 
 
 General operating expenses                          3          (233.2)        (263.3)        (272.8) 
 Depreciation and amortisation                      7,8          (37.4)         (39.9)         (40.3) 
 Impairment and write offs of PPE and intangible 
  assets                                            7,8           (8.2)         (17.4)          (7.5) 
-------------------------------------------------  -----  -------------  -------------  ------------- 
 Total operating expenses                                       (278.8)        (320.6)        (320.6) 
 Expected credit loss expense                                    (17.9)          (7.8)         (14.6) 
-------------------------------------------------  -----  -------------  -------------  ------------- 
 Loss before tax                                                 (60.2)        (106.2)        (138.9) 
-------------------------------------------------  -----  -------------  -------------  ------------- 
 Tax expense                                         5            (1.5)          (0.9)          (2.2) 
-------------------------------------------------  -----  -------------  -------------  ------------- 
 Loss for the period                                             (61.7)        (107.1)        (141.1) 
-------------------------------------------------  -----  -------------  -------------  ------------- 
 
 Other comprehensive expense 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                                        (6.7)          (6.9)          (1.2) 
   - changes in fair value transferred to 
    the income statement on disposal                                  -            0.1          (0.4) 
-------------------------------------------------  -----  -------------  -------------  ------------- 
 Total other comprehensive expense                                (6.7)          (6.8)          (1.6) 
-------------------------------------------------  -----  -------------  -------------  ------------- 
 
 Total comprehensive loss for the period                         (68.4)        (113.9)        (142.7) 
-------------------------------------------------  -----  -------------  -------------  ------------- 
 
 Earnings per share 
 Basic earnings per share (pence)                    12          (35.8)         (62.1)         (81.8) 
 Diluted earnings per share (pence)                  12          (35.8)         (62.1)         (81.8) 
-------------------------------------------------  -----  -------------  -------------  ------------- 
 

CONDENSED Consolidated balance sheet (unaudited)

 
                                                        30 June    31 December        30 June 
                                                           2022           2021           2021 
                                            Note    GBP'million    GBP'million    GBP'million 
-----------------------------------------  -----  -------------  -------------  ------------- 
 Assets 
 Cash and balances with the Bank 
  of England                                              2,862          3,568          5,111 
 Loans and advances to customers             6           12,364         12,290         12,325 
 Investment securities held at FVOCI                        781            798          1,198 
 Investment securities held at amortised 
  cost                                                    5,393          4,776          3,165 
 Financial assets held at fair value 
  through profit and loss                                     2              3              5 
 Property, plant and equipment               7              749            765            786 
 Intangible assets                           8              227            243            253 
 Prepayments and accrued income                              80             68             75 
 Other assets                                                97             76             95 
-----------------------------------------  -----  -------------  -------------  ------------- 
 Total assets                                            22,555         22,587         23,013 
-----------------------------------------  -----  -------------  -------------  ------------- 
 Liabilities 
 Deposits from customers                                 16,514         16,448         16,620 
 Deposits from central banks                              3,800          3,800          3,800 
 Debt securities                                            577            588            596 
 Repurchase agreements                                      166            169            212 
 Derivative financial liabilities                             8             10              8 
 Lease liabilities                           9              264            269            310 
 Deferred grants                             10              19             19             22 
 Provisions                                                  14             15              5 
 Deferred tax liabilities                    5               12             12             13 
 Other liabilities                                          212            222            280 
-----------------------------------------  -----  -------------  -------------  ------------- 
 Total liabilities                                       21,586         21,552         21,866 
-----------------------------------------  -----  -------------  -------------  ------------- 
 Equity 
 Called up share capital                     11               -              -              - 
 Share premium account                       11           1,964          1,964          1,964 
 Retained earnings                                      (1,004)          (942)          (835) 
 Other reserves                                               9             13             18 
-----------------------------------------  -----  -------------  -------------  ------------- 
 Total equity                                               969          1,035          1,147 
-----------------------------------------  -----  -------------  -------------  ------------- 
 
 Total equity and liabilities                            22,555         22,587         23,013 
-----------------------------------------  -----  -------------  -------------  ------------- 
 

As at 30 June 2022

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 2022 and were signed on its behalf by:

 
 Robert Sharpe   Daniel Frumkin 
 Chairman        Chief Executive Officer 
 

CONDENSED Consolidated cash flow STATEMENT (unaudited)

For the half year to 30 June 2022

 
                                                                        Half      Half year           Half 
                                                                        year             to           year 
                                                                          to    31 December             to 
                                                                     30 June           2021        30 June 
                                                                        2022    GBP'million           2021 
                                                         Note    GBP'million                   GBP'million 
------------------------------------------------------  -----  -------------  -------------  ------------- 
 Reconciliation of loss before tax to net cash 
  flows from operating activities: 
 Loss before tax                                                        (60)          (106)          (139) 
 Adjustments for: 
 Impairment and write offs of property, plant 
  and equipment and intangible assets                    7,8               8             17              8 
 Interest on lease liabilities                            9                8              8              9 
 Depreciation and amortisation                           7,8              37             40             40 
 Share option award charges                               4                2              1              1 
 Grant income recognised in the income statement                           -            (4)            (7) 
 Amounts provided for                                                      -              5              - 
 Gain on sale of assets                                                    -            (1)            (8) 
 Accrued interest on and amortisation of investment 
  securities                                                               3              4              1 
 Changes in operating assets and liabilities 
 Changes in loans and advances to customers                             (74)             35          (235) 
 Changes in deposits from customers                                       66          (172)            548 
 Changes in operating assets                                            (35)             30          2,817 
 Changes in operating liabilities                                       (28)          (115)             77 
------------------------------------------------------  -----  -------------  -------------  ------------- 
 Net cash (outflows)/inflows from operating 
  activities                                                            (73)          (258)          3,112 
------------------------------------------------------  -----  -------------  -------------  ------------- 
 Cash flows from investing activities 
 Net purchase of investment securities                                 (607)        (1,216)          (953) 
 Purchase of property, plant and equipment                               (1)           (42)              - 
 Purchase and development of intangible assets            8             (12)           (13)           (26) 
 Net cash outflows from investing activities                           (620)        (1,271)          (979) 
------------------------------------------------------  -----  -------------  -------------  ------------- 
 Cash flows from financing activities 
 Repayment of capital element of leases                   9             (13)           (14)           (15) 
 Net cash outflows from financing activities                            (13)           (14)           (15) 
------------------------------------------------------  -----  -------------  -------------  ------------- 
 
 Net (decrease)/increase in cash and cash equivalents                  (706)        (1,543)          2,118 
 Cash and cash equivalents at start of period                          3,568          5,111          2,993 
------------------------------------------------------  -----  -------------  -------------  ------------- 
 Cash and cash equivalents at end of period                            2,862          3,568          5,111 
------------------------------------------------------  -----  -------------  -------------  ------------- 
 
 Loss before tax includes: 
------------------------------------------------------  -----  -------------  -------------  ------------- 
 Interest received                                                       235            206            203 
 Interest paid                                                            65             52             74 
------------------------------------------------------  -----  -------------  -------------  ------------- 
 

CONDENSED Consolidated statement of changes in EQUITY (unaudited)

For the half year to 30 June 2022

 
                                  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 2022                -          1,964          (942)            (5)             18          1,035 
---------------------------  --------------  -------------  -------------  -------------  -------------  ------------- 
 Loss for the period                      -              -           (62)              -              -           (62) 
 Other comprehensive 
  expense 
  (net of tax) relating to 
  investment 
  securities designated at 
  fair 
  value through other 
  comprehensive 
  income                                  -              -              -            (6)              -            (6) 
---------------------------  --------------  -------------  -------------  -------------  -------------  ------------- 
 Total comprehensive 
  expense                                 -              -           (62)            (6)              -           (68) 
 Net share option movements               -              -              -              -              2              2 
---------------------------  --------------  -------------  -------------  -------------  -------------  ------------- 
 Balance at 30 June 2022                  -          1,964        (1,004)           (11)             20            969 
---------------------------  --------------  -------------  -------------  -------------  -------------  ------------- 
 
 Balance at 1 July 2021                   -          1,964          (835)              1             17          1,147 
---------------------------  --------------  -------------  -------------  -------------  -------------  ------------- 
 Loss for the period                      -              -          (107)              -              -          (107) 
 Other comprehensive 
  expense 
  (net of tax) relating to 
  investment 
  securities designated at 
  fair 
  value through other 
  comprehensive 
  income                                  -              -              -            (6)            (1)            (7) 
---------------------------  --------------  -------------  -------------  -------------  -------------  ------------- 
 Total comprehensive 
  expense                                 -              -          (107)            (6)            (1)          (114) 
 Net share option movements               -              -                                            2              2 
---------------------------  --------------  -------------  -------------  -------------  -------------  ------------- 
 Balance at 31 December 
  2021                                    -          1,964          (942)            (5)             18          1,035 
 
 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 
---------------------------  --------------  -------------  -------------  -------------  -------------  ------------- 
 
 

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 2022 were authorised for issue in accordance with a resolution of the Directors on 27 July 2022.

These condensed consolidated interim financial statements for the six months ended 30 June 2022 have been prepared in accordance with UK adopted International Accounting Standards (IAS 34 Interim Financial Reporting) and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority. Whilst the change from IFRS as adopted by EU to UK-adopted IAS constitutes a change in accounting framework, there is no impact on recognition, measurement or disclosure from this transition.

In the year to 31 December 2022 our annual financial statements will be prepared in accordance with IFRS as adopted by the UK Endorsement Board.

The comparative financial information as at and for the periods ending 31 December 2021 and 30 June 2021 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 2021 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 have adopted the going concern basis in preparing these condensed consolidated interim financial statements. This assessment has been reached after assessing the Group's principal risks, which remain unchanged from those disclosed in the risk report of the 2021 Annual Report and Accounts. As with the assessment undertaken at the year end the Directors placed additional consideration on capital risk given that the Group continues to utilise its regulatory buffers. Further details on the Group's capital risk can be found in the risk report.

In reaching their conclusion the Directors reviewed an updated central projection to reflect the changes in outlook since the full year. The projection remains in line with the delivery of the Group's strategic priorities as outlined within the 2021 Annual Report and Accounts and on which an update is provided within the Business Review section of this report. As well as considering the Group's central forecast the Directors considered associate scenarios and sensitivities which included severe but plausible downside risks. These scenarios and sensitivities focused on areas where the greatest level of judgement had been applied in the forecast assumptions. On top of this consideration was given to the possibility of a worsened economic environment over the forecast period leading to an increase in expected credit losses, costs as well as a reduction in income.

Under all scenarios considered, the Directors believe the Group to remain a going concern on the basis that it maintains sufficient resources 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. In the most severe scenarios this would require making reasonable adjustments to the Group's operating plans, including slowing down the pace of future originations to limit risk weighted asset growth.

The Directors did not deem there to be any material uncertainties with regards to the assessment on going concern.

Accounting policies

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 2021.

Future accounting developments

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

   3          Critical accounting judgements 

In our 2021 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

Following the conclusion of matters with the US Office of Foreign Assets Control (OFAC) in relation to Cuba and Iran without fine or penalty, the recognition of provisions is no longer considered a critical accounting judgement.

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

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

IFRS 9 requires accounts to be allocated into one of three stages. Stage 3 reflects accounts in default. Stage 2 are the accounts which have shown a significant increase in credit risk since origination (SICR), and Stage 1 is everything else. IFRS 9 requires a higher level of expected credit loss to be recognised for underperforming loans. For loans in Stage 2 and Stage 3 a lifetime ECL is recognised compared to a 12-month ECL for performing loans (Stage 1).

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 is performed at each reporting period by considering the change in the Probability of Default (PD) over the remaining life of the financial instrument. The assessment explicitly or implicitly compares the PD occurring at the reporting date to that at initial recognition, considering reasonable and supportable information, including information about past events, current conditions, and future economic conditions.

 
IFRS 9 requires a higher level of expected credit loss to 
 be recognised for underperforming loans. This is considered 
 based on a staging approach: 
Stage             Description                             ECL recognised 
----------------  --------------------------------------  ----------------------------------- 
Stage 1           Financial assets that have              12-month expected credit 
                   had no significant increase             losses 
                   in credit risk since initial            Total losses expected on 
                   recognition or that have low            defaults which may occur 
                   credit risk (high quality               within the next 12 months. 
                   investment securities only)             Losses are adjusted for 
                   at the reporting date.                  probability-weighted macroeconomic 
                                                           scenarios. 
----------------  --------------------------------------  ----------------------------------- 
Stage 2           Financial assets that have              Lifetime expected credit 
                   had a significant increase              losses 
                   in credit risk since initial            Losses expected on defaults 
                   recognition but that do not             which may occur at any 
                   have objective evidence of              point in a loan's lifetime. 
                   impairment.                             Losses are adjusted for 
                   Financial instruments that              probability-weighted macroeconomic 
                   are classified in Early Warning         scenarios. 
                   List 1 and 2 will be reported 
                   in Stage 2. 
                   The IFRS 9 standard also provides 
                   a rebuttable presumption which 
                   states that financial instruments 
                   falling 30 DPD due on contractually 
                   defined payments are to be 
                   considered as having deteriorated 
                   significantly since origination. 
----------------  --------------------------------------  ----------------------------------- 
Stage 3           Financial assets that are               Lifetime expected credit 
                   credit impaired at the reporting        losses 
                   date. A financial asset is              Losses expected on defaults 
                   credit impaired when it has             which may occur at any 
                   met the definition of default.          point in a loan's lifetime. 
                   We define default to have               Losses are adjusted for 
                   occurred when a loan is greater         probability-weighted macroeconomic 
                   than 90 days past due (non-performing   scenarios. 
                   loan) or where the borrower 
                   is considered unlikely to               Interest income is calculated 
                   pay, this includes customers            on the carrying amount 
                   who are categorised as Early            of the loan net of credit 
                   Warning List 3.                         allowance. 
----------------  --------------------------------------  ----------------------------------- 
Purchased         Financial assets that have              Lifetime expected credit 
 or originated     been purchased and had objective        losses 
 credit impaired   evidence of being 'non-performing'      At initial recognition, 
 (POCI) assets     or 'credit impaired ' at the            POCI assets do not carry 
                   point of purchase.                      an impairment allowance. 
                                                           Lifetime expected credit 
                                                           losses are incorporated 
                                                           into the calculation of 
                                                           the asset's effective interest 
                                                           rate. Subsequent changes 
                                                           to the estimate of lifetime 
                                                           expected credit losses 
                                                           are recognised as a loss 
                                                           allowance. 
----------------  --------------------------------------  ----------------------------------- 
 

In light of the classification outlined above, our stage allocation criteria must include:

   --      A relative measure of creditworthiness deterioration since origination. 
   --      An absolute measure of creditworthiness deterioration since origination. 

There are two main criteria driving the SICR assessment identified as follows:

-- Quantitative criteria - where the numerically calculated probability of default on a loan has increased significantly since initial recognition. This is determined when the lifetime PD at observation is greater than the lifetime PD at origination by a portfolio specific threshold. Given the different nature of the products and the dissimilar level of lifetime PDs at origination, different thresholds are used by sub-products within each portfolio (term loans, revolving loan facilities and mortgages). The threshold is set at three times the median PD of the portfolio at origination.

-- Qualitative criteria - instruments that are 30 days past due or more are allocated to Stage 2, regardless of the results of the quantitative analysis. In addition, instruments classified on the Early Warning List as higher risk, are allocated to Stage 2, regardless of the results of the quantitative analysis.

There are additional SICR rules utilised across portfolios. These rules, as well as more granular detail of both quantitative and qualitative criteria, are captured within the IFRS 9 model methodology and are approved as part of the annual model review process at Model Governance and Model Oversight Committees. The low credit risk exemption allowed under IFRS 9 has not been applied across the retail mortgage or consumer portfolios to identify SICR.

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

We have applied 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 our Model Governance, Impairment Committee and Audit Committee.

PMAs and PMOs are defined as follows:

-- Post model adjustments (PMAs): 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.

-- Post model overlays (PMOs): 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.

Given the ongoing economic uncertainty, we continue to maintain prudent levels of PMOs. The level of PMAs/PMOs has remained stable during 2022 with the total percentage of ECL stock comprised of PMAs/PMOs remaining at 26.4% (2021: 26.3%).

PMAs contribute GBP7.9 million of ECL stock as at 30 June 2022 (31 December 2021: GBP9.1 million) and are held in anticipation of IFRS 9 commercial models planned for implementation in the second half of 2022.

-- IFRS 9 commercial secured LGD model (30 June 2022: GBP7.6 million; 31 December 2021: GBP9.8 million).

-- IFRS 9 commercial business loans lifetime PD model scope extended to commercial revolving facilities (30 June 2022: (GBP0.5) million; 31 December 2021: (GBP0.7) million).

-- IFRS 9 commercial fixed term EAD model (30 June 2022: GBP0.8 million; 31 December 2021: GBPnil).

PMOs have been reassessed during the period to ensure an appropriate level of ECL to account for the high level of macroeconomic uncertainty, following the Russian invasion of Ukraine, high inflation environment and cost of living pressures.

PMOs make up GBP37.1 million of the ECL stock for the half year ending 30 June 2022 (31 December 2021: GBP35.0 million) and comprise of:

-- High inflation environment and cost-of-living risks - Management overlay has been introduced in the period to reflect high inflation and cost of living pressures, which are not fully captured through the economic scenarios and IFRS 9 models (30 June 2022: GBP29.6 million; prior period COVID-19 overlays of GBP28.7 million have been released). This reflects the associated risks across retail mortgage, consumer, and commercial portfolios.

-- Climate change impact - An expert judgement overlay raised in 2021 has been maintained for 30 June 2022 and reflects the impact of climate change on property values for the mortgage and commercial portfolios (30 June 2022: GBP5.1 million; 31 December 2021: GBP5.1 million).

-- Concentration risk adjustment - An overlay raised in 2021 has been maintained for the first half of 2022 to reflect Metro Bank's geographical concentration risk on the retail mortgage and commercial property portfolios (30 June 2022: GBP1.2 million; 31 December 2021: GBP1.2 million).

-- Commercial impairment calculation enhancements - An overlay of GBP1.2 million raised in anticipation of refinements to the impairment calculation for the commercial portfolio in the second half of 2022 (30 June 2022: GBP1.2 million; 31 December 2021: GBPnil).

   4          Critical accounting estimates 

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 forecasted 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 our 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. Since the inception of COVID-19, the macroeconomic scenarios are assessed and reviewed monthly to ensure appropriateness and relevance to the ECL calculation. The weightings of these scenarios reflect the latest UK economic outlook. The selection of scenarios and the appropriate weighting to apply are considered and discussed internally and proposed recommendations for use in the IFRS 9 models are made to the monthly Impairment Committee (designated Executive Risk Committee for impairments) for formal approval.

Our credit risk models are subject to internal model governance including independent validation. We undertake annual model reviews and have regular model performance monitoring in place. The impairment provisions recognised during the year reflect our best estimate of the level of provisions required for future credit losses as calibrated under our conservative weighted economic assumptions and following the application of expert credit risk judgement overlays.

Scenarios and probability weights used as at 30 June 2022 are as follows are as follows:

 
                       Half year      Half year   Half year 
                              to             to          to 
                         30 June    31 December     30 June 
 Scenario weighting         2022           2021        2021 
--------------------  ----------  -------------  ---------- 
 Baseline                    40%            40%         40% 
 Upside                      20%            20%         20% 
 Downside                    30%            30%         30% 
 Severe Downside             10%            10%         10% 
--------------------  ----------  -------------  ---------- 
 

The macroeconomic scenarios reflect the current macroeconomic environment as follows:

-- Baseline scenario (40% weight): Reflects the projection of the median, or '50%' 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 10% probability the economy will perform better than in this scenario, broadly speaking, and a 90% probability it will perform worse.

-- Downside scenario (30% weight): In this recession scenario, in which a deep downturn develops, there is a 90% probability the economy will perform better, broadly speaking, and a 10% probability it will perform worse.

-- Severe Downside scenario (10% weight): In this recession scenario, in which a deep downturn develops, there is a 96% probability the economy will perform better, broadly speaking, and a 4% probability it will perform worse.

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            2023      2024     2025     2026 
-----------------------------  -----------------  --------  -------  -------  ------- 
 UK five year mortgage 
  interest rates (%)            Baseline            3.6%      4.0%     4.1%     4.2% 
-----------------------------  -----------------  --------  -------  -------  ------- 
  Upside                                            3.9%      4.2%     4.3%     4.3% 
 -----------------------------------------------  --------  -------  -------  ------- 
  Downside                                          2.3%      2.8%     3.0%     3.1% 
 -----------------------------------------------  --------  -------  -------  ------- 
  Severe Downside                                   2.2%      2.8%     2.9%     3.0% 
 -----------------------------------------------  --------  -------  -------  ------- 
 Unemployment (%)               Baseline            4.4%      4.6%     4.7%     4.8% 
-----------------------------  -----------------  --------  -------  -------  ------- 
  Upside                                            3.7%      3.8%     4.0%     4.2% 
 -----------------------------------------------  --------  -------  -------  ------- 
  Downside                                          7.1%      7.4%     7.2%     6.6% 
 -----------------------------------------------  --------  -------  -------  ------- 
  Severe Downside                                   8.4%      8.1%     8.2%     7.7% 
 -----------------------------------------------  --------  -------  -------  ------- 
 House price index (YoY%)(1)    Baseline            2.9%      4.8%     2.2%     0.9% 
-----------------------------  -----------------  --------  -------  -------  ------- 
  Upside                                            13.1%     4.6%    (1.8%)   (2.5%) 
 -----------------------------------------------  --------  -------  -------  ------- 
  Downside                                         (8.8%)     0.3%     3.7%     4.4% 
 -----------------------------------------------  --------  -------  -------  ------- 
  Severe Downside                                  (15.7%)   (0.5%)    3.3%     3.0% 
 -----------------------------------------------  --------  -------  -------  ------- 
 UK GDP (YoY%)                  Baseline            1.6%      1.4%     1.2%     1.0% 
-----------------------------  -----------------  --------  -------  -------  ------- 
  Upside                                            2.7%      1.2%     1.0%     1.2% 
 -----------------------------------------------  --------  -------  -------  ------- 
  Downside                                         (2.2%)     2.9%     1.7%     0.9% 
 -----------------------------------------------  --------  -------  -------  ------- 
  Severe Downside                                  (4.0%)     2.6%     2.9%     1.3% 
 -----------------------------------------------  --------  -------  -------  ------- 
 

The period-end assumptions used for the ECL estimate as at 31 December 2021 are as follows:

 
 Macroeconomic variable         Scenario            2022      2023      2024    2025 
-----------------------------  -----------------  --------  --------  -------  ----- 
 UK five year mortgage 
  interest rates (%)            Baseline            2.7%      3.3%      3.7%    4.1% 
-----------------------------  -----------------  --------  --------  -------  ----- 
  Upside                                            3.0%      3.6%      4.2%    4.6% 
 -----------------------------------------------  --------  --------  -------  ----- 
  Downside                                          2.3%      2.8%      3.1%    3.1% 
 -----------------------------------------------  --------  --------  -------  ----- 
  Severe Downside                                   2.1%      2.6%      2.9%    3.1% 
 -----------------------------------------------  --------  --------  -------  ----- 
 Unemployment (%)               Baseline            4.7%      4.4%      4.4%    4.5% 
-----------------------------  -----------------  --------  --------  -------  ----- 
  Upside                                            3.9%      3.3%      3.5%    3.8% 
 -----------------------------------------------  --------  --------  -------  ----- 
  Downside                                          6.2%      6.6%      6.5%    6.3% 
 -----------------------------------------------  --------  --------  -------  ----- 
  Severe Downside                                   7.2%      7.5%      7.2%    7.1% 
 -----------------------------------------------  --------  --------  -------  ----- 
 House price index (YoY%)(1)    Baseline            3.4%      6.0%      5.2%    3.7% 
-----------------------------  -----------------  --------  --------  -------  ----- 
  Upside                                            14.2%     8.5%      4.8%    2.1% 
 -----------------------------------------------  --------  --------  -------  ----- 
  Downside                                         (12.8%)   (8.1%)    (1.9%)   4.4% 
 -----------------------------------------------  --------  --------  -------  ----- 
  Severe Downside                                  (16.3%)   (10.3%)   (2.5%)   4.3% 
 -----------------------------------------------  --------  --------  -------  ----- 
 UK GDP (YoY%)                  Baseline            3.9%      3.1%      1.4%    1.0% 
-----------------------------  -----------------  --------  --------  -------  ----- 
  Upside                                            7.7%      1.7%      1.2%    1.1% 
 -----------------------------------------------  --------  --------  -------  ----- 
  Downside                                         (2.3%)     5.7%      2.4%    1.7% 
 -----------------------------------------------  --------  --------  -------  ----- 
  Severe Downside                                  (3.9%)     5.4%      2.2%    1.8% 
 -----------------------------------------------  --------  --------  -------  ----- 
 

1. The HPI economic forecast has been stressed on the downside and more severe downside scenarios to reflect Metro Bank's geographical concentration risk.

Key assumptions underpinning the baseline June 2022 scenarios:

-- The U.K. economic outlook has darkened following Russia's invasion of Ukraine and the resulting increase in energy and food commodity prices, as well as the exacerbation of global supply-chain disruptions. The pace of growth remains subdued for the remainder of the year.

-- Global oil prices remain elevated for several months before they start reducing to prior levels. European natural gas and electricity prices remain high for the next 12 months.

   --      Global supply-chain bottlenecks ease but fail to abate by the end of the year. 

-- U.K. headline CPI inflation continues to increase in the coming months owing to higher energy, food, and manufactured goods prices. Higher wages and strong services demand add to the price pressures, ensuring inflation remains far above target throughout 2022.

-- Volatility in financial markets remains contained despite the tightening financial conditions, and the U.K. government bonds do not lose their risk-free status.

The June 2022 base case macroeconomic estimates and assumptions reflect a more negative economic outlook compared to December 2021, with the exception of HPI. Deterioration has been observed in the majority of the macroeconomic factors in the course of 2022, such as Unemployment rate, GDP, CPI and Wage Growth, and reflect the rising inflation and cost of living pressures exacerbated as a result of the war in Ukraine. The HPI forecast has improved since the start of the year reflecting the continued increase in observed house prices. A comparison of the base case macroeconomic estimates across the forecast period between 31 December 2021 and 30 June 2022 is shown in the tables above. 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. We note that the scenarios applied comprise our best estimate of economic impacts on the ECL, and the actual outcome may be different.

We have also assessed the IFRS 9 ECL sensitivity impact at a total portfolio level, by applying a 100% weighting to each of the four chosen scenarios.

 
                                   Variance to reported 
                             ECL           weighted ECL 
 Scenario            GBP'million        at 30 June 2022 
-----------------  -------------  --------------------- 
 Weighted                    171                   100% 
 Baseline                    155                   (9%) 
 Upside                      144                  (16%) 
 Downside                    193                    13% 
 Severe Downside             223                    31% 
-----------------  -------------  --------------------- 
 

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 consider movements in impairment stage allocations that would result under the different scenarios.

   5          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 
                                                            2022           2021           2021 
                                                     GBP'million    GBP'million    GBP'million 
-------------------------------------------------  -------------  -------------  ------------- 
 Cash and balances held with the Bank of England             9.5            2.1            2.3 
 Loans and advances to customers                           208.0          195.9          182.2 
 Investment securities held at amortised cost               21.9           11.5            9.1 
 Investment securities held at FVOCI                         0.3            2.0            0.6 
-------------------------------------------------  -------------  -------------  ------------- 
 Total interest income                                     239.7          211.5          194.2 
-------------------------------------------------  -------------  -------------  ------------- 
 

Interest expense

 
                                   Half year      Half year      Half year 
                                          to             to             to 
                                     30 June    31 December        30 June 
                                        2022           2021           2021 
                                 GBP'million    GBP'million    GBP'million 
-----------------------------  -------------  -------------  ------------- 
 Deposits from customers                12.4           14.6           25.5 
 Deposits from central banks            13.1            2.1            1.9 
 Repurchase agreements                   0.8            1.1            1.1 
 Debt securities                        25.0           23.8           23.6 
 Lease liabilities                       7.6            7.9            8.8 
 Total interest expense                 58.9           49.5           60.9 
-----------------------------  -------------  -------------  ------------- 
 
   3.   General operating expenses 
 
                                                    Half year      Half year      Half year 
                                                           to             to             to 
                                                      30 June    31 December        30 June 
                                                         2022           2021           2021 
                                                  GBP'million    GBP'million    GBP'million 
----------------------------------------------  -------------  -------------  ------------- 
 People costs                                           119.9          117.5          121.5 
 Information technology costs                            29.9           29.9           27.3 
 Occupancy expenses                                      15.0           16.7           16.2 
 Money transmission and other banking related 
  costs(1)                                               24.5           24.2           26.4 
 Transformation costs                                     1.0            7.1            1.8 
 Remediation costs                                        3.0           20.5           25.4 
 Capability & Innovation fund (C&I) costs                 0.3            2.3            5.8 
 Legal and Regulatory fees                                3.3            3.2            3.4 
 Professional Fees                                       20.2           22.7           27.4 
 Contractor costs                                           -              -            2.1 
 Printing, postage and stationery costs                   3.1            3.2            2.4 
 Travel costs                                             0.8            0.6            0.5 
 Marketing and advertising costs                          3.5            3.2            1.5 
 Business acquisition and integration costs                 -            0.1            2.3 
 Other(1)                                                 8.7           12.1            8.8 
 Total general operating expenses                       233.2          263.3          272.8 
----------------------------------------------  -------------  -------------  ------------- 
 

1. During the second half of 2021 we reclassified certain costs from money transmission and other banking related costs to other costs to better reflect their nature. The half year to 30 June 2021 comparator figure has been updated to reflect this changes.

   4.   People costs 
 
                                           Half year      Half year      Half year 
                                                  to             to             to 
                                             30 June    31 December        30 June 
                                                2022           2021           2021 
                                         GBP'million    GBP'million    GBP'million 
-------------------------------------  -------------  -------------  ------------- 
 Wages and salaries                             99.2           98.1          103.1 
 Social security costs                          11.5           10.8           11.2 
 Pension costs                                   6.8            6.9            6.5 
 Equity-settled share based payments             2.4            1.7            0.7 
 Total people costs                            119.9          117.5          121.5 
-------------------------------------  -------------  -------------  ------------- 
 
   5.   Taxation 

Tax expense for the period

The components of tax expense for the six months ended 30 June 2022, 31 December 2021 and 30 June 2021 are:

 
                                                         Half year      Half year      Half year 
                                                                to             to             to 
                                                           30 June    31 December        30 June 
                                                              2022           2021           2021 
                                                       GBP'million    GBP'million    GBP'million 
---------------------------------------------------  -------------  -------------  ------------- 
 Current tax 
 Current tax                                                     -          (0.5)              - 
 Adjustment in respect of prior years                            -            0.7          (0.1) 
---------------------------------------------------  -------------  -------------  ------------- 
 Total current tax credit/(expense)                              -            0.2          (0.1) 
---------------------------------------------------  -------------  -------------  ------------- 
 Deferred tax 
 Origination and reversal of temporary differences           (0.9)            1.1            2.3 
 Effect of changes in tax rates                              (0.6)          (1.0)          (4.4) 
 Adjustment in respect of prior periods                          -          (1.2)              - 
---------------------------------------------------  -------------  -------------  ------------- 
 Total deferred tax expense                                  (1.5)          (1.1)          (2.1) 
---------------------------------------------------  -------------  -------------  ------------- 
 Total tax expense                                           (1.5)          (0.9)          (2.2) 
---------------------------------------------------  -------------  -------------  ------------- 
 

Reconciliation of the total tax expense

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 2022, 31 December 2021 and 30 June 2021 are as follows:

 
                                                Half 
                                                year                                                  Half 
                                                  to                       Half                       year 
                                                  30                    year to   Effective             to 
                                                June   Effective    31 December         tax        30 June   Effective 
                                                2022    tax rate           2021        rate           2021    tax rate 
                                         GBP'million           %    GBP'million           %    GBP'million           % 
-------------------------------------  -------------  ----------  -------------  ----------  -------------  ---------- 
 Loss before tax                              (60.2)                    (106.2)                    (138.9) 
-------------------------------------  -------------  ----------  -------------  ----------  -------------  ---------- 
 Tax credit at statutory income tax 
  rate of 19%                                   11.4       19.0%           20.2       19.0%           26.4       19.0% 
-------------------------------------  -------------  ----------  -------------  ----------  -------------  ---------- 
 
 Tax effects of: 
 Non-deductible expenses - 
  depreciation 
  on non-qualifying fixed assets               (0.9)      (1.5%)          (1.9)        1.8%          (0.8)      (0.6%) 
 Non-deductible expenses - investment 
  property impairment                              -           -          (1.8)        1.7%              -           - 
 Non-deductible expenses - 
  remediation                                  (0.5)      (0.8%)          (2.5)        2.4%          (4.6)      (3.3%) 
 Non-deductible expenses - other                 0.5        0.8%              -           -          (0.1)      (0.1%) 
 Impact of intangible asset 
  impairment 
  on R&D deferred tax liability                  0.2        0.3%            1.1      (1.0%)            1.9        1.4% 
 Share based payments                          (0.1)      (0.2%)          (0.1)        0.1%          (0.2)      (0.1%) 
 Adjustment in respect of prior years              -           -          (0.5)        0.5%          (0.1)           - 
 Losses for the period for which no 
  deferred tax asset has been 
  recognised                                  (11.5)     (19.1%)         (14.4)       13.6%         (20.3)     (14.6%) 
 Derecognition of tax losses arising               -           -              -           -              -           - 
  in prior years 
 Effect of changes in tax rates                (0.6)      (0.9%)          (1.0)        0.9%          (4.4)      (3.2%) 
-------------------------------------  -------------  ----------  -------------  ----------  -------------  ---------- 
 Tax expense reported in the 
  consolidated 
  income statement                             (1.5)      (2.4%)          (0.9)      (0.8%)          (2.2)      (1.5%) 
-------------------------------------  -------------  ----------  -------------  ----------  -------------  ---------- 
 

Effective tax rate

The effective tax rate for the period is (2.4%) (half year to 30 June 2021: (1.5%); half year to 31 December: (0.8%)). This has been calculated by applying the effective tax rate which is expected to apply to the Group for the half year ended 30 June 2022 using rates substantively enacted by 30 June 2022 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.

An increase in the UK corporation rate from 19% to 25% for taxable profits over GBP250,000 (effective 1 April 2023) was substantively enacted on 24 May 2021.

Losses for which no deferred tax asset has been recognised

The tax effected value of losses for which no deferred tax asset has been recognised is GBP11.5 million (half year to 30 June 2021: GBP20.3 million). This is due to our long term investment in cost, revenue and infrastructure transformation impacting the Bank's profits in the short term.

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.

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

 
                                                Investment      Property, 
                                   Unused       securities        plant &     Intangible 
                               tax losses    & impairments      equipment         assets          Total 
                              GBP'million      GBP'million    GBP'million    GBP'million    GBP'million 
--------------------------  -------------  ---------------  -------------  -------------  ------------- 
 30 June 2022 
 Deferred tax assets                   12                4              -              -             16 
 Deferred tax liabilities               -                3           (24)            (7)           (28) 
--------------------------  -------------  ---------------  -------------  -------------  ------------- 
 Deferred tax liabilities 
  (net)                                12                7           (24)            (7)           (12) 
--------------------------  -------------  ---------------  -------------  -------------  ------------- 
 
 At 1 January 2022                     13                5           (23)            (7)           (12) 
 Income statement                     (1)                -            (1)              -            (2) 
 Other comprehensive 
  income                                -                2              -              -              2 
--------------------------  -------------  ---------------  -------------  -------------  ------------- 
 At 30 June 2022                       12                7           (24)            (7)           (12) 
--------------------------  -------------  ---------------  -------------  -------------  ------------- 
 
 31 December 2021 
 Deferred tax assets                   13                3              -              -             16 
 Deferred tax liabilities               -                2           (23)            (7)           (28) 
--------------------------  -------------  ---------------  -------------  -------------  ------------- 
 Deferred tax liabilities 
  (net)                                13                5           (23)            (7)           (12) 
--------------------------  -------------  ---------------  -------------  -------------  ------------- 
 
 At 1 July 2021                        13                3           (21)            (8)           (13) 
 Income statement                       -                -            (2)              1            (1) 
 Other comprehensive 
  income                                -                2              -              -              2 
 At 31 December 
  2021                                 13                5           (23)            (7)           (12) 
--------------------------  -------------  ---------------  -------------  -------------  ------------- 
 
 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) 
--------------------------  -------------  ---------------  -------------  -------------  ------------- 
 

Unrecognised deferred tax assets

The Group had total unused tax losses of GBP918.2 million for which a deferred tax asset of GBP217.6 million has not been recognised as we continue to be loss making in the short term. The impact of recognising the deferred tax asset in the future would be material although tax benefits would be spread over a number of years. In addition the 50% corporate loss restriction in place extends the timeline over which the Bank can offset losses against future profits. This will be reassessed for the year ending 31 December 2022 in light of actual performance against management forecasts and prevailing market conditions. There is no time limit beyond which these losses expire.

Due to an investment property impairment being unrealised there is an unrecognised deferred tax asset of GBP2.6 million (30 June 2021: GBP3.1 million).

   6.   Loans and advances to customers 
 
                                                         30 June 2022 
                                         ------------------------------------------- 
                                                 Gross 
                                              carrying            ECL   Net carrying 
                                                amount      allowance         amount 
                                           GBP'million    GBP'million    GBP'million 
---------------------------------------  -------------  -------------  ------------- 
 Retail mortgages                                6,785           (18)          6,767 
 Consumer lending                                1,269           (56)          1,213 
 Commercial lending                              4,481           (97)          4,384 
---------------------------------------  -------------  -------------  ------------- 
 Total loans and advances to customers          12,535          (171)         12,364 
---------------------------------------  -------------  -------------  ------------- 
 
 
                                                        31 December 2021 
                                         --------------------------------------------- 
                                          Gross carrying            ECL   Net carrying 
                                                  amount      allowance         amount 
                                             GBP'million    GBP'million    GBP'million 
---------------------------------------  ---------------  -------------  ------------- 
 Retail mortgages                                  6,723           (19)          6,704 
 Consumer lending                                    890           (42)            848 
 Commercial lending                                4,846          (108)          4,738 
---------------------------------------  ---------------  -------------  ------------- 
 Total loans and advances to customers            12,459          (169)         12,290 
---------------------------------------  ---------------  -------------  ------------- 
 
 
                                                          30 June 2021 
                                         --------------------------------------------- 
                                          Gross carrying            ECL   Net carrying 
                                                  amount      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 
---------------------------------------  ---------------  -------------  ------------- 
 

Loans and advances to customers by category

 
                                                    30 June    31 December        30 June 
                                                       2022           2021           2021 
                                                GBP'million    GBP'million    GBP'million 
--------------------------------------------  -------------  -------------  ------------- 
 Residential owner occupied                           4,977          5,022          5,028 
 Retail buy-to-let                                    1,808          1,701          1,787 
--------------------------------------------  -------------  -------------  ------------- 
 Total retail mortgages                               6,785          6,723          6,815 
--------------------------------------------  -------------  -------------  ------------- 
 Overdrafts                                              70             66             71 
 Credit cards                                            16             13             11 
 Term loans                                           1,183            811            622 
--------------------------------------------  -------------  -------------  ------------- 
 Total consumer lending                               1,269            890            704 
--------------------------------------------  -------------  -------------  ------------- 
 Total retail lending                                 8,054          7,613          7,519 
--------------------------------------------  -------------  -------------  ------------- 
 Professional buy-to-let                                853            950          1,037 
 Bounce back loans                                      984          1,304          1,394 
 Coronavirus business interruption loans                145            165            162 
 Recovery loan scheme                                   357            157              - 
 Other term loans                                     1,638          1,791          1,963 
 Commercial term loans                                3,977          4,367          4,556 
 Overdrafts and revolving credit facilities             110            156            133 
 Credit cards                                             4              3              3 
 Asset and invoice finance                              390            320            280 
 Total commercial lending                             4,481          4,846          4,972 
--------------------------------------------  -------------  -------------  ------------- 
 Total gross loans to customers                      12,535         12,459         12,491 
--------------------------------------------  -------------  -------------  ------------- 
 

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 2022 
                          ---------------------------------------------------------- 
                                  Stage          Stage          Stage 
                                      1              2              3        POCI(1) 
                            GBP'million    GBP'million    GBP'million    GBP'million 
------------------------  -------------  -------------  -------------  ------------- 
 Up to date                       5,420          1,226             27              - 
 1 to 29 days past due                1             18             10              - 
 30 to 89 days past due               -             19             14              - 
 90+ days past due                    -              -             50              - 
------------------------  -------------  -------------  -------------  ------------- 
 Gross carrying amount            5,421          1,263            101              - 
------------------------  -------------  -------------  -------------  ------------- 
 
   1.     Purchase or originated credit impaired 
 
                                               31 December 2021 
                          ---------------------------------------------------------- 
                                Stage 1        Stage 2        Stage 3           POCI 
                            GBP'million    GBP'million    GBP'million    GBP'million 
------------------------  -------------  -------------  -------------  ------------- 
 Up to date                       5,544          1,010             38              - 
 1 to 29 days past due                2             27              9              - 
 30 to 89 days past due               -             26             16              - 
 90+ days past due                    -              -             51              - 
------------------------  -------------  -------------  -------------  ------------- 
 Gross carrying amount            5,546          1,063            114              - 
------------------------  -------------  -------------  -------------  ------------- 
 
 
                                                 30 June 2021 
                          ---------------------------------------------------------- 
                                Stage 1        Stage 2        Stage 3           POCI 
                            GBP'million    GBP'million    GBP'million    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              - 
------------------------  -------------  -------------  -------------  ------------- 
 

Consumer lending

 
                                                 30 June 2022 
                          ---------------------------------------------------------- 
                                  Stage          Stage          Stage 
                                      1              2              3           POCI 
                            GBP'million    GBP'million    GBP'million    GBP'million 
------------------------  -------------  -------------  -------------  ------------- 
 Up to date                       1,089            133              2              - 
 1 to 29 days past due                3              2              -              - 
 30 to 89 days past due               -             10              4              - 
 90+ days past due                    -              -             26              - 
------------------------  -------------  -------------  -------------  ------------- 
 Gross carrying amount            1,092            145             32              - 
------------------------  -------------  -------------  -------------  ------------- 
 
 
                                               31 December 2021 
                          ---------------------------------------------------------- 
                                Stage 1        Stage 2        Stage 3           POCI 
                            GBP'million    GBP'million    GBP'million    GBP'million 
------------------------  -------------  -------------  -------------  ------------- 
 Up to date                         786             71              2              - 
 1 to 29 days past due                -              2              -              - 
 30 to 89 days past due               -              9              3              - 
 90+ days past due                    -              -             16              1 
------------------------  -------------  -------------  -------------  ------------- 
 Gross carrying amount              786             82             21              1 
------------------------  -------------  -------------  -------------  ------------- 
 
 
                                                 30 June 2021 
                          ---------------------------------------------------------- 
                                Stage 1        Stage 2        Stage 3           POCI 
                            GBP'million    GBP'million    GBP'million    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 
------------------------  -------------  -------------  -------------  ------------- 
 

Commercial lending

 
                                                 30 June 2022 
                          ---------------------------------------------------------- 
                                  Stage          Stage          Stage 
                                      1              2              3           POCI 
                            GBP'million    GBP'million    GBP'million    GBP'million 
------------------------  -------------  -------------  -------------  ------------- 
 Up to date                       3,646            510             89              - 
 1 to 29 days past due                8             46             17              - 
 30 to 89 days past due               -             56             14              - 
 90+ days past due                    -              3             92              - 
------------------------  -------------  -------------  -------------  ------------- 
 Gross carrying amount            3,654            615            212              - 
------------------------  -------------  -------------  -------------  ------------- 
 
 
                                               31 December 2021 
                          ---------------------------------------------------------- 
                                Stage 1        Stage 2        Stage 3           POCI 
                            GBP'million    GBP'million    GBP'million    GBP'million 
------------------------  -------------  -------------  -------------  ------------- 
 Up to date                       3,727            656            118              - 
 1 to 29 days past due               12             46              2              - 
 30 to 89 days past due               -             78             23              - 
 90+ days past due                    -              -            184              - 
------------------------  -------------  -------------  -------------  ------------- 
 Gross carrying amount            3,739            780            327              - 
------------------------  -------------  -------------  -------------  ------------- 
 
 
                                                 30 June 2021 
                          ---------------------------------------------------------- 
                                Stage 1        Stage 2        Stage 3           POCI 
                            GBP'million    GBP'million    GBP'million    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              - 
------------------------  -------------  -------------  -------------  ------------- 
 

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 
  2022                5,546   1,063     114      -   6,723     (2)    (12)     (5)      -    (19)   5,544   1,051     109      -   6,704 
 Transfers 
  to/from stage 
  1(1)                  199   (189)    (10)      -       -     (3)       2       1      -       -     196   (187)     (9)      -       - 
 Transfers 
  to/from stage 
  2(1)                (343)     346     (3)      -       -       -       -       -      -       -   (343)     346     (3)      -       - 
 Transfers 
  to/from stage 
  3(1)                  (3)    (10)      13      -       -       -       -       -      -       -     (3)    (10)      13      -       - 
 Net remeasurement 
  due to 
  transfers(2)            -       -       -      -       -       2     (1)       -      -       1       2     (1)       -      -       1 
 New lending(3)         511     147       -      -     658     (3)     (2)       -      -     (5)     508     145       -      -     653 
 Repayments, 
  additional 
  drawdowns 
  and interest 
  accrued              (57)    (13)     (1)      -    (71)       -       -       -      -       -    (57)    (13)     (1)      -    (71) 
 Derecognitions(4)    (432)    (81)    (12)      -   (525)       1       -       1      -       2   (431)    (81)    (11)      -   (523) 
  Changes 
   to 
   assumptions(5)         -       -       -      -       -       -       3       -      -       3       -       3       -      -       3 
-------------------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------ 
 Balance 
  at 30 June 
  2022                5,421   1,263     101      -   6,785     (5)    (10)     (3)      -    (18)   5,416   1,253      98      -   6,767 
-------------------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------ 
 
   1.     Represents the stage transfers prior to any ECL remeasurement 

2. 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

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

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

5. 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

 
                            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 2021       5,918      786     111      -    6,815     (4)     (6)     (5)      -    (15)    5,914      780     106      -    6,800 
 Transfers 
  to/from stage 
  1                   (7)        7       -      -        -     (1)       2     (1)      -       -      (8)        9     (1)      -        - 
 Transfers 
  to/from stage 
  2                 (189)      189       -      -        -       -       -       -      -       -    (189)      189       -      -        - 
 Transfers 
  to/from stage 
  3                  (10)      (5)      15      -        -       -       -       -      -       -     (10)      (5)      15      -        - 
 Net 
  remeasurement 
  due to 
  transfers             -        -       -      -        -       1     (1)       -      -       -        1      (1)       -      -        - 
 New lending          349      156       -      -      505       -     (3)       -      -     (3)      349      153       -      -      502 
 Repayments, 
  additional 
  drawdowns 
  and interest 
  accrued            (39)      (6)     (1)      -     (46)       -       -       -      -       -     (39)      (6)     (1)      -     (46) 
 Derecognitions     (476)     (64)    (11)      -    (551)       -       -       1      -       1    (476)     (64)    (10)      -    (550) 
  Changes 
   to 
   assumptions          -        -       -      -        -       2     (4)       -      -     (2)        2      (4)       -      -      (2) 
----------------  -------  -------  ------  -----  -------  ------  ------  ------  -----  ------  -------  -------  ------  -----  ------- 
 Balance at 
  31 December 
  2021              5,546    1,063     114      -    6,723     (2)    (12)     (5)      -    (19)    5,544    1,051     109      -    6,704 
----------------  -------  -------  ------  -----  -------  ------  ------  ------  -----  ------  -------  -------  ------  -----  ------- 
 
 
                            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                   369    (352)    (17)      -        -     (7)       6       1      -       -      362    (346)    (16)      -        - 
 Transfers 
  to/from stage 
  2                 (280)      288     (8)      -        -       1     (1)       -      -       -    (279)      287     (8)      -        - 
 Transfers 
  to/from stage 
  3                   (9)     (21)      30      -        -       -       1     (1)      -       -      (9)     (20)      29      -        - 
 Net 
  remeasurement 
  due to 
  transfers             -        -       -      -        -       6       -       -      -       6        6        -       -      -        6 
 New lending          545       77       -      -      622     (1)     (1)       -      -     (2)      544       76       -      -      620 
 Repayments, 
  additional 
  drawdowns 
  and interest 
  accrued            (92)     (11)     (1)      -    (104)       -       -       -      -       -     (92)     (11)     (1)      -    (104) 
 Derecognitions     (526)     (58)    (11)      -    (595)       1       1       -      -       2    (525)     (57)    (11)      -    (593) 
 Changes to 
  assumptions           -        -       -      -        -       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 
----------------  -------  -------  ------  -----  -------  ------  ------  ------  -----  ------  -------  -------  ------  -----  ------- 
 

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 
  2022               786      82      21      1     890    (18)     (8)    (16)      -    (42)     768      74       5      1     848 
 Transfers 
  to/from stage 
  1                   16    (16)       -      -       -     (2)       2       -      -       -      14    (14)       -      -       - 
 Transfers 
  to/from stage 
  2                (108)     108       -      -       -       1     (1)       -      -       -   (107)     107       -      -       - 
 Transfers 
  to/from stage 
  3                  (9)     (4)      13      -       -       -       2     (2)      -       -     (9)     (2)      11      -       - 
 Net 
  remeasurement 
  due to 
  transfers            -       -       -      -       -       1     (5)     (9)      -    (13)       1     (5)     (9)      -    (13) 
 New lending         583      10       2      -     595    (10)     (1)     (1)      -    (12)     573       9       1      -     583 
 Repayments, 
  additional 
  drawdowns 
  and interest 
  accrued           (93)    (26)     (2)    (1)   (122)       -       -       -      -       -    (93)    (26)     (2)    (1)   (122) 
 Derecognitions     (83)     (9)     (2)      -    (94)       4       1       1      -       6    (79)     (8)     (1)      -    (88) 
  Changes 
   to 
   assumptions         -       -       -      -       -       4       1       -      -       5       4       1       -      -       5 
----------------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------ 
 Balance 
  at 30 June 
  2022             1,092     145      32      -   1,269    (20)     (9)    (27)      -    (56)   1,072     136       5      -   1,213 
----------------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------ 
 
 
                          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 2021        642      43      18      1     704    (20)     (5)    (17)      -    (42)     622      38       1      1     662 
 Transfers 
  to/from stage 
  1                  (6)       6       -      -       -       1     (1)       -      -       -     (5)       5       -      -       - 
 Transfers 
  to/from stage 
  2                  (2)       2       -      -       -       -       -       -      -       -     (2)       2       -      -       - 
 Transfers 
  to/from stage 
  3                  (1)     (1)       2      -       -       -       -       -      -       -     (1)     (1)       2      -       - 
 Net 
  remeasurement 
  due to 
  transfers            -       -       -      -       -       -       -     (1)      -     (1)       -       -     (1)      -     (1) 
 New lending         185      42       7      -     234       1     (4)     (6)      -     (9)     186      38       1      -     225 
 Repayments, 
  additional 
  drawdowns 
  and interest 
  accrued            (9)     (3)       -      -    (12)       -       -       -      -       -     (9)     (3)       -      -    (12) 
 Derecognitions     (23)     (7)     (6)      -    (36)       1       1       6      -       8    (22)     (6)       -      -    (28) 
  Changes 
   to 
   assumptions         -       -       -      -       -     (1)       1       2      -       2     (1)       1       2      -       2 
----------------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------ 
 Balance at 
  31 December 
  2021               786      82      21      1     890    (18)     (8)    (16)      -    (42)     768      74       5      1     848 
----------------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------ 
 
 
                          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 
----------------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------ 
 

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 
  2022             3,739     780     327      -   4,846    (27)    (29)    (52)      -   (108)   3,712     751     275      -   4,738 
 Transfers 
  to/from stage 
  1                  164   (163)     (1)      -       -     (6)       6       -      -       -     158   (157)     (1)      -       - 
 Transfers 
  to/from stage 
  2                (135)     137     (1)      -       1       1     (1)       -      -       -   (134)     136     (1)      -       1 
 Transfers 
  to/from stage 
  3                 (98)   (108)     206      -       -       -       4     (4)      -       -    (98)   (104)     202      -       - 
 Net 
  remeasurement 
  due to 
  transfers            -       -       -      -       -       3     (4)       -      -     (1)       3     (4)       -      -     (1) 
 New lending         427      54       2      -     483     (7)     (2)     (1)      -    (10)     420      52       1      -     473 
 Repayments, 
  additional 
  drawdowns 
  and interest 
  accrued          (180)    (25)     (5)      -   (210)       -       -       -      -       -   (180)    (25)     (5)      -   (210) 
 Derecognitions    (263)    (60)   (316)      -   (639)       1       1      22      -      24   (262)    (59)   (294)      -   (615) 
  Changes 
   to 
   assumptions         -       -       -      -       -       2     (8)       4      -     (2)       2     (8)       4      -     (2) 
----------------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------ 
 Balance 
  at 30 June 
  2022             3,654     615     212      -   4,481    (33)    (33)    (31)      -    (97)   3,621     582     181      -   4,384 
----------------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------  ------  ------  ------  -----  ------ 
 
 
                            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 2021       3,986      800     186      -    4,972    (21)    (37)    (51)      -    (109)    3,965      764     134      -    4,863 
 Transfers 
  to/from stage 
  1                    63     (63)       -      -        -     (2)       2       -      -        -       61     (61)       -      -        - 
 Transfers 
  to/from stage 
  2                 (173)      174     (1)      -        -       -       -       -      -        -    (173)      174     (1)      -        - 
 Transfers 
  to/from stage 
  3                 (163)      (3)     166      -        -       -       1     (1)      -        -    (163)      (2)     165      -        - 
 Net 
  remeasurement 
  due to 
  transfers             -        -       -      -        -     (1)     (6)     (6)      -     (13)      (1)      (6)     (6)      -     (13) 
 New lending          299      (1)       1      -      299     (3)       4     (1)      -        -      296        3       -      -      299 
 Repayments, 
  additional 
  drawdowns 
  and interest 
  accrued            (26)     (22)       -      -     (48)       -       -       -      -        -     (26)     (22)       -      -     (48) 
 Derecognitions     (247)    (105)    (25)      -    (377)       1       4       8      -       13    (246)    (101)    (17)      -    (364) 
  Changes 
   to 
   assumptions          -        -       -      -        -     (1)       2       -      -        1      (1)        2       -      -        1 
----------------  -------  -------  ------  -----  -------  ------  ------  ------  -----  -------  -------  -------  ------  -----  ------- 
 Balance at 
  31 December 
  2021              3,739      780     327      -    4,846    (27)    (29)    (52)      -    (108)    3,712      751     275      -    4,738 
----------------  -------  -------  ------  -----  -------  ------  ------  ------  -----  -------  -------  -------  ------  -----  ------- 
 
 
                            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 
----------------  -------  -------  ------  -----  -------  ------  ------  ------  -----  -------  -------  -------  ------  -----  ------- 
 
   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 
  2022                    18            280            341             24              1            295            959 
 Additions                 -              -              1              -              -              -              1 
 Write-offs                -           (10)              -            (2)              -              -           (12) 
 30 June 2022             18            270            342             22              1            295            948 
--------------  ------------  -------------  -------------  -------------  -------------  -------------  ------------- 
 Accumulated 
 depreciation 
 1 January 
  2022                    12             68             28             19              -             67            194 
 Charge for 
  the period               -              6              3              1              -              7             17 
 Write-offs                -           (10)              -            (2)              -              -           (12) 
30 June 2022              12             64             31             18              -             74            199 
Net book value 
 at 
 30 June 2022              6            206            311              4              1            221            749 
 
 Cost 
 1 July 2021              18            300            290             25             11            330            974 
 Additions                 -              4             37              -              1            (4)             38 
 Disposals                 -              -              -              -              -           (29)           (29) 
 Write-offs                -           (10)              -            (1)           (11)            (2)           (24) 
Transfers                  -           (14)             14              -              -              -              - 
31 December 
 2021                     18            280            341             24              1            295            959 
 Accumulated 
 depreciation 
 1 July 2021              13             72             23             18              8             54            188 
 Charge for 
  the period             (1)              8              2              1              1             11             22 
 Impairments               -              -              -              -              -              6              6 
 Disposals                 -              -              -              -              -            (4)            (4) 
 Write-offs                -            (9)              -              -            (9)              -           (18) 
Transfers                  -            (3)              3              -              -              -              - 
31 December 
 2021                     12             68             28             19              -             67            194 
Net book value 
 at 
 31 December 
 2021                      6            212            313              5              1            228            765 
 
 
 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 
 
   8.   Intangible assets 
 
                                    Goodwill        Brands      Software          Total 
                                 GBP'million   GBP'million   GBP'million    GBP'million 
Cost 
1 January 2022                            10             2           336            348 
Additions                                  -             -            12             12 
Write-offs                                 -             -          (16)           (16) 
30 June 2022                              10             2           332            344 
Accumulated amortisation 
1 January 2022                             -             -           105            105 
Charge for the period                      -             -            20             20 
Write-offs                                 -             -           (8)            (8) 
30 June 2022                               -             -           117            117 
Net book value at 30 June 
 2022                                     10             2           215            227 
 
Cost 
1 July 2021                               10             2           355            367 
Additions                                  -             -            13             13 
Write-offs                                 -             -          (32)           (32) 
31 December 2021                          10             2           336            348 
Accumulated amortisation 
1 July 2021                                -             -           114            114 
Charge for the period                      -             -            18             18 
Impairment                                                           (1)            (1) 
Write-offs                                 -             -          (26)           (26) 
31 December 2021                           -             -           105            105 
Net book value at 31 December 
 2021                                     10             2           231            243 
 
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 
 
   9.   Lease liabilities 
 
                                   Half year     Half year     Half year 
                                          to            to            to 
                                     30 June   31 December       30 June 
                                        2022          2021          2021 
                                 GBP'million   GBP'million   GBP'million 
At beginning of the period               269           310           327 
Additions and modifications                -           (6)             - 
Disposals                                  -          (29)          (11) 
Lease payments made                     (13)          (14)          (15) 
Interest on lease liabilities              8             8             9 
At the end of the period                 264           269           310 
 

10. Deferred grants

 
                                                  Half year     Half year     Half year 
                                                         to            to            to 
                                                    30 June   31 December       30 June 
                                                       2022          2021          2021 
                                                GBP'million   GBP'million   GBP'million 
At beginning of the period                               19            22            28 
Released to the income statement                          -           (3)           (7) 
Offset against capital expenditure (see note 
 8)                                                       -             -             1 
At the end of the period                                 19            19            22 
 

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 2022 we are currently on track with the delivery of these commitments.

11. Share capital

As at 30 June 2022 we had 172.4 million ordinary shares of 0.0001 pence (31 December 2021: 172.4 million, 30 June 2021: 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 
                                      2022          2021          2021 
                               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 
                                      2022          2021          2021 
                               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 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 
                                                      2022          2021       2021 
(Loss) attributable to ordinary equity holders 
 (GBP'million)                                      (61.7)       (107.1)    (141.1) 
Weighted average number of ordinary shares 
 in issue (thousands)                              172,421       172,421    172,420 
Basic earnings per share (pence)                    (35.8)        (62.1)     (81.8) 
 

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 2022 31 December 2021 and 30 June 2021, 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 
                                                     2022          2021       2021 
(Loss)/profit attributable to ordinary equity 
 holders (GBP'million)                             (61.7)       (107.1)    (141.1) 
Weighted average number of ordinary shares 
 in issue (thousands)                             172,421       172,421    172,420 
Diluted earnings per share (pence)                 (35.8)        (62.1)     (81.8) 
 

13. Fair value of financial instruments

 
                                                       Quoted         Using  With significant 
                                                       market    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 2022 
Assets 
Loan and advances to customers           12,364             -             -            12,498        12,498 
Investment securities held 
 at FVOCI                                   781           743            38                 -           781 
Investment securities held 
 at amortised cost                        5,393         3,685         1,482                53         5,220 
Financial assets held at FVTPL                2             -             -                 2             2 
Liabilities 
Deposits from customers                  16,514             -             -            16,377        16,377 
Deposits from central banks               3,800             -             -             3,800         3,800 
Debt securities                             577           447             -                 -           447 
Derivative financial liabilities              8             -             -                 8             8 
Repurchase agreements                       166             -             -               166           166 
 
31 December 2021 
Assets 
Loan and advances to customers           12,290             -             -            12,356        12,356 
Investment securities held 
 at FVOCI                                   798           760            38                 -           798 
Investment securities held 
 at amortised cost                        4,776         2,977         1,710                60         4,747 
Financial assets held at FVTPL                3             -             -                 3             3 
Liabilities 
Deposits from customers                  16,448             -             -            16,452        16,452 
Deposits from central banks               3,800             -             -             3,800         3,800 
Debt securities                             588           495             -                 -           495 
Derivative financial liabilities             10             -            10                 -            10 
Repurchase agreements                       169             -             -               169           169 
 
 
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 
 

Cash and balances with the Bank of England, trade and other receivables, trade and other payables, assets classified as held for sale and other assets and liabilities which meet the definition of financial instruments are not included in the tables. Their carrying amount is a reasonable approximation of fair value.

Information on how fair values are calculated 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).

Financial assets and liabilities held at fair value through profit and loss

The financial assets at fair value through profit and loss relate to the loans and advances previously assumed by the RateSetter provision fund. Following the purchase of the RateSetter back book from peer-to-peer investors in April 2021 the provision fund ceased to have liability for further claims which resulted in a net release of GBP18 million of assets and liabilities held at fair value through profit and loss.

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.

Derivative financial liabilities

The fair values of derivatives are obtained from discounted cash flow models or option pricing models as appropriate.

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 only contingent liability which we have, which could potentially have a material impact, is the FCA's enquiries regarding our financial crime systems and controls. We continue to engage and co-operate fully with the FCA on these matters and their enquiries remain at a relatively early stage.

The inclusion of these enquiries does not constitute any admission of wrongdoing or legal liability. The outcome and timing of these matters is inherently uncertain and based on the facts currently known, it is not possible to predict the outcome or reliably estimate any financial impact. As such, at the reporting date no provision has been made within the financial statements.

15. Post balance sheet events

There have been no material post balance sheet events.

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 225 of our 2021 Annual Report and Accounts.

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

 
                                            Impairment 
                                             and write 
                                                  offs 
                                                of PPE           Net 
                            Statutory   and intangible           BCR  Transformation    Remediation    Underlying 
Half year to 30                 basis           assets         costs           costs          costs         basis 
 June 2022                GBP'million      GBP'million   GBP'million     GBP'million    GBP'million   GBP'million 
Interest income                 239.7                -             -               -              -         239.7 
Interest expense               (58.9)                -           0.1               -              -        (58.8) 
Net interest income             180.8                -           0.1               -              -         180.9 
Net fee and commission 
 income                          39.5                -             -               -              -          39.5 
Net gains on sale                   -                -             -               -              -             - 
 of assets 
Other income                     16.2                -         (0.4)               -              -          15.8 
Total income                    236.5                -         (0.3)               -              -         236.2 
 
General operating 
 expenses                     (233.2)                -           0.3             1.0            3.0       (228.9) 
Depreciation and 
 amortisation                  (37.4)                -             -               -              -        (37.4) 
Impairment and write 
 offs of property, 
 plant & equipment 
 and intangible assets          (8.2)              8.2             -               -              -             - 
Total operating 
 expenses                     (278.8)              8.2           0.3             1.0            3.0       (266.3) 
Expected credit loss 
 expense                       (17.9)                                                                      (17.9) 
Loss before tax                (60.2)              8.2             -             1.0            3.0        (48.0) 
 

Details of our other alternative performance measures including the methodology used to calculating them can be found on page 224 of our 2021 Annual Report and Accounts.

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