Metro Bank — Primed for growth

A community bank

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

Financials

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

Valuation

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

Sensitivities

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Lending growth and mix

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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