Metro Bank H1 2025 Earnings Call Transcript

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Provided by Quartr
August 6, 2025

Key Takeaways

  • Positive Sentiment: Revenue up 22% year on year despite a 100 bps cut in base rates and a 24% balance sheet reduction, demonstrating strong top-line performance in a lower rate environment.
  • Positive Sentiment: Operating costs reduced by 8% year on year, delivering a 30% jaws ratio and underlying profit before tax of £45 m—three times H1 2024 levels.
  • Positive Sentiment: Net interest margin expanded by over 100 bps to an exit rate of ~2.95%, positioning the bank close to its full-year guidance.
  • Positive Sentiment: Commercial and corporate lending doubled to £1 bn in H1, with an £800 m credit-approved pipeline exceeding all of 2023’s lending, showing strong lending momentum.
  • Positive Sentiment: Capital actions included a £584 m unsecured loan sale and £250 m AT1 issuance, and the bank expects to be reclassified under the new MREL regime, eliminating the need for further MREL debt raises.
AI Generated. May Contain Errors.
Earnings Conference Call
Metro Bank H1 2025
00:00 / 00:00

There are 6 speakers on the call.

Operator

Good morning. Welcome to Metrobank's half one twenty twenty five results presentation. I'm Dan Frumkin, CEO of Metrobank. Half one twenty twenty five shows the strategic pivot we started eighteen months ago, refocusing on Metro Bank's relationship banking ethos is working. The strong financial performance combined with the actions taken positions Metro Bank to deliver best in class returns over time.

Operator

You're going to hear from me this morning a bit of an overview, then we'll go into Mark, who will give you more detail on the financial performance. And then I'll talk a bit about the strategy driving the future through 2027 and beyond. And then we're always happy to take your questions. So let's start. Revenue was up 22% year on year.

Operator

It's up 22% even though the Bank of England base rate is down a 100 basis points. We also shrunk the balance sheet by 24%. So we managed to grow revenue while shrinking the balance sheet and living in a lower rate environment. We also managed to reduce cost to reduce cost by 8% year on year. That gave us a jaws of 30%.

Operator

It led to a £45,000,000 underlying PBT. That is treble what we did in the 2024. On the upper right, we did a billion pounds of commercial and corporate lending. That's twice what we did a year ago. We have an £800,000,000 credit approved pipeline.

Operator

The credit approved pipeline is more than all of the lending we did in 2023. You can see we expanded NIM in the bottom left by over 100 basis points in the year. The February exit NIM is very close to our year end guidance. And we've created real capacity for growth through our capital actions in the first half of the year, both the unsecured personal loan sale and the £250,000,000 of AT1 we raised. And we believe, and we expect to be reclassified a transfer bank under the new MREL regime.

Operator

And when we're reclassified a transfer bank under the new regime, it means MREL capital is set equal to your minimum capital requirements. Therefore, Metro Bank has no intention of raising any more MREL debt. We told you that there are four key drivers for us to deliver 2027 guidance. The first was cost discipline. As I've mentioned, costs are down 8% year on year.

Operator

Our costs are now better than they need to be to deliver 2027 guidance. Our cost of deposits, our exit cost of deposits was a 102 basis points. That is the best of any high street bank in The UK. Our cost of deposits is now below what it needs to be to deliver the 2027 guidance. We talked about just the passage of time that our treasury portfolio, our natural hedge, rolls off and we can reinvest the the proceeds when those securities mature.

Operator

We have a half a billion this year, a billion and '26, and another half a billion in '27. Just the roll off and reinvestment of those proceeds under the current yield curve delivers a 660 basis point improvement and return on tangible equity by the 2027. And we said we need to rotate assets. Well, you saw and I talked about earlier, we've done a billion pounds of commercial and corporate. We have an £800,000,000 pipeline.

Operator

We're launching new products in our specialist residential mortgage space. And most importantly, we saw half a billion pounds of our prime resi mortgage book run off. One of the strengths of the business plan is that we free up about £4,000,000,000 of liquidity and significant amounts of capital because we're running off the prime residential mortgage book. You've seen this slide before. I'm not going to spend a lot of time on the why we win drivers.

Operator

I'll come back to those in the second half of the presentation. But I do want to spend a bit of time on the chart on the right. You've seen it before. This is our clear blue water chart. Metro Bank is in a universe of its own.

Operator

We are uniquely positioned to generate outsized returns on a going forward basis. We have a funding model that delivers a cost of deposits that is better than the high street banks. And we have a lending platform that's delivering risk adjusted yields in line with the specialist lenders. That combination, driven by our relationship ethos, allows Metro Bank to win every day. And this is the guidance.

Operator

Mark will come back to it. But again, as I've talked about, for the '27 guidance, the building blocks are in place now for a lot of the guidance that will be delivered in '27. And with that, I'll turn it over to Mark to go through the details of the financials. Thank you.

Speaker 1

Thank you, Dan. Look, it's great to be able to talk about such a strong level of performance. And what I'd like to take you through today is a little bit more about the drivers and the actions we've taken and how we think they translate to forward momentum as we go forward from here. So look, firstly, let's look at the performance dashboard over a longer period of time. The first thing to notice is all of our trading metrics have improved, and let's go through those one by one.

Speaker 1

So firstly, as Dan mentioned, we have more than halved the cost of deposits from just over 2% to just over 1% versus the same period last year. That has helped increase our exit NIM along with the asset rotation strategy, which we'll come back to later, to an exit NIM of $2.95. That in turn has increased our revenue to 286,000,000, which is 22% up on the prior year on a smaller balance sheet and a lower rate environment. Combined with two things, combined with cost discipline, that improves our cost to income ratio from 95% at year end down to 82% and well on track to deliver all future guidance. From a credit risk perspective, strong underwriting disciplines in markets we already know has kept the cost of risk low, already low, and stable compared to half one twenty twenty four.

Speaker 1

The combination of increasing revenue, lowering costs, and low cost of risk means we've increased underlying profits to £45,000,000 in the period, which is more than treble the half two period in 2024. In addition to that, we are seeing convergence between our statutory profit and underlying profits with a statutory profit of £43,000,000, which translates into a return on tangible equity of 7% in the period, which is right in line with our guidance, all at the same time as increasing our capital position. And we're gonna come on to more of these drivers in-depth as we go through the next section. So Dan mentioned there was four things that were important to this to the transformation in terms of our PPT. Let's go through them one by one.

Speaker 1

So firstly, how have we managed to reduce the cost of deposits by more than half? Well, on the left hand side, this shows how our deposit mix has changed over time. And I'm drawing your attention to the third column, and importantly, our cost our mix of deposits, which are checking accounts or non interest bearing, is 43% of our mix. Now that equates to a market average of 18%. So we have more than twice the amount of mix in low cost deposits, which are born out of the relationship strategy we hold dear.

Speaker 1

In addition, we are starting from an extremely strong place in terms of liquidity, so an LCR ratio of 315%, and a loan to deposit ratio of 65%. That means we can be very disciplined with the types of deposits we need, and and as such, we have and a pricing advantage versus peers. That most of our heavy lifting of the transformation was completed last year from a people perspective, and that's true. And as you can see in the chart, we have reduced total cost half on half by £21,000,000 in the period versus half versus full year. But you can see our people costs are stable, reflecting the fact that all of the heavy lifting on people transformation was done last year.

Speaker 1

Pleasingly, we have further improved our operating efficiency by £21,000,000 in our non people costs as a result of targeted actions and embedded in our partnership with Infosys. All of this combines with the increased revenue to improve our cost to income ratio to 82% and well on track to deliver the guidance we set out in the plan. The third component, as Dan mentioned, was tailwinds from treasury investments. Here you can see the effect of the nearly 2,000,000,000 of maturities as they yield from lower yielding rates onto higher yielding rates. Cumulatively, we expect £15,000,000 worth of benefit this year, which is worth ten ten points on NIM.

Speaker 1

That builds substantially into 2026 to drive a £44,000,000 increase or 29 basis points on NIM. And cumulatively, over the period, it drives six sixty basis points of ROTE. Now, all of this is largely locked in. We know the rates, we know the balances, and are currently performing in line with our projections of the yields they're expecting to deliver. Finally, let's go to asset rotation.

Speaker 1

What does it mean for us? On the left hand side, this shows how our balance sheet has changed in loans and advances over the period since half one twenty twenty five half two twenty four. Our total loans are now 8,900,000,000.0, down from 9,200,000,000.0. But really, the story is in the middle block of how we're recycling runoff portfolios into targeted growth areas. You can see in our runoff books, we have run off the book by 1,200,000,000.0 from 5.8 down to 4.6.

Speaker 1

We have recycled this into our targeted areas and growing them by 900,000,000.0 in the period. As you can see on the right hand side, a lot of that growth is driven by our targeted acquisition in corporate and commercial lending. We did a billion pounds worth of new lending in half one twenty five compared to half a billion in '24 and point 3,000,000,000 in the same period in '23. So double twenty four, treble 2023, and building momentum. And as you can see, we have over 800,000,000 of credit approved pipeline ready to complete in the remainder of this year.

Speaker 1

Again, this gives us strong confidence our growth and strategy is delivering. But it's more than just growth. It's also within asset rotation about yield management and optimizing for risk adjusted returns. Now in our two target portfolios, in the middle two blocks, we've split out what the what the yields are, spread to base for commercial and customers joining, so three fifty seven, and and attrition, three thirty three. So the combination of growing in this segment and at a better yield has improved the spread to base from 3.12 to 3.46% in the period.

Speaker 1

That is NIM accretive and income earning. Likewise, in the mortgage portfolio on the right hand side, you can see that our attrition equals our gross lending, but actually the yield of gross lending significantly outperforms the attrition. So five seventy seven plus four sixty. We guided that we would generate new commercial loans over the course of the plan of 350 points of the base rate, and we are at that level, and we are at the lending volumes we need to deliver the guidance. Likewise, in mortgages, we're delivering over 200 basis points of swap rates.

Speaker 1

We continue to launch new products in this segment, and we look forward to telling you the results of those as they mature. So let's zoom out a little bit. What does all of that mean in terms of our four performance drivers on the key metrics? Well, versus half one twenty twenty four, our NIM has increased from 178 to two ninety five, driven by two key components, the asset rotation strategy and the cost of deposit management. That exit NIM is already within five basis points of our full year guidance of three to 3.25 for the remainder of the year.

Speaker 1

The strategic actions taken to increase revenue and lower costs have improved our jaws by 30% and the combination of which has improved our PBT to £45,000,000 in the period. Now let's just look at that £45,000,000 and how that's emerged over the passage of time. The reason we keep talking about these four drivers is because they have a material impact on profitability of the bank. You can see the effects of deposit optimization, cost management, treasury assets, and asset rotation as we build to a royalty of 7%, which is the midpoint of our guidance for the year. All of which has been achieved by strengthening our already robust capital position.

Speaker 1

And key significant changes on capital in the first half of this year is we raised $250,000,000 of AT1s, we completed the unsecured personal loan of $584,000,000 portfolio sale, we organically generated CET1 through profits, and as you can see on the right hand side, that now leads to an increase in our CET1, our total capital, and our MREL to the highest point we've had to date. All of this, we further expect benefits from the changes from the MREL regime, and we'll come back with further details as more is known in the future. Finally, ending on guidance. Look, on the left hand side, this is the halfway stage for the year. You can see where we are versus where we've said we'll be for the full year, and hopefully this brings you confidence that we are well on track to deliver, the strategies in action are working, and and we expect to have a very clear path to delivering the returns we set out in our guidance.

Speaker 1

And with that, I'm gonna hand back to Dan, who's gonna take you through our strategic drivers.

Operator

Thanks, Mark. So, listen, we're going to spend a little bit of time talking about the strategy driving the future, where we go to beyond '27, and how we get to '27 going forward. So listen, these are the strategic pillars that I've discussed before. These are the strategic pillars that underpinned the delivery of the strategic repositioning of Metro. So as we talked about cost, we have 38% fewer colleagues onshore today than we had eighteen months ago.

Operator

We've restructured our frontline distribution team, we've reduced store hours, but still have the longest store hours of any high street bank. That has built a scalable platform. All of those energies, all of those efforts were put into building a scalable platform. Infrastructure. Our partnership with Infosys has given us access to new colleagues who bring something different to Metro.

Operator

We've upgraded our financial crime capabilities, we've upgraded our fraud technologies, and we've redone our call center infrastructure to take advantage of AI. We have capabilities now that we did not possess eighteen months ago. In terms of communications, we have increased colleague engagement during a tremendous effort in turning around the bank. The culture of Metro remains strong. In balance sheet optimization, again, we sold £2,500,000,000 of residential mortgages.

Operator

We sold almost 600,000,000 of unsecured personal loans. We raised a quarter of a billion of AT1. All of that gives us capacity to grow. And then in terms of revenue, you saw the progress we've made on lending. You saw the new products we're launching in the specialist space.

Operator

We've increased our regional expansion in the North. Two thirds of our commercial lending is now done outside of London. That builds huge confidence in our ability to deliver in '27 and beyond. I said I'd come back to the why we're winning. The four key pillars of why we win every day.

Operator

Our local relationship led service model is a true differentiator. We're the only bank that assigns a relationship manager to every borrower of all sizes. We have a 102 local business managers across our 76 stores. We are committed to those communities in which we operate, and we have physical presence to support SMEs, commercial and corporate, across the country. We've talked about cost of deposits, and Mark mentioned our relationship led model drives a differentiator in cost of deposits because we have a much higher mix of current accounts, almost two and a half times the market, and we have a much smaller percentage of high cost fixed term deposits and cash ISAs where we have one fifth the market penetration.

Operator

We spend a lot of time talking about the scalable platform and the efficiencies we've built in. Those set us up well for the future. And then funding high yield specialist lending. Again, the bottom box in the middle, we are a local relationship led service model that differentiates us from the big banks, and the breadth of our service offering differentiates us from the other challenger banks. We have a team of over 400 professionals in the commercial and corporate space that on average have over twenty years of experience.

Operator

They're supported by a credit team that has over twenty five years on average of experience. We have small market shares. We only have a sort of a 7% market share in the SME space. And we lend into large markets. The SME commercial and corporate is a quarter of a trillion pound market.

Operator

And the specialist mortgage market is over £50,000,000,000. We are doing niches inside those markets. But all of those give us confidence in our ability not only to deliver 27, but to continue to grow beyond '27 as we take more market share, as we take larger shares of a very large market. And back to this slide. The chart on the right means Metro Bank is uniquely placed to deliver outsized returns.

Operator

And the reasons we're uniquely placed are completely sustainable. Our relationship based model generates low cost deposits, best in the market. And our lending teams who are skilled and capable generate yields in line with specialist lenders. That gives us the confidence that by 2027, Metro Bank will be generating one of the highest return on tangible equity, if not the highest, of any high street bank. Thank you so much, and we're happy to take your questions.

Speaker 2

Thank you very much. Ask a question, please press star followed by one on your telephone keypad now. Our first question comes from Benjamin Thoms from RBC Capital Markets. Your line is open, Please go ahead.

Speaker 3

Good morning,

Speaker 2

Good Good morning, morning,

Speaker 3

noticed in the presentation that Metro will become a transfer firm from an MREL perspective from the first to first twenty twenty six. I appreciate the moment that you don't have all the answers, but can you speak a little bit about how you think about the arguments for and against calling the MREL debt now versus letting it mature in 2028? And how this might this news might impact your current strategy, particularly around targeted growth loan segments? And secondly, Metro, a profitable company on capital, there's a boost to MREL coming at some stage. When is it reasonable expectation for us to start putting dividends into our model?

Speaker 3

And then lastly, if that's okay, on Slide 14, I can see that you're meeting your ambition in advancing commercial lending at a spread of greater than three fifty basis points. The right hand side of that slide on mortgages makes it less clear how you're progressing versus your greater than 200 basis point spread over swaps for mortgages. A quick and dirty calc suggests that you're running slightly behind on that ambition. Is that the right way to think about it in terms of front book mortgage profitability? And do you expect the spreads to pick up from here?

Operator

Good. Okay. Thanks, Ben. I'll do those in order, and Mark, I'll let you talk So about the mortgage we expect to be designated a transfer firm. You're right, we have £525,000,000 of existing MREL debt at a 12% interest rate that we could try to buy back before its call date in April '28.

Operator

Again, we'll run the economics and the math on it, but it is trading at 114 plus, So the math around whether it's worth buying it back now and using up the CET1 for the premium we'd have to pay to buy it back versus using that CET1 to invest in the business in other ways is math we need to do. We haven't really run the math yet. We're waiting to get written confirmation of the change, and again, the new rules don't become in effect until 01/01/2026, so there's a bit of time. In terms of capital return, you're right. A bank that's generating mid to upper teens return on tangible equity sustainably, which we think we will be, starting in '27, clearly needs a capital return policy.

Operator

So, you know, we haven't yet had those conversations internally, but I think it's fair to assume that we will start to have those conversations as we near the '27, you know, sort of upper teens return on tangible equity and what that means. So I would think we will be talking about capital return policy sort of in year end '26 results, and we'll create clarity for what that means for '27 and '28 and beyond. I don't know if you want talk about mortgage swaps.

Speaker 1

Yeah. Just I I think it's it's harder to show the margin versus swaps. So you're right, Ben. I think the way to think about it is we're at the volumes we need to. In terms of the margin to swaps, it actually is at about the 2%, and we've just launched new products, so we've got more to come in the second half.

Speaker 1

Look, we're really comfortable with where we are on the mortgage side, and it's in line with what we've guided.

Operator

And and all I would add to that is remember, you know, per the guidance, we're doing a billion, a billion 2 a year in a £50,000,000,000 market. As we launch the products, there's lots of niches for us to go after to generate the yield we want.

Speaker 3

Thank you.

Speaker 2

Our next question comes from Grace Dargan from Barclays. Your line is open, Grace. Please go ahead.

Speaker 4

Hi, good morning. Thanks very much for taking my questions. Maybe one first on kind of loan growth more broadly. I mean, I know in the appendix, you're making point of highlighting the CAGRs as you talked about at 24. Maybe you could give us an update on how you're thinking about that today?

Speaker 4

What's changed, if anything? And then secondly, maybe you could give us a view on kind of what your targeted or expected RWA density is over time. I guess you've talked about that previously. So any color on that would be helpful. Thank you.

Operator

Yes, Grace, thank you so much. And again, on Page 27 of the deck, we've laid out relatively detailed modeling guidance. And again, this is the same guidance we provided at year end '24. So, you know, some of the rates and some of that other information is slightly stale, but we wanted to be consistent. We see nothing in that guidance that we would change at this point.

Operator

I think Ben's earlier question about what we would do outside of the MREL regime and what it might mean for asset mix, and the fact that not being an MREL actually frees up a bit of net interest margin and all that, all is for conversations we need to have internally over the next handful of months. But I would think the density we mentioned on this slide, as well as the CAGARs, still pretty appropriate. Mark, I don't know if there's anything you'd like to add.

Speaker 1

No, no. I mean, we're at 39% We said 40% for 2025, so trading exactly where we expected it to be from a density perspective.

Operator

Yeah. And I guess the the point sorry. I'm getting a little long winded. But but the point that seems to be missed is we do have that £4,000,000,000 of prime residential mortgages that rolls off, that frees up liquidity, but it also frees up a chunk of capital. So so yes, density will increase, but overall, the overall balance sheet doesn't grow very much over the over the guidance, which which makes us much more capital efficient and drives much better ROADs.

Speaker 4

Okay. Thank you very much.

Speaker 2

Our next question comes from Correne Cunningham from Autonomous. Your line is open, Correne. Please go ahead.

Speaker 5

Good morning, everyone. Three probably quick ones from me, please. First one is just on the existing seniors. They do have a clause that would allow for a Regpar call. We've kind of assumed that you can't invoke that.

Speaker 5

But is there any possibility that, that could come into your liability conversations? Second one is with the with your dropping out of hopefully dropping out of the real status. Do you expect the Bank of England review your Pillar 2A requirements? And then last one, just a quick one on your PBT versus your net income. Do you expect that DTA allowance to actually kick in?

Speaker 5

Or is the tax rate that we're seeing in the first half, is that representative of what you would be expecting for the full year? Thank you.

Operator

Sure. So listen, those are three really good questions, Corinne, so thank you so much. We have looked at the clause in the agreement. We have obviously had it reviewed by lawyers. And we had the conversations before we actually issued the five twenty five in October 23.

Operator

We believe that clause only applies if the AMRO regime were to be removed at macro level. So if the Bank of England came to the conclusion that that the whole AMRO regime wasn't needed, we don't we don't think it's firm specific, so we have no intentions of using that clause to call the debt at par. In terms of the two, can't really comment. I do know we just as everybody does, we went through our capital review with the regulator not that long ago, and I think they would have been aware of the pending changes under MREL at the time we were having those conversations. And in terms of the tax rate, Marco?

Speaker 1

Yeah. So tax rate on the P and L will be at the standard rate of tax, but where we see the benefit is just how much of that profit after tax we get to keep by utilizing the DTA over time. Actually, you'll see how we utilize the DTA is really how efficient we are at taking the CET1 benefits. I think you'll see the P and L will still be at the normal tax rate, but the CET1 benefit is post the DTA usage.

Speaker 5

Thank you.

Speaker 2

We currently have no further questions, so I'll now hand back to CEO, Daniel Thumpkin, for some closing remarks.

Operator

Thank you, everybody, for taking the time this morning. I appreciate your commitment. Take care.

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