Metro Bank PLC H1 2019 Results

Metro Bank PLC

H1 Trading Update 2019

 July 24, 2019

CHALLENGING H1 WITH PROGRESS ON STRATEGIC INITIATIVES

Metro Bank PLC (LSE: MTRO LN)

1. Underlying revenue excludes Capability & Innovation Funding in respect of the RBS alternative remedies package

2. Underlying profit before tax excludes Listing Share Awards, the FSCS levy, impairment of property, plant & equipment ("PPE") and intangible assets, costs relating to the RBS alternative remedies package application and transformation and remediation costs.

Craig Donaldson, Chief Executive Officer at Metro Bank, said:

"This has been a challenging first half for the bank, with deposit outflows following intense speculation at the time of our capital raise in May. Despite this, we have delivered a resilient performance with both personal and business current accounts growing alongside increased revenues and fee income, with deposit growth returning to normal in June and July to date.

We described 2019 as a year of transition for Metro Bank and management has continued its focus on our strategic initiatives, upgrading our cost savings guidance to the upper end of our original range, investing in additional fee service offerings and rebalancing our lending mix."

Vernon Hill, Chairman and Founder at Metro Bank, added:

"As we enter our tenth year on Britain's high streets, Metro Bank continues to revolutionise the UK banking industry. We remain relentlessly focused on delivering the very best in service and convenience for our customers. Our upsized £375 million equity raise was significantly oversubscribed, showing investors' confidence in our strategy and our absolute focus on creating FANS. We will continue to strengthen our foundations as we deliver our growth plans."

Financial highlights for the Half Year Ended 30 June 2019

Deposits

3. SME defined as enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding €50 million, and/or an annual balance sheet total not exceeding €43 million, and have aggregate deposits less than €1 million.

Loans

Profit and Loss Account

Capital, Funding and Liquidity

Strategic and Operational Update

Customer Experience

5. MarketVue Business Banking from Savanta (Survey Period: Q3 July 2018 - Q2 Jun 2019). Main bank for business banking - Switching Gains based upon 318 respondents of which 59 were in London/SE. Data is weighted by region and turnover to be representative of businesses in GB. 6. All figures, unless otherwise stated, are from YouGov Plc and are taken from four surveys. Total sample size was in London was 1,004 adults. Fieldwork was undertaken between 9-12 July 2019. The figures have been weighted and are representative of all London adults (aged 18+). Total sample size in the UK was 2,048 adults. Fieldwork was undertaken between 9-10 July 2019. The figures have been weighted and are representative of all GB adults (aged 18+).

Governance and Leadership

Outlook

Metro Bank PLC

Summary Balance Sheet and Profit & Loss Account

(Unaudited)

7. Comprises investment securities, cash & balances with central banks, and loans and advances to banks

8. Comprises property, plant & equipment, intangible assets and other assets

Analyst and investor call

An analyst and investor call will be held as follows:

The information contained within this Announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014 and was authorised for release by David Arden, Chief Financial Officer.

For more information, please contact:

Metro Bank PLC Investor Relations

Jo Roberts

+44 (0)20 3402 8900

[email protected]

Metro Bank PLC Media Relations

Charlotte Sjoberg / Tina Coates

+44 (0)7970 633255 / +44 (0)7811 246016

[email protected]

Teneo

Charles Armitstead

 +44 (0)207 420 3187 / +44 (0)7703 330269

[email protected]

ENDS

About Metro Bank

Metro Bank is the revolution in British banking. It is celebrated for its exceptional customer experience and achieved the top spot in the Competition and Market Authority's Service Quality Survey among personal current account holders for its overall service and came second among business current account holders in February 2019. It was also awarded 'Best All Round Personal Finance Provider' at the Moneynet Personal Finance Awards 2019 and it is recognised by Glassdoor in its 'Best Place to Work UK 2019' top 50 list.

Offering retail, business, commercial and private banking services, it prides itself on using technology to give customers the choice to bank however, whenever and wherever they choose. Whether that's through its growing network of stores open seven days a week, from early in the morning to late at night, 362 days a year; on the phone through its UK-based 24/7 contact centres manned by people 10 not machines; or online through its internet banking or award-winning mobile app: the bank offers customers real choice.

The bank employs over 3,900 colleagues and is headquartered in Holborn, London.

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 nam

METRO BANK PLC

Interim Report

Six months ended 30 June 2019

Company Information

Key Highlights

The following metrics represent the core key performance indicators for the bank:

1. Underlying profit before tax excludes Listing Share Awards, the FSCS levy (included when reporting on a full year basis), impairment and write offs of property, plant & equipment ("PPE") and intangible assets, costs relating to the RBS alternative remedies package, Capability & Innovation fund income and expenditure and transformation and remediation costs.

Business and financial review

The first half of 2019 has been a challenging six months for us with headwinds in the external operating environment combined with company specific factors that have impacted our financial position and performance.

Total deposits at £13.7 billion are flat year-on-year following net outflows during the first half of 2019. Our deposit performance was impacted by intense speculation at the time of the capital raise in May, primarily driven by a limited number of commercial customers withdrawing deposits. However, we are pleased that retail deposits have continued to grow during the period, with stability across the SME deposit base. This was supported by continued customer account growth of 190,000 during the first six months of 2019 to 1.8 million, with sustained year-on-year growth in personal current accounts at 23%, and growth in business current accounts at 19%. Growth in customer accounts is underpinned by our focus on providing superior customer service, acknowledged by our 1st and 2nd place in the latest CMA survey results for overall customer service quality for personal and business customers respectively. Following completion of the £375 million capital raise, which was upsized from an initial target of £350 million due to investor demand, customer deposits have returned to business as usual growth during June, with continued positive momentum month-to-date in July.

We have taken action during the first six months of 2019 to maintain a strong and resilient balance sheet. Completion of the £375 million equity raise means our CET1 ratio increased to 15.8% from 13.1% at 31 December 2018, and is materially above our target of c.12.0% and regulatory tier 1 minimum requirement of 10.6% to support our growth plans. Our liquidity coverage ratio ("LCR") is 163%, up from 139% at year-end 2018 following the equity raise and sale of non-LCR eligible investment securities, remaining comfortably above our regulatory minimum of 100% throughout the period. We also continue to gradually manage down our loan to deposit ratio towards our medium-term guidance of 85%-90% and expect it to be c.100% by the end of the 2019. The loan to deposit ratio was 109% at 30 June 2019, incorporating the impact of executing the sale of a previously acquired loan portfolio. The portfolio has been sold to an affiliate purchaser of Cerberus Capital Management. It was not considered a strategic portfolio, with its sale having no impact on our customer franchise given it has continually been serviced by an external provider. The pro-forma CET1 ratio following the loan portfolio sale is 16.1%.

Net loan growth was up 25% to £15.0 billion (including the impact from the loan portfolio disposal), reflecting the strong lending pipeline at the end of 2018. In line with our strategy to rebalance our lending mix to optimise capital efficiency, lending to more capital intensive commercial customers reduced to 29% of total lending as of 30 June 2019 from 31% at 31 December 2018. Going forward we expect to continue rebalancing our lending mix while maintaining our low risk approach to lending. This is reflected in our low cost of risk at 6bps in the six months to 30 June 2019, down from 8bps a year earlier, with non-performing loans making up just 0.17% of the total loan portfolio. Looking forward, we expect to continue managing lending volumes in line with a gradual reduction in the loan to deposit ratio.

Mortgage yields have stabilised during the first half of 2019 but competition remains elevated. This, coupled with the adoption of IFRS 16 and interest expense on our Tier 2 debt, has meant our net interest margin has reduced to 1.62% from 1.85% a year earlier. Combined with continued growth in regulation, people, and technology costs, our underlying profit before tax for the six month for 30 June 2019 has reduced to £13.6 million from £24.1 million a year earlier. Statutory profit before tax of £3.4 million captures an increase in transformation and remediation costs as we implement our cost transformation programme and remediation work (six months to 30 June 2018: £20.8 million).

While profitability is down during the first six months of the year, we have made good progress with our cost transformation programme, with the plan tracking ahead of schedule and exit run-rate cost savings in 2019 expected to be at the top-end of the previously announced £15 million to £19 million range. We also continue to grow our fee income, supported by growth in customer accounts and the roll-out of new value-added services for customers. Receiving the £120 million Capability & Innovation funding in April has allowed for the planned expansion of further products and services we can offer to SME customers in the UK, and we continue to invest in bringing competition to this underserved and historically underinvested community in the UK.

Finally, following the risk-weighted asset ("RWA") adjustment announced on 23 January 2019, we continue to make progress implementing a remediation of internal systems, process and controls as well as recruiting additional expertise. A "big four" accounting firm is supporting our programme of remediation, expected to be completed in 2020. Among other actions internally, we have appointed a Director of Financial Transformation to coordinate our response and doubled the number of colleagues in our regulatory reporting team. We also intend to engage another accounting firm to undertake an external assurance review of our RWA calculations on a yearly basis, beginning with our full year 2019 results.

Income statement review

Net interest income

Net interest income was up 6% year-on-year to £166.2 million (six months to 30 June 2018 £156.3 million) driven by net lending growth of 25%. Although mortgage asset yields have stabilised during the first half of 2019, competition remains elevated and has impacted interest income. Interest expense also increased due to higher cost of deposits (up to 0.70% in the period from 0.57% in the same period last year) through a combination of both a base rate rise in August 2018 and the subsequent repricing of deposits, alongside further pricing actions in Q2 to support deposit flows. Following these pricing actions, we expect cost of deposits to be closer to base rate for the full year 2019. Interest expense also increased following the adoption of IFRS 16, the new leasing standard, on 1 January 2019, as well as interest expense on the Tier 2 debt instrument issued in June 2018.

Fee, commission and other income

The last quarter of 2018 saw the implementation of a number of initiatives such as dynamic foreign currency conversion, adjustments in pricing of safe deposit boxes and optimised transactions fees from Business debit cards. These initiatives, alongside a growing customer base, contributed to a year-on-year increase in fees and commission income.

Income from safe deposit boxes continued to increase during the period, up 21% to £6.4 million compared to the first six months of 2018 and continues to make a vital contribution to helping cover the costs of operating our store network.

We remain focused on further developing our customer proposition, which in turn will continue to augment fee income growth. The second half of 2019 will see us further evaluate fee opportunities across existing products, make trade finance and foreign currency enhancements, and develop a mobile cash collection and drop-off service, with further products and services from 2020 and beyond. Receiving the £120 million Capability & Innovation funding has allowed for the planned expansion of products and services we can offer to SME customers in the UK, and we continue to focus and invest in bringing competition to this underserved and historically underinvested community in the UK.

Operating expenses

Operating costs during the first six months of the year rose 21% to £174.7 million up from £143.8 million in the same period in 2018. The increase reflects continued growth in regulation, people and technology costs to support the long-term growth of the bank, as well as further expansion of our physical and digital footprints.

Improving cost efficiency is a key part of the evolved strategy that we announced in line with our year-end 2018 results. The first half of 2019 saw the start of the cost transformation programme, and we are making good progress. 2019 exit run-rate cost savings are expected to be at the top end of the previously announced £15 million to £19 million range, with upgrades to savings targets in the outer years of the programme with a reduced cost to achieve relative to our initial guidance. We expect cost growth to moderate with low single digit growth in the second half 2019 compared to the first six months of 2019.

Transformation and remediation costs include costs associated with delivery of cost programme and remediation programme relating to our RWA adjustment.

Balance sheet review

Deposits

The first half of 2019 has been a challenging period for deposit growth following intense speculation at the time of the capital raise in May. Total deposits at £13.7 billion were flat year-on-year, with a 13% reduction from 31 December 2018. Net deposit outflows of £2.0 billion in the first six months were primarily driven by a limited number of commercial customers with deposits from retail customers now representing 55% of total deposits (31 December 2018: 47%). Retail deposits have continued to grow in the period, with stability across the SME deposit base. Following the completion of the £375 million capital raise customer deposits have returned to business as usual growth during June, with continued momentum month-to-date in July.

Current accounts grew by 2% during Q2 2019 and make up 31% of total customer deposits as at 30 June 2019 (31 March 2019: 30%). The high proportion of current accounts supports the bank's low cost of deposits.

We continue to focus on attracting diversified low cost deposits, supported by continued strong growth in personal and business current accounts. Growth in customer accounts is underpinned by our focus on providing superior customer service, acknowledged by our 1st and 2nd place in the latest CMA survey results for overall customer service quality for personal and business customers respectively.

Lending

Lending continued to grow during the period as the strong pipeline as at year-end 2018 continued to flow through during the first few months of the year. Our loan to deposit ratio increased to 109% at the 30 June 2019, after incorporating the impact of executing the sale of a previously acquired loan portfolio, up from 91% at 31 December 2018. We expect to gradually reduce the loan to deposit ratio over time returning it to the guided range of 85%-90% and expect it to be c.100% by the end of the 2019. This will be achieved by managing our lending pipeline whilst growing customer deposits. Management of our loan growth also reflects the rebalancing of the lending mix away from more capital intensive commercial lending segments, with a focus on cost efficient residential mortgages. Commercial lending as a percentage of total lending reduced to 29% from 31% as at year-end 2018.

Asset quality remains strong due to a continued focus on low risk lending. Cost of risk remained flat during the first six months at 0.06% compared to 0.06% for the last six months of 2018 and improved from 0.08% for the same period last year. The bank's non-performing loan ratio was 0.17%, compared to 0.15% at 31 December 2018.

Property, plant & equipment and intangibles

Following the adoption of IFRS 16, the new leasing standard, on 1 January 2019, we added a £313 million right of use asset to our balance sheet in respect of right of use assets relating to our leases. Further increases in our property plant and equipment were driven by the expansion of our store network and IT infrastructure.

During the period we opened stores in Moorgate and Enfield. We have also continued to build our store pipeline and in the second half of the year we will expand into the Midlands as well as Northern England in Manchester and Liverpool.

We also continued to invest in our digital offering. Alongside this we also completed a major upgrade to our core banking platform which was implemented successfully at the start of July.

Capital structure

Following the completion of the £375 million equity capital raise our CET1 ratio is 15.8%, providing material headroom above our target of c.12%, supporting our future growth.

On a pro-forma basis following the loan portfolio sale of £521 million announced today our CET1 ratio at 30 June 2019 would be 16.1%, exceeding our Tier 1 regulatory minimum of 10.6%. Our pro-forma total capital ratio at the same date was 18.8%, in excess of our current regulatory minimum of 13.0%1. Our Regulatory Leverage ratio was 7.2%.

We will issue MREL eligible debt during the second half of 2019 to satisfy our interim MREL requirement by 1 January 2020.

Capability & Innovation funding

On 22 February 2019 we were awarded £120 million from the RBS alternative remedies package Capability & Innovation fund, the largest award available. Investment through the Capability & Innovation Fund in new capabilities will enable us to compete against the 'big 4' in the SME market. For example, in 2019 we will introduce trade finance and FX services and additional support for customers in managing their bookkeeping and tax compliance needs.

We received the money in April 2019 and have made good progress in the period including investing in 'Business Insights' our app-based Artificial Intelligence powered money management tool for business customers, and a mobile cash collection and drop-off service for SMEs, as well as signing a lease for a store in Manchester and acquiring sites in Liverpool and Sheffield.

Going concern

These condensed consolidated interim financial statements are prepared on a going concern basis, as the Directors are satisfied that the both the Group and parent company have the resources to continue in business for the foreseeable future. In making this assessment, the Directors considered a wide range of information relating to present and future conditions, including future projections of profitability, cash flows and capital resources.

Governance

Governance is at the top of the Board's agenda. The Board has announced that it will commence the process of recruiting an independent, Non-Executive Chairman. The Chairman, Mr Hill, believes that the Bank has now reached a size and scale where it is appropriate to appoint an independent Chairman. This transition will also ensure that the Board continues to evolve in-line with best practice corporate governance guide lines. Mr Hill will continue as Chairman until a successor is appointed, after which he will remain as a Non-Executive Director, Founder and President.

In line with Board succession planning outlined in the 2018 Annual Report and Accounts, we have announced the appointment of Michael Torpey as a new Independent Non-Executive Director (subject to regulatory approval). Michael has extensive experience in senior roles across financial services and brings deep banking expertise. Michael will join the Board with effect from 1 September 2019. His appointment brings the number of directors on the Board to 12, including six independent directors.

The Board continues its proactive search for additional independent NED candidates and we expect to make further appointments this year.

Since 2010, InterArch has provided architectural, design and creative services, creating the iconic Metro Bank brand and stores. We are running a process to identify an additional alternative supplier of architecture services and intend to transition both architectural design as well as creative and branding services to alternative suppliers. InterArch will work with us to ensure a smooth operational transition by the end of 2020.

Looking ahead

Despite the challenges in the first half of 2019 we enter the second half of the year in a position of balance sheet strength with a robust capital and liquidity position. We are focused on continuing the momentum we have generated in customer account growth, capital-light fee income generation, the rebalancing of our lending mix, and delivery of our cost efficiency programme.

The appointments of Cheryl Newton as CIO and Daniel Frumkin at CTO will strengthen the executive team and bring specialist expertise and experience. Cheryl is a technology specialist and has held global managing director and IT Board level positions implementing IT solutions for financial companies worldwide. She will be responsible for developing our technology agenda to further enhance the service we provide to customers across all channels. Daniel Frumkin joins with a wealth of operational and risk experience in global executive roles in banks worldwide. He will take the lead in delivering the bank-wide efficiency programme to further enhance our already superior customer experience.

Both these appointments are a significant step forward in our year of transition and will help the bank to deliver on its strategic initiatives.

2019 remains a year of transition for us as we build on the strengths of our model, become more capital efficient, and implement initiatives to deliver our medium-term guidance.

Craig Donaldson

Chief Executive Officer 

24 July 2019

Principal risks and uncertainties

There has been no significant change to our business model, risk management framework or risk appetite during the six month period ended 30 June 2019.

A detailed description of the principal risks and uncertainties to which the Group is exposed, along with the Group's approach to mitigating these risk, is set out in the risk report on pages 23 to 43 of the 2018 Annual Report and Accounts. These risks include:

·; credit risk - the risk of financial loss due to a borrower's failure to meet the terms of any contract or otherwise fail to perform as agreed.

·; market risk - the risk that earnings or the economic value of equity will underperform due to changes in interest rates, foreign exchange rates, or other financial market asset prices. Our ability to manage market risks contributes to our overall capital management.

·; liquidity and funding risk - the risk that future financial obligations are not met or future asset growth cannot occur because of an inability to obtain funds at a reasonable price within a reasonable time.

·; conduct risk - the risk of treating customers unfairly, and delivering inappropriate outcomes that lead to customer detriment.

·; regulatory risk - the risk of financial loss or reputational damage due to regulatory fines or penalties, restriction or suspension of business, or cost of mandatory corrective action as a result of failing to adhere to applicable laws, regulations and supervisory guidance.

·; operational risk - the risk of direct or indirect loss from failed or inadequate processes, people or systems, or exposure to external events.

·; financial crime - the risk of financial loss or reputational damage due to regulatory fines or penalties, 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 (which we define to include internal or external fraud, anti-money laundering/counter terrorist financing, bribery and corruption and sanctions compliance).

·; model risk - the potential for negative outcomes from random or systematic errors in model development, input, calculation or use of outputs. Models are always approximations and never perfect and there are therefore risks associated with using them. These risks range from their theoretical basis, the data and methods used in their construction, the economic conditions under which they are developed, and their use.

Board role

The Board is responsible for setting strategy, corporate objectives and risk appetite. The strategy and risk appetite considers the interests of our customers, shareholders and other stakeholders. On the advice of the Risk Oversight Committee ("ROC"), the Board approves the level of risk acceptable under each principal risk category, whilst providing oversight to ensure there is an adequate framework in place for reporting and managing those risks. The Board has delegated responsibility for reviewing the effectiveness of this framework to the ROC.

It is also responsible for maintaining an appropriate control environment to manage risk effectively, and for ensuring that the capital, liquidity, and other resources are adequate to achieve our objectives within our risk appetite.

The Board has delegated responsibility for reviewing the effectiveness of internal controls to the Audit Committee. This committee monitors and considers the internal control environment, internal and external audits and risk assurance, and is assisted in its oversight role by our Internal Audit function. Internal Audit carries out both regular and ad-hoc reviews of risk management controls and procedures and reports the results to the Audit Committee. Internal Audit and the Audit Committee will review the commercial RWA controls enhancement programme in 2019. The Director of Internal Audit's reporting line is to the Chairman of the Audit Committee, with a dotted line to the CEO, which underpins the function's independence.

Chief Risk Officer and the Risk function

Our Chief Risk Officer ("CRO") leads the Risk function, which is independent from operational and commercial functions. She is responsible for ensuring that appropriate risk management processes, policies and controls are in place, that they are sufficiently robust, that key risks are identified, assessed, monitored and mitigated, and that we are operating within our risk appetite.

The Risk team provides specialist knowledge and support to colleagues, acting as a reference point for advisory queries, whilst also overseeing colleagues and the risk management and controls in place. It operates themed, targeted and ad-hoc reviews to provide assurance to the leadership team, and ultimately to the Board, that risks are properly managed, controls are effective, and that we are not exceeding our risk appetite.

Risk management policies

We've established our risk management policies to identify and analyse the risks we face, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. The Risk team regularly reviews these policies and controls to verify compliance and to reflect changes in market conditions and our activities. We use training and management standards and procedures to develop a robust and effective control environment - one where all colleagues understand their roles and obligations.

 Risk appetite

Our approach to risk appetite is to set relevant quantitative and qualitative measures against which risk management performance can be reviewed for each of our principal risks. Risk appetite is set by the Board, based on the recommendation of the ROC, and implemented by the Executive Risk Committee. Our risk appetite has been developed in line with our business plan, strategy and vision, and is underpinned by a culture in which all colleagues embed risk considerations in decision-making and are rewarded accordingly.

Risk Oversight Committee

The ROC assists the Board in providing leadership, direction and oversight with regard to risk governance and management, and also assists the Board in fostering a culture that emphasises and demonstrates the benefits of a risk-based approach to risk management and internal controls when creating FANS. It works closely with the Audit Committee. It is chaired by a Non-Executive Director and meets at least quarterly. Its responsibilities include:

·; recommending to the Board our risk appetite;

·; regularly reviewing risk exposures in relation to the risk appetite;

·; reviewing risk policies, and approving or recommending to the Board for approval; and

·; monitoring the effectiveness of risk management processes and procedures put in place by management.

Directors' Responsibility Statement

The Directors are responsible for preparing the interim financial report in accordance with applicable law and regulations.

We confirm that to the best of our knowledge:

(a) the condensed consolidated interim financial statements have been prepared in accordance with IAS 34 'Interim Financial Reporting';

(b) the interim management report includes a fair review of the information required by DTR 4.2.7R (indication of important events and their impact during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

(c) the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).

On behalf of the Board

Independent review report to Metro Bank PLC

Report on the condensed consolidated interim financial statements

Our conclusion

We have reviewed Metro Bank PLC's condensed consolidated interim financial statements (the "interim financial statements") in the interim report of Metro Bank PLC for the 6 month period ended 30 June 2019. 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 International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

What we have reviewed

The interim financial statements comprise:

• The consolidated Balance Sheet as at 30 June 2019;

• The consolidated statement of comprehensive income for the period then ended;

• The consolidated cash flow statement for the period then ended;

• The consolidated statement of changes in equity for the period then ended;

• The notes to the interim financial statements.

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

As disclosed in note 1 to the interim financial statements, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

Responsibilities for the interim financial statements and the review

Our responsibilities and those of the directors

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

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

What a review of interim financial statements involves

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

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

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

PricewaterhouseCoopers LLP

Chartered Accountants

London

24 July 2019

Consolidated statement of comprehensive income (unaudited)

For the half year to 30 June 2019

Consolidated balance sheet (unaudited)

 As at 30 June 2019

1. Deposits from central banks comprises solely of amounts drawn down under the Bank of England's Term Funding Scheme ("TFS").

These condensed consolidated interim financial statements were approved and authorised for issue by the Board of Directors on 24 July 2019 and were signed on its behalf by:

Consolidated cash flow STATEMENT (unaudited)

For the half year to 30 June 2019

Consolidated statement of changes in EQUITY (unaudited)

For the half year to 30 June 2019

Notes to the condensed consolidated interim financial statements (unaudited)

1. Basis of preparation and accounting policies

1.1 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.

1.2 Basis of preparation

The condensed consolidated interim financial statements of Metro Bank and its subsidiaries ("the Group") for the six months ended 30 June 2019 were authorised for issue in accordance with a resolution of the Directors on 24 July 2019.

These condensed consolidated interim financial statements for the six months ended 30 June 2019 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority ("FCA") and IAS 34 Interim Financial Reporting as adopted by the European Union ("EU"). They do not include all the information required by International Financial Reporting Standards ("IFRS") in full annual financial statements and should be read in conjunction with our Annual Report and Accounts for the year ended 31 December 2018 which are available on our website.

The comparative financial information for the year ended 31 December 2018 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for that year 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.

The Directors consider that it is appropriate to continue to adopt the going concern basis of accounting in preparing the condensed consolidated interim financial statements. In reaching this assessment, the Directors have considered projections for our capital and funding position and have had regard to the principal risks and uncertainties of the liquidity and capital requirements of the business for the foreseeable future.

1.3 Accounting policies

The accounting policies and methods of computation are consistent with those applied in our 2018 Annual Report and Accounts, other than the following.

Leases

On 1 January 2019 we adopted IFRS 16 ("Leases"). IFRS 16 provides guidance on the classification, recognition and measurement of leases to help provide useful information to the users of financial statements and replaces IAS 17 ("Leases"). IFRS 16 provides a single lessee accounting model, requiring lessees to recognise right of use ("RoU") assets and lease liabilities for all applicable leases, with operating leases being brought onto the face of the balance sheet.

We adopted IFRS 16 using the modified retrospective approach. Under this approach the opening lease liability was measured as the present value of the remaining lease payments. We also elected to set the RoU asset equal to the related lease liability at the point of transition (prior to adjustments for previous amounts accrued in respect of rent free periods) for all leases and therefore there is no opening adjustment to retained earnings. As at the 1 January 2019 the lease liabilities and RoU assets recognised on the balance sheet were £328 million and £313 million respectively.

Under the modified retrospective approach comparative figures are not restated and as such these continue to be measured and presented under IAS 17.

Changes to our accounting policies as a result of the adoption of IFRS 16 can be found in notes 7 and 11.

Government Grants

On 22 February 2019 we were awarded £120 million from the Capability & Innovation fund part of the RBS alternative remedies package, the largest award available.

The contract was signed and the money received in April 2019. Our accounting policy for government grants can be found within note 12.

Derivatives

During 2019 we implemented a macro hedging programme as part of which we increased our use of interest rate swaps to manage our interest rate risk. Prior to this our use of interest rate swaps to hedge our exposure was immaterial. Our accounting policy for derivatives can be found within note 10.

1.4 Future accounting developments

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

1.5 Critical accounting judgements and estimates

There have been no significant changes in the basis upon which critical estimates and judgements have been determined, compared to those applied at 31 December 2018.

1.6 Operating segments

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

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

2. Net interest income

Interest income

Interest expense

3. General operating expenses

1. These costs consist of amounts spent in delivering the commitments we agreed to as part of our successful bid to the Capability & Innovation fund. Part of these costs are paid for by the £120 million grant we received, with offsetting income included within 'other income'. Further details can be found within note 12.

4. People costs

5. Taxation

Tax charge for the period

The components of tax expense for the six months ended 30 June 2019 and 2018 are:

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 six months ended 30 June 2019 and 2018 is as follows:

Share based payments

During the period our share price fell from £16.94 to £5.22. This had the impact of reducing the deferred tax asset held for share options and in turn resulted in an associated deferred tax charge of £0.4 million. This charge contributes 11% of the 62% effective tax rate.

Effective tax rate

The effective tax rate for the period is 62% (Six months to 30 June 2018: 27%).

The effective tax rate for the period excluding the effect of changes in tax rates, adjustments in respect of prior years and share based payments is 29% (Six months to 30 June 2018: 29%).

The main driver for the higher effective tax rate for the first six months of 2019 is the lower accounting profit before tax and the non-deductible expenses in the form of non-qualifying depreciation and the shared based payment charge.

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:

6. Loans and advances to customers

Loans and advances to customers by category

Residential mortgage lending

The average debt to value ("DTV") of our residential mortgage book is 61% (31 December 2018: 61%).

An analysis of our retail mortgages by DTV is set out below: