1Q 2020 Results and Progress Update 6th May 2020 Andrew Bester, CEO Nick Slape, CFO
Responding to the COVID-19 challenge Supporting small businesses Supporting our customers and Strong balance sheet as we build momentum colleagues through COVID-19 improves resilience to COVID-19 in our SME franchise ● ● ● 100% of branches and contact Coronavirus Business Interruption c.£12m financial impact of COVID- centres are open, adapting to serve Loan Scheme (CBILS) overdrafts 19 in 1Q20; underlying customers safely and loans launched for existing performance in line with SME customers on 29 April expectations ● c.15,000 payment holidays ● ● requested by mortgage customers Working to be able to offer Bounce Low-risk lending; secured lending Back Loans as soon as possible comprises 93% of customer assets ● c.2,000 payment holidays (Core mortgages: 92%) ● requested by credit cards and loans Temporary removal of fees and ● customers charges on SME lending facilities Low levels of corporate exposure following sustained period of de- ● ● First to offer £500 interest free Partnership with Co-operatives UK risking overdrafts, supporting over to support co-operative businesses ● 350,000 customers through the pandemic CET1 ratio of 18.3% against regulatory minimum of 10.9%; ● ● >95% of non-customer facing SME deposits increase 11% year Total capital ratio of 22.6% colleagues working from home on year ● enabled by IT improvements Robust liquidity with LCR of 159%; ● Attracting 16% of customers via delivered in 2019 TFSME initial allowance estimated Incentivised Switching Service to be £1.75bn ● Well-being measures to support against plan of 6% colleagues managing work and home life 2
Delivering our plan commitments in a challenging macroeconomic environment ● Underlying loss of £14.3m aligns with expectations despite COVID-19 impact ● Mitigating cost actions implemented; significant focus to further reduce spend Actions taken to mitigate COVID-19 in 2020 to mitigate risks on operating income and impairments financial impacts ● Outlook in 2020 and beyond is uncertain at this point; update to guidance to be provided in due course ● Highest NPS score since 2013 at +30 ● Proud winner of ‘Changing lives in the Community’ award (Card & payments awards) ● Franchise growth as core customer assets increase 2% funded through growth Brand strength driving in retail franchise and SME deposits; positive deposit momentum continued in franchise growth April ● SME deposit growth of 11% YoY (over 20% to April) as we acquire 16% of ISS (target 6%) ● Separation of IT systems complete with proven service stability ● Continued renewal of key supplier agreements driving operational benefits, flexibility and cost savings Delivering our Plan ● Business banking transformation strategy on track in line with BCR investment commitments commitment ● Committed and fully prepared to issue MREL-qualifying debt when market conditions are supportive 3
Performance is in line with expectations despite c.£12m COVID-19 impact Total income reduces by 20% to £75.8m • COVID-19 impacts include EIR adjustment due to lower base rate £m 1Q 20 1Q 19 Change projections and treasury volatility; total c.£9m Net interest income 64.8 87.7 (26%) • Other impacts include cost of Tier 2 debt issued in April 2019 Other operating income 11.0 7.1 55% Total income 75.8 94.8 (20%) • Other operating income improves from renewed partnership arrangements with our key suppliers Operating expenditure (87.2) (98.9) 12% Impairment (2.9) (1.0) >(100%) Operating expenditure reduces by 12% to £87.2m Underlying (loss) (14.3) (5.1) >(100%) • Benefits from cost saving initiatives and removal of reward-based Strategic change (9.4) (29.5) 68% pay in 2020; underlying cost:income ratio guidance unchanged as Non-operating (expense) / income (3.3) 6.0 >(100%) actions on spend to offset reduced income Loss before tax (27.0) (28.6) 6% Impairment of £2.9m relates primarily to one Legacy Corporate case unrelated to COVID-19. £0.3m impairment relating to COVID-19 Ratios reflects our low-risk, secured book and is aligned with regulatory guidance on taking a balanced, considered approach to 1Q ECL Customer NIM (bps) 1 144 199 (55) assessment Underlying cost:income ratio (%) 2 115 104 (11) Loss before tax of £27.0m down 6%, as the impact of an increased Cost of risk (bps) 3 2 1 (1) underlying loss is offset by a reduction in strategic change spend CET1 ratio (%) 4 18.3 19.6 (1.3) Non-operating expense driven by macroeconomic volatility in the valuation of the Bank’s Visa Inc. shareholding CET1 ratio down to 18.3%; down 1.3pp since FY19 1. Calculated as net interest income over average customer assets 2. Calculated as operating expenses over operating income 3. Calculated as impairment charge over average customer assets 4 4. CET1 ratio comparative shown as at FY 19
Underlying NIM reduces 11bps in the quarter; challenges in the remainder of the year due to COVID-19 Customer net interest margin (bps) 1 Income by segment £m 1Q 20 1Q 19 Change (11bps) Retail 57.4 68.8 (17%) (16) SME 9.9 9.8 1% 166 155 (17) Core customer interest income 67.3 78.6 (14%) (3) (8) 18 Treasury (1.8) 8.7 >(100%) 11 199 Total core interest income 65.5 87.3 (25%) Legacy or unallocated (0.7) 0.4 >(100%) 148 144 Total net interest income 64.8 87.7 (26%) Retail 7.9 2.5 >100% 1Q 19 Customer mix Treasury / 4Q 19 Customer mix Treasury 1Q 20 and rate other and rate volatility / SME 4.2 4.1 2% other Core customer fee income 12.1 6.6 83% • NIM has reduced throughout 2019 following Tier 2 issuance and Treasury (1.2) (0.2) >(100%) sustained mortgage margin pressure Total core other operating income 10.9 6.4 70% • EIR impacts due to customer behaviour (4Q19) and base rate Legacy or unallocated 0.1 0.7 (86%) change (1Q20) Total other operating income 11.0 7.1 55% • 1Q20 underlying margin primarily impacted by COVID-19 volatility Total core income 76.4 93.7 (18%) in treasury and continued mortgage margin pressure Total income 75.8 94.8 (20%) • Income expectations impacted by base rate reduction to 0.1%, TFSME and reducing levels of new business 5 1. Calculated as net interest income over average customer assets
Mortgage growth funded by retail franchise and SME deposits Mortgage flows (£m) Core customer deposit flows (£m) % change FY +2.6% 18,864 19,050 19 61 (144) 138 130 -4.0% 3,451 3,595 (387) 1,050 (593) 353 Retail franchise 2,180 +2.9% 2,119 4,443 4,305 +3.2% +2% 16,690 16,267 8,975 8,845 +1.5% FY 19 Franchise Current SME Term 1Q 20 savings accounts 1 FY 19 Maturities Retention New business Other outflows 1Q 20 • 2.6% growth in mortgages with new business of £1.1bn; Gross customer deposit and lending rates 2 volumes dropping in 2Q. Retention higher than expectations 2.49% 2.46% • 1.0% increase in core customer deposits; growth in Retail 2.42% 2.43% 2.41% franchise and SME deposits has offset targeted reduction in expensive term balances through repricing 1.90% 1.85% 1.83% 1.82% 1.80% • 2.9% SME growth benefits from a higher than targeted share 0.61% 0.61% 0.59% 0.60% 0.60% of Incentivised Switching Service customers • Customer corridor reduces marginally; cost of funds stable at 1Q 19 2Q 19 3Q 19 4Q 19 1Q 20 61bps and will reduce in 2Q following base rate action Core customer assets Core customer liabilities Gross margin 1. Other outflows include contractual repayments and fixed period redemptions 6 2. Calculated as annualised core customer income over the core customer average balances for the three-month period
Cost reductions driven by management action Operating expenditure movements (£m) Operating expenditure has reduced by £12m as a result of: (12%) • Staff costs reduce due to removal of 2020 4 (5) variable pay provisions to help mitigate 2 (5) (2) COVID-19 impacts 62 • Non-staff costs lower due to benefits from 57 strategic investment and other efficiencies • Significant focus to further reduce spend in 2020 to mitigate risks on operating income 33 28 and impairments 1Q 19 Staff costs Non-staff costs Continuous 1Q 20 improvement Strategic project costs (£m) Strategic project costs reduce by 68% following conclusion of key strategic initiatives in 2019 (68%) • Spend in 2020 includes £4m of final Separation costs which will not continue after this quarter 9.4 • We have delayed some strategic initiatives for 29.5 2020 as we look to reduce expenditure in light on COVID-19 5.4 4.0 1Q19 1Q20 Separation Other 7
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