Metro Bank Holdings PLC

OTC:MTRBF

Earnings Call Transcript 2019-Q3

[Operator]

Ladies and gentlemen, welcome to the Metro Bank Q3 results call. [Operator Instructions] Today, I'm pleased to present Craig Donaldson, the CEO; and David Arden, the CFO.

[Craig Francis Donaldson, CEO & Executive Director]

Thank you, operator, and many thanks to everyone for joining the call. I'm with David Arden, our CFO, and we will provide a summary of the third quarter before taking any questions. Clearly, it's been a difficult 9 months for the bank, and our Q3 financial results reflect the challenges we faced. Despite which, we've made good progress in reducing costs, increasing fees and further strengthening our capital and liquidity position as well as retaining our top position for overall quality of service for personal customers. However, balance sheet action taken in Q2 and Q3 have impacted underlying profitability in the third quarter. These actions include the sale of the loan portfolio in Q3 and the sale of non-LCR-eligible treasury assets, which were primarily driven by the prudent management of our liquidity position following the deposit outflows in half 1. On deposits, we saw a return to customer deposit growth with GBP 528 million of growth in the third quarter, with total deposits now of GBP 14.2 billion. Deposits through the month of September however were impacted bynegative sentiment following the postponed MREL transaction with GBP 213 million of outflows, but we are returning to business as usual. Having issued GBP 350 million senior non-preferred notes at the start of October, we will now meet our internal MREL requirement and have headroom as we move into 2020. Importantly, key parts of our customer franchise have continued to grow and demonstrate real resilience in Q3. Customer accounts growth of over 100,000 to 1.9 million included continued growth in personal and business current accounts. We were very pleased to maintain our #1 position for personal customers and #2 position for business customers in the August 2019 CMA survey. We've also made further progress on our key priorities as we continue to focus on optimizing our capital allocation and returns. First, Q3 over Q2 shows an absolute reduction in operating costs despite continued opening of new stores and the winning of new customers, reflecting our focus on restructuring and cost takeout to deliver a more efficient operating model. Second, we are recording further growth in fees and other noninterest income as we continue to grow our customer accounts and benefit from the recent further rollout of value-added services. And finally, we continue to deliver on our organic capital efficiency focus as we rebalance our lending mix out of more capital-intensive lending segments. Alongside the 3 new store openings in the Midlands in the last quarter, we've also secured and are developing C&I for new sites in Liverpool and Manchester. We're also expanding digitally having recently announced the launch of our new AI in-app Business Insights tool and a trio of fintech and SME partnerships to enhance our business banking offering, which will help drive fee income and cost efficiency as we move forward. And finally, we've separately announced this morning that Sir Michael has been appointed as Interim Chairman with immediate effect following Vernon's decision yesterday to step down from his role as Chairman. Vernon will continue as a Nonexecutive Director until the end of the year and will then step down from the Board. I'd personally like to thank Vernon for his vision, which was what created Metro Bank 10 years ago and continue to drive us forward, and on behalf of myself and all of our colleagues say how grateful we are for everything he has done and wish him well on his next journey. I will now hand over to David to talk you through the numbers in more detail.

[David Thomas Arden, CFO, Company Secretary & Executive Director]

Thanks, Craig. Good afternoon to everybody. I'll walk you through our key metrics. At the half year, we guided towards a lower NIM in the second half. Headline NIM has actually reduced to 1.5% in Q3 due to the actions that we've taken to prudently manage the balance sheet. The actions we've taken primarily are the sale of the GBP 1.5 billion interest-bearing non-LCR-eligible investment securities book, an increase in funding cost for which fixed-term front book pricing has now normalized, the execution of the GBP 520 million loan portfolio disposal and lower lending volumes. The loan portfolio disposal also incurred a one-off charge of GBP 2.5 million in the quarter, which is reflective of an underlying loss before tax of GBP 2.2 million for the third quarter.Total customer loans are broadly flat as we have managed [ reiterations ] and redemptions. Our prudent low-risk lending approach means we continue to see no sign of credit stress in the book. Cost of risk remained very low in the quarter at just 5 bps, and our NPL ratio is just 20 basis points. Asset quality, therefore, has remained robust. A slowdown in the pace of loan growth on the GBP 528 million of net deposit inflows in the third quarter led to a reduction in the loan-to-deposit ratio to 105% from 109% at the half. We expect our loan-to-deposit ratio to continue to manage downwards towards 100% in a controlled way. However, we do expect deposit growth to moderate in Q4 as we strike the balance between growth, cost of deposit and ongoing capital efficiency. In line with expectations, the cost of deposits increased to 84 basis points in the third quarter and 75 basis points year-to-date. The increase in the third quarter is primarily due to competitive pricing of our fixed-term retail savings accounts as we consciously elevated pricing to support brand and deposit momentum. As the quarter progressed, we actually normalized pricing, and we're currently approaching it back to usual levels. It's obviously our continued expectation for full year deposits to be marginally above base rate by the end of the year. The reduction in NIM plus fees in the quarter was partially offset by continued strong fee growth. Fees grew 5% quarter-on-quarter and 50% -- 56% year-on-year, supported by continued customer acquisition and further digital investments. We expect positive fee growth to continue to partially offset the further NIM pressure that will arise from the cost of MREL debt issued in Q4. Reflecting all these trends, the underlying cost-to-income ratio for the third quarter increased to 100% and 94% for the first 9 months of the year. The movement in the third quarter cost-to-income ratio primarily reflects the income challenges I've already outlined and, more positively, the absolute reduction in operating costs quarter-on-quarter, albeit on a margin basis. This is evidence of the focus on cost efficiency and the progress we've made on the portfolio actions that we outlined in previous results. Moving on to liquidity. Our balance sheet remains highly liquid with an LCR ratio that is above the 163% we outlined at the half year following cash inflows from deposit growth, the loan portfolio disposal and the GBP 350 million debt issuance that we undertook in October. Finally, on capital, our CET1 ratio of 16.2% continues to materially exceed our Tier 1 minimum requirement of 10.6% and is well above our management target of 12%. Following the bank's inaugural senior non-preferred issuance in October, our pro forma total capital ratio plus MREL is 22.6% as of the 30th of September, which exceeds our interim MREL requirement of 18% [ plus buffers ]. I'll now hand back to Craig.

[Craig Francis Donaldson, CEO & Executive Director]

Thank you, David. So given all the challenges we faced this year, we're going to further and fully evaluate the balance of future growth with plans to maximize returns. We need to be very clear that we are focusing on the maximizing of returns. This review will look closely at how we balance future expansion, cost initiatives and optimizing capital efficiency. Our plans regarding [indiscernible] remain unchanged. And also, our revised plans, targets and KPIs will be communicated in conjunction with our full year results. But in the meantime, we'll be focusing on capital optimization, continuing to make progress with our cost efficiency program and targeting further income diversification. David and I are both now happy to take any questions. I now hand back to you, operator. Thank you.

[Operator]

[Operator Instructions] And our first question comes from the line of Ben Toms at RBC.

[Benjamin Toms, Analyst]

Two from me, please. First question is in relation to NIM and your guidance in Q4 where you guide that margin trends are expected to continue. My understanding of this is that NIM excluding cost of MREL is flat and NIM including the cost of MREL goes down. Should we expect the NIM including the cost of MREL to go down by about 11 bps quarter-on-quarter in line with this quarter? And the second question is in relation to the outlook statement where you say you're performing an evaluation of future plans in the quarter, the results of which will be communicated at full year. What options are on the table here? Are we talking about further loan sales, securitizations and further slowing down of growth or all of the above?

[David Thomas Arden, CFO, Company Secretary & Executive Director]

Ben, this is David here. I'll answer the first part, and I'll pass on to Craig for the second. And so quarter-on-quarter, Q3 into Q4, I would expect headline NIM to be broadly flat excluding MREL. MREL, as you know, is a GBP 33 million charge. And so when you feed that into a flat NIM in the quarter, you should be able to articulate what we think NIM we be in Q4, and you start moving miles away from what you suggested. Craig?

[Craig Francis Donaldson, CEO & Executive Director]

Thanks, David. Thanks, Ben. So on -- look, we've had a challenging year, as we said, so far. And post the MREL, the Board has taken a decision that we should be fully evaluating the plans we had in place. What that means is we are looking at how we monitor ourselves going forward within our equity to manage the cost, growth and capital efficiency whilst remaining within the equity that we have in the business today. What it doesn't mean is that we're challenging creating funds and that we won't be absolutely 100% focused on delivering amazing service because that's the core to the organization. But how we deliver that amazing service and how we create funds and how we deal with it in the most capital and revenue efficient way is what we'll be focused on as part of the evaluation that we're undertaking.

[Operator]

Our next question comes from the line of Christopher Cant of Autonomous.

[Christopher Cant, Partner, United Kingdom and Irish Banks]

I appreciate you may have more to say at the strategy update. But if I look at what you've printed for the quarter and I strip out the asset sale loss you mentioned, which I think is the negative in revenues within the asset sale line, if I take that out but I put in the cost of MREL, I think your cost-to-income run rate would be around 106%. And obviously, you're currently above target on loan-to-deposit. So if I was to adjust your 3Q balance sheet structure for loan-to-deposit ratio in the middle of your 85% to 90% target range, displacing loan assets and assuming they were replaced with treasury assets based on the average yields you disclosed on those 2 books during the first half, I think that would take your cost-to- income run rate to about 122%. If I look at consensus, and I know you don't compile an official company consensus, but looking at Bloomberg consensus, the market is expecting you to be profitable next year and in 2021. Given that it looks like you're going to be unprofitable at a pre-provision level for some time, do you think consensus is realistic in expecting you to be profitable even next year or in 2021, please?

[Craig Francis Donaldson, CEO & Executive Director]

Chris, thank you for the question. Obviously, I can't -- won't comment on where people put their positionings on the forward look. We don't comment on that. What I would say is we were very clear at the half year of what we expected to happen with NIM, and it has happened. And we've been hopefully clear in what we expect to happen in Q4. I think David set it out very clearly, and I think it is set out in the RNS that went out a little while ago. And I think if you carry that through, I think your math on the NIM and how that plays through is spot on. However, I think that part of the evaluation is around where we would look to manage our loan-to-deposit ratio, how we would look to have that loan-to-deposit ratio made up but also will be looking at costs and how we manage our costs, both in the existing business and as we move forward. So I think that you're taking your guidance or your thoughts on looking forward but not thinking about the other parts that could move to manage the balance sheet and the business in a slightly different way. So I will suggest to you that the whole point of the evaluation that we're doing is for exactly the reason that we are reviewing our costs, our capital makeup, our balance sheet, how and where we lend, using -- driving capital efficiency and what things like our loan-to-deposit ratio, our LCR, et cetera, et cetera, would be at. And that's why we want to take the time to work that through properly. But I would agree with you. If you want to draw lots of lines, take lots of scenarios, you can come up with a number of different scenarios. That's why we want to take time to report it.

[Operator]

Our next question comes from the line of Joseph Dickerson of Jefferies.

[Joseph Dickerson, Head of European Banks Research & Equity Analyst]

Just a couple -- you've already answered most of my questions, just a couple of things. What was the store count as at the end of Q3, please? And then the other question I had is the consumer finance or consumer lending loans were down. I know it's a small number, were down 8% Q3 on Q2. I thought this was an area that you were looking to grow in the future. Any comments on that trajectory?

[Craig Francis Donaldson, CEO & Executive Director]

So Joe, it's Craig here. Thanks for the questions. Store count, slightly different ways of answering it. The store count, I believe, was around 70 at the end of Q3, but I think we've opened around about 5 stores during Q3 -- during the first 9 months of the year. We actually opened in Birmingham, Solihull and Merry Hill during the quarter and prior to that have opened in Moorgate and in Enfield in the first half.

[Joseph Dickerson, Head of European Banks Research & Equity Analyst]

So 3 stores in Q3?

[Craig Francis Donaldson, CEO & Executive Director]

It's 3 stores in Q3 as we entered the Midlands and opened up a new market there, which is very exciting for us. So hopefully, that answers that one. On consumer lending, we currently, as part of our development, building out our new business lending platform, and we've also entered into a partnership with Funding Options for lending as well [indiscernible] customers who we may not be able to support within our risk appetite. So these are types of things that will help drive forward our consumer lending at a cost-efficient level. So yes, we have seen some reduction, as you said, in consumer lending as we've had some loans paid back, as we've managed our capital efficiency over the last few months. But what we did is we just implemented a new fintech partnership, and what we are doing is building out a new consumer finance business lending platform that will launch next year that will help drive that forward. And that was always the plan.

[Operator]

Our next question comes from the line of Robert Sage of Macquarie.

[Robert Ian Sage, Research Analyst]

I've got a couple of quick questions, again, that might have been answered. And I think it sort of goes back to, the first one, your comment that there's going to be this strategy update. And I sort of heard your sort of commentary around sort of a number of things that you're going to be revisiting. And I guess my question is in 2 parts. Firstly, I mean, sort of looking at Vernon's departure, it's easy to sort of think that he's gone, therefore you're going to be completely reining back in terms of your ambitions. And I was wondering -- presumably, sort of you're pressing on with plans now and you don't really need a new Chairman in before you actually sort of go live with sort of where the new strategy might fall out. And I guess the other sort of aspect of this question is -- and this, I think, sort of came out perhaps from your answer to Chris Cant's question. Presumably, when we're sort of looking at trying to take a view of where this business goes forwards, then we should really jettison a lot of -- pretty much all of this sort of the growth numbers that you've sort of put out, deposit growth of 20% per annum or that sort of type of stuff, et cetera. Is that correct? Or is that sort of slightly over [ racking ] it and there's going to be much more sort of fine-tuning of it? And the second question was could you just give a quick comment in terms of anything happening on the incentivized switching scheme? I see SME balances on the loan side are fairly flat. But whether there's any movement there or not, I'd just be interested.

[Craig Francis Donaldson, CEO & Executive Director]

So Robert, let us try and answer that. And if we miss something, please shout out and ask us again. So on your first point about the evaluation of the plan and reevaluating the plan, my view is very simple. It's, with the macroeconomic environment we're in, with what's happened and the challenges during this year, it is the right time to review the plan of how we take the organization forward. As I've said, absolutely core to us will be delivering the amazing service that you'd expect. But exactly how we do that and with what growth, I think, is -- will be driven by the equity that we have because what we need to do is grow within our equity strategy. And what we need to do is prove that return on that equity stack to a point at which markets and our shareholders are comfortable before we'd ever consider stepping out and talking to people again and add more equity. So for me, it's really simple. We work within our equity stack. We build the plan to work within that and deliver the returns that our shareholders would expect from us. By doing that then, we can look at growth plans. But at the moment, I think it's far more important that we manage that equity and that we manage our growth within that equity and we manage our capital efficiency to help us deliver more within that equity. And that's what I think the plan will be very much focused on. So I don't think growth is thrown away. I think it's all about timing. And in the macroeconomic environment we're in, with what we're dealing with and with the equity stack that we have, I think that we have to adapt ourselves to prove out where the challenges are. Whether that would wait for the Chairman, I think we're being very clear in the last bullet point in the RNS. In the intervening time, we're going to continue to optimize capital. We're going to continue to progress on cost efficiency, and we're going to continue to target further income diversification. I think that most people would agree they were the right things to focus on as well as delivering the service that we are renowned for. And I think that will continue -- the evaluation of the plan will continue. And I would suggest that we're working with the Board on this, and I would hope we'll have a Chairman on board. But I'm not involved in that, forgive me. That's being led by Sir Michael Snyder and Roger Farah. My job is to work with the Board to get this -- the evaluation in the right place and get it ready for us to announce in the new year. And then on the -- sorry, I can't remember your second question again, my apologies, good sir.

[Robert Ian Sage, Research Analyst]

Yes, not at all. Just the incentivized switching scheme, any comment?

[David Thomas Arden, CFO, Company Secretary & Executive Director]

I think it's fair to say, Robert, it has continued to be quite slow. We're not seeing any material increase in the ISS, and I think that's true of all players in the scheme. I just think it's been disappointing so far.

[Craig Francis Donaldson, CEO & Executive Director]

I think we've taken our share of [indiscernible], but just our share.

[Operator]

Our next question comes from the line of Michael Perito of KBW.

[Michael Perito, Analyst]

I have a couple of them. Why don't we just start just on the fee growth? Craig, I was wondering if you can maybe split that out a little bit for us and tell us where the kind of success this year has been. And then also, just trying to get a sense of kind of how far along we are from a penetration standpoint, how much more growth potential there is embedded in your customer base that really will require dramatic further investment to drive future fee income growth.

[Craig Francis Donaldson, CEO & Executive Director]

Certainly, Mike. So your first one about the split out, really it's been driven by 2 -- well, 3 core things actually. One is we have increased some fees. We've increased those again last year in things like safety deposit boxes, some interchange on some card transactions. And the fact that we've been announced as #2 in the business market and #1 in personal, I think, shows that we've rightsized the fees because it hasn't damaged the metrics of our service that we're delivering. But part of it is rightsizing fees and making sure we sit in the right competitive set. Part of it then is being the new services that we've launched. Launching AI into the mobile app, again, helps as that impacts on services that we could charge for with Mastercard, launching our trade finance offering that we've just launched. We already have a number of customers who want to trade finance on us. But previously, we've had to introduce that to third parties as we've not been able to fulfill what the customers wanted from us. By being able to fulfill for those customers, we've just taken more of the value chain. And therefore, we absolutely were clear about how big that value chain could be, and there's a lot more to go. And then the third one is about winning more customers. As we said earlier and as we spoke, we have over 100,000 new accounts in the quarter, and that genuinely helps drive the fee income. Now how much penetration there is. I think there's a lot more to go. We've just launched trade services and definitely drives into that. There are a number of opportunities we have both on existing book and as we launch new services and as we win new customers to drive fee income through adding value to our customers significantly more. And that's when we talk about fee income growth, we are confident about the continued growth quarter-on-quarter in our fee income because we know we've got the growth in new customers and we've got the growth in value-added services that we're launching and the customers want to buy from us.

[David Thomas Arden, CFO, Company Secretary & Executive Director]

And if I may, Mike, I think the bulk of it is driven by increased volumes. And those increased volumes we expect to continue into Q4.

[Michael Perito, Analyst]

Helpful. And then, secondly, if I look at the makeup of your deposit portfolio after some of the outflows you guys have had over the last 6 or 7 months or so, it's much more heavily tilted towards retail customers than corporate. And at least the last 2, 3 years, I think it was the other way around. I guess do you kind of anticipate that to be the case moving forward now? I mean are you noticing more -- obviously, there were more outflows at the tail end of the third quarter. Were you noticing more opportunities on the retail side than corporate? And do you expect that to have any longer-term impact on your overall cost of deposits? Is there a noticeable difference between kind of where the commercial deposits accounts are priced and where the retail deposit accounts are priced?

[Craig Francis Donaldson, CEO & Executive Director]

Thank you, Mike. So I think the question is around how do we believe the deposit book will change over time. And obviously, we're doing the work on the -- as we evaluate the plan. But I think what we said was we manage the organization to fit within the equity that the organization has. The absolute focus -- first focus would be on winning more personal and business current accounts. And the trading and the fee opportunities go with those personal and business current accounts, and they would come to us at NIBLs, as non-interest-bearing liabilities, which would be at 0%.Now could we fill the whole hopper with those customers? We absolutely would love to do that. What we'll exactly do though is look to bring the depositors close to those [indiscernible]. And so what you're going to see as we look to manage within the equity that we have, we will manage the growth in deposits and focus on the highest returning and the most capital liquidity efficient deposits that we want to win first. And I think that will drive these things that you suggested definitely. But we need to work that through in detail. I think that's something that we would definitely be talking about in February. But to my view, as we manage within our equity, we will absolutely manage to win the best liquidity and the best return on that liquidity.

[Michael Perito, Analyst]

And is there a noticeable -- I mean could you guys have the information available in terms of kind of where deposit pricing is for the retail customers versus the corporate customers as of the third quarter?

[Craig Francis Donaldson, CEO & Executive Director]

I'm trying to think ahead, Mike. It's -- let us come back to that because I think at the moment, it's -- there's been a few moving things within that. There's no doubt that we will win the personal customers. The commercial customers, you hold more liquidity against those. So we've always -- the commercial deposits, if you look on Page 2 in the RNS, you will see the movements. Where you're seeing more movement of liquidity, we would have been holding more liquidity against that anyway. So therefore, it may just be in liquidity, but it was less profitable liquidity. And what I was talking to you about is we will be having more profitable liquidity as we manage the growth within the equity. So I think your assertions and your assumptions will prove out correct. I just think we're in that migration as we speak.

[Operator]

Our next question comes from the line of Robin Down of HSBC.

[Robin Down, Co]

Just a couple really on the deposit pricing. You've given us this target for the full year of being slightly above base rates, 75 basis points. But clearly, given it's Q4 and you're looking at a full year number there, that gives us quite a wide range of outcomes for Q4. I just wondered if you could sort of slightly narrow it down for the quarter. And then just second question, just looking against -- perhaps the same question, looking slightly further ahead into next year, given your MREL position and the lack of capital generation, you -- clearly, difficult to grow the loan book from here. And obviously, loan-to-deposit ratio is well above your target level. Should we expect to see you looking to try and reduce the average deposit cost through 2020 as you have kind of less demand to attract in new funding and I would guess, hopefully, that the next move is more towards the current accounts?

[David Thomas Arden, CFO, Company Secretary & Executive Director]

It's David here. For Q4 cost of deposit, and as we've articulated, we did elevate fixed-term retail deposits in Q3. We've repriced down twice in August, once again in September. And we're now very much BAU. We do not anticipate going back into what I would describe as all my pricing levels in Q4, and that will be a driver of Q4 cost of deposits. So I would expect it should be marginally down in Q4.You're absolutely right. As we look forward into 2020, we look at returning what the growth levels are for the bank and the evaluation of all the options in front of us. And our lower growth rate will imply -- on the asset side will imply lower deposit growth. And as we lower that down, we should be able to just create a somewhat eloquent strategy for filling the hopper and with lower cost funding. And it, particularly, nibbles through PCA to BCAs, which continue even given all the headwinds that we've experienced in 2019. The underlying franchise in terms of PCAs and BCAs continues to progress, week in, week out.

[Craig Francis Donaldson, CEO & Executive Director]

If I may say, we would expect to continue to lend as we move forward but within, as we said, the equity stack. And as we look to take opportunities to drive capital efficiency and release RWAs, we would look to lend back to the right customers giving us the right return on that equity. And so it is about that rebalancing of the book, allowing us to grow the organization and our RWAs within our equity by being very, very efficient with how we use that equity as we go forward. And that's why we're talking about -- we've talked at the half year about a number of different options that we will pursue as part of the evaluation process.

[Robin Down, Co]

So I don't want to sort of preempt sort of what you might say at year-end, but on the -- on an ex-MREL basis then, would you be looking to raise margins overall for the group running into next year then as you optimize those, the loan book and the deposit base?

[Craig Francis Donaldson, CEO & Executive Director]

I think it will be very hard to say within the sort of -- in the very short term, but absolutely. If you look at what we've been looking to do as we work through the evaluation -- or the reevaluation of the plan is to make sure that we are driving the return on the EVA for the business absolutely in the right way. And if we're going to drive that return on the EVA, then we have to do what you just said.

[Operator]

Our next question comes from the line of John Cronin of Goodbody.

[John Cronin, Financial Analyst]

The first one is on -- back to the NIM point in terms of the points you made around accretion on the ex-MREL basis in Q4. Just trying to -- just -- can you confirm, is that strong growth in consumer driving that because, clearly, you have further deposits, yields, headwinds coming into the fourth quarter? And second question then is -- yes?

[David Thomas Arden, CFO, Company Secretary & Executive Director]

John, forgive me, I didn't think we'd say NIM accretion in Q4 ex-MREL. I said that we would expect NIM to be broadly flat Q4 ex-MREL. And then when you overlay the cost of MREL into that, clearly, that's going to create some more of a headwind on NIM and NII into Q4.

[John Cronin, Financial Analyst]

Okay. Apologies. But on this same question in terms of the flat on an ex-MREL basis, so presumably, there's something coming through from an asset perspective given the expected further uptick in deposit funding costs in fourth quarter. And my question is, is that a rebalancing of the loan mix marginally towards consumer?

[David Thomas Arden, CFO, Company Secretary & Executive Director]

No. And as I explained, we've now repriced down -- back down the front book fixed term, which we would not expect to feed through in the -- in accretion or higher cost of deposits into Q4. Thereafter, we are very careful about the lending mix and the assets that we're putting on given the capital constraints and the -- as Craig describes, the equity base that we're operating under.

[Craig Francis Donaldson, CEO & Executive Director]

And John, you also have some back book things that will play through as well.

[David Thomas Arden, CFO, Company Secretary & Executive Director]

Yes.

[John Cronin, Financial Analyst]

Okay. Yes, yes. Understood. And then on the deposit balances, just a commentary in returning to business as normal. Look, you've given a few updates to some of the questions. I haven't picked up all your answers, actually. But I just want to make sure -- I'm just trying to understand that in terms of the commercial book, when do you think things can stabilize there particularly?

[Craig Francis Donaldson, CEO & Executive Director]

I mean it's all stabilizing. I think that within the commercial book, we have a number of good customers that we have transaction banking with. We want to keep that trading businesses and transaction banking. We're actually more focused on the deposit book around the PCAs and the BCAs. So I'm not sure that it isn't returning to -- or there. It's just the expectation going forward is we're obviously focused on commercial customers. We want their trading business. We want to do their lending. I'm not quite sure we'll have the same mix in deposits going forward, though. So that said, what will become the new norm is what we need to work through now as part of the evaluation of the plan because I don't think it will look the same mix as you would consider BAU is today.

[John Cronin, Financial Analyst]

Okay. And finally, is there an acceptance at board level now that the weighting towards -- or the reweighting towards mortgage business? So I think you previously guided to that, to mortgages growing to ultimately 75% of your loan book. Is there an admission that, that strategy is not conducive to your ROTE ambitions? And that is feeding into your thoughts around the strategy update in February?

[Craig Francis Donaldson, CEO & Executive Director]

I think challenging the asset mix to drive the right return in equity and the right returns for our shareholders is absolutely part of all of that. So the mix is absolutely being reevaluated. As we've seen what's happened through this year, as we continue to develop our functionality and ability to fulfill for different customer needs. And also, as we continue to see the strength in our cost of risk, which allows us the opportunity to take other opportunities. So I think your question is are those things going to be reviewed as part of the evaluation of the plan, and the answer is absolutely yes.

[Operator]

Our next question comes from the line of Aman Rakkar of Barclays.

[Amandeep Singh Rakkar, European Banks Analyst]

Two questions, actually. One was -- so you've indicated you've been managing the balance sheet in the quarter. And if I look at your risk density as a proportion of loans, it actually came down quite a lot in the quarter, but it came down most significantly below what I was expecting, particularly given that you sold the low-risk rate mortgages in Q2. Is that you managing the corporate and buy-to-let loans that are now risk-weighted at 100%? Is that you actively managing that book down? I know there was some reports about removal of exit fees to try to -- is that part of an asset to kind of accelerate exit of those relationships? And I guess tied to that, could you give us an indication of what the kind of duration is on that 100% risk-weighted loan book? Basically, if it was to just naturally roll off, kind of what time period would that come through?And I guess the second part of the question and related as well is I -- if I look at your MREL, I estimate -- you're -- given your total capital ratio of plus MREL, you've got capacity to grow your balance sheet about 5% from here, which to me -- I know you're looking to manage your balance sheet, but to me, does it -- the loan sales are a really sensible part of that and probably something that should be coming quite soon. Is that something that we can expect to happen potentially before year-end? And is -- basically, is that something that you're already quite actively considering now, perhaps more so than you were before?

[Craig Francis Donaldson, CEO & Executive Director]

Aman, may I...

[David Thomas Arden, CFO, Company Secretary & Executive Director]

Yes. So go on.

[Craig Francis Donaldson, CEO & Executive Director]

Go on, David.

[David Thomas Arden, CFO, Company Secretary & Executive Director]

So on the risk density point, so it has reduced in the quarter from -- to 44% from 45%. The primary move was the sale of the loan book because it was held for sale in the half year accounts. But we have been -- as you quite rightly pointed out, we have been actively managing lending volumes and the mix, which is something that we articulated back in February of this year, and that's all starting to flow through.With -- regarding the asset sale options, I've been consistent in saying that we do retain optionality over loan sales. It is something that we will consider at the right time. And you should consider that as the evaluation of the loan will take over in the next 2 to 3 months of options for Metro Bank going forward, potential asset sales will be part of that evaluation.

[Craig Francis Donaldson, CEO & Executive Director]

On here, if you asked -- sorry. On the portfolio bank, [indiscernible], most of it was written over 5 years. So no, I wouldn't suggest that we're not on that back book just to be clear as well on that.

[Operator]

Our next question comes from the line of Jim McCormick of First Manhattan Consulting Group.

[James M. McCormick, Co]

My questions have been dealt with.

[Operator]

I guess our next question comes from the line of Daniel Crowe of Goldman Sachs.

[Daniel Crowe, Debt Analyst]

I just had a question on your issuance of MREL and why you did those at the level of -- that you did it at and the timing. So I understand you had to meet MREL requirements by the end of this year, but the issue with senior debt at 9.5% kind of hamstrings you a little bit. So were you told to issue that no matter what the cost?

[David Thomas Arden, CFO, Company Secretary & Executive Director]

No. We weren't told to issue no matter the cost. We clearly had an unfortunate event late September. The Board, as you would expect, considered the options and concluded that executing the deal as quickly as possible was the right thing for Metro Bank and particularly when you consider the ongoing market dislocation -- or potential market dislocation that could be caused by Brexit in the broader macro environment. So we saw an opportunity in front of us. I fully accept that the cost was somewhat elevated, but I think it was the right thing to do for the long term of the bank.

[Daniel Crowe, Debt Analyst]

Okay. And then just kind of a follow-up question, I guess. You talk about managing the growth in the bank to your equity, but are you really not managing effectively to your MREL requirement? So your...

[David Thomas Arden, CFO, Company Secretary & Executive Director]

Yes. We are very focused on our total capital ratios and our total capital requirements, so that's implicit of both. Absolutely, that's the case.

[Craig Francis Donaldson, CEO & Executive Director]

All I would say is I would imagine it's -- or I would expect that as we deliver on the foundations of the organization on the evaluation of the plan and move forward, there will be opportunities to consider MREL at different points. I would not expect to be doing that with equity in the same time frame.

[David Thomas Arden, CFO, Company Secretary & Executive Director]

But we've only said now, we wouldn't expect to be back to the market in the midterm.

[Craig Francis Donaldson, CEO & Executive Director]

Absolutely, 100%.

[Daniel Crowe, Debt Analyst]

So I guess we assume then that we're not going to see RWA growth effectively. What this cost means that you need to grow into your new cost base?

[Craig Francis Donaldson, CEO & Executive Director]

If you look at our -- we are sitting today at -- I think the pro forma in the RNS at [20%, 26%], and we have a number of opportunities that we will be pursuing or looking to evaluate around driving capital efficiencies, looking to capital efficiencies, looking at the buffer we have over our MREL minimum requirements at the moment. There are opportunities, but we will take those opportunities in a controlled way to drive the right returns for the organization.

[Operator]

Our next question comes from the line of Shailesh Raikundlia of Panmure Gordon.

[Shailesh Mansukhlal Raikundlia, Analyst]

Just a couple of related questions, actually. I just want to get back on the deposit growth, the guidance that you've given for the fourth quarter. Are you saying that the growth is to moderate? Obviously, quarter-on-quarter, we saw just under 4% growth, and year-on-year, it was down 4%. So I'm just trying to get a sense of where you're seeing deposits at the end of the year. Are you sort of seeing flat to maybe even down?And related to that, just coming back to the liquidity requirements in the LCR, you're saying it's greater than 163% now. I'm just sort of trying to ascertain that if the deposits don't grow much, does that mean that you might have to make further treasury asset sales? Or is that pretty much done? So are we going to see some more drag on NIM because of the sale of the treasury assets?

[David Thomas Arden, CFO, Company Secretary & Executive Director]

On deposit growth, as we clearly articulated, we would expect deposits to moderate in Q4. Q3 growth was GBP 0.5 billion. And given the cost on the MREL, it's -- and the fact that the stability is -- it's stabilizing rather than stabilized it, it's something that we need to just be very mindful of. I would expect to be somewhere between GBP 200 million, GBP 250 million of growth for Q4.Thereafter -- what was the second part of the question?

[Shailesh Mansukhlal Raikundlia, Analyst]

On liquidity requirement.

[Craig Francis Donaldson, CEO & Executive Director]

I think that our LCR is very high as it is today. I think that we also have the option on treasury asset sales, but I don't anticipate the requirement for treasury asset sales. And as David said, if you'll have a look at the deposits, are expected to moderate below the GBP 0.5 billion we did in Q4 to fit with the lending we want to do as we move forward. And to me, as we've discussed on several of the different calls, it will be managing our deposits within our equity and the lending that we want to do to make sure that we balance that revenue return for the long term.

[David Thomas Arden, CFO, Company Secretary & Executive Director]

Just to [indiscernible], our liquidity is very, very strong today.

[Operator]

Our next question comes from the line of Otto Dichtl of Stifel, Nicolaus.

[Otto Dichtl, Managing Director]

I was wondering about the process that I think you still have with the PRA regarding potentially higher charges for operational risks, et cetera. I was just wondering if you've -- if that has concluded yet or if that's still ongoing, if you could comment on that. Also, I mean, if there was a higher charge, would that impact your MREL requirements? Or is the interim MREL in the payment of that?

[David Thomas Arden, CFO, Company Secretary & Executive Director]

Our Pillar 2A remains the same at 1.52%. And there's no update to give there, I'm afraid.

[Operator]

Our next question comes from the line of Rand Golven (sic) [ Brad Golding ] of CRC.

[B. Bradley Golding, Managing Director]

It's Brad Golding. There are a lot of -- there -- in a -- really a follow-up to Otto's question. There are a lot of -- constraints are being imposed on the bank in terms of the dramatically higher cost from the senior issue, potential fines, potential increase in the operational cost. In February, will there -- will one of the options be that the bank cannot operate profitably given the constraints and it may be time to sell the bank? I understand that's a Board-level decision, but it's a -- this is -- seems like the 800-pound gorilla that no one has addressed.

[David Thomas Arden, CFO, Company Secretary & Executive Director]

The Board are very focused on undertaking the evaluation over the next 2 to 3 months. And we've been clear that we will come back to market with the output from that with revised targets and KPIs. We can't obviously comment on any speculation around takeover. But just to be clear, the Board is very mindful of its fiduciary duties.

[Craig Francis Donaldson, CEO & Executive Director]

But I would say, Brad, to be clear, we are very clear, we have a resilient and strong business here. We continue to deliver great service and win customers. And absolutely, we are building the plan that will deliver what we've said. And so we are very focused on our organic way forward and focusing on the organic way forward. But of course, as David said, should something occur, we will treat it with the right respect because that's the fiduciary duty of the Board. We are very focused on the organic way forward.

[Operator]

Our last question comes from the line of Christopher Cant of Autonomous.

[Christopher Cant, Partner, United Kingdom and Irish Banks]

I just wanted to come back to you on your comments around deposit growth into the fourth quarter. First of all, you've talked about returning to business as usual on deposits. The deposits today lower than end of September. That will be the first question. And secondly, in terms of driving the loan-to-deposit ratio down to close to 100 by the year-end, your comment about GBP 200 million to GBP 250 million of deposit growth would suggest limited progress in that direction unless you're either selling loans or expecting the loan book to contract in the fourth quarter. Are we now into a world where you're expecting the loan book to be contracting, please?

[Craig Francis Donaldson, CEO & Executive Director]

So Chris, it's Craig here. Thank you. So on the loan book, I would expect it to be pretty flat. I'm not sure it'll contract, but I would expect it to be pretty flat, very similar to around what's happened in Q3.With regard to deposits, we're really not going to get into giving monthly updates on deposits. As we said, we saw some outflows on the back of the speculation around the postponement of MREL. MREL was postponed until early October. And therefore, the tail did move through into October. But the business is returning to BAU, and that will continue. And we will win customers as we continue to do and grow deposits. So I'm not going to go into -- on a month-by-month blow now because we need to move away from that. [Indiscernible] MREL was not the best thing we've ever done, and we were very clear on that, as David said. But then it did have an impact and that's documented in the RNS. It's back on with grow -- well, managing the business to grow in the right way within the equity and the total capital, including our MREL that we have today.

[David Thomas Arden, CFO, Company Secretary & Executive Director]

And therefore, bring -- we'll bring the LTD down to 100% in a controlled way. We're not going to increase deposit rates or do anything silly. We're just going to manage the business in a very considered way over the next few months while we fully evaluate the options in front of us.

[Craig Francis Donaldson, CEO & Executive Director]

That, I believe, is the last question. Can I just say thank you to everybody joining the call? Thank you for your continued support and questions and challenges.Obviously, we are very focused on delivering the things that we said. We are very focused on delivering to continued service metrics that we have, and we're very proud of that. What we're going to do is by optimizing our capital, continue to focus on delivering cost-efficient progress and also targeting further income diversification, which is very important for us. All of this, obviously, is what we'll be doing whilst we are also reevaluating our plans for our way forward, what won't change is focusing on our customers.Thank you very, very much for your time, everybody.

[Operator]

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.