Metro Bank's CFO: What I learned building a £16bn balance sheet
Metro Bank’s chief financial officer helped steer the bank from an idea to a business with more than a million customers, £12bn in deposits and 55 branches. He learned some lessons along the way.
Metro’s still a David among the high street banking Goliaths, but it’s growing fast. The bank’s 2017 annual report notes:
- Deposits are up 47% year on year to £11.7bn and lending by 64% to £9.6bn
- Underlying profit before tax of £20.8m, compared to a £11.7m loss last year
- The workforce grew by 600 to over 3,000
From humble beginnings
Metro has taken on several hundred million pounds of funding since launching in 2010. It achieved profitability in 2017, remarkably meeting the timetable in its original business plan.
The bank started with a plan to bring a US retail banking model to the UK and a small team with three rented desks. The building was called Vernon house, amusing the group led by American businessman Vernon Hill.
CFO Michael Brierley recalls getting his payslip with a one in the corner every; not only was he the first employee but he had to set up payroll to get paid.
“It was very much a blank piece of paper,” said Brierley. “It was very much hand-to-mouth. Everyone had to turn their hands to everything for quite some period of after that.”
Back office tasks like that dominated the first stage of Brierley’s role in the business’s evolution. They started with a stack of “unimpressive” servers that had to be turned on and back off again if they failed, for one.
Brierley's boss Vernon Hill had a background in retail and US commercial banking. He learned his scaling philosophy from McDonald’s founder Ray Kroc, who he drove on location scouting trips. Hill explained in a 2010 profile: “I learned that costs are relatively fixed, so it’s all about volume.”
This mentality of scale was a necessity in a low margin market like retail banking. Brierly says there was a “lofty” sense of ambition in the beginning, something he thinks is necessary if you’re going to achieve something like this in business.
“We've never been looking to be a slightly better version of a high street bank, we're looking to re-invent banking by bringing back customer service in the context of the modern age. Our ambition was to build a brand, to build a franchise,” said Brierley.
Building a finance team
The finance team were the front runners of the business’s expansion. It needed to deliver practical things like payroll and accounts payable. But also produce accounts suitable for audit, and to carry out the forecasting and stress tests necessary to gain a bank licence.
Brierley’s background as a qualified accountant and chief risk officer helped with the process. The crisis saw the kind of outlier risk tests he advocated in previous roles become mainstream. In one example, he suggested running models on a previous employer being locked out of the securitisation market for 18 to 24 months.
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“People told me that couldn't happen, but that was exactly what happened to banks at the time of the financial crisis,” he recounts.
The experience with risk proved valuable when dealing with the regulator, who was preparing to grant the first banking license in 100 years. These conversations created the playbook for the wave of banking authorisations that was to follow as the regulator tried to stimulate competition on the high street.
Creating a brand
The financial crisis, particularly events like Northern Rock’s failure, made consumers cautious. The team had to work hard to convince people Metro was a conservatively run high street bank in the beginning.
Brierley says Metro proved it was a “deposit gathering machine” early on, but hesitated to lend that money.
“Lending isn’t something you rush, it's something you do very carefully,” he said. “We started off with a very low [loan-to-deposit] ratio and we attracted a good deal of attention from analysts who wondered about our ability to lend. What we were actually doing is being very sensible and cautious.”
Brierley adds that before the crash lots of banks had loan-to-deposit ratios of 120% and 130%, although they have now brought them into check.
The new normal is very different. Metro’s loan-to-deposit ratio increased from 74% to 82% year on year in 2017. For contrast, Lloyds reported a ratio of 109% in 2016 and 110% in 2017.
Loan-to-deposit ratios are closely linked to Net Interest Margin – a crucial KPI for banks – which represents the difference between the interest earned and the interest paid. Metro achieved a NIM of 2.19% in 2017, compared to HSBC at 1.63% and Lloyds at 2.86%.
Dealing with high growth rates
Metro’s growing at a pace that needs to be managed carefully. Not only have they achieved profitability, but the average deposit level per branch is increasing.
“We have what we call on the P&L ‘positive open jaws’, which is a great term describing the fact that revenue is increasing way faster than expenses,” Brierley explains. “By definition, the income line has now definitely crossed the expense line. What we have is a curve, not a line. Profitability will ramp up significantly over the next few years.”
Metro expects to open 12 branches, create 900 jobs and lend £1bn to Britain’s small businesses this year.
The personnel is also changing. Brierley’s clearly had a blast during his near-decade at the top of one of the financial sectors’ fastest growing businesses. He’s speaking to me because he’s intending to retire shortly, with David Arden, CFO of Sainsbury's Bank, taking over.
“Vernon has this phrase 'the best is yet to come',” says Brierley. “I'm a shareholder of this bank. I understand the numbers, I understand how it works. The best is absolutely yet to come. It is creating a revolution.
“It probably requires someone that's a little bit younger than me. Building something like this is hard work, it's exciting, it's fun, but it's also hard work. I've done it for 10 years now and I'm an ageing centre-half.”
Journalist and editor with eight years' experience covering politics and business. His work has been featured in a range of publications including The Guardian, The Financial Times, The Independent, the BBC and Vice magazine.