Metro Bank Prelim FY’23 Credit Summary

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Prelim FY’23 Credit Summary

Metro Bank full year 2023 preliminary results. With the latest recapitalization by the key shareholder Jaime Gilinsky, the bank is back in a more stable condition.

• Recapitalization in Q4’23, with £150m equity injection, £525m in new senior bonds and £150 in Tier 2 debt.
• Likely to see a shift to a shift towards commercial lending, including bridging lending to specialist lenders, BtL portfolio lending to the alternative lending space, to compete with Shawbrook, Together and OSB.
• Capital Adequacy has been under pressure over the past few years as Metro endured continuous losses. The PRA was monitoring the situation. Now improved the bottom line performance and along with the Recap, CET1 ratio improved to 13.1%, with headroom above the regulatory minimum.
• Whilst increased rates have helped Metro Bank’s NiM. Expect ECLs to rise in 2024. Furthermore, Metro Bank are still seeing increases into Stage 3 loans.
• UK focused loan book, with a high concentration towards mortgage lending, both owner occupied and Buy to Let. Improving lending standards to SMEs and lower incidence of NPLs and LICs.

Metro Bank Operating Performance

Income Summary

Critically, the accumulated losses of £800m over 2018-2022 were the key risk investors and analysts have sighted and raised concerns with Metro Bank. Under the capital adequacy section below, the importance of continued losses is explained. And most recently in FY’23 stopped the tide of losses with £29.1m in net profit.

Metro has vitally improved, mainly through improved Nii, and increased fee and commission income. They also managed to improve their lending strategy, and as a result have enhanced their loanbook, and as a result have slowed down their NPLs, such that their LICs have declined from £77.7m in 2019 to £4.6m in 2023.

Metro now have a Cost : Income ratio of 97%, down from 106%, in 2022. They managed so far to get on the right trajectory.

NiM

Metro had recently rebalanced their NiM based on a combination of reducing their fixed term savings accounts and reallocating a portion of their securities book into slightly higher yielding securities over 2023.

Nii in 2023 was £412m, up 1.63% YoY. The Average Interest Income Rate was 3.3%, up 70Bps YoY.As BoE rates increased, they were able to pass on the rate rises.

Interest Expense was higher, due to enhanced savings rates being offered.

Blended NiM was higher in 2023, up 6Bps to 1.98%. (half of the depositors are commercial).

Metro strategically reduced the amount of savings accounts available to new customers to lower the amount of interest paid in 2022. But have since reversed that, with an increase in Fixed Rate Savings accounts to £2.1Bln FY’23, from £625m FY’22.

Metro saw that there was starting to show signs of a declining depositor base, so U-turned and started to offer Fixed Term savings accounts again.

Critically, on the back of the appetite for Metro to manage credit risk, they decreased lending by £800m to £12.5Bln. Generating 6.8% in interest income nearly double FY’22 at 3.53%.

Asset Quality

Asset Risk Summary

The credit risk is driven by the loan book and securities held at Metro.

ECLs are calculated at £199m slightly higher than FY’22 at £187m, with a coverage ratio of 1.59%. ECLs are up likely to increase over 2024.

The following variables are the key drivers of ECL:

• UK interest rate (five-year mortgage rate). Currently 5-7%.
• UK unemployment rate. Currently just under 3.9%.
• UK HPI change, year-on-year (adjusted across all scenarios to reflect further uncertainty in residential property values). Current level of 149, up 4% YoY. Down -1.2% prior month.
• UK GDP change, year-on-year. Dropping to -0.1% Jan’24, low UK GDP growth forecast into 2024.

• UK commercial real estate change, year-on-year (adjusted across all scenarios to reflect further uncertainty in commercial property values). UK commercial property capital values decreased by 13.3% as a whole in 2022 and 3.9% in FY’23, and annual total returns were down 1.7%, according to the CBRE Monthly Index published.

All these factors are negative, and ECLs will be forecast to increase at Metro Bank into 2024.

On the £12.5Bln loan book, There are loans currently in Stage 3 of £389m, up from £352m in Stage 3 in FY’22, with a loss allowance of £199m compared to FY’22 with £187m. There are £10.6Bln in Stage1 and £1.5Bln in Stage2. 2023 is likely to see a further shift from Stage1 to Stage2, and likely to see a move again from Stage 2 to Stage 3. ECLs will likely rise in 2024.

Non-Performing Loans

Metro NPLs at FYE’23, were 3.12% (FY’22 2.65%) (as measured by NPLs / total loans). In comparison at FYE’22, HSBC recorded NPL’s of 1.57% and Santander (UK) had 1.3% (Santander Group – 3.1%). Shawbrook has an NPL ratio of 2.3%[1].

NPL coverage from provisions is negative as Metro reported a loss, with just £4m in provisions.

The £22Bln balance sheet assets are made up of a £12.3Bln loanbook, £5Bln in securities and a further £3.9Bln in cash held at the BoE.

Metro Bank Loan Book

The loan book consists of £9Bln in retail products and £3.4Bln in SME products.

The £9.1Bln Retail business is made up of a £7.8Bln mortgage book. 75% lent to owner occupied and 25% to Buy-To-Let (“BTL”). Clearly with mortgage rates increasing in 2023, there was a deep concern that UK mortgage holders could find themselves in arrears and Metro bank was not immune to that risk. However, with inflation down, albeit with exceptionally low GDP growth, there is likely to see interest rates cuts in 2H’24.

LTV analysis

The combined Loan-To-Value of the £7.8Bln mortgage book is 63% (FY’22 56%). However on closer inspection Metro have £2.2Bln in LTVs of over 70%. With £640m in loans with an LTV over 80% (FY’22 £390m). A fall of 20% in property prices will considerably change the LTV profile at Metro. There is a concentration of mortgage lending in London and the South East, with £3.1Bln in London and a further £1.9Bln in the South East. Both areas have seen substantial price increases in the past ten years. Prices though have not corrected yet.

In terms of changes to their lending book strategy, Metro increased their home lending to consumers by £590m to £1.4m in 2022. But reduced exposure to £1.2Bln in 2023. Metro also significantly increased their mortgage lending by £344m to owner occupiers and reduced BTL by £177m.

They strategized a reduction in commercial lending, with reductions in lending across professional BTL and SME lending in 2022 and 2023. Metro also had £1.47Bln in Covid related loans to business, gov’t backed. And have they have partially repaid and the balance is now at £524m.

Metro have increased their Asset & Invoicing business by £50m, and is an area that can be profitable whilst risky, but Metro have an opportunity to grow that business given their current scope of expertise.

Strategic changes to the loan book and exposure to better yielding segments

Strategic changes to the lending strategy from 2024 -2026 include moving into more commercial lending, including lending to alternative finance lenders in the bridging space, BtL portfolios similar to Shawbrook, OSB and Together. They have the capability and capacity to do this. But being regulated by the FCA will have to hold sizeable capital to offset their RWA exposure.

Securities Book

The £5Bln securities portfolio is made up of “AAA” to “AA-” rated securities. Essentially the main change is the increased exposure to Multilateral Development Banks (“MDBs”) which pay a little more than holding cash or bonds at the central bank. Securities risk is managed well at Metro, and remains credit positive.

Funding & Liquidity

Metro Bank is mainly funded by deposits. Deposits of £15.6Bln, is made up of £8.9Bln in retail deposits, and £6.3Bln in SME deposits. They have over £5.7Bln in demand deposits, which historically have been stable. Metro have a £3Bln term funding loan from the central bank.

Drawdowns will mature in 2025 and 2027 in the amounts of £1.8Bln and £1.2Bln respectively.

Metro operate a moderate gross loans/deposits ratio of 79% at FY’23. According to Fitch Metro are less press sensitive than peers.

Metro Recapitalization includes two bonds and £150m in Equity:-

1. 04/29 (callable 04/28)
2. 04/34 (callable 04/29)

Liquidity Coverage Ratio (“LCR”) remains robust at 332% (FY’22 213%). Metro hold HQLA of £6.7Bln. They have an Internal Liquidity Adequacy Assessment Process (“ILAAP”) in place, monitoring daily the liquidity requirements of the bank.

Capital Adequacy

Metro’s CET1 and total capital ratios were improved as a result of the Recap to 13.1% and 15.1% from 9.9% and 13.0% in Q2’23, respectively. Improving headroom above the 8.2% and 11.9% minimum requirements, including the capital conservation buffer and the 2% UK countercyclical capital buffer.

Metro had a total capital plus MREL ratio of 22% (FY’22 17.7%). The regulatory minimum is 17%.

CET1 of £985m up 20% YoY.

RWAs are £7.5Bln. RWAs are down 6% YoY. Off balance sheet risk accounts for £169m in RWA and Capital Requirements Regulations RWA of £748m.

The RWA density is 33% down 3% YoY. As a side note, the rationale for holding the type of investment securities they do, is to keep the RWAs low.

Appendix

Mortgage Analysis

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[1] Measured as Credit Impaired Loans as a percentage of total loans – https://www.metrobankonline.co.uk/investor-relations/

For other recent Credit work please see on EHYO – https://www.europeanhighyield.online/ardagh-group-credit-summary-fy23/