Metro Bank — Primed for growth

Metro Bank (LSE: MTRO)

Last close As at 13/11/2024

GBP0.96

9.60 (11.11%)

Market capitalisation

GBP646m

More on this equity

Research: Financials

Metro Bank — Primed for growth

Having successfully refinanced in late 2023, Metro Bank is making good progress with repositioning its business model towards higher-return commercial and specialist mortgage lending, reducing its cost of funding and shrinking its cost base. It confidently expects to be profitable before year-end and has guided to strong progress thereafter, reaching a mid- to upper-teens percentage return on tangible equity from 2027. Despite a strong performance since the interims, Metro’s shares are far from pricing in the scale of improvement that management is guiding towards.

Martyn King

Written by

Martyn King

Director, Financials

Financials

Metro Bank

Primed for growth

Initiation of coverage

Banks

31 October 2024

Price

75p

Market cap

£503m

H124 tier 1 ratio

12.9%

H124 total capital ratio

15%

H124 tangible book value per share

138p

H124 MREL ratio

22.2%

Shares in issue

672.8m

Free float

43%

Code

MTRO

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

10.0

86.1

78.3

Rel (local)

11.2

89.2

58.0

52-week high/low

75p

29p

Business description

Metro Bank is a community bank that serves both retail and commercial customers in major cities in the UK. It operates a network of more than 70 ‘stores’ in prime locations, a key source of new lending and low-cost deposits. Metro is in the process of a strategic repositioning towards a mid- to upper-teens return business model focussed on commercial and specialist mortgage lending.

Next events

Q3 FY24 announcement

14 November 2024

Analyst

Martyn King

+44 20 3077 5700

Metro Bank is a research client of Edison Investment Research Limited

Having successfully refinanced in late 2023, Metro Bank is making good progress with repositioning its business model towards higher-return commercial and specialist mortgage lending, reducing its cost of funding and shrinking its cost base. It confidently expects to be profitable before year-end and has guided to strong progress thereafter, reaching a mid- to upper-teens percentage return on tangible equity from 2027. Despite a strong performance since the interims, Metro’s shares are far from pricing in the scale of improvement that management is guiding towards.

Year end

Underlying PBT (£m)

TBVPS*
(p)

ROTE**
(%)

DPS
(p)

Yield
(%)

P/TBV
(x)

12/23

(16.9)

140

3.7

0.0

N/A

0.54

12/24e

(28.2)

120

(16.6)

0.0

N/A

0.62

12/25e

65.9

130

7.8

0.0

N/A

0.58

12/26e

130.1

149

14.0

0.0

N/A

0.50

Note: *Tangible book value per share. **Return on tangible equity.

Significant return on capital expected

Metro expects the net interest margin (NIM) to expand very substantially in the next three years, driven by maturing low-yielding securities, a repricing of the deposit book and a shift in lending mix towards higher-return commercial and specialist mortgage loans. Redeployment of the proceeds from the sale of a lower-margin £2.5bn book of retail mortgages, along with the recycling of securities, provides visibility over around a third of the more than 200bp NIM expansion that Metro expects. Meanwhile, an £80m pa cost reduction plan is well on track and should contribute fully in FY25. Our forecasts are broadly consistent with Metro’s guidance and reflect a relatively benign macroeconomic backdrop. This will inevitably evolve, as will the competitive landscape, but we expect management to be proactive and we note Metro’s ability to adapt nimbly across a broad range of product offerings.

Evolution not revolution

Metro Bank was founded in the wake of the financial crisis as a ‘challenger bank’ to bigger, more traditional lenders. It has adapted to market conditions over time, but its branch-based, deposit-led, community banking strategy has been a constant. It seeks to embed itself in the local communities where it operates, providing high levels of service and convenience, while delivering simple and straightforward banking products to retail, business banking and corporate customers. It has been a bumpy road in terms of profitability but, having built a robust and scalable platform from its strengthened capital base and ample liquidity, Metro believes it is primed for growth.

Valuation: Strong upside from improving RoTE

The shares have risen strongly since the H124 results but are far from pricing in the improvements in return on tangible equity (RoTE) that Metro guides to and that are reflected in our forecasts. Based on a medium-term mid- to high-teens RoTE, even a modest c 0.7x FY28e P/TBVPS discounted at 15% pa implies a value per share today of more than 90p.

Investment summary

A community bank

Metro Bank was founded in 2010, in the wake of the financial crisis, as a ‘challenger bank’ to bigger, more traditional lenders, and was the first full-service, independent, new high street bank to open in the UK in more than 150 years. It listed on the London Stock Exchange in March 2016. While the bank has adapted to market conditions over time, its branches (or ‘stores’ as Metro refers to them) remain core to its operating model and deposit-led, community banking strategy. Through its branch network, it seeks to embed itself in the local communities where it operates, providing high levels of service and convenience while delivering simple and straightforward banking products to retail, business banking and corporate customers. Following its H223 refinancing, Metro is well capitalised and liquid and well underway in repositioning its lending strategy towards areas of commercial and specialist mortgage lending where it expects to be able to grow strongly with attractive risk-adjusted returns, optimising and growing its deposit funding and reducing costs.

Financials

With its interim results in late July, the bank substantially upgraded its financial guidance for the next three years and beyond. Based on its current expectations for the UK economy and interest rate progression, as well as competitive dynamics in the market, it expects a mid- to upper-teens RoTE by 2027 and beyond, driven by NIM expansion, capital optimisation and cost efficiencies. The change in Metro’s guidance reflects its increasing confidence in the strategy it set out with its refinancing in late 2023. Although it showed an expected loss in H124, Metro confidently expects to return to profitability during Q424.

Valuation

Metro’s shares and its traded debt have risen strongly since the H124 results but are far from pricing in the successful achievement of management’s medium-term guidance. It continues to trade at a c 50% discount to tangible equity, well below its closest peers. There is significant upside potential if the bank is successful in achieving its expected returns and this is likely to be recognised progressively in the share price as milestones are achieved, the first being to return to profitability during Q424. If Metro achieves the mid- to upper-teens RoTE by late 2027 to which it guides, we would expect it to trade at a significantly higher P/TBVPS. If we apply a 0.7x multiple to our FY27e TBVPS of 182p and discount this by 15% pa, the implied value per share today is more than 90p, 20% higher than the current price.

Sensitivities

Metro’s strategy, and our forecasts, are subject to a number of risks, including operational, financial and competitive risks, many of which are completely outside Metro’s control and to which we would expect the bank to respond. The UK banking market is mature and competitive. The success of Metro’s strategy is dependent on its ability to leverage its broad product capability to identify and capture attractive returns in underserved market segments and respond to the competitive landscape in a nimble way. Like all banks, Metro’s business faces macroeconomic risks such as fluctuations in GDP growth, interest rates and employment, which can have an impact on loan growth, margins and credit quality.

Background and strategy

Metro Bank opened its first ‘store’ (or branch) in Holborn, Central London, in July 2010, and since that time has built a carefully targeted network of 75 branches, serving three million personal and business customers. At a time when other high street banks continue to pare back, Metro’s branch network remains core to its strategy. While further branch openings are planned, Metro is focused is on leveraging its robust and scalable infrastructure and its strong deposit franchise and liquidity to significantly increase earnings and return on capital.

Exhibit 1: Branch growth

Exhibit 2: Customer accounts and revenues per branch

Source: Metro Bank

Source: Metro Bank

Exhibit 1: Branch growth

Source: Metro Bank

Exhibit 2: Customer accounts and revenues per branch

Source: Metro Bank

Having significantly strengthened its capital base in late 2023, including additional equity and new debt capital with extended maturities, Metro is well placed for targeted growth, with a disciplined focus on RoTE. The bank is well underway in optimising its balance sheet, pivoting lending towards higher-return commercial and specialist mortgage lending, optimising its funding and reducing costs. As discussed in detail below, management expects to return to profitability during the fourth quarter of this year and to generate increasingly strong returns over the next three years. Before examining management’s guidance and the bank’s strategy in detail, we look briefly at the progression and evolution of Metro’s business since listing.

The bumpy road to building profitably

Metro’s success in building its deposit-led customer franchise is clear, but to date this has not been reflected in sustainable profitability and returns. To be fair, Metro has faced significant headwinds related to the broader sector, including:

The extended period of low interest rates up to 2022, which was a headwind to all banks, but especially for a deposit-led bank such as Metro.

In common with other challenger banks, Metro has operated with more stringent regulatory capital requirements than those that typically apply to larger incumbents, which has required a selective and flexible approach to generating attractive risk-adjusted lending returns.

The pandemic lockdowns with significant economic impacts.

Metro’s performance can perhaps be broken down into three phases. Before and after listing, the bank was very focused and successful in growing its network and customer franchise, particularly for deposits. This first phase was punctuated in 2019 when it emerged that the bank had miscalculated its asset risk weightings and under-estimated its regulatory capital requirement.

The miscalculation of risk weightings required the bank to issue new equity (£350m) and debt capital and brought about significant management change. The chairman and co-founder of Metro, Vernon Hill, left the bank and Dan Frumkin became CEO (a position he holds today), heralding the second phase of development. Following a thorough review, Mr Frumkin reaffirmed Metro’s core community banking strategy, but with a sharper and more disciplined focus on improving return on capital. He recognised the need for the bank to invest in a more efficient, robust and scalable platform, which, in addition to growing customers, would better serve them across a wider range of products and services and take a larger share of their wallet. In particular, this involved building a scalable, asset-generating platform to better complement the bank’s strong deposit base.

The post-2019 plan was working, reflected in a steady decline in the cost/income ratio and a return to profitability by H123. However, in July 2023, the UK regulatory ‘countercyclical buffer’ requirement was raised,1 increasing the amount of capital that Metro and other banks were required to hold. In September, it also became clear that AIRB accreditation for the mortgage portfolio had been further delayed2 and was in any case unlikely to reduce Metro’s need for growth capital as much as it had anticipated. The bank was once again forced into a significant refinancing operation (successfully completed in late 2023), which was accompanied by a significant pivot in lending strategy, a key driver of increased return on capital.

  1 From 1.5% to 2.5% of risk-weighted assets.

  2 Metro’s regulatory capital requirement in respect of lending risk is calculated using the standardised approach. Since 2016, the bank had been seeking accreditation to adopt the Advanced Internal Rating-Based (AIRB) approach based on a bank’s own loan performance data and experience. The standardised approach is less risk sensitive and tends to lead to higher risk-weighted assets than the AIRB approach. A key factor delaying accreditation for Metro appears to be that its high-quality, relatively young residential mortgage book provides little historical loss experience data.

We are now in what may be called phase three of Metro’s development. From its now well-capitalised and liquid balance sheet position, Metro believes that its efforts of the past few years leave it primed to deliver the additional revenue that will materially improve profitability by leveraging what is a substantially fixed cost base.

Exhibit 3: Cost/income ratio with forecasts

Exhibit 4: Underlying PBT with forecasts

Source: Metro Bank data, Edison Investment Research forecasts

Source: Metro Bank data, Edison Investment Research forecasts

Exhibit 3: Cost/income ratio with forecasts

Source: Metro Bank data, Edison Investment Research forecasts

Exhibit 4: Underlying PBT with forecasts

Source: Metro Bank data, Edison Investment Research forecasts

The refinancing measures undertaken

The £925m refinancing package was announced and completed in November, and comprised:

A placing of £150m (before costs) of new shares.

The issuance of £150m (nominal value) of new tier 2 loan notes with a 14% coupon, in effective exchange for £250m (nominal value) of existing tier 2 notes (coupon of 5.5%).

The issuance of the £525m of new Minimum Requirement for Own Funds and Eligible Liabilities (MREL) loan notes, with a coupon of 12%, of which £175m was for cash and £350m in effective exchange for existing 9.5% MREL notes.

Metro’s largest shareholder, Spaldy Investments, which had been an investor since 2019, committed to taking 340m of the 500m new shares issued in November 2023, investing £102m and increasing its shareholding from 9.1% to 53%.

Following the refinancing, Metro is robustly capitalised, with no debt capital maturities until 2028, and well positioned to pursue the growth opportunities that it has identified and about which its confidence has increased.

Increased guidance for the next three years

With its interim results, the bank substantially upgraded the financial targets it had set at the time of the refinancing and extended the horizon of guidance. It now expects a double-digit RoTE by the end of 2026, having previously looked for a high single-digit return, and a mid- to upper-teens RoTE from 2027.

Metro’s guidance is based on its current expectations for the UK economy and interest rate progression, as well as competitive dynamics in the market. Metro works with a range of macroeconomic forecast scenarios, using data secured from independent external economists at Moody’s. A summary of this analysis is shown in Appendix 2, comprising a baseline scenario and various upside/downside scenarios for key variables. The baseline scenarios for the years to 2027 show interest rates staying higher for longer but moderating by around 1%, GDP growing by 1.0–1.5% from 2025, stable unemployment and moderate (low single-digit) growth in house prices. The baseline outcomes are assigned a probability of 50%.

Macroeconomic and market conditions will inevitably evolve, but we expect management to be proactive and we note Metro’s ability to adapt nimbly across a broad range of product offerings.

Exhibit 5: Metro Bank’s financial guidance

Source: Metro Bank

The increased guidance reflects the bank’s growing confidence in the strategy as a result of the progress already achieved. This includes significant cost savings, with more to come, and the recent disposal of a £2.5bn book of lower-margin, lower-RoTE retail residential mortgages.


A disciplined approach to maximising RoTE

For Metro to reach a mid- to upper-teens RoTE by 2027 would represent a significant step-up in performance. It was loss making in H124, although it expects to be profitable again during Q424. The key driver of increasing RoTE is NIM expansion, driven by balance sheet optimisation, while leveraging a substantially fixed cost base. Metro expects a material expansion in NIM from 174bp at the end of Q224 to around 400bp by the end of 2026 by focusing on targeted, higher-yielding assets, specifically specialist and less competitive segments of commercial lending and the mortgage market, combined with a lower average cost of funding. Metro expects a strong increase in net interest income without dramatically growing the asset base. Meanwhile, cost reductions are well advanced and the cost/income ratio should reduce markedly.

There is good visibility on around a third (or 70bp) of the bank’s expected 224bp NIM expansion. The proceeds from the £2.5bn mortgage book sale will be used for the early repayment of relatively higher-cost drawings on the Bank of England’s TFSME3 facility. Mostly in the next three years, approximately £2.3bn of low-yielding treasury assets (a blended c 1% yield) will run off, creating capacity for lending growth at a significantly higher margin.

  3 The Term Funding Scheme with additional incentives for SMEs (TFSME) was introduced in March 2020. During a period of very low interest rates, it provided low-cost funding, tied to the base rate, to encourage banks to pass the benefits onto SME borrowers while maintaining an appropriate spread over deposit funding costs. Metro had TFSME drawings of £3bn at end-H124, which was due to be repaid by end H125.

Exhibit 6: Illustrative potential benefit from treasury asset repricing*

Source: Metro Bank H124 results presentation. Note: *Compiled on a contractual basis, excluding behavioural assumptions. The illustrative reinvestment yields were based on market expectations at 29 July 2024.

The sale of the mortgage assets is accretive to earnings, NIM and capital ratios and has created further capacity to rotate lending towards higher-yielding commercial, corporate and SME lending and specialist mortgages.

Lending growth and mix

Metro expects to grow lending by 8–11% pa following the initial drop resulting from the mortgage book sale. Adjusted for this sale, the H124 loan book (gross of impairment provisions) was £9.2bn and the bank’s guidance suggests loan book growth to somewhere between £13bn and £15bn by the end of 2028, with a significant change in composition.

Exhibit 7: H124 loans (adjusted for mortgage sale)

Exhibit 8: Target loan book

Source: Metro Bank

Source: Metro Bank

Exhibit 7: H124 loans (adjusted for mortgage sale)

Source: Metro Bank

Exhibit 8: Target loan book

Source: Metro Bank

Far more significant than loan growth is the pivot towards higher-margin/higher-RoTE lending. A material part of the current (pro forma) loan book (around three-quarters) is expected to run off, including the remaining retail mortgage book (£5bn), consumer lending (£1bn), government-backed commercial loans originating from the pandemic (£0.8bn) and commercial buy-to-let mortgages (£0.4bn). These are to be replaced by higher-NIM/higher-RoTE lending, split 70:30 between commercial and specialist mortgages.

Commercial lending, including asset and invoice financing, is an area where Metro has significant experience in origination and risk management, and a seasoned team that it plans to leverage. Lending will continue to be significantly secured against commercial property and other business assets. With the bank’s capital position strengthened in late 2023, its approved pipeline of lending and loan drawdowns showed significant growth in H124.

Specialist mortgages are typically products that meet the specific needs of individuals or businesses that are outside the standard lending criteria. Among a range of potential opportunities, this may include limited company buy-to-let, self-employed mortgages, adverse credit mortgages and complex income mortgages. Because of their niche characteristics, there is generally less competition from larger or monoline competitors.

The loan book shift and increased margins on future loan originations will take time to work through but on future mortgage originations, Metro expects to earn margins of more than 200bp above the prevailing market reference rate from H125, well above that of its existing ‘plain vanilla’ retail mortgage book, much of which is yet to reflect more recent pricing. Commercial loan originations are already at more than 350bp above the Bank of England base rate.

Funding growth and mix

Metro has a strong and valuable deposit franchise and an equally strong liquidity position. There is significant scope to reduce liquidity, increase the share of low-cost deposits and increase NIM. Deposits are the key source of funding (£15.7bn at H124) and, compared with peers, Metro has a high share of low-cost current account deposits and non-interest-bearing liabilities (NIBLs). The early repayment of the TFSME drawings will increase the share of deposit funding and this should lower Metro’s average cost of funding notwithstanding the potential for widespread TFSME repayments across the sector to increase competition for deposit funding.

The H124 loan/deposit ratio of 73% was low relative to peers and adjusting for the mortgage book sale would be lower still. This should gradually increase over time with loan growth outpacing expected deposit growth. Metro expects deposits to reduce in H224, as it pares back higher-cost savings deposits, and to remain broadly flat until 2026. Thereafter, it expects mid- to upper single-digit growth per year, supported by growing the number, depth and quality of its deposit relationships with both retail and commercial customers.

Exhibit 9: Metro has a high share of non-interest-bearing liabilities

Exhibit 10: Metro’s liquidity is strong and its coverage ratio is well above regulatory requirements*

Source: Metro Bank interim results presentation


Source: Metro Bank interim results presentation. Note: *The liquidity ratio is a measure of a bank’s ability to meet its short-term obligations and compares its liquid assets, such as cash and cash equivalents, to its short-term liabilities.

Exhibit 9: Metro has a high share of non-interest-bearing liabilities

Source: Metro Bank interim results presentation


Exhibit 10: Metro’s liquidity is strong and its coverage ratio is well above regulatory requirements*

Source: Metro Bank interim results presentation. Note: *The liquidity ratio is a measure of a bank’s ability to meet its short-term obligations and compares its liquid assets, such as cash and cash equivalents, to its short-term liabilities.

Credit risk

Metro’s loan book continued to perform strongly in H124 with an expected credit loss charge of just 10bp of lending. While the bank has indicated in the past that it would expect to see a through-the-cycle impairment charge of c 30bp pa, this was based on a higher share of mortgage lending than it now targets. Prior to the recent £2.5bn mortgage sale, low-risk retail mortgages represented two-thirds of lending, compared with the 30% weighting to specialist mortgages that the bank expects over the medium term. While higher lending yields inevitably reflect some increase in credit risk, Metro says that the shift in lending mix does not represent any material change in its risk appetite. Alongside the residential property-backed specialist mortgage book, commercial lending will continue to be significantly secured against commercial property and other business assets.

Irrespective of any lending mix shift, with the total cost of risk having been below the bank’s through-the-cycle expectation of 30bp for some time, it would be logical to assume that it rises above this level at some point. We have assumed a gradual increase in the total cost of risk to around 50bp pa, which is well ahead of any period since listing, with the exception of 2020 during the pandemic.

Exhibit 11: Cost of risk (% gross lending)

2017

2018

2019

2020

2021

2022

2023

H124

Retail residential mortgages

0.03%

0.01%

0.00%

0.19%

-0.11%

0.20%

-0.01%

0.04%

Retail consumer lending

2.03%

1.54%

1.92%

5.97%

3.68%

2.26%

3.29%

1.39%

Commercial lending

0.13%

0.10%

0.11%

1.99%

0.16%

0.11%

-0.30%

-0.23%

Total cost of risk

0.11%

0.07%

0.08%

0.86%

0.18%

0.32%

0.26%

0.10%

Source: Metro Bank

Significant increase in cost efficiency

Metro expects increased revenues to combine with cost base reductions to significantly reduce its cost/income ratio and has made significant progress with its goal of removing £80m of annualised costs compared with the H223 run rate. By the end of H124, it had already achieved £50m of annualised savings and Metro expects to reach the £80m pa target by the end of the year. Actual 2024 costs are expected to be below the 2023 level, with further reductions in 2025 as the costs savings have a full-year effect.

The cost savings comprise a c 20% reduction in headcount combined with more streamlined processes and increased digitalisation that can both enhance customer service and reduce costs.

The banking sector has a high degree of fixed costs, in part the result of strict regulation such that revenue growth has a disproportionate impact on profitability. This is particularly the case with Metro’s branch-based, service-led model, which remains central to its service-based proposition. In fact, a net 10 new store openings are planned by the end of 20264 (two of which in 2025), the costs of which are included in Metro’s cost/income ratio guidance. On an underlying basis, the H124 cost/income ratio was 109% (112% on a reported basis) and Metro expects a reduction to 70%, on a run-rate basis, by the end of 2026, 60% by the end of 2027 and 50% by the end of 2028.

  4 The closure of one London store was recently completed and Metro is committed to opening an additional 11 new stores in the north of England. The operational costs pre- and post-launch will be part-funded by a grant awarded in 2019 by the BCR Capability and Innovation Fund. Of these 11, construction has begun on a store in Chester and a lease has been signed for a store in Gateshead.

Progress in H124

Although Metro was loss-making in H124, there were clear signs of progress with the balance sheet repositioning and cost reductions, which Metro expects will drive significant improvements going forward.

On an underlying basis, the pre-tax loss of £26.8m in H124 was slightly reduced on the H223 loss (£33.0m), but well below the £16.1m profit earned in H123.

Compared with H223, net interest income and, to a lesser extent, non-interest income declined, offset by the reduced costs and expected credit losses discussed above. H124 NIM was 1.64% versus 1.85% in H223, reflecting higher deposit funding costs and the step change in the cost of refinanced debt capital. The cost of deposit funding increased to 2.18% (H223: 1.29%) due to a deliberate decision in H223 to attract price-sensitive savings deposits amid media speculation over the bank’s capital position. Metro expects the cost of deposits to fall in H224 as these higher-cost deposits begin to mature.

On the other hand, lending yields continued to increase, up by 68bp versus H123 to 5.18% (FY23: 4.75%), primarily driven by the repricing of fixed-rate loans as they mature, and should continue to increase as the lending book migrates towards higher-yield lending, including the impact of the post-period mortgage book sale. Going into H2, the commercial lending pipeline is more than twice that of all new lending in 2023.

Exhibit 12: Summary of H124 earnings

Underlying basis

H124

H223

H123

H124/H223

H124/H123

£m unless stated otherwise

Jun-24

Dec-23

Jun-23

Net interest income

171.9

190.4

221.5

-10%

-22%

Non-interest income

62.1

70.5

64.1

-12%

-3%

Total income

234.0

260.9

285.6

-10%

-18%

Operating expenses

(254.6)

(272.0)

(258.2)

-6%

-1%

Expected credit loss

(6.2)

(21.9)

(11.3)

-72%

-45%

Profit before tax

(26.8)

(33.0)

16.1

-19%

-266%

Non-underlying items

(6.7)

48.1

(0.7)

-114%

857%

Statutory profit before tax

(33.5)

15.1

15.4

-322%

-318%

Source: Metro Bank

The H124 reduction in expected credit loss expense to £6.2m reflected the continuing resilient performance of commercial customers, allowing for a release of provisions as businesses remained robust.

Exhibit 13: H124 balance sheet movements

H124

H223

H124/H223

£m unless stated otherwise

Jun-24

Dec-23

Customer loans (net)

11.5

12.3

-6%

Treasury assets

8.8

8.8

1%

Other assets

1.1

1.2

-4%

Total assets

21.5

22.2

-3%

Customer deposits

15.7

15.6

1%

Central bank deposits (TFSME)

3.1

3.1

0%

Debt securities

0.7

0.7

-3%

Other liabilities

0.9

1.7

-46%

Total liabilities

20.4

21.1

-3%

Shareholders’ equity

1.1

1.1

-3%

Book value per share (p)

164

169

-3%

Tangible book value per share (p)

138

140

-2%

Source: Metro Bank

Metro remained highly liquid in H124, with deposits showing a marginal increase as it focused on building low-cost relationship deposits ahead of the anticipated run-off of the higher-cost savings deposits acquired in H223. The reduction in lending in H124 was broadly spread across the portfolio, primarily due to the run-off impact of areas that have been de-emphasised (eg consumer lending, retail mortgages, professional buy-to-let and government-backed loan schemes). The fall also reflects the time lag between committing to new commercial loan facilities and the subsequent drawdown.

The H124 ‘common equity’ ratio (CET1) of 12.9%, total capital ratio of 15.0% and total capital including MREL of 22.2% were all above the regulatory minima.

Our forecasts versus guidance

Our forecasts track the bank’s guidance closely and we feel it is more useful to examine the key sensitivities to both. The obvious point to make is that Metro operates within a dynamic environment, both in terms of the macroeconomic backdrop and the competitive landscape. We are very confident about near-term progress and a return to profitability, based on the visible opportunities to further reposition the balance sheet and reduce costs. Looking further out, Metro benefits from an ability to respond nimbly to a changing environment across a broad range of product capabilities. This gives us comfort about the direction of travel we present in our medium-term forecasts and the bank’s guidance. We have no doubt that the details will inevitably evolve along the way and in all probability evolve quite materially.

Exhibit 14 shows a summary of the key operating metrics reflected in the financial summary at the end of this report. The key variation between our forecasts and Metro’s guidance is the cost/income ratio (ours is higher in the later years). In particular, we note:

Compound growth in lending of 9% to end 2028, split 70:30 between commercial and specialist mortgages.

Compound growth in customer deposits of 2% pa, reflected in a steady rise in the loan/deposit ratio to 85%, which remains conservative compared with the current position of peers.

A progressive increase in NIM to an annual rate of c 4% by 2027,5 reflecting an expansion in both lending and deposit margins compared with current levels.

  5 The NIM guidance in Exhibit 5 is the levels that the bank expects to ‘approach’ by each period.

A well contained expected cost of risk, representing 0.5% or 50bp of gross outstanding loans by 2027.

A steady increase in RoTE to around 20% by 2027, which is higher than the stated target RoTE of mid- to upper teens.

Well controlled administrative expenses, with a 2028 level of £516m being c 5% below the H223 run-rate level. Our forecast cost/income ratio of 70% in 2028 is nonetheless above the bank’s expectation of 60%.

Exhibit 14: Edison forecast summary

£m unless stated otherwise

H124

2024e

2025e

2026e

2027e

2028e

H124–2028 CAGR

Gross lending

11.7

9.2

9.7

10.7

12.0

13.5

9%

Total assets

21.5

16.9

16.5

17.1

18.0

19.2

3%

Customer deposits

15.7

14.3

13.8

14.3

15.0

15.9

2%

Total liabilities

20.4

15.9

15.4

15.9

16.6

17.5

2%

NIM

1.64%

1.91%

2.97%

3.52%

3.94%

4.01%

Cost of risk

0.10%

0.21%

0.34%

0.49%

0.50%

0.50%

Loan: deposit ratio

75%

64%

70%

75%

80%

85%

Cost/income ratio

112%

106%

83%

83%

77%

70%

Underlying PBT

(26.8)

(28.2)

65.9

130.1

223.1

269.8

Equity/net assets

1.1

1.0

1.1

1.2

1.4

1.7

RWA

7.2

6.3

6.9

7.9

9.0

10.2

11%

Loan book risk weighting

45.0%

48.2%

51.9%

56.6%

59.7%

61.9%

Total asset risk weighting

33.5%

37.5%

42.1%

46.4%

50.0%

53.1%

RoTE

-7.1%

-5.5%

7.8%

14.0%

20.1%

19.8%

CET1 ratio

12.9%

13.0%

12.8%

12.8%

13.8%

14.8%

Tier 1 ratio

12.9%

13.0%

12.8%

12.8%

13.8%

14.8%

Total capital ratio

15.0%

15.3%

15.0%

14.7%

15.5%

16.3%

MREL ratio

22.3%

23.6%

22.6%

21.3%

21.3%

21.4%

Source: Edison Investment Research

Organic growth in capital

We forecast that higher earnings will be driven by an increased RoTE rather than balance sheet growth. In fact, we forecast that total assets will be lower by end-FY28 than at end-H124, prior to the mortgage sale. The changing mix of lending will nonetheless drive an increase in risk-weighted assets and in the bank’s capital requirement, which we expect to be met by retained earnings. Metro does not expect the phased introduction of Basel 3.1 capital requirements from 2025 (see below) to have a material impact, and we have not assumed any, but the exact outcome remains uncertain. Peers such as Paragon and OSB have indicated a Basel 3.1 impact on their CET1 ratios, based on their respective loan books, of around 200bp.

We forecast a CET1 ratio of 14.8% by end 2028, well above the current regulatory minimum requirement of 9.2%, and a total capital ratio of 16.3%, well above the current minimum requirement of 12.9%. While equity builds over the period, we forecast no change in the amount of MREL qualifying debt, consisting of the £150m in tier 2 loan notes and the £525m in MREL loan notes. As a result, our predicted MREL ratio is fairly constant at a little over 21% through 2026–28, only just in line with current requirements. This suggests to us that Metro may seek to increase its MREL resources, perhaps as part of a wider adjustment to the increasing weight of common equity in the capital structure. The bank has commented only that it has a range of options for managing its capital base, and that this could include accessing debt capital markets ahead of the maturity of its existing loan notes. £525m of reset callable (MREL) loan notes mature in 2029 at a fixed coupon of 12.0%. However, these will cease to be MREL eligible one year before maturity, at the call date6 in April 2028.

  6 At the call date, Metro has the option to redeem the loan notes.

Based on our forecasts for the bank’s MREL requirement, we think it likely that it will seek to refinance the existing debt and potentially increase the amount of MREL-qualifying debt, subject to market conditions, and the impact of any refinancing on funding costs is difficult to predict.

Metro’s traded loan notes, like its ordinary shares, have increased markedly in price since the interim results as investor confidence in the bank’s strategy strengthens. The 14% tier 2 loan notes have more than doubled to trade at almost 90% of par value. The 12% MREL notes have risen even more strongly and now trade slightly above par. Whether there is scope to reduce the share of common equity within the capital base in part depends on the uncertain impact of Basel 3.1 from 2025 (see below).

Key forecasting sensitivities and risk factors

The successful implementation of Metro’s strategy, and our forecasts, are subject to a number of risks, including operational, financial and competitive risks, many of which are completely outside Metro’s control and to which we would expect the bank to respond. Key among these are:

Macroeconomic risks: like all banks, Metro’s business faces macroeconomic risks such as fluctuations in GDP growth, interest rates and employment, which can have an impact on loan growth, margins and credit quality.

Interest rate risk: Metro manages interest rate risk conservatively and does not seek to create value through taking interest rate decisions. However, its liabilities reprice somewhat faster than its assets, which means it is more likely to benefit when interest rates are falling and more likely to be disadvantaged when rates rise. While this may have a short-term effect on performance, it is unlikely to affect Metro’s longer-term guidance or our forecasts meaningfully. Exhibit 15 shows the company’s calculation of net interest sensitivity to a +200bp and -200bp parallel interest rate shock over a one-year forecasting period. Hypothetically, this is based on a constant balance sheet as well as a full pass-through of the increase to all of its variable rate assets and liabilities.

Exhibit 15: Interest rate sensitivity

£m

200bp increase

200bp decrease

At 31 December 2023

(13.8)

14.3

At 31 December 2022

(8.3)

8.4

Source: Metro Bank

Credit risk: changes in the economic and monetary environment can have a material impact on credit losses and expose weakness in credit risk management. We would expect Metro’s targeted loan mix to be more exposed to changes in the credit cycle than is currently the case and estimate that based on the current balance sheet, a 10bp increase in the charge for expected credit losses is equivalent to c £10m.

Competition: the market for UK financial services is mature and highly competitive. For one bank to grow, it must effectively take market share from another. Shifts in customer demands, changes in technology or its application, market consolidation and regulatory developments may all alter the competitive balance over the medium term. While Metro is targeting underserved submarkets, where competition may be expected to be lower, it is unlikely to be alone in identifying opportunities.

Regulation: the sector is very highly regulated, and breaches can result in significant punitive action and reputational damage. Changes in capital adequacy rules have the potential to significantly affect profitability and competitiveness at both the company and product level, and even viability. The impacts of Basel 3.1 remain uncertain and if the impact on required capital is greater than Metro currently expects, this may affect its ability to grow as it expects.

Liquidity risk: all lenders are subject to liquidity risks as deposits and debt financing must be retained to fund less liquid assets. Metro is currently well capitalised and liquid, with a strong core deposit franchise and minimal reliance on wholesale funding. It has no debt capital maturities until 2028. In this respect, it is well placed but not immune to unexpected developments, as in late 2023.

Maintaining customer service

The quality of Metro’s customer service has been a key factor in its continued growth in customer accounts. Maintaining an optimal balance between customer satisfaction and increasing efficiency as the bank seeks to drive more business through its platform will be an important factor in determining the success of its strategy.

Exhibit 16: Customer current accounts have grown to three million

Source: Metro Bank

Metro’s branch services have consistently been rated very highly by both personal and business customers (almost consistently ranked number one versus peers) and it scores well versus most peers for overall service. In other areas (online and mobile services, overdrafts), its relative scores have been much more mixed, highlighting the opportunity to do more with existing customers. The slight weakening of personal customer satisfaction in August may well be related to the change in Metro opening hours and other product terms (eg the introduction of fees on debit cards used abroad), which is likely to be temporary. Metro’s decision to no longer open branches on Sundays and restrict opening times at selected branches followed an extensive process of consultation among the communities served and, despite significant media attention, the bank says that it has seen no material impact on customers.

Exhibit 17: Strong branch customer satisfaction

Survey

Personal customers

SME customers

Service in branches

Overall service quality

Service in branches

Overall service

Relationship management

Aug-24

73%

3

67%

6

72%

1

65%

5

65%

5

Feb-24

74%

=1

66%

5

71%

1

65%

5

65%

5

Aug-23

72%

1

67%

4

70%

1

63%

5

63%

5

Feb-23

74%

1

69%

4

67%

1

62%

5

59%

5

Aug-22

79%

1

72%

4

71%

1

65%

2

62%

5

Feb-22

81%

1

74%

4

74%

1

68%

3

66%

3

Aug-21

78%

1

74%

4

73%

1

69%

3

66%

3

Feb-21

82%

1

76%

4

72%

1

66%

2

66%

3

Aug-20

84%

1

81%

4

72%

2

67%

2

63%

3

Feb-20

84%

1

82%

2

75%

2

68%

2

65%

2

Source: Competition and Markets Authority Banking Satisfaction Survey, Ipsos, BVA BDRC

Valuation: Significant upside on successful execution

Metro’s share price has risen strongly since it reported H124 results, although at this early stage of its journey it is perhaps unsurprising that it is trading at just c 0.6x FY24e TBVPS, well below its closest peers. However, there is significant upside potential if the bank is successful in lifting RoTE in line with its guidance, and we would expect this to be progressively recognised in the share price as milestones are achieved, the first being to return to run-rate profitability during Q424.

Exhibit 18 shows the relatively close relationship between RoTE and price/book value P/TBV across UK banks and specialist lenders.

Exhibit 18: Historical RoTE versus P/TBV

Source: LSEG Data & Analytics, company data, Edison Investment Research (FY23 data). Note: Prices at 30 October 2024.

Exhibit 19 compares Metro more directly with its closest peers. Paragon mostly provides buy-to-let mortgages for professional landlords, with a smaller commercial division providing SME lending, development finance, structured lending and motor finance. OSB is also focused on buy-to let mortgages and, to a lesser extent, residential mortgages. It also has small commercial lending and specialist mortgage (second charge, bridging, development) books.

Both Paragon and OSB are achieving good levels of RoTE, enabling them to fund balance sheet growth and return capital to shareholders in the form of dividends and share repurchases.7 For Metro we have assumed that earnings are retained to support balance sheet growth, including increased risk asset intensity.

  7 In addition to dividend distributions, OSB completed a £150m share repurchase programme in FY23 and has announced a further £100m of planned repurchases in the current year. Paragon completed a £100m repurchase programme in FY23 and targets a further £100m in the current year.

Exhibit 19: Metro versus close peers

Metro Bank

Paragon

OSB

Share price (p)

75

700

367.2

Market cap (£m)

474

1,432

1,354

CET1 ratio

12.9%

14.7%

16.2%

Tier 1 ratio

12.9%

14.7%

17.4%

Total capital ratio

15.0%

16.6%

19.5%

MREL ratio

23.6%

N/A

25.3%

Tangible book value per share (p)

137.7

580

555

P/tangible book value per share (x)

0.54

1.21

0.66

RoTE

-7%

21%

17%

12-month trailing DPS (p)

N/A

39.6

32.5

Dividend yield

N/A

5.7%

8.9%

Source: LSEG Data & Analytics, company data, Edison Investment Research. Note: Paragon’s RoTE is adjusted for fair value movements on hedges that will unwind over time. On a statutory basis, the annualised H124 RoTE was 13%. Prices as at 30 October 2024

If Metro’s guidance of a mid- to upper-teens RoTE by late 2027 is successfully achieved, we would expect it to trade at significantly higher P/NTA. If we apply a 0.7x P/NTA to our FY27e tang per share of 182p and discount this by 15% pa, the implied value per share today is more than 90p, over 30% higher than the current price.

Governance and management

Spaldy Investments is a 53% shareholder

In November 2023, Metro issued 500m new shares, increasing the number outstanding to c 673m. Its largest shareholder, Spaldy Investments, an investor since 2019, committed to taking 340m of the new shares, investing £102m and increasing its shareholding from 9.1% to 53%. Spaldy is the investment vehicle of Jaime Gilinski Bacal, a highly successful Colombian investor with a number of investments in financial institutions and real estate, primarily in Latin America and the US, including controlling interests in Banco GNB Sudameris, Banco GNB Peru, Banco GNB Paraguay and Lulo Bank, and significant shareholdings in Grupo Sura and Grupo Nutresa.

Shareholders approved a waiver from Takeover Code rules that would otherwise require Spaldy to make a full bid and a relationship agreement between Spaldy, its sole owner Jaime Gilinski Bacal and the company that ensures the bank’s independence. Spaldy and Jaime Gilinski Bacal have the right to appoint up to three non-executive board members.

The board and management

The board comprises eight members, seven of whom are non-executive, plus the CEO and CFO. A majority of the board are independent.

Robert Sharpe has chaired the board since November 2020 and brings more than 45 years of experience in retail banking, in both executive and non-executive roles, in the UK and overseas. The other independent non-executive directors (NEDs) are Catherine Brown (senior NED), Paul Thandi, Michael Torpey, Nicholas Winsor and Jaime Gilinski Bacal, who joined the board in September 2024 and has replaced Dorita Gilinski (who joined the board in 2022).

We provide brief biographies of the leadership team on page 20 and full board details are available on the company website.

Turnaround specialist Dan Frumkin has been CEO since early 2020, having joined the bank as COO in September 2019. He has worked in America, the UK, Eastern Europe and Bermuda, and has performed business, risk, product and commercial executive level roles throughout his career. Prior to joining Metro he was COO at Bermuda-based Butterfield Bank, which he helped restructure following its 2010 rescue by private equity group Carlyle. He had previously held senior restructuring roles at the Latvian bank Parex and Northern Rock. Having participated in the November capital raise, he owns 8.2m shares in Metro (c 1.2% of the outstanding shares).

Marc Page was appointed CFO in February and took up the role in early September, replacing interim CFO Cristina Alba Ochoa. Marc has more than 20 years’ experience in financial services roles at Barclays, Halifax Bank of Scotland and Lloyds Banking Group, and was most recently CFO of Kensington Mortgages following its acquisition by Barclays in 2023.

Exhibit 20: Financial summary

Year to 31 December (£m)

2022

2023

2024e

2025e

2026e

2027e

2028e

INCOME STATEMENT

Net interest income

404.1

411.9

370.9

467.9

552.2

650.9

703.5

Net fee & commission income

81.8

90.4

90.9

100.0

110.0

120.0

130.0

Other income

37.6

146.6

(76.7)

20.0

20.0

20.0

20.0

Total income

523.5

648.9

385.1

587.9

682.2

790.9

853.5

General operating expenses

(467.6)

(502.9)

(439.2)

(412.5)

(422.9)

(431.4)

(440.1)

Depreciation

(77.0)

(77.7)

(76.2)

(76.2)

(76.2)

(76.2)

(76.2)

Impairments & write-offs of PPE and intangibles

(9.7)

(4.6)

(.3)

0.0

0.0

0.0

0.0

Total operating expenses

(554.3)

(585.2)

(515.7)

(488.7)

(499.1)

(507.6)

(516.3)

Expected credit loss

(39.9)

(33.2)

(19.3)

(33.3)

(53.0)

(60.2)

(67.4)

Profit before tax

(70.7)

30.5

(149.9)

65.9

130.1

223.1

269.8

Adjust for:

Impairment & write-off PPE & intangibles

9.7

4.6

.3

0.0

0.0

0.0

0.0

Holding company costs

1.8

1.8

0.0

0.0

0.0

0.0

0.0

Non-recurring costs

8.6

20.2

0.0

0.0

0.0

0.0

0.0

Other non-recurring items

0.0

(74.0)

121.4

0.0

0.0

0.0

0.0

Company basis underlying PBT

(50.6)

(16.9)

(28.2)

65.9

130.1

223.1

269.8

Tax

(2.0)

(1.0)

0.4

0.0

0.0

0.0

0.0

Net profit

(72.7)

29.5

(149.5)

65.9

130.1

223.1

269.8

Period-end number of shares (m)

172.5

672.7

672.7

672.7

672.7

672.7

672.7

Average number of shares (m)

172.5

214.3

672.7

672.7

672.7

672.7

672.7

Diluted average number of shares (m)

172.5

220.8

672.7

672.7

672.7

672.7

672.7

EPS (p)

(42.2)

13.4

(22.2)

9.8

19.3

33.2

40.1

DPS (p)

0.0

0.0

0.0

0.0

0.0

0.0

0.0

BALANCE SHEET

Loan assets

13,102

12,297

8,999

9,652

10,726

11,979

13,535

Cash

1,956

3,891

2,161

1,573

2,157

2,331

2,067

Other treasury assets

5,914

4,879

4,594

4,099

3,084

2,553

2,480

Other assets

1,147

1,178

1,127

1,127

1,127

1,127

1,127

Total assets

22,119

22,245

16,881

16,450

17,094

17,990

19,208

Customer deposits

(16,014)

(15,623)

(14,285)

(13,788)

(14,301)

(14,974)

(15,923)

Deposits from central banks

(3,800)

(3,050)

0

0

0

0

0

Debt securities

(571)

(694)

(675)

(675)

(675)

(675)

(675)

Other liabilities

(778)

(1,744)

(934)

(934)

(934)

(934)

(934)

Total liabilities

(21,163)

(21,111)

(15,894)

(15,397)

(15,910)

(16,583)

(17,532)

Net assets

956

1,134

988

1,053

1,184

1,407

1,677

Book value per share (p)

554

169

147

156

176

209

249

Tangible book value per share (p)

429

140

120

130

149

182

223

RATIOS

Loan: deposit ratio

82%

79%

63%

70%

75%

80%

85%

Net interest margin

1.92%

1.98%

1.91%

2.97%

3.52%

3.94%

4.01%

Expected credit loss (ECL) as % gross lending

0.32%

0.26%

0.21%

0.34%

0.49%

0.50%

0.50%

Cost: income ratio

106%

90%

134%

83%

73%

64%

60%

Return on tangible equity (RoTE)

(9.7%)

3.7%

(16.6%)

7.8%

14.0%

20.1%

19.8%

Risk weighted assets (RWA)

7,990

7,533

6,326

6,920

7,923

8,987

10,204

Common equity tier 1 ratio (CET1)

10.3%

13.1%

13.0%

12.8%

12.8%

13.8%

14.8%

Tier 1 ratio (T1)

10.3%

13.1%

13.0%

12.8%

12.8%

13.8%

14.8%

Total capital ratio

13.4%

15.1%

15.3%

15.0%

14.7%

15.5%

16.3%

MREL

17.7%

22.0%

23.6%

22.6%

21.3%

21.3%

21.4%

Source: Metro Bank historical data, Edison Investment Research forecasts


Appendix 1: Capital requirements

The Basel regulatory capital framework applied to UK banks comprises three pillars:

Pillar 1 defines the minimum capital requirement for credit, market and operational risks.

Pillar 2 builds on Pillar 1, additionally incorporating the bank’s own assessment of the additional capital needed to cover any specific risks not covered by the minimum requirement set out in Pillar 1. This is also assessed by the Prudential Regulation Authority as part of its Supervisory Review and Evaluation Process and is used to determine the overall capital resources required by the bank.

Pillar 3 requires banks to publish detailed information on their principal risks, capital structure and risk management.

New standards for assessing risks of all types (Basel 3.1) are due to be implemented in July 2025 (fully phased in by 2030) and are expected to narrow the current gap between risks assessed on a standardised basis versus AIRB. It has been expected that the changes will increase the capital requirement for most, but not all, banks, although the exact rules have not yet been finalised. It seems likely that Metro’s requirements will increase but, based on its current balance sheet and lending mix, it does not expect any change to be material, particularly on Basel 3.1 implementation.

In addition to meeting the Basel regulatory capital requirements, banks in the UK and across the EU must comply with the MREL standard, which requires banks to maintain a minimum amount of loss-absorbing resources. MREL helps to ensure that when firms fail, the resolution authority (the Bank of England in the UK) can use a firm’s financial resources to absorb losses and recapitalise the business so it can continue to provide critical functions without the need to rely on public funds. MREL resources can take the form of regulatory capital (own funds) and certain types of debt liabilities (eligible liabilities), including types of subordinated debt that are not considered as part of regulatory capital.

Metro’s capital requirement

Metro’s H124 tier 1 ratio of 12.9% (tier 1 capital represented 12.9% of risk-weighted assets or RWA). This was 3.7% above the level required under Pillars 1 and 2. Tier 1 was entirely made up of core equity, or shareholders’ net assets adjusted for intangible assets and certain other items. There is no additional tier 1 capital such as subordinated debt, the holders of which are repaid before shareholders but after other lower-ranking debt holders.

Including its £150m of tier 2 loan notes,8 Metro’s H124 total capital ratio was 15.0%, 2.1% above the regulatory minimum.

  8 £150m callable subordinated loan notes, which mature in 2034 at a fixed coupon of 14.0%. Metro has the option to call the notes (redeem before the maturity date) in April 2029.

In addition to its regulatory capital, including the £525m of MREL qualifying loan notes,9 the MREL ratio was 22.3% of RWA compared with a minimum requirement of 21.2%.

  9 £525m reset callable loan notes, which mature in 2029 at a fixed coupon of 12.0%. Metro has the option to call the notes (redeem before the maturity date) in April 2028.

Exhibit 21: H124 capital ratios and requirements

£m unless stated otherwise

Capital

Capital as % of RWA

Minimum requirement

Net assets

1,103

Adjustments

(166)

Core equity tier 1 (CET1)

937

12.9%

Additional tier 1(AT1)

0

Total tier 1 capital (T1)l

937

12.9%

9.2%

Tier 2 capital

150

Total capital

1,087

15.0%

12.9%

MREL qualifying debt

525

Total capital including MREL

1,612

22.3%

21.2%

Source: Metro Bank data

H124 risk weighted assets were £7.2bn, comprising credit risk, market risk and operational risk. The end-FY23 detailed breakdown is as follows:

Exhibit 22: FY23 RWA breakdown

£m unless stated otherwise

Loan book RWA

5,597

Treasury portfolio

242

Other assets

886

Total assets

6,725

Off balance sheet

79

Credit risk excluding counterparty credit risk

6,804

Counterparty credit risk, market risk & operational risk

729

Total RWA

7,533

Lending RWA as % gross lending

45%

Total RWA as % gross assets

34%

£m unless stated otherwise

Loan book RWA

Treasury portfolio

Other assets

Total assets

Off balance sheet

Credit risk excluding counterparty credit risk

Counterparty credit risk, market risk & operational risk

Total RWA

Lending RWA as % gross lending

Total RWA as % gross assets

5,597

242

886

6,725

79

6,804

729

7,533

45%

34%

Source: Metro Bank data

Risk-weighted assets in respect of the loan book represented c 45% of gross lending, an average of the various types of lending. Less risky loans, such as residential mortgages, have a lower risk weighting than, say, an unsecured consumer or commercial loan. In Exhibit 14 above, our forecast shows that up to the end of 2028, risk weighted assets will increase by 11% pa versus loan growth of 9% pa. This reflects an increased share of commercial loans and specialised mortgages, both of which have a higher risk weighting than the retail mortgages and government-backed loans that will run off.

Appendix 2: Metro Bank’s economic variable assumptions

Exhibit 23: Metro Bank’s economic variable assumptions

Source: Metro Bank annual report 2023

Contact details

Gross lending split

Metro Bank plc
1 Southampton Row
London WC1B 5HA
UK

IR@metrobank.plc.uk

www.metrobankonline.co.uk

Leadership team

Chair: Robert Sharpe

CEO: Daniel Frumkin

Robert was appointed chair in November 2020. He has over 45 years’ experience in retail banking and is currently chair at Pollen Street and Hampshire Trust Bank. He has extensive board experience in the UK and the Middle East. In the UK this includes chair of Bank of Ireland UK, non-executive director at Aldermore Bank, George Wimpy, Barclays Bank UK Retirement Fund, Vaultex, LSL Properties and RIAS. In the Middle East he has held non-executive director roles at banks in Qatar, UAE, Oman and Turkey. Robert was previously CEO at West Bromwich Building Society, a role he took to chart and implement its rescue plan. Prior to this, he was CEO at Portman Building Society and at Bank of Ireland’s consumer business in the UK.

Dan joined Metro Bank in September 2019, initially as chief transformation officer before becoming CEO in early 2020. Prior to joining Metro Bank, Dan worked in America, the UK, Eastern Europe and Bermuda. He has performed business, risk, product and commercial executive-level roles throughout his career. Previously, he was group COO at Butterfield Bank, a full-service community bank based in Bermuda, with responsibility for eight jurisdictions across the globe covering a range of business and support areas. He has previously held roles at RBS and Northern Rock.

Senior independent non-executive director: Catherine Brown

CFO: Marc Page

Catherine was appointed to Metro Bank’s board in September 2018. She has extensive experience in organisational transformation in financial services, leadership and operations. Her previous executive appointments include group strategy director at Lloyds Banking Group, executive director of human resources at the Bank of England and COO at Apax Partners. She holds non-executive roles at QBE Underwriting, one of the world’s leading international insurers, and FNZ (UK). She has previously been non-executive director at the Cabinet Office and was chair of Additive Flow. She has also been a trustee of Cancer Research UK and Chatham House.

Marc joined Metro Bank as CFO in September 2024, taking over from interim CFO Cristina Alba Ochoa. Marc has more than 20 years’ experience in financial services roles in Barclays, Halifax Bank of Scotland and Lloyds Banking Group. He joins from Barclays, where he held a number of senior positions since joining in 2017. He was most recently CFO of Kensington Mortgages following its acquisition by Barclays in 2023 and non-executive director of Clydesdale Financial Services, also part of Barclays, having previously been its CFO.

Principal shareholders (source: LSEG Data & Analytics, 30 October 2024)

(%)

Spaldy Investments

52.9

Spruce House Investment Management

8.7

Ruane Cunnif & Goldfarb

5.7

Davis Selected Advisers

5.2

Kernow Asset Management

2.9

Daniel Frumkin (Metro Bank’s CEO)

1.2


General disclaimer and copyright

This report has been commissioned by Metro Bank and prepared and issued by Edison, in consideration of a fee payable by Metro Bank. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

General disclaimer and copyright

This report has been commissioned by Metro Bank and prepared and issued by Edison, in consideration of a fee payable by Metro Bank. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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Oryzon Genomics — Q3 results recap key upcoming inflection points

Oryzon has reported its Q324 results, the highlight of which was the borderline personality disorder (BPD) programme, with the final Phase IIb PORTICO data demonstrating vafidemstat’s potential to offer meaningful results in a condition with no approved drugs currently. A further boost was the positive FDA feedback for Phase III, and the next step will be the submission of a full trial protocol for PORTICO-2 (expected in Q125). Oryzon also made strides in strengthening its intellectual property (IP) profile, extending vafidemstat’s patent protection up to at least 2040. In oncology, the first patient was dosed in the investigator-initiated Phase Ib study of iadademstat with venetoclax and azacitidine in acute myeloid leukaemia (AML). For FRIDA (iadademstat with gilteritinib in AML), the strategic priority in oncology, the next update will be at EHA 2025. Our valuation adjusts to €796m or €12.3/share (from €775m or €12.1/share).

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