Company Announcements
Annual Financial Report
Related Companies
By LSE RNS
METRO BANK PLC (the "Company")
Publication of Annual Report and Notice of Meeting
Legal Entity Identifier: 213800X5WU57YL9GPK89
23 April 2019: Following the release on 26 February 2019 of the Company's preliminary results for the financial year ended 31 December 2018 (the "Preliminary Announcement"), the Company is pleased to announce that it has today published its Annual Report and financial statements for the financial year ended 31 December 2018 (the "2018 Annual Report and Accounts") and 2019 Notice of Annual General Meeting.
The Annual General Meeting of Metro Bank PLC will be held at One Southampton Row, London WC1B 5HA on Tuesday 21 May 2019 at 1.30pm (BST).
The following documents are available to view in the Investor Relations section of the Company's website at www.metrobankonline.co.uk:
· 2018 Annual Report and Accounts
· Notice of Annual General Meeting to be held on 21 May 2019.
Hard copies have been mailed to shareholders who have elected to receive them. Copies of the above documents have also been submitted to the National Storage Mechanism and will shortly be available for inspection at http://www.morningstar.co.uk/uk/NSM.
The Appendix to this announcement contains the following additional information for the purposes of compliance with DTR 6.3.5 only:
· a description of the principal risks and uncertainties relating to the Company;
· indication of important events during the year;
· a note on related party transactions; and
· the directors' responsibilities statement.
The Preliminary Announcement included a set of condensed financial statements. Together these constitute the material required by DTR 6.3.5 to be communicated to the media in unedited full text through a Regulatory Information Service.
This announcement should be read in conjunction with, and is not a substitute for reading, the full 2018 Annual Report and Accounts.
Enquiries
Metro Bank PLC
David Arden
Company Secretary 07814 583 731
APPENDIX
References to page numbers and notes to the accounts made in the Appendix refer to page numbers and notes to the accounts in the 2018 Annual Report and Accounts.
PRINCIPAL RISKS AND UNCERTAINTIES
The principal risks and uncertainties relating to the Company are set out on pages 31-40 of the 2018 Annual Report and Accounts. The following is extracted in full and unedited text from the 2018 Annual Report and Accounts:
Our principal risks represent defined groupings that we use to help consistently identify, assess, manage, monitor and report risks. Using consistent risk categories enables risks to be aggregated to determine their overall impact to the organisation. The principal risks are designed to be both comprehensive and mutually exclusive.
Our principal risks are detailed below. In addition to the eight risks listed we also have ninth principal risk in the form of strategic risk. Strategic risk is a manifestation of material instances, or a combination of the other eight principal risks.
As such strategic risk is assessed in line with those principal risks.
1. Credit risk
Definition
Credit risk is the risk of financial loss due to a borrowers failure to meet the terms of any contract or otherwise fail to perform as agreed.
For more information on our strategy please see pages 10 to 11
Change since 2017: No change
Link to strategy: Low-risk diversified lending
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Appetite and mitigation |
Measurement and monitoring |
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Appetite The credit risk appetite and policy is owned and approved by the Board annually. Portfolio-level policies and credit risk appetite are recommended by the Executive to the Board via the Credit Risk, Policy and Appetite Committee ('CRPAC') and the Risk Oversight Committee ('ROC'). The credit risk appetite is specified as a set of key performance indicators ('KPIs'), concentration measures, capital and impairment components. Policy and appetite are based on sound credit risk principles.
Lending and collateral Our foremost exposure to credit risk is through the loans and advances we make to our customers. We primarily mitigate credit risk through holding collateral against our residential mortgage and commercial term loan portfolios. Collateral is usually held in the form of real estate, guarantees and other liens that we can call upon in the event of the borrower defaulting. All real estate assets taken as security are supported by an external valuation with a first fixed charge registered at the land registry. At 31 December 2018 94% of our loans consisted of retail mortgages and commercial term loans secured on collateral with average debt-to-value of 61% (2017: 60%) and 59% (2017: 58%) respectively.
Our exposure to loans of greater than 100% remains low at less than 1% of retail mortgage lending (31 December 2017: 1%) and 11% of commercial term lending (31 December 2017: 12%). On the retail mortgage lending portfolio, these loans have principally been part of portfolios we have acquired. On the commercial term lending, additionally forms of collateral (such as debentures, unsupported guarantees providing recourse to our customers) are excluded from these debt-to-value ('DTV') figures, so the true credit risk exposure on these loans is lower and is underwritten on the strength of all types of collateral. The approval for consumer lending and retail mortgages is automated and underpinned by scorecard and policy rules. The end-to-end process is overseen by our colleagues in the first line and approved in accordance with agreed delegated lending authorities.
Undrawn commitments We have additional limited credit exposure to committed and undrawn amounts, such as unused overdraft limits and facilities. At 31 December 2018 we had £242 million (31 December 2017: £138 million) of undrawn credit card and overdraft facilities. We mitigate credit risk in respect of these undrawn balances by regular customer monitoring to allow undrawn limits to be removed if we observe credit quality deterioration.
Interest-only lending We have exposure to refinance risk. This is the risk from loans to customers who are subject to a bullet or balloon payment at contractual maturity but who find themselves unable to refinance or otherwise make this payment.This risk arises principally in the mortgage book where the exposure to interest-only loans stands at £4.4 billion. There is further exposure to refinance risk in the Commercial Book of £1.6 billion from interest-only loans and a portion of non-fully amortising term loans. We manage this risk by ensuring the borrower has an appropriate repayment plan in place or would be able to refinance the lending at the end of the term. Also by ensuring these loans are appropriately collateralised (see lending and collateral section above) we would have first charge in the event of default by the borrower.
Geographical and sector exposure We manage the level of credit risk concentration based on individual borrowing entities, deal type and sector. We have specialist sector lending teams including in healthcare, hospitality, property and not for profit. We also manage our lending exposure by region. Our current residential mortgage and commercial term lending is concentrated within London and the South East, which is representative of our current customer base and store footprint. As we expand our footprint over time we envisage our geographical exposure of lending will change. All of our current loans exposures are secured on UK based collateral.
Investment securities As well as our loans and advances, the other main area where we are exposed to credit risk is within our Treasury portfolio. At 31 December 2018 we held £4.1 billion of investment securities which are used for balance sheet and liquidity management purposes, of which £3.4 billion is eligible as collateral at the Bank of England, We have a robust securities trading and investment policy which requires us to invest in high-quality liquid debt instruments. At the 31 December 2018 81% of our investment securities were rated as AAA (31 December 2017: 79%) with a further 15% (31 December 2017: 13%) rated AA- or higher with minimal use of derivatives for hedging purposes. Additionally we hold £2.5 billion (31 December 2017: £2.2 billion) in cash balances, which is either held by ourselves or at the Bank of England, where there is minimal credit exposure. Understand more about our credit risk exposure on pages 136 to 149
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Measurement We measure credit quality for impairment purposes using a suite of IFRS 9 models. We have a strong suite of credit risk models and have invested heavily in credit risk model development in support of enhancing our IFRS 9 calculation, stress testing capability and IRB programme. Our IFRS 9 models incorporate the impact of a range of possible future economic scenarios we have placed a higher probability on our Downside scenario (a worsening economic outcome), largely to reflect a greater likelihood of a worse outcome for the UK economy due to exiting the European Union. The models used are subject to the internal model governance, are validated by an independent team, regularly monitored and annually reviewed. Key Performance Indicators ('KPIs') are defined, reported against and escalated through to the Risk Oversight Committee. KPIs on portfolio concentrations are included in the monitoring reviewed by the Executive and Board Committee as part of our risk appetite. We monitor lending policy exceptions and their subsequent performance. Our stress testing capability has been enhanced significantly over the last 12 months in order to account for the introduction of the IFRS 9 models. Credit risk quality assurance reviews are performed regularly and cover portfolios and sector exposure. The reviews cover top exposures, portfolio trends, concentration and key risk areas. As of 31 December 2018 all exposures are measured under the standardised approach for credit risk for regulatory capital, we are parallel running the IRB rating system for residential mortgages and a slotting solution for commercial real estate will be implemented during 2019.
Monitoring Credit risk is overseen by the Chief Risk Office ('CRO'), Credit Risk, Policy and Appetite Committee ('CRPAC') and the Risk Oversight Committee ('ROC').Three functions support the management of credit risk and report to the CRO:
• Our Commercial Credit Underwriting team supports the creation of commercial credit policies, ensures the business has suitable credit assessment tools and procedures and provides an independent review of individual commercial credit proposals and renewals.
• Our Credit Risk and Analytics team develops credit risk policies in accordance with the risk appetite, develops appropriate frameworks to comply with regulatory and statutory requirements and works with other areas of the Bank to ensure credit risk control practices are effectively implemented throughout the Bank. It monitors aggregate exposures and reviews portfolio performance and concentrations, providing comprehensive reports to senior management and the ROC. It also develops and monitors models used for automatic credit decisioning, portfolio management and impairment, and develops stress test methodologies.
• Our Treasury Risk team supports the development and implementation of applicable policies and procedures and monitors the credit risk aspects of the Treasury portfolio.
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2. Operational risk
Definition
Operational risk is the risk of direct or indirect loss from failed or inadequate processes, people or systems, or exposure to external events.
Change since 2017: No change
Link to strategy: Unique culture
For more information on our strategy please see pages 10 to 11
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Appetite and mitigation
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Measurement and monitoring
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Appetite We aim to maintain robust operational systems and controls and seek a low level of operational risk. We have detailed policies, procedures and controls in place which are designed to evaluate, monitor and report these risks as well as, where appropriate, develop mitigation plans to minimise the impact of losses suffered in the normal course of business (expected losses) and to avoid or reduce the likelihood of suffering a large extreme (or unexpected) loss.
Investment in our systems and technology We continue to invest in the ongoing maintenance and development of our key controls, which combine system and process measures to mitigate risk or to minimise any impact on us or our customers. The pace of our growth has the potential to increase the execution risks associated with delivery of consistently AMAZEING service to our customers. Therefore, in 2018, we continued to invest heavily in our systems. This included ongoing development of our end-to-end technology infrastructure to provide a single customer view, enabling better customer service. Where possible, we have invested in fully or semi-automated controls to support us in managing within risk appetite, while freeing up colleagues to focus on our customers.
We continue to grow our omnichannel presence, offering customers a choice in how they interact with us to suit their needs. This increases our digital risk, in an environment where online and mobile technologies are changing the way banks interact with customers. To mitigate this risk we are investing even more in our digital platforms to build resilient and secure technologies. The current era of evolving technology requires us to maintain a secure digital infrastructure. This is central to our vision of creating FANS, by protecting their data.
Culture and training As we continue our growth journey, we do so safely through continued investment in our colleagues and training so that we can continue to support them in delivering consistently AMAZEING service to our customers, whilst maintaining a safe, reliable and resilient banking operation.
Operational resilience Operational resilience has been a central part of our risk management activity throughout 2018. This includes assessing a number of top operational risks, including: business continuity; technology; cyber; information security; payments; and third-party suppliers and ensuring we continue to appropriately mitigate these.
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Measurement We measure operating risk using a number of quantitative and qualitative metrics. These KPIs are defined, reported against and escalated to the ROC.
Monitoring We continuously develop and embed our approach to the management of operational risks with the aim of maintaining robust operational processes, systems and controls. In 2018 we enhanced our risk and control framework through the further development of our tools and processes for identifying, assessing, managing, monitoring and reporting operational risks. Key developments included: operational (including IT) resilience; the deployment of new automated controls to mitigate the fraud risk experienced widely by the industry; operational disruption event response planning; and, enhanced operational risk scenario analysis, particularly as part of the our Internal Capital Adequacy Assessment Process ('ICAAP').
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3. Liquidity and funding risk
Definition
Liquidity risk is the risk that future financial obligations are not met or future asset growth cannot occur because of an inability to obtain funds at a reasonable price within a reasonable time.
Change since 2017: No change
Link to strategy: Diversified low-cost deposits
For more information on our strategy please see pages 10 to 11
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Appetite and mitigation |
Measurement and monitoring |
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Appetite The purpose of our liquidity policy is to ensure that we maintain liquidity resources which are sufficient, both as to amount and quality; to ensure that liabilities can be met as they fall due; and to ensure that we maintain a prudent funding profile, appropriately diversified within the context of a deposit-led bank. Our approach is to ensure that we can both meet payments as they fall due and support asset growth in line with plan, in both normal conditions and in the event of a liquidity stress, and that we can survive a severe liquidity stress event and continue as a going concern.
Deposit-funded approach Our mid-term guidance as set out on page 15 underlines our approach of having a long-term loan-to-deposit ratio of 85-90%. Our deposit-led approach means we do not have reliance on wholesale funding to enable our ongoing lending.
Our deposits are diverse and are generally low cost. This means they are less sensitive to competition within the deposit market, especially in a rising base rate environment. At 31 December 2018 53% of our deposit came from commercial customers (31 December 2017: 53%) with the remaining 47% (31 December: 47%) coming from retail customers. Additionally 30% of deposits at year end (31 December 2017: 32%) were in the form of current accounts, with the remainder split between a combination of instant access and fixed-term savings products. In 2018 our cost of deposits was 0.61% (2017: 0.54%) below the current Bank of England base rate of 0.75%.
Liquidity management We aim to hold a prudent level of liquidity to cover unexpected outflows, ensuring that we are able to meet financial commitments for an extended period. We recognise the potential difficulties in monetising certain assets, so set higher-quality targets for liquid assets for the earlier part of a stress period. We have assessed the level of liquidity necessary to cover both systemic and idiosyncratic risks and maintain an appropriate liquidity buffer at all times. Our Liquidity Coverage Ratio ('LCR ') ensures that we comply with our own risk appetite as well as regulatory requirements. Our liquidity portfolio consists of cash and balances at the Bank of England as well as high-quality liquid assets ('HQLAs') that are available to be sold to raise funding in the event of stress. We are conscious of the cost implications of holding high levels of liquid assets and seek to avoid holding a "buffer over a buffer".
Contingency planning The Contingency Funding Plan ('CFP') details a series of indicators which would tend to suggest a liquidity stress event may be in train. It assigns responsibilities and actions to key individuals, specifies time frames, and establishes the Contingency Funding Committee ('CFC') chaired by the CFO which sits as required in the event of a liquidity stress. Understand more about our liquidity risk exposure on pages 149 to 151 |
Measurement Our asset and liability management ('ALM') model is used to capture all positions across the Bank and evaluate their liquidity. We calculate our LCR and perform stress testing of our liquidity daily. Forward-looking short-range forecasts are produced at least monthly.
Early warning indicators ('EWIs') are set out in the Liquidity Policy. Colleagues monitor these and bump up any triggers. A cost of funds model is used help colleagues account for liquidity, capital and interest rate risk in pricing.
We perform an Internal Liquidity Adequacy Assessment Process ('ILAAP') every year for the identification, measurement, management and monitoring of liquidity, having due regard for the PRA Rulebook section 'Internal Liquidity Adequacy Assessment'. Treasury seeks ILAAP input from a range of teams including Finance and Products.
The conclusions of the ILAAP are reviewed and approved by the Board, assisting in: • identification of our material liquidity risks; • deciding the management of material liquidity risks; and • determining the Board's risk appetite.
For liquidity risk, we assess against internal and external requirements. The chief external requirement is the LCR, and a series of internal requirements are set and maintained through our ILAAP.
Monitoring Treasury risk has responsibility for our compliance with liquidity policy and strategy. The Regulatory Reporting team monitors compliance with LCR. The ALCO is responsible for liquidity and funding risk. Liquidity and funding cannot be considered in isolation, and we have regard to liquidity risk, profitability, and capital optimisation when considering funding sources. We issued subordinated debt for the first time in 2018, primarily as a capital management measure.
Our liquidity mismatch chart is in note 24 to the financial accounts.
Our liquidity position has remained stable over the year with our LCR remaining strong at 139% (2017: 141%).
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4. Market risk
Definition
Market risk is the risk that earnings or the economic value of equity will underperform due to changes in interest rates, foreign exchange rates, or other financial market asset prices. Our ability to manage market risks contributes to our overall capital management.
Change since 2017: Risk increased
Link to strategy: Low-risk diversified lending
For more information on our strategy please see pages 10 to 11
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Appetite and mitigation
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Measurement and monitoring
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Appetite As maturity transformation is one of the primary roles of a bank, we are exposed to interest rate risk by many of our activities. Our Market Risk Policy is set with a view to ensuring that our funding resources are invested in assets that satisfy our earnings risk and economic value risk appetites.
Interest rate risk We benefit from natural offsetting between certain assets and liabilities, which may be based on both contractual and behavioural characteristics of these positions. Where natural hedging is insufficient we hedge net interest rate risk exposures appropriately, including, where necessary, with the use of interest rate derivatives. We enter into derivatives only for hedging purposes and not as part of customer transactions or for speculative purposes.
Our Treasury and Treasury Risk teams work closely together and ensure that risks are managed appropriately - and that we're well positioned to avoid losses outside our appetite, in the event of unexpected market moves.
Foreign exchange exposure We have very limited exposure to foreign exchange risk. Foreign exchange assets and liabilities are matched off closely in each of the currencies we operate and less than 5% of our assets and liabilities are in currencies other than pounds sterling. We do not have any operations outside the United Kingdom. We offer currency accounts and foreign exchange facilities to facilitate customer requirements but do not perform speculative trading activities.
We have hedge accounting solutions in place to reduce the volatility in the income statement arising from these hedging activities.
Treasury management We are mindful of upcoming regulatory changes, such as ring-fencing, as we shape the investment portfolio in 2019 and beyond - and are working to reduce the proportion of our assets that are ineligible for a ring-fenced entity. As our loan to deposit ratio approaches its long-term target, natural roll-off of ineligible assets is expected to continue, and we will cease to acquire assets which a ring-fenced entity may not hold.
Understand more about our market risk exposure on pages 151 to 152
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Measurement We measure interest rate risk exposure using:
•economic value sensitivity: calculating repricing mismatches across our assets and liabilities and then evaluating the change in value arising from a change in the yield curve. Our risk appetite scenario is based on a parallel rate movement of 2% to all interest rates, but we evaluate based on a series of other parallel and non-parallel rate changes. The scenarios are designed to replicate severe but plausible economic events and to have regard to risks which would not be evident through the use of parallel shocks alone.
• interest income sensitivity: the impact on 12-month future income arising from various interest rate shifts. Our risk appetite scenarios are based on parallel rate movements of 2% and of divergences of up to 1.15% between Bank of England base rate and LIBOR against a constant balance sheet. We also evaluate a series of other parallel, non-parallel and non-instantaneous rate changes.
•interest rate gaps: calculating the net difference between total assets and total liabilities across a range of time buckets.
The frequency of calculating and reporting each measure varies from daily to quarterly appropriate to each risk type.
We use an integrated Asset and Liability Management ('ALM') system which consolidates all our positions and enables the measurement and management of interest rate repricing profiles for the entire Bank. The model takes into account behavioural assumptions as specified in our Market Risk Policy. Material assumptions can be updated more frequently at the request of business areas, in response to changing market conditions or customer behaviours.
We measure and monitor our exposures to foreign exchange risk daily and do not maintain net exposures overnight in any currency other than pounds, beyond de minimis amounts. Monitoring Interest rate risk measures have limits set against them through the Market Risk Policy, and these are monitored on a regular basis by the Treasury Risk team. Measures close to the limits are escalated to Treasury in order to enable prompt action, and limit excesses are escalated to the ALCO. A digest of interest rate risk measures and details of any excesses are presented monthly at the ALCO.
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5. Financial crime risk
Definition
Financial crime risk is the risk of financial loss or reputational damage due to regulatory fines or penalties, restriction or suspension of business, or cost of mandatory corrective action as a result of failing to comply with prevailing legal and regulatory requirements relating to financial crime (which we define to include internal or external fraud, anti-money laundering/counter terrorist financing, bribery and corruption and sanctions compliance).
Change since 2017: No change
Link to strategy: Diversified low-cost deposits
For more information on our strategy please see pages 10 to 11
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Appetite and mitigation
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Measurement and monitoring
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Appetite
The Risk team define our risk appetite and recommend this to the Board for approval. In order to monitor the effectiveness of our control framework and the alignment with our risk appetite, KPIs are defined, reported against and escalated to the ROC.
Investment in our systems and technology We invest in and refine our financial crime technology such as customer screening, payment profiling and customer authentication systems where we have evolved the effectiveness of these technology capabilities to reflect our risk appetite. We have also invested in enhancing our data analytics capabilities to further enhance our fraud prevention, detection and investigation controls.
In 2018 we saw fraudsters taking advantage of external operational disruption events impacting customers and financial institutions. We continue to invest in our operational resilience capabilities to ensure that we are proactively avoiding, responding, recovering and learning from internal and external operational incidents to minimise the impact on our customers.
Improving customer awareness We launched our "Be Your Own Hero" campaign designed to provide our customers with new fraud trends as well as hints and tips to enable them to protect themselves from becoming a victim of fraud.
We anticipate that in 2019 we will continue to see an increase in more sophisticated social engineering cases impacting our customers, with fraudsters adapting and very closely mimicking the Bank. This is making it harder for customers to identify targeted fraud attempts and protect against them even with targeted customer fraud awareness communications and campaigns. There is an interaction with our cyber security, data privacy and cyber risk awareness in this area.
Colleague training A key focus of 2018 was strengthening our dedicated financial crime specialist resource and equipping this resource and our colleagues across the Bank with specific training. We increased our headcount across both lines of defence and invested substantially in equipping a number of our colleagues with industry recognised financial crime qualifications. We rolled out further training and education to key colleagues in our stores.
Horizon scanning We actively conduct horizon scanning activity to identify emerging trends and typologies as well as to identify and prepare for new legislation and regulation. As required, we will update our control framework to ensure alignment with these risks.
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Measurement
The Financial Crime Risk team own our control framework with accountability for execution owned by our colleagues across the first line. The Risk team define our risk appetite and recommend this to the Board for approval. In order to monitor the effectiveness of our control framework and the alignment with our risk appetite, Key Performance Indicators are defined, reported against and escalated through to the Risk Oversight Committee. We report monthly on our Bank wide account opening pass rates, fraud volumes and associated operational losses through this process.
Monitoring Our policy framework also sets out key requirements which must be complied with consistently to manage our risk. We have risk-based audit and assurance plans to monitor the effectiveness of our controls. Dedicated and skilled resources are in place to complete these reviews with findings and recommendations tracked through our financial crime governance structure.
We maintain policies and minimum standards, aligned to our legal and regulatory obligations which also articulate our risk appetite.
Each year we complete a financial crime risk assessment to ensure that our financial crime control framework is commensurate and robust to manage our inherent business risks across each of the four areas.
We participate in external industry forums including being an active member of the Cyber Defence Alliance and liaise with government bodies such as the Home Office, HMRC, Financial Conduct Authority ('FCA') and law enforcement to support our identification of new and evolving risks.
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6. Regulatory risk
Definition
Regulatory risk is the risk of financial loss or reputational damage due to regulatory fines or penalties, restriction or suspension of business, or cost of mandatory corrective action as a result of failing to adhere to applicable laws, regulations and supervisory guidance.
Change since 2017: Risk increased
Link to strategy: Low-risk diversified lending
Diversified low-cost deposits
For more information on our strategy please see pages 10 to 11
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Appetite and mitigation |
Measurement and monitoring |
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Appetite We have no appetite for regulatory risk. We aim to comply with the relevant rules, regulations and sourcebooks. We have policies and procedures in place to ensure compliance with the regulatory obligations, and robust oversight and monitoring to evidence compliance. Alongside this we regularly engage with the PRA, the FCA, and other industry bodies to proactively manage this risk.
Avoidance Our mitigation strategy favours risk avoidance through ensuring compliance with our relevant rules and requirements. We seek to achieve this through the allocation of appropriate resources for regulatory compliance advisory and oversight activities. In instances which challenge our ability to comply or remain compliant with a particular rule, we seek to collaborate and engage early with our regulatory supervisors to reduce the risk to an acceptable level.
Our Board, ROC and Executive Leadership Team (via the Executive Risk Committee) continue to monitor and oversee our focus on maintaining regulatory compliance. This includes periodic reporting on regulatory themes, regulatory changes on the horizon and the regulatory environment, alongside supporting key risk measures and Board approved policies and standards.
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Measurement We have policies, procedures and standards in place to ensure compliance with our regulatory obligations. This is supported through our Enterprise Risk Management Framework by oversight and monitoring activity to evidence compliance.
As part of our ongoing supervision by the PRA, the PRA helped us identify potential inconsistencies in our regulatory reporting. Following this, we conducted an internal review of our risk-weighting of certain commercial loans, supported by one of the big four professional service firms. This work identified that some adjustments were required to our RWAs. On 26 February 2019, we received notification that the PRA and FCA is investigating the circumstances and events that led to the RWA adjustment. We are satisfied that the risk weightings have now been assigned properly. We are continuing to work on further enhancements to our systems and controls.
Monitoring As an industry we are increasing regulatory obligations including minimum requirements for own funds and eligible liabilities ('MREL'), IFRS 16, IFRS 9, the second Payment Services Directive ('PSD II'), Open Banking and General Data Protection Regulation ('GDPR'). The Board and Senior Management are focused on responding in a timely and effective way to these changes including ensuring we are appropriately resourced and have sufficient capability in these areas.
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7. Conduct risk
Definition
Conduct risk is the risk of treating customers unfairly, and delivering inappropriate outcomes that lead to customer detriment.
Change since 2017: No change
Link to strategy: Unique culture
For more information on our strategy please see pages 10 to 11
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Appetite and mitigation
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Measurement and monitoring
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Appetite We have no appetite for conduct risk. We provide customers with simple, fairly priced products delivered with unparalleled levels of service and convenience and we are committed to avoiding materially unfair outcomes for our customers.
Simple and transparent products Our simple, transparent product range and activities continue to help ensure that customer outcomes are fair. Our colleagues are fully trained in all relevant products and services and these are delivered to our customers through all channels, with openness and transparency. We believe in looking after our existing customers and will never offer teaser rates or better rates for new customers that aren't also available to our existing customers. Our products are reviewed regularly to ensure they continue to meet customer needs and operate as expected. We do not undertake any financial promotions or marketing and are committed to ensuring that our communications are clear, fair and not misleading. Sales incentives in stores neither exist nor are perceived by colleagues to exist.
Make every wrong right Our service-led business model and absence of legacy issues give us an inherent advantage. We are committed to doing the right thing for our customers and to making every wrong right.
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Measurement We measure and monitor conduct risk through product governance activity, compliance monitoring, analysis of expressions of dissatisfaction, root cause analysis and reporting through customer treatment fora. We also use our 'Voice of the Customer' surveys to inform continuous improvement activity. Key performance Indicators are also defined, reported against and escalated to the ROC.
Monitoring The simplicity of our offering drives a low level of reportable complaints, below the industry average. As well as monitoring the trends in the metrics outlined above we constantly analyse the root cause of complaints and any underlying trends, to identify opportunities to improve service provision while delivering consistently fair outcomes for customers.
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8. Model risk
Definition
Model risk is the potential for negative outcomes from random or systematic errors in model development, input, calculation or use of outputs. Models are always approximations and never perfect and there are therefore risks associated with using them. These risks range from their theoretical basis, the data and methods used in their construction, the economic conditions under which they are developed, and their use.
Change since 2017: New risk
Link to strategy: Diversified low-cost deposits
For more information on our strategy please see pages 10 to 11
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Appetite and mitigation |
Measurement and monitoring |
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Appetite There is a low appetite for model risk. This is defined as part of our overall risk appetite and is regularly monitored by the CRPAC and ROC. All models are evaluated on the basis of our model governance framework and detailed procedures and target operating models are in place to manage the risk.
Governance CRPAC is the designated committee for the management of model risk. The Model Governance Committee ('MGC') is the technical committee overseeing the model risk lifecycle. Any material model is presented to the CRPAC for approval ahead of implementation or model changes.
The CRPAC defines and approves the policies and procedures relevant to model risk and approves the model risk appetite on an annual basis. The MGC owns the minimum standards and target operating models to mitigate model risk and also defined roles and responsibilities, with clear ownership and accountability. The model governance function maintains a model inventory which records key features of models including ownership and review schedules. The model governance function also tracks model risk and actions.
Independent review An independent model validation function is part of the Enterprise Risk Function. This team is independent from the Model Development team and is responsible for reviewing the model development submissions and maintains a model validation action log to track model risk mitigation plans. Models are also subject to internal and external audit. |
Measurement A set of KPIs are regularly reported and discussed at the MGC, CRPAC, ROC and Board. On a monthly basis the CRPAC reviews any material validation actions and tracks their completion.
Monitoring A dedicated Model Monitoring team are responsible for assessing the ongoing performance of models against pre-specified tolerances approved by the CRPAC as part of the model monitoring standards.
Model monitoring is regularly performed and results are discussed at the MGC and CRPAC where actions are agreed and tracked for completion. |
SIGNIFICANT EVENTS
Further to the authority granted by shareholders at the 2018 AGM, on 25 July 2018 a further 8,851,304 new ordinary shares of an aggregate nominal value of £8.51 were issued at £34.22 per share. The issue followed the completion of a non pre-emptive cash placing of new ordinary shares, for gross consideration of £303 million. The new shares were admitted for trading on the London Stock Exchange on 27 July 2018.
During the year we also successfully completed a debt issuance which raised £250 million of Tier 2 capital and acquired a portfolio of seasoned UK mortgages for £523 million.
RELATED PARTY TRANSACTIONS
Key management personnel
Our key management personnel, and persons connected with them, are considered to be related parties for disclosure purposes. Key management personnel are defined as those persons having authority and responsibility for planning, directing and controlling the activities of the Group. The Directors and members of the Executive Leadership Team are considered to be the key management personnel for disclosure purposes.
Key management compensation
Total compensation cost for key management personnel for the year by category of benefit was as follows:
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Group |
2018 |
2017 |
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£'million |
£'million |
|
Short-term benefits |
6.0 |
4.8 |
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Share-based payment costs |
3.1 |
2.4 |
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Total compensation for key management personnel |
9.1 |
7.2 |
Short-term employee benefits include salary, medical insurance, bonuses and cash allowances paid to key management personnel. The share-based payment cost includes the IFRS 2 charge for the year associated with listing awards awarded in previous years. The cost includes the in-year IFRS 2 costs for Listing Share Awards granted to selected key management personnel in recognition of their significant contribution to the successful private placement and admission of Metro Bank to the London Stock Exchange.
Banking transactions with key management personnel
We provide banking services to Directors and other key management personnel and persons connected to them. Loan transactions during the year and the balances outstanding at 31 December were as follows:
|
Group |
2018 |
2017 |
|
|
£'million |
£'million |
|
Loans outstanding at 1 January |
3.0 |
3.2 |
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Loans relating to persons and companies newly considered related parties |
0.1 |
- |
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Loans relating to persons and companies no longer considered related parties |
- |
(0.3) |
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Loans outstanding as at 1 January for current key management personnel and their connected persons |
3.1 |
2.9
|
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Loans issued during the year |
0.8 |
0.4 |
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Loan repayments during the year |
(0.1) |
(0.3) |
|
Loans outstanding as at 31 December |
3.8 |
3.0 |
|
Interest expense on loans payable to the Group (£'000) |
82 |
80 |
There were ten (31 December 2017: seven) loans outstanding at 31 December 2018 totalling £3.8 million (31 December 2017: £3.0 million). Of these, nine are residential mortgages secured on property and one is an unsecured loan; all loans were provided on our standard commercial terms.
In addition to the loans detailed above, the bank has issued credit cards and granted overdraft facilities on current accounts to Directors and key management personnel.
Credit card balances outstanding at 31 December were as follows:
|
Group |
2018 |
2017 |
|
|
£'000 |
£'000 |
|
Credit cards outstanding as at 31 December |
34 |
27 |
Deposit balances outstanding at 31 December were as follows:
|
Group |
2018 |
2017 |
|
|
£'million |
£'million |
|
Deposits held at 1 January |
3.4 |
5.2 |
|
Deposits relating to persons and companies newly considered related parties |
0.3 |
- |
|
Deposits relating to persons and companies no longer considered related parties |
(0.2) |
(3.0) |
|
Deposits held as at 1 January for current key management personnel and their connected persons |
3.5 |
2.2 |
|
Net amounts deposited |
1.0 |
1.2 |
|
Deposits outstanding as at 31 December |
4.5 |
3.4 |
Other transactions with related parties
The following transactions were carried out with related parties:
|
Group |
2018 |
2017 |
|
|
£'000 |
£'000 |
|
Architectural design services |
4,084 |
4,135 |
|
Creative and brand services |
498 |
513 |
|
Total purchase of services with entities connected to key management personnel |
4,582 |
4,648 |
|
Amounts outstanding as at 31 December owed by Metro Bank |
51 |
23 |
Architecture, design, creative and brand services are provided by InterArch, Inc. ('InterArch'), a firm which is owned by Shirley Hill, the wife of Vernon W. Hill, II, the Chairman. In order to ensure that the terms of the InterArch arrangements are consistent with those that could be obtained from an independent third party, and in accordance with the Articles, the contractual arrangements with InterArch are subject to an annual review by our Audit Committee using benchmarking reviews conducted by independent third parties. For the architectural design contract, which covers the build and design of our stores, a big four professional services firms carries out the benchmarking review. The creative and brand services contract which covers branding, marketing and advertising services is reviewed by the largest independent global marketing audit firm. For 2018, having reviewed the output from the independent audit of each contract, the Audit Committee has concluded that the contracts for services with InterArch are at arm's length and are at least as beneficial as those which could be obtained in the market from an alternative supplier.
In order to expand the suppliers used, the management intends to run a competitive tender in 2019 to identify an additional alternative supplier of architecture services.
Further details of the review conducted by the Audit Committee can be found on page 71.
Architectural design services
InterArch provide various architectural design services, including pre-design, architectural design, interior design, construction management, landscape architectural, signage, security design and layout and procurement services. The fee structure for each project is based on a fixed percentage of final construction costs. Certain additional services are provided on an hourly basis. The contract for architectural design services has recently been renegotiated. As part of the renegotiation, any recommendations of the independent audit have been picked up and included in the contract.
Creative and brand services
InterArch also provide branding, marketing and advertising services. The contract for creative and brand services has recently been renegotiated. As part of the renegotiation, any recommendations of the independent audit have been picked up and included in the contract.
For 2019, both the architectural design services and creative and brand services contracts have been aligned to be effective from 28 February 2019, for one year. In addition, both contracts have been subjected to the bank's recently adopted supplier risk management process.
DIRECTORS' RESPONSIBILITY STATEMENT
Each of the Directors, whose names and functions are listed on pages 56 and 57, confirm that, to the best of their knowledge:
· the financial statements, which have been prepared in accordance with IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group taken as a whole; and
· the Strategic Report contained in the Annual Report includes a fair review of the development and performance of the business and the position of the Group taken as a whole, together with a description of the principal risks and uncertainties that it faces.
ENDS
About Metro Bank
Metro Bank is the revolution in British banking. It is celebrated for its exceptional customer experience and achieved the top spot in the Competition and Market Authority's Service Quality Survey among personal current account holders for its overall service and came second among business current account holders in February 2019. It was also awarded 'Best All Round Personal Finance Provider' at the Moneynet Personal Finance Awards 2019, as well as 'Most Trusted Financial Provider' at the Moneywise Customer Service Awards in 2016 and 2017 and 'Best Financial Provider' at the Evening Standard Business Awards 2017. It is recognised by Glassdoor in its 'Best Place to Work UK 2019' top 50 list.
Offering retail, business, commercial and private banking services, it prides itself on using technology to give customers the choice to bank however, whenever and wherever they choose. Whether that's through its growing network of stores open seven days a week, from early in the morning to late at night, 362 days a year; on the phone through its UK-based 24/7 contact centres manned by people not machines; or online through its internet banking or award-winning mobile app: the bank offers customers real choice.
The bank employs over 3,900 colleagues and is headquartered in Holborn, London.
Metro Bank PLC. Registered in England and Wales. Company number: 6419578. Registered office: One Southampton Row, London, WC1B 5HA. 'Metrobank' is the registered trade mark of Metro Bank PLC.
It is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. Most relevant deposits are protected by the Financial Services Compensation Scheme. For further information about the Scheme refer to the FSCS website www.fscs.org.uk.
All Metro Bank products are subject to status and approval.
Metro Bank PLC is an independent UK bank - it is not affiliated with any other bank or organisation (including the METRO newspaper or its publishers) anywhere in the world. Please refer to Metro Bank using the full name.
DISCLAIMER
The matters described in this announcement (the "Announcement") are subject to discussion and amendment, and neither it nor any part of it shall form the basis of, or be relied on in connection with, any contract to purchase or subscribe for any securities of the issuer or any subsidiary or affiliate of or related to Metro Bank PLC (the "Company") nor shall it or any part of it form the basis of or be relied on in connection with any contract or commitment whatsoever. This Announcement does not, and is not intended to, constitute or form part of, and should not be construed as, an offer or invitation to sell, or a solicitation of an offer to purchase, subscribe for or otherwise acquire, any securities of Company, nor shall it or any part of it form the basis of or be relied upon in connection with or act as any inducement to enter into any contract or commitment or investment decision whatsoever.
To the extent available, the industry, market and competitive position data contained in this Announcement come from official or third party sources. Third party industry publications, studies and surveys generally state that the data contained therein have been obtained from sources believed to be reliable, but that there is no guarantee of the accuracy or completeness of such data. While the Company reasonably believes that each of these publications, studies and surveys has been prepared by a reputable source, the Company has not independently verified the data contained therein. In addition, certain of the industry, market and competitive position data contained in this Announcement come from the Company's own internal research and estimates based on the knowledge and experience of the Company's management in the markets in which the Company operates and the current beliefs of relevant members of management. While the Company reasonably believes that such research and estimates are reasonable and reliable, they, and their underlying methodology and assumptions, have not been verified by any independent source for accuracy or completeness and are subject to change. Accordingly, reliance should not be placed on any of the industry, market or competitive position data contained in this Announcement.
The information contained in this document does not purport to be comprehensive. None of the Company or its subsidiary undertakings or affiliates, or their directors, officers, employees, advisers or agents accepts any responsibility or liability whatsoever for/or makes any representation or warranty, express or implied, as to the truth, fullness, fairness, accuracy or completeness of the information in this Announcement (or whether any information has been omitted from the Announcement) or any other information relating to the Company, its subsidiaries or associated companies, whether written, oral or in a visual or electronic form, and howsoever transmitted or made available or for any loss howsoever arising from any use of this Announcement or its contents or otherwise arising in connection therewith. To the fullest extent permissible by law, such persons disclaim all and any responsibility or liability, whether arising in tort, contract or otherwise, which they might otherwise have in respect of this Announcement. This Announcement has not been verified and is subject to verification, correction, completion and change without notice.
The information and opinions contained in this Announcement are provided as at the date of the Announcement, are subject to change without notice and do not purport to contain all information that may be required to evaluate the Company. None of the Company or its subsidiary undertakings or affiliates, or their respective directors, officers, employees advisers or agents, or any other party undertakes or is under any duty to update this Announcement or to correct any inaccuracies in any such information which may become apparent or to provide you with any additional information. No reliance may, or should, be placed for any purpose whatsoever on the information contained in this Announcement or on its completeness, accuracy or fairness. Recipients should not construe the contents of this Announcement as legal, tax, regulatory, financial or accounting advice and are urged to consult with their own advisers in relation to such matters.
This Announcement contains forward-looking statements. Forward-looking statements are not historical facts but are based on certain assumptions of management regarding our present and future business strategies and the environment in which we will operate, which the Company believes to be reasonable but are inherently uncertain, and describe the Company's future operations, plans, strategies, objectives, goals and targets and expectations and future developments in the markets. Forward-looking statements typically use terms such as "believes", "projects", "anticipates", "expects", "intends", "plans", "may", "will", "would", "could" or "should" or similar terminology. Any forward-looking statements in this Announcement are based on the Company's current expectations and, by their nature, forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond the Company's control, that could cause the Company's actual results and performance to differ materially from any expected future results or performance expressed or implied by any forward-looking statements. As a result, you are cautioned not to place undue reliance on such forward-looking statements. Past performance should not be taken as an indication or guarantee of future results, and no representation or warranty, express or implied, is made regarding future performance. Some of the information is still in draft form and will only be finalised, if legally verifiable, at a later date. The Company undertakes no obligation to release the results of any revisions to any forward-looking statements in this Announcement that may occur due to any change in its expectations or to reflect events or circumstances after the date of this Announcement and the parties named above disclaim any such obligation.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
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