Hello, and welcome to the Metro Bank PLC full year 2021 results. Throughout the call, all participants will be in a listen-only mode, and afterwards, there will be a question and answer session. Today, I am pleased to present CEO Daniel Frumkin. Please go ahead with your meeting.
Good morning, everyone, and thank you so much for joining us. I need to start by apologizing to our U.S. stakeholders. I know, this timing is inconvenient, but again, it's a difficult choice for us. We need to look after our U.K. stakeholders as well. On to the presentation. You'll see the first slide. Clicker's not working. You'll see the first slide actually talks about on the left-hand side, there is, there's a clear indication that we're sticking to what has made Metro successful for a long period of time, which is the customer service proposition. We're very clear that we continue to stay focused on providing exceptional customer service and creating fans. Again, the CMA results, we were number one for in-store service on the high street.
Once again, we've been recognized by various industry awards, which is always nice, and we continue to grow customer numbers. I think the middle part of this graph is really important. We have, since 2019, fundamentally changed the shape of the balance sheet. You see small business lending, it continues to be a part of what we do, but you'll see consumer lending has grown, up to 7% of the overall balance sheet. Actually, government-backed lending has grown to 13% of, the overall lending portfolio. Again, not something that even existed when we were in 2019. That has led to meaningful increases in lending yield. Then on deposits, we've reduced fixed-term deposits down to about 9% of overall deposit book by 2021, a significant reduction.
What that leads to is you end up with a 61 basis point increase in lending yield over the period and almost a 60 basis point decrease in cost of deposits. A meaningful uptick in overall margin. That widening of the jaws in a near 18 months is really the thing that's driving the transformation. On the right-hand side, we sort of do a small tick list. It's not everything, but it gives you an idea of everything we've managed to accomplish. You know, in terms of balance sheet actions taken, I mean, the GBP 3.1 billion mortgage sale, the RateSetter acquisition, all have had transformative effects on the P&L and the shape of the balance sheet.
Again, we'll talk about IRB a couple times throughout the presentation, but we're really not gonna say much more than the application's progressing, and we continue to work with the PRA in an iterative process. The legacy issues, we're quite pleased. We put in place a provision today for the FCA investigation. We put a provision in place of GBP 5.3 million. We've made enough progress in that investigation that we're comfortable to put in place a provision. There's still some ongoing work to be done. It will still take a few months before it's finally resolved. We continue to work closely and collaboratively with the FCA and are comfortable. The PRA investigation into the RWA issue has been closed, and it's a nice moment to put those behind us.
It's a nice moment to put those legacy issues behind us and move on with driving the business forward. Again, we continue to enhance IT and resilience. Again, cost growth for us, it's not, I think it might be the first time ever in Metro's history, underlying operational costs decreased in the second half of the year versus the first half of the year. Actually, costs went down. In terms of near-term focus on the path to profitability, you'll see in the upper left a couple of big drivers. Spot headcount's actually down year-over-year. Averages are still up a bit, but spot headcount's down. The one I'm actually sort of proud of, it doesn't make that big a difference, but it is actually something we strove to do.
All of you know we have excess space in the stores. Moving 310 desks into the stores for colleagues to work in store has started to eat up some of that excess space. It makes a small dent, but it is a step in the right direction. Below the upper left, you will see that we are optimizing our property footprint, and we announced today we're closing three stores. At the end of the day, those three stores had unique challenges to them, and we thought it appropriate to close them and move on. I've always said that we would treat the store estate with a cold, calculating eye, and we will continue to treat the store estate with a cold, calculating eye. If it makes sense to exit stores, we'll exit stores.
However, we're really comfortable with the store estate where it is now post these three closures. We remain committed to stores. We think the service proposition in stores makes sense. We think it's a differentiator for Metro. As you saw on the previous slide, we're the clear number one for service on the High Street in stores. I wouldn't take this as an indication we're walking away from stores as the basis for Metro going forward. If there are stores that need to be exited, we'll do what we need to do for all stakeholders. We've also, as we've said before, exited Old Bailey, and we now have a hybrid working environment in our Holborn offices. We have about one desk for every three colleagues. We're improving efficiency overall.
As I said, headcount's down a little bit, and we continue to drive forward. We do expect 2022 exceptional costs to be down meaningfully on 2021. Again, we'll get to guidance in a bit, but we really have gotten through the various investigations as well as the remediation efforts, and we're comfortable with the exceptionals. The middle column just shows some activity levels. We are seeing some pickup post-COVID. Obviously, January was a bit of a tough month given the sort of quasi-lockdown, but we've seen real activities bounce back in terms of spending and store activity. On the right-hand side, this is all about what we're gonna do, which is really just continue to execute on the plan as we've done to date.
We are going to introduce some digital products for SMEs in the lending space, which we think will be quite attractive, and we are going to enter the auto lending space under the RateSetter brand. We continue to build up our consumer lending operation as well as our specialist mortgage operation. We do continue to shrink the commercial real estate book, the transactional commercial real estate book, which we think is appropriate, given our strive to improve risk-adjusted returns on regulatory capital. This slide you've seen before. These are the key performance indicators. I think the takeaway from this slide is all the arrows are going in the right direction except for capital, which I'll come onto next.
The bottom that we put in a box to make it even easier for you, the bottom bullet point is really meaningful. Yeah. If you adjust for the GBP 3.1 billion mortgage sale that we did at the end of 2020, revenue increased 42% year-on-year. NII increased 56% year-on-year. I've been doing this a long time, and I've looked at a lot of bank peer groups, both in the U.S., the U.K., and across Europe. I don't remember another bank growing revenue 42% in a year. We did it the old-fashioned way. We changed the shape of the balance sheet, we lent money, and we brought down the cost of deposits. Now on to capital. Listen, capital, we are currently operating within buffers. We're now into 2022.
We know the EBA severance adjustment roll-off, and we knew we lost a quarter of the IFRS 9 adjustment, which means we're now operating within buffers. We are very comfortable operating within buffers. We see no problem operating in buffers as we sit here today. The regulator's fully aware of our capital position. They've seen our 22 budget. They've seen our five-year forecast, and we continue to work closely with the regulator, but we are very comfortable operating within buffers. Let me be really clear that I understand regulatory capital requirements.
If you look at whether we have sufficient capital to operate the business and you go to any kind of an economic capital model, and for my sins, I started doing economic capital modeling in the 1990s, the reality is for a bank that has GBP 9 billion sitting in some treasury portfolio and half its loan book in resi mortgages, we need a lot less capital than we currently hold to run the business. Now we understand the importance of the regulatory. We're very clear we're not going to go below regulatory minima, but we're also very comfortable operating within buffers. You'll see the bottom right bullet point, the whole code implementation has now been pushed back to June 2023. It aligns with the first call date of the tier two instrument. Five pillars. We've talked about this since February 2020.
This is the strategy in a nutshell. I think across all five pillars, we've made progress. We continue to work hard to optimize the balance sheet and drive risk-adjusted returns on regulatory capital. I think from an infrastructure perspective, this bank is a safer and sounder bank than it was when I arrived. We've made real progress, be it on cyber, financial crime, and other activities. We continue to drive costs down while protecting our service proposition, and we continue to do things as creatively as we can in terms of buying freehold, buying leasehold and creating freehold to change the P&L profile of some of our properties and give us a bit more financial flexibility. We are striving for scalable growth and improving the margin and NII growth.
Ultimately, our goal is to become the U.K.'s best community bank. This slide I want to spend a minute on. This is just a typical P&L slide, and we're going to spend a couple of minutes on the P&L. You'll see the NIM bridge on the left. If you take the end of year second half NIM from 2020, which is 128 basis points. Now, again, this has to be from memory because I cannot see that slide, so you're going to have to trust me. If I get it a basis point or two wrong, bear with me. That 128 basis point NIM needs to be adjusted down for the drop in loan-to-deposit ratio. Mainly caused by the mortgage sale.
That 31 basis point drop in loan-to-deposit ratio means we started the year with a NIM that was 97 basis points. Okay? We ended the year with an exit NIM in the fourth quarter of 156 basis points. If my math is right, that's a 59 basis point improvement in NIM from the start of the year to the quarter four NIM run rate. Again, I'm not sure how many banks have ever driven NIM that hard, that quickly. You'll see fee income growth on the right-hand side. The reality is we've seen an increase in fee income. We're a pretty simple bank. We need people to do stuff. If people do stuff, our fee income grows. As the economy opens up, we will drive more traction and we expect to see further fee income growth. Operating cost discipline.
I think in the upper left, you'll see that overall operating costs. To be clear, we're going to start talking about overall operating costs again. We're going to move away from running the bank and change the bank. This is the last time you will see the run the bank and change the bank split. In the upper left, cost increased by not an insignificant sum. You need to remember RateSetter annualized costs are in there. You'll see on the bottom right that it's the largest single year that we've ever had for change the bank spend. We don't anticipate that recurring in 2022 and beyond. We think 2021 will be the single largest year for change the bank spend in the history of Metro.
You've seen a drop already from the first half to the second half, which means on the upper left, we actually reduced overall operating expenses 1% in the second half of the year. Again, I'm not sure Metro's ever been able to say that. We are guiding that overall operating expenses will decline a little bit in 2022. Expected credit losses really aren't the story. The credit portfolio continues to hold up well with a couple of exceptions, and I'll point that out really quickly. Overall, I want to be really clear. We have credit loss expense this year. Not many of our peers actually have an expense. Most of them did net releases. We still have an expense.
We're still carrying PMOs and PMAs, which are about 26% of our overall provision number. At the end of the day, we have taken the decision because of the uncertainty of the macro environment to be conservative about our overall provision levels. Actually coverage, provision coverage went up from 130 to 135 during the year. Again, most of our peers, you will have seen the coverage went down during 2021. Again, we think there's a level of prudence. The only number that probably is worth highlighting, which we put a little bar around, is commercial nonperformance have increased. The majority of that is driven by BBLS, and we can talk about BBLS in Q&A if people have questions. Then let's talk a little bit about the balance sheet and what that means for the income statement.
Again, we've talked about cost of deposits. We ended 2020 with 21% of our deposit book in fixed term deposits. We end 2021 with 9% of our deposit book in fixed term deposits. I think the bottom left needs to be called out because I can hear the headlines now. Deposits only grew 2%. Malarkey. The reality is we grew demand current accounts by 18%. We grew demand savings accounts by 20%. We actually shrunk fixed term deposits by 58%. You're right. Overall, we grew deposits by 2%. The reality is we had a ton of activity and a ton of growth that we offset by shrinking fixed term deposits. That gives us a much better deposit mix to improve our asset sensitivity on the right. We are an asset sensitive bank.
As rates go up, we make more money. Now, the chart on the right is, you know, every bank does it, right? It's a parallel shift, assuming a beta. Our beta is 60%. The reality is that the curve shift won't be parallel and our beta won't be 60%. It gives you an indication of the earning potential from a rising rate environment at Metro. These slides, I think, the next couple of slides are new, and they're new because we really want to try to tell the story in a different way. If you look at unsecured lending volumes in the upper left, we were averaging less than 1 million a month, organically, pre the acquisition of RateSetter.
You can see the growth in there and you can try to draw the lines across. We have cheated here. It's the only place we provide it. We do provide a January 2022 number. We did GBP 102 million of unsecured personal lending during the month of January, the largest single month in the history of RateSetter, more than Metro Bank did since its inception prior to the acquisition of RateSetter, and 100 times what we've ever done in a single month organically at Metro prior to the acquisition of RateSetter. You'll also see that specialist mortgages, which you defined by yield, it's not a great definition. We have a bit of work to do there, but the trend is right. That is we are doing a much greater proportion of our overall mortgage lending in the specialist space.
In the bottom left, you see loan interest income divided by lending RWAs. We have been much more efficient about wringing out every pound of earnings from every pound of RWA than we were historically. To increase that from the second quarter of 2020, so in 18 months to add 200 basis points into loan interest income divided by lending RWAs is yeoman's effort. You'll see the blended mortgage yield. We put that on there for a couple of reasons. One, we didn't chase mortgage yields down in the second half of 2021. We did not feel the need for volume. We were very disciplined about our pricing. Overall, we're really pleased with how both businesses are performing. Now, this next slide, I will tell you that it hurts your head a little bit.
Let me walk you through left to right what it is. On the left, it's a bit like the lending yield divided by our RWAs, but now it has a capital lens on it, where we take that x 20.5 to give you a capital. I said when I re-arrived, we would focus on risk-adjusted returns on regulatory capital. I said that would become nomenclature inside the organization. It would drive our conversations about how we prioritize what assets we focused on, and we would drive the organization forward accordingly. That has absolutely occurred. The graph on the left gives you that indication. Now, I accept the numerator isn't risk adjusted. Fine. It is still indicatively true that it is the return divided by regulatory capital.
You can see that in the second quarter of 2020, we were at sort of 19%. For almost all of 2019, we were low 20s to high teens. We're now running 35%. For almost all of 2021, we were in the 30s. If you wanna know how we grew NIM or how we grew NII or how we grew revenue, that's how we did it. That you would say, "Well, geez, you would think you'd be closer to breakeven if you're driving and generating those kind of returns." You're right. The middle column shows you the headwinds. Our treasury book, which again is bigger than it has been because of the mortgage sale, we have almost GBP 9 billion in treasury between cash and investments, has really struggled to provide the returns it was providing pre the pandemic.
As you would expect, the rate reductions affect our returns on the treasury book. You will see towards the tail end of 2021, the yield curve started to steepen and we started to generate a bit more return, which has turned out to be great. The other headwind is loan-to-deposit ratio. We are a capitally constrained bank. We know that. We're mature enough to deal with it, and we're generating as much return as we can out of the lending assets we have. As we begin to free up capital, be it through IRB accreditation, organic capital generation, or access to capital markets, this bank has a huge growth potential because we can continue to stretch loan-to-deposit ratio to align better with our peers and drive significant ROE for our shareholders. Now, for those of you who find the math hard, I can suggest a couple things.
If you go to footnote two in the interim financials, you will see the lending income. You will also see the treasury income in note two. You will see lending income year-on-year is down about GBP 15 million. That lending income is down year-on-year by about GBP 15 million after the GBP 60 million drop caused by the mortgage sale. We have recovered GBP 45 million of the GBP 60 million of lending income in a year. If you go to page 50 of the interim results, and you go to the bottom of page 50, you are going to see the RWA table. If you look at RWAs related to credit, they dropped by GBP 550 million in the year.
We have grown lending income by GBP 45 million in the year, almost closing the full gap from the mortgage sale, and we've reduced credit RWAs by GBP 550 million in the year. If you need the example of what we're talking about risk-adjusted return on regulatory capital, it's in those two numbers. if you also look at note two, you'll see the earnings from the treasury, either cash or the investment portfolio. You'll notice they're down about GBP 5 million year-on-year. That GBP 5 million drop is after putting GBP 3 billion more into the treasury portfolio. As rates come off the bottom and we can unleash the treasury portfolio to generate more earnings because we're asset sensitive, that headwind turns into a tailwind, which is truly helpful in terms of getting to breakeven. Year-on-year profitability.
This slide's in here to humor me a bit, if I'm honest. I was very worried that analysts would write, "Well, you lost GBP 272 million in 2020. You lost GBP 171 million in 2021. Oh, you reduced ECL by GBP 104 million. Oh, it's just ECL." And the whole momentum story would be lost. No, actually, that's not the way it worked because you need to take the GBP 272 million, adjust for the mortgage sale, which is GBP 57 million quid. You need to then get the costs and reduce the GBP 65 million pounds of cost increase, really RateSetter, as well as some change in the bank spend. Then you realize we grew NII GBP 106 million in the year. We're a tiny little bank.
To grow NII GBP 106 million a year is really hard yards. Fees grew by GBP 15 million in the year. It's GBP 121 million of elbow grease we put in to transforming the P&L during the year. I think we get into this opportunity for growth slide. The reality is, as we start at the GBP 171 million, if you use the exit rate NIM, the fourth quarter NIM which is 156 basis points, and you project it out, we begin to close that gap a little bit. The things on the right, we didn't want to be overly specific, but rate rises are gonna happen. We know we'll continue to shift the asset mix. We've already had GBP 102 million of unsecured lending in the month of January alone.
We will see continued fee growth because we think activity will bounce back. We've told you that costs are going to go down year- on- year. We told you exceptionals are going to drop meaningfully. At the end of the day, I think you can start to see a path. Again, the last bullet point I want to spend a minute on because I think it's gotten lost in the story. This isn't about getting to breakeven. This is about getting the growth engine that was Metro Bank firing on all cylinders again. What we've successfully started to do, and I think by the middle of this year, we'll have, for all intents and purposes, accomplished when we launch the SME products and the auto lending products.
We will have hooked a very good asset generating engine, be it specialist mortgages, unsecured lending, auto, credit cards, you know, small business lending, onto a really good liability generating engine. We will have created a balanced institution that will continue to grow significantly beyond breakeven and be able to get to really good returns for our shareholders. In addition, we're not in a lot of markets. We're not in Newcastle, we're not in York, we're not in Leeds. We're in Bradford, but not Leeds. There's a lot of places we're not. We don't have good coverage in the Midlands. We're not in Norfolk in any meaningful way. There is a lot for us to do to continue to drive the Metro story into communities that deserve the service quality that we deliver.
This is a growth story that's kind of gotten lost for the last couple of years, and I think you can now see that the growth is both on the asset side and the liability side, which is transformational for the organization. You're gonna have to drive because this has stopped again. I think that the next slide. I think all of that, all of this to get to this point has been accomplished by our colleagues. We shouldn't kid ourselves. This has been a hard two years between the pandemic, the amount of change we've asked Metro to go through to transforming the balance sheet. All of that has asked a lot of our colleagues. They're a great group. They're wonderfully diverse. They look like the communities we operate in. They are phenomenal at looking after customers and creating fans.
Those in Amazing Central do everything they can to support the frontline staff in the stores and add to try to make sure we're doing everything we can to grow fans. If you think about Metro, we stayed open seven days a week in almost all our stores throughout the whole pandemic. We were open more hours than any other bank during the pandemic. We've educated almost a quarter of a million children since inception in our Money Zones. The thing that makes Metro special is our localness. We are connected to the communities in which we operate. One of the ways we do that, we have 120 local business managers scattered across our store estate to help the local community be successful. They're to help small businesses grow and prosper so the communities in which we operate in can do better.
Then we put some quotes in from fans because we thought it was appropriate and gives you an indication of the advocacy we create. We get into outlook. We are not providing medium-term outlook. We think it's premature given the uncertainty in the macro environment. You've got inflationary pressures. Are they transitory, not transitory? Let's take a little bit of a look at where we are in terms of the momentum building in the business. If you look at the second half versus the first half, NIMs up 23 basis points. We've seen a 17% increase in fees in the second half of the year versus the first half of the year.
We've reduced costs in the second half of the year, and we've seen a 44% improvement in the underlying loss before tax H2 over H1. That's pretty good going in a half. If you take a look at the Q4 averages of momentum going into 2022, there is. Our cost of deposits for the year were 24. We're down to 15 basis points. Lending yields up to 3.19 and NIMs up to 1.56. We think you'll see higher loan growth in 2022 than you saw in 2021. Although again, we're going to be very disciplined about risk-adjusted returns on regulatory capital, and that'll always influence how much loan growth you see. I think you've seen the strong exit NIM.
I would say there is some momentum in that number, but it'll be a bit offset by cost of deposits potentially. There is some momentum in that number. Fees will be influenced by the pace of recovery, but it looks like the pace of the recovery will be reasonably strong, which should mean there'll be a bit of fee growth. Costs, we've been pretty clear that we're guiding to a reduction in operating costs year-on- year. Exceptionals, we think, will be less than 20% of what they've been running. Capital, you know, we're comfortable operating within buffers, and we'll do what we need to do if we think we need to do it. I'm gonna close here, but I want to be really clear about the momentum in the business. 2021 was meaningfully better than 2020.
The second half of 2021 was meaningfully better than the first half of 2021. The fourth quarter of 2021 was meaningfully better than the prior three-quarters of 2021. We have real momentum in the business that is now coming through in the NIM, in the P&L, and is embedded in the balance sheet. Thank you. I'm happy to take your questions now.
Our first question comes from the line of Ben Toms from RBC. Please go ahead. Your line is now open.
Good morning, and thank you for taking my questions.
Morning, Ben.
Morning. First one is on capital, really. The MREL ratio capital fell half a point. Although you note that both you and the regulator are comfortable operating in your buffers. Although clearly it's not what you want, can we extend the assertion to mean that everybody is comfortable with your MREL ratio ultimately going as low as the lower regulatory bound of 18%? The second question, you've continued to grow your unsecured lending book really well. Slide 10, I think, shows the positive momentum here, particularly at the beginning of this year, as you noted. What's a particular driver of the strong originations in January, and should we expect the trajectory to continue upwards in 2022, or do you think it will now start to tail off a bit?
Lastly, just around your guidance in the balance sheet, you say that you expect growth higher in 2022 versus 2021. When we just think about the base growth of 2021 as a reference point, should we be stripping out the RateSetter transaction, or do you expect growth in 2022 will be higher than 21 even when reference growth rate includes RateSetter? Thank you.
You know where we spend. Three really good questions. I'm gonna do them in reverse order, if that's okay. I think balance sheet growth, we need even with the rates that are acquired portfolio in there. We think, listen, we made a conscious decision to continue to exit some mortgages during 2021 that came up and rolled off, and we didn't work very hard to retain them because they didn't provide the risk-adjusted return on regulatory capital that was attractive to some other asset classes we had. We also had continued to shrink our transactional commercial real estate book.
Those things will continue a bit in 2022, but we think they'll be offset by further growth in our specialist mortgage business and further stretching of our legs in unsecured lending, as well as a bit of auto and a bit of SME lending. I think you can expect some balance sheet growth. In terms of unsecured lending, the GBP 102 million in January. You know, we have worked really hard to get to a point where we could do real-time quotes, and I think it's been transformational. Instead of getting indicative pricing, well, you now get real-time quotes from RateSetter, which is one of a handful of institutions that does that. They work really hard with their scorecards and all their vendors to try to make that work.
Operationally, we are slicker about doing unsecured personal lending. We're also doing a bit more through the stores, a bit more through the direct channels, RateSetter through its website, doing a fair amount more. We actually think the unsecured lending market's bouncing back a bit, and we expect that to continue through 2022. You know, we think we're one of the top couple, three players on the aggregator sites for unsecured personal lending, and we anticipate that continuing through 2022. We think there's reasonable growth. Do I think it's GBP 100 million a month? I don't actually. I think January was an exceptional month, but you can take a look at where the balance of the unsecured personal lending is. It tends to be an 18-20-month product.
You can pick a number of unsecured personal lending originations for a month and realize that the balances of our unsecured personal lending will be meaningfully higher at the end of 2022 than they were at the start. Then lastly, MREL. All we're guiding is that we are happy to operate within buffers, and we won't breach regulatory minima. Our MREL regulatory minima from memory is I think 18.2, and that's the regulatory minima that we will not breach. Above that, everything else is buffers.
Thank you for that.
Our next question comes from the line of Grace Dargan from Barclays. Please go ahead. Your line is now open.
Hi. Morning. Thank you for taking my question.
Morning, Grace.
Maybe if I could ask one on capital as well, and then one on costs. On capital, I guess near term, noting you've got the roughly 100 basis points of headwinds kind of this year. What are the avenues to support your capital throughout 2022, given you may still be loss-making this year, albeit noting the momentum in the business? Secondly, on costs on your guidance, what kind of inflation assumptions are you including in that? Wage growth assumptions and any color around that would be helpful. Thank you.
Sure. Happy to. Yeah. Listen, Grace, great questions again. Listen, in terms of supporting capital, I think we've been pretty clear that we have multiple different actions available to us, and if we choose to take them, we can. But at this point, we're not planning to take any actions. I think the key to this organization is getting it to break even. I think you've seen the momentum in the business and that momentum, I think creates a clear path that can be modeled to break even, and that's the single most important thing for Metro Bank to achieve. In terms of cost, I provided this to a reporter this morning, so I feel like I should just provide it. I think I'm gonna get into trouble for it.
The reality is we had initially budgeted for 2022 salary increases for colleagues of about 2.5%. We ended up approving and have rolled out and will be announcing over the next week or so to our colleagues a pay round that's closer to 5% overall. That creates a bit of budget headwind, you know, probably about GBP 8 million-GBP 10 million for the organization. Even with that headwind, we are still guiding that operating expenses will be down year-on-year marginally.
Perfect. Thank you.
Our next question comes from the line of Sheel Shah from JP Morgan. Please go ahead. Your line is now open.
Hi. Can you hear me?
Yeah, we can.
Yeah.
Morning.
Morning. Could you give a sense of the moving parts for NIM over 2022? I've noticed that you've used a 60% pass-through assumption for the deposits. Could that be higher given around 50% of the deposit base is to SMEs and corporates? What are you assuming on mortgage margins through the year?
Give me two seconds, and then I'll come back to you. If you go to the NIM slide, which is slide six, and apologies, I have to put on glasses. I am old enough to need reading glasses. If you take a look at the NIM slide on left-hand side of slide six. A lot of the NIM accretion getting us from 97 basis points to even the 151 basis points, a chunk of that was cost of deposits, right? We had 24 basis point increase related to cost of deposits.
It's likely while there'll be some annualized effect on cost of deposits because again, fixed term deposits exited throughout the year. I think you shouldn't model in as, you know, as much benefit from cost of deposits because it can't really get much lower than it is. Yeah. I think the lending mix and the lending yield, I think will continue to create benefit as we roll into 2022, as will the investment yield. I think those are the moving parts for NIM. In terms of the asset sensitivity, if you go to slide nine. Sorry, let me flip through. If you go to slide nine, in terms of the asset sensitivity, the 60% beta for the first 40 basis points of rate rise that we've already seen, we've had a beta significantly below the 60%.
You are right, over time, I'm not sure what the beta will be. We haven't really come off of zero before, in the country, so for a long time. Coming off of zero rates, we continue to stay plugged into the market. We continue to review what competitors are doing, and we continue to reassess. At least for the first 40 basis points, we've been below the 60% pass-through rate or beta if you're from America. The reality is our deposit mix being mainly non-interest-bearing liabilities gives us a bit more flexibility than somebody who's funding the balance sheet with fixed term deposits. We're pretty confident that there is earnings in rising rates.
Thanks.
Our next question comes from the line of Chris Cant from Autonomous. Please go ahead. Your line is now open.
Good morning. Thank you for taking my questions. I had a few-
Good morning, Chris.
Um.
Yeah, sure.
On mortgages, obviously you focused on specialist mortgages. I think a lot, not all, but I think a lot of what you were doing in 2021 was higher LTV business, within that kind of specialist envelope, and I guess some buy-to-let in there too. If I think about what's been happening with pricing in the market, higher LTV and buy-to-let pricing for the market overall has been really compressed quite dramatically in recent months. I think that the spread pickup you're getting for the industry overall for high LTV business right now is the lowest it's been since before the financial crisis. What spreads do you think you are actually gonna be able to develop going forward on specialist lending?
I know earlier in the year you were talking about, you know, getting a 100 basis point spread pickup versus peers, or sort of vanilla business, I suppose. What spreads are you actually seeing on applications at the moment on a blended basis? Because I can't imagine you're seeing, you know, that higher level. If you are-
So-
Do you think you're competitive in that space?
Yeah. Can I ask another question, Chris? What would you think would be? Can I turn it on its head a little bit? What would you expect us to be seeing given the competitive pressure for acquisition yield?
If I think about what some of your larger peers are saying, NatWest recently said at the end of the fourth quarter their blended application spreads were down to 70 basis points. I would guess that the 100 pip spread pickup that you would have been talking about earlier this year would have come down a bit, given what we've seen in terms of higher LTV and buy-to-let pricing relative to vanilla resi business. I guess less than 100 pips above that. I honestly don't know because your pricing is quite standoffish at the moment, when I look at the rates on your website. As you say, you've been willing to kind of not grow mortgages.
Yeah.
I'm just curious as to what you actually see as a-
Yeah, fine. Sure.
An application spread relative to that 70 that some of your large peers are talking about. Where are NatWest application spreads at the moment?
Yeah. Yeah, sure. Why don't we do that first, and then we can go through the rest of your questions, okay? We'll do them because I think it's a good one. I think if you go to slide 10, you'll see last year where first half and second half, and we did the majority of our volume specialist mortgage in the first half of the year, not the second half of the year. You know, 2.7, 2.9, the blend is, I don't know, upper 2.8s probably for the year. Yeah? Maybe even in the low 2.9s.
That's the spread base rate, right? Is this?
No, that's the overall yield.
What-
That's the overall yield.
Okay.
That's just the overall yield. That's the gross yield, Chris. Yeah?
Okay.
We can argue about what you want to use to take off of that. I'm just gonna give you overall yield, yeah? Because, you know, is it the swap rate? Do you know what I mean? I don't want to get into. Yeah. Because we could argue about what we're actually doing spread over. I'm gonna give you gross yield. Okay? I think so far, and again, I'm providing some 2022 numbers, but I'm gonna do it because I think it's indicative. We have seen a meaningful uptick in application volume in the last three or four weeks. We're almost running at application volumes that look like the first half of 2021. Pretty strong for those who remember because, you know, at that point you had all the stamp duty stuff and everything else.
Pretty strong application volumes. We are within 30 or 40 basis points of the 2.8-ish kind of a number you see there. Upper 240s to mid 250s in terms of gross yield, which I think provides a pretty good risk-adjusted return on regulatory capital, yeah?
If I think about that versus, you know, where swap rates are today, and I don't know where you write the majority of your business. You know, your larger peers-
Yeah.
Writing kind of a 50-50 split of two and five-year fixes. If I think about where the five-year rate is right now, you're talking about a spread over five-year business there of maybe 140 versus the sort of 70 that NatWest would be talking about. Is that the sort of level we should be thinking about?
Yeah. Although I would say for our five-year business, we're charging more. That's a blended yield. Yeah. I would think on our five-year business it would be closer to 2.9% or 3%. Yeah.
Okay. Okay.
I think we're there or thereabouts, Chris. I mean, I don't have a sense that we're. I think, you know, we did a lot of specialist volume last year. We would be in line with some of the asset-only generators that are currently in market. You know, the reality is we run a really good specialist business with a great team who are very well connected in the market, and we still think we're generating really good returns out of that business. We continue to be nimble about introducing new products and being creative in that space. Listen, this is getting long winded, and I apologize because I know we need to. We got Barclays behind us. The reality is that we manually underwrite every mortgage decision.
Now, we were doing that when we were doing prime resi. Why we're doing, I don't know. The reality is we have a group of people who allow us to do creative things in a pretty risk-averse kind of a way. We're really happy with that business. Yeah.
If I could ask then about capital, and I'm just as you said, there's another call coming up, so I'll limit myself to two. When you talk about operating within buffers, I appreciate you're now operating within your MDA buffers. Are you happy to go below your Tier 1 MDA? Because, you know, and I asked this question in the first half, and I guess things have moved on a bit now, so we now know that the countercyclical buffer in the U.K. is going up to 1% this year and likely going to 2% by mid-2023.
Yeah. We do.
Your MDA is gonna be 11.3 for Tier 1, and as of 1 January, you're at 11.5. That's pre-growth, pre further losses in 2022. Are you happy to run below your Tier 1 MDA at the bank?
Again, when we have conversations with the regulators, we acknowledge that we are going to be in buffers across the capital spectrum. Yeah.
Okay. The regulators, I mean, you know, generally dipping into the capital buffers. I appreciate MREL might be a little bit of a softer debate given that it's a, you know, emerging requirement over the last couple of years. When we think about going into capital buffers, let's say a CET1 or Tier 1 level, generally we'd expect the regulator to then start having some degree of intervention in certain aspects of the running of the business. Do you expect dipping into your regulatory capital buffers as opposed to MREL buffers, you know, going below the MDA on Tier 1? Do you expect there to be constraints on your ability to grow or to pay-
No.
no dividend or anything like that?
No. We've not had a single conversation that leads me to believe that there'll be constraints on the plan we've put in place for the business.
Okay. Right. Thank you.
Our next question comes from the line of John Cronin from Goodbody. Please go ahead. Your line is now open.
Thanks for the presentation, Dan. My question.
Morning, John.
Hi there. My questions have mostly been asked at this stage on capital. I guess, look, in terms of alternative capital actions remaining available to you, for the follow on, I guess, from Chris's question. Are you progressing any plans to sell loan portfolios at the current time, and would that be a preference rather than an outright capital raise if you needed to build up your capital base a bit more strongly as you continue-
Yeah.
to print the losses?
John, a great question and the question, right? You would expect, as a CEO of a bank that's operating within buffers, that we have lots of contingency plans and have lots of things that we could do if we need to. I would say that those contingency plans exist as you'd expect them to exist. It would be remiss of me not to do that. The reality is the single most important thing is to get this place to break even. I think we've shown a really clear path to break even today. I think it is now really beyond doubt that this place will get to break even. It's really hard to see how zero is still on the table.
You know, our debt capital markets friends and our fixed income investor friends need to figure out how to do math because at the end of the day, the yields and maturities on our MREL and our tier two stuff are deeply offending. I think we always have contingency plans as needed, and I really don't understand how our debt's priced. It's pretty frustrating to me, John, as you can tell. Of course, we would always have contingency plans.
Okay. I guess just one final one. Looking from press reports recently linking you to a potential acquisition or that linked you to a potential acquisition of Sainsbury's Bank in the past, any prospects of anything else in the pipeline in the near term?
John, I can't make any comment on that. If we have something to say, we'll come back and tell you. Yeah. We've always been clear that we're always looking at organic and inorganic. The reality is that we're really focused on getting the organic business back to break even. I think the results here demonstrate. I know there was noise about PE and there was noise about everything else. We stay completely focused on delivering results for our stakeholders, as you can see from these numbers. Yeah.
Sure. Look, just a quick final one, if I can, on IRB accreditation. Look, is there any more color you can give us? I mean, the application has been with the regulator for a number of years. I understand there's been a lot of dialogue between Metro Bank and the PRA on this. Is there anything more you can say around what other requirements need to be met before you would be in a position to potentially achieve accreditation and anything on timing associated with the kind of work that has to be done?
Yeah. Listen, I know my predecessor got drawn on timing, so I'm really adverse to providing any kind of insight on timing because I think that was a moment that really hasn't borne out to be true. What I can say as we continue to work closely with the PRA, we find them to be helpful in regards to working on the IRB application, as we find them to be helpful overall. We find them to be bright, intelligent and knowledgeable, and we continue to have those debates. We have rebuilt the credit team from the ground up since my arrival. We have a new Chief Credit Officer. We have a team that is really capable in the modeling space. We have very different conversations internally that would clearly clear any use test kind of requirements. Again, the work's ongoing.
We need to let it play out. I'm not gonna be drawn on timing because I just think that's a mudslide. Yeah.
All right. Thanks.
Our next question comes from the line of Sajan Shah from Morgan Stanley. Please go ahead. Your line is now open.
Thank you. Maybe a bit more on behalf of those fixed income investors you talked about. You have a story to sell now on the platform. You know, do you think that GBP 100 million-GBP 200 million capital raise is available for you know, if you wanted to go there and get that self-fulfilling boost towards, you know, organic capital generation? Obviously that will change, you know, material things on the fixed income side. Any color on that, especially from your, you know, your key shareholders and their backing? That's my first question.
Yeah. Listen, it's a fair question. We continue to have strong support from our key shareholders. I think they've demonstrated that support by being patient through this turnaround. I think we're now on the cusp of providing positive earnings, which I think will be well received by our shareholder base. I believe we continue to garner their support. Are we anticipating doing an equity raise? We're not really at this juncture. It doesn't mean we wouldn't consider it. I believe we have shareholder support if something interesting came along. I think as we sit here today, we're not.
I do not understand when I look at the peer group yields maturities and the growth that this organization's demonstrating and the clear path to profitability, why the fixed income guys are lagging behind? It's fine. We'll get it fixed over time. I don't need them right now. They're welcome to do the math over time.
Thank you. Obviously, you know, this platform seems like a, you know, a perfect model for the private equity world. Any color on why those negotiations didn't materialize? The third question, can you just give us some color on the duration of the Treasury portfolio?
Yeah. Listen, a couple of bits. I've known the Carlyle team for a long time, right? I mean, they were at Butterfield. I was hired and interviewed by the Carlyle team into Butterfield in 2010. That was the last bank investment that they did through the FIG fund. The FIG fund at Carlyle actually hasn't raised money separately. They now invest as part of the overall European Fund or the U.S. Buyout Fund. It just didn't really work. We couldn't get to a price that we thought was fair and reasonable for all parties included. You know, it's gonna happen, right? I wish it wouldn't have leaked. I wish it wouldn't have leaked, 'cause it leaked very early.
I would have preferred not to talk about it and just have it happen behind the scenes. Listen, you know, they're allowed to come in. I think at the moment for the board, given the financial performance of the organization and the path forward from here, the board is left in a difficult spot for what actual value of this organization is. It just didn't work. Yeah? Yeah, I don't have much more to say about the PE stuff.
That's fine. Just on the treasury portfolio duration, can you just give us some color on that?
Treasury portfolio duration, I don't have at hand. I think my guess is we sit on a bunch of cash. If you exclude the cash, I think the overall Treasury portfolio duration for actually what's invested, which is a small piece of our liquidity, I think hovers around three years, somewhere between 2.8-3.1 years. Yeah.
Thank you.
That's from memory. Again, we'll get the IR team to come back to you and give you a better number. Yeah. It's directionally correct. Yeah.
Thank you. Our next question comes from the line of Perley Mong from KBW. Please go ahead. Your line is now open.
Hi. I'll try to be quick here because obviously, we're running out of time. Just a few quick one. The first one is on interest sensitivity. I've noticed. Thank you for the disclosure on that. I've noticed that a lot of it is sort of tilted towards year two, but I think a lot of peers tend to see more of the impact coming through in first year. Just wondering why is it that the impact is a bit more delayed for you? That's one. Number two is on cost. Just, you know, definitely hearing your guidance on managing down the underlying cost.
I've noticed that run the bank cost is up 3% in the previous year, and obviously you've talked about some inflation expectations in the numbers as well. I'm just wondering how you're thinking about investment spend. Is that what is being cut down essentially to manage the cost target? Number three is just very quickly on management change. Obviously, David has announced a departure about a week ago. Sort of just any color on how do you think that might impact on the delivery of your strategy?
Yeah. Okay, let's go through that. Interest sensitivity, relatively straightforward. I haven't looked at the other bank's disclosures, but the other banks I've worked at, it tends to have a bit of a spike in year two. For us, there's just some asset repricing that takes us a bit of a lag, which is actually I think the question from Morgan Stanley before about the duration of our treasury book. We need a bit of that to roll off, to be able to generate the earnings in the outer years. Nothing interesting or overly complicated. We just have some repricing that kicks in. Again, we are doing, which was Chris's question originally in the market, is doing a lot of fixed rate mortgage lending. Again, the mortgage lending needs to roll through.
We need to do new originations for some of that to take a bite. In terms of cost, I think if you go to the cost slide, on slide seven, you'll see in H2 we came down to GBP 51 million from GBP 60 million. I think you will see in 2022 that we will spend less than twice that GBP 51 million. You'll see a continued reduction, and that's driven by a couple things. One, we've done a ton of heavy lifting. We're pretty much through the majority of which I think I said when I stood up in February 2020, the first two years would be the majority of the change spend, and we've done exactly that. But you'll see it ramp down. There's also so much change the organization can absorb.
At some point, you need the organization to breathe a little bit to bed in a lot of the change we've enacted. You are right. Overall, OPEX will be reducing. A chunk of that will come from the change spend. Lastly, regards to David. You know, I really rate David. I think David's good at his job and was a good friend and remains a good friend. I think the board was supportive of David. David's departure had nothing to do with change in strategy. David's departure had nothing to do with a falling out over the financials or some big disagreement. It was unrelated to sort of the strategy as it sits today. I will miss David's guidance, but at the end of the day, the strategy was put in place, and will remain the strategy going forward.
That makes sense. Thank you very much.
Thank you. Our final question comes from the line of Daniel Crowe from Goldman Sachs. Please go ahead. Your line is now open.
Hi there. Good morning, and thanks for taking the question.
Good morning.
I just want to come back around on capital and MREL again. So I know you say you're happy just operating within your buffers. Does that mean you have no intention to issue or attempt to issue MREL this year because you're already GBP 70 million short as of first of January? Then back to Chris's question, just on the Tier 1. I know you're saying you want to grow, but you're capital constrained at the moment. And by end of year, you know, the buffer just on current numbers will be very slim to your Tier 1. You mentioned that you want to work within the buffers. Just, can you give more guidance about what is your kind of capital planning to allow you to grow into the stuff that will provide you the additional earnings that you need?
Again, I think you know a couple of bits. Again, we look at all different optionality around capital and I think John Cronin's right to raise. Are you thinking about small asset sales? What do you do? What does that look like? Again, one of the contingencies we have is whether we want to issue some MREL and how we would do that and what that looks like. All of that's in play. Do I think it's a 2022 issue? I don't know that it is. Maybe tail end, maybe sometime in 2023. We are very comfortable with the capital plans we have in the budget for 2022 that has growth in it. The regulators see those and understand how we operate within buffers during that period.
Again, I don't have much more to say than that. It seems to be causing consternation, and I don't quite understand it because from an overall sufficiency perspective, we have more capital than we could ever need, and we continue to make sure the regulator is aware of everything we're doing. Now, what I would say is we do need to execute. We earn the respect and the right of time from our regulator by continuing to move the organization forward. We will continue to move the organization forward throughout 2022 and continue on the path to profitability. I think that path isn't all that long. At the end of the day, the bleed of capital starts to ameliorate, at which point the whole conversation shifts. Yeah?
Yeah. I guess just the last time there was a breach of MREL, you effectively, you issued a 9.5% coupon MREL, which, you know, was terrible for your-
Actually, let's be clear. We weren't in breach of MREL then. That was an emerging requirement that we needed to be in compliance with by a certain time. We didn't approach the regulator at the time to ask for an extension or do anything else. We literally just chose to issue at 9.5%. Slightly different situation, yeah?
Yeah.
It transferred a lot of the economics from the business from our equity holders to the bond holders on that 9.5% piece of paper, yeah? You know, I don't know, Daniel. I mean, again, we can do math here. We get it. We'll consider our options accordingly.
Okay. Thanks very much.
Thank you. At this stage, there are no further questions. I will hand back to Daniel for any final remarks.
No, I just wanna thank everybody for their time today. I know the presentation bumped up against Barclays. Again, I think there's real momentum in the business, and that momentum creates a clear path back to profitability. I appreciate all your support, and I look forward to talking to you all individually over the coming months. Thank you so much.