AIBGY - AIB Group plc (AIBRF) Q2 2023 Earnings Call Transcript

2023-07-28 10:45:03 ET

AIB Group plc (AIBRF)

Q2 2023 Earnings Conference Call

July 28, 2023, 4:00 a.m. ET

Company Participants

Colin Hunt - CEO

Donal Galvin - CFO

Conference Call Participants

Raul Sinha - JPMorgan

Alastair Ryan - Bank of America Merrill Lynch

Chris Cant - Autonomous Research

John Cronin - Goodbody

Diarmaid Sheridan - Davy

Grace Dargan - Barclays

Seamus Murphy - Carraighill

Borja Ramirez - Citi

Andrew Stimpson - KBW

Presentation

Colin Hunt

Good morning, and welcome to the presentation of our interim results for 2023. As usual, I'll spend a few moments reflecting on the highlights of the first half. I'll give an overview of the economic landscape as we see it, as well as provide an update on our strategic development before I hand over to Donal, our CFO, who will bring us through the financial details, and then we'll have some time for questions. As we move through the closing phase of the three-year transformation plan that we announced in December 2020, we're very pleased with how AIB Group is performing. We've overseen considerable positive change at AIB in terms of the strength of our customer franchise, the range of the products and the services that we present to market, the efficiency of our operations, and the quality of our balance sheet. At the outset, I want to thank my colleagues across the Group for the energy and professionalism they invested in our transformation plan that they brought to the task of onboarding, migrating customers, and seizing the once-in-a-lifetime opportunity presented by the imminent departures of Ulster Bank and KBC from our core market.

Our Group is in vigorous good health. Against a resilient economic backdrop, we're reporting organic growth in our lending book and continued deposit inflows on the liability side of the balance sheet. With a larger customer base in our core market than ever before, more assets at work, and a normalized monetary policy environment, we're reporting a very strong financial performance for the first six months of this year, with profit after tax of €854 million. Given the performance to date this year, and the momentum we see in our business, we're again upgrading our guidance for 2023, with net interest income expected now to exceed €3.6 billion, with the expected ROTI tipping above the 20% mark. This performance is firmly underpinned by continuing conservatism and how we run the business. We're cautious and forward-looking in our underwriting. We're rational in our pricing, and we're prudent in our provisioning. We have no doubt that this is the correct approach today and for the long term, and it is supported by very strong capital and liquidity positions, with a CET1 of 15.7% reported at the end of June.

Now, as I said already, we are nearing the end of our current strategic cycle, and the Group is in a position of great strength as we complete our product suite, migrate the great majority of the Ulster Bank portfolio acquisitions, while advancing the digitalization of our business with clear benefits for customers, for risk management, and for efficiency. We're also pleased with the progress in the broad ESG agenda in the first half of the year, with a strong performance by our renewable energy lenders, being counterbalanced by a significant and deliberate pullback in new commercial property lending. Our leadership in the ESG area was recognized by our peers earlier this year in the most impressive financial institution ESG bond issuer award by GlobalCapital. In addition, a key milestone in the Group's strategic evolution was reached at the end of June, with AIB returning to majority private ownership. So, I think it's only fair for us to regard the first six months of this year as very successful across a multitude of fronts.

Turning now to the economy. While we are expecting a moderation in the pace of growth, the real rate of expansion in modified domestic demand is forecast to remain comfortably in positive territory. This confidence is underpinned by employment levels pushing to fresh all-time highs, a rate of unemployment of 3.8%, healthy household and business balance sheets, and a savings ratio of 14%. Households and businesses will also be supported by the ongoing fall in the rate of consumer price inflation, with a forecast of 2.8% penciled in for 2024. We do recognize and take account of the headwinds from the uncertain global environment and the sustained tightening of monetary policy, which are reflected in a softening in our own manufacturing PMI readings. We remain positive about the resilience of the domestic economy, and we will continue to be a leading provider of capital to support economic, social, and environmental progress, while maintaining robust credit discipline.

We are now closing out on our 2021 to 2023 strategic plan with 12 planned initiatives concluding successfully in the first seven months of this year. The scale of that plan's ambition required significant collaboration and effort right the way across the organization over the last number of years. I'm pleased to report that the majority of transformation project activity is now behind us, with the migration of the bulk of Ulster Bank's tracker Mortgage book taking place successfully last weekend. The Group is now very well positioned and is poised to deliver a strong and sustainable performance over the years ahead.

2023 has been a busy year on the product front with years of planning and careful execution manifesting in an enhanced suite of customer propositions. AIB Life, our JV with Great-West Lifeco, is now live in the market and we are pleased with this performance and look forward to it making a material contribution to the Group over the medium and long terms. On highlighting the quality of the integration of Goodbody, we launched Goodbody Private, which significantly enhances the wealth proposition available to our customers. Meanwhile, we have just launched our AIB business app, which allows us to align the mobile experiences enjoyed by both our personal and our business customers, and we will continue to invest in new propositions to support our customers and to enhance our operational efficiency.

On the inorganics front, the Ulster Bank portfolio acquisitions and migrations are now substantially complete. On a combined basis, these transactions introduced over 45,000 new customers to AIB Group, with associated drawn balances in excess of €8 billion. We also welcomed 227 ex-Ulster Bank employees to AIB, who will work to service our expanded customer base. And together with our existing franchise, these acquisitions position AIB as Ireland's leading corporate business and personal bank. They are materially to our performing balance sheet today, as well as our prospects for sustained strong growth in the years ahead.

From an organic lending perspective, headline new lending growth of 2% masks quite significant differences in the performances of our various business sectors. New mortgage lending was broadly flat, with the market adjusting to lower switch activity and to varying speed of interest rate changes across the competitive landscape, while personal lending increased by some 29%. Property lending was down by 20%, reflecting a conservative and risk-conscious disposition towards that sector, while new business lending was ahead by 12%, with particularly strong performances reported by both our corporate banking and our energy climate action and infrastructure teams. Reflecting the quality of our customer franchise and our underwriting discipline, our balance sheet is very resilient. Mortgages remained the largest part of our lending book, accounting for some 50% of loan exposures, with an increased appetite for our fixed rate offerings pushing that share of the portfolio to 62% today. In and around 60% of mortgages have been underwritten since the introduction of the Central Bank of Ireland's Macroprudential Rules 2015, and the book is characterized by relatively low LTVs in terms of both flow and stock.

In our commercial real estate book, over 40% is residential in nature, with offices and retail assets accounting for 25% and 16%, respectively. In line with our conservative and forward-looking approach to asset quality, we have increased CRE Stage 2 assets by €2.3 billion, and we remain cautious on new lending opportunities in this space, at least in the near term. Meanwhile, we have made further progress in reducing non-performing exposures, which stood at 3.3% of gross loans at end of June. Legacy pre-COVID NPEs now stand at 0.3% of gross loans, highlighting the huge progress made over many years in strengthening the quality of our balance sheet. And it's worth recalling that in the aftermath of the global financial crisis, NPEs at AIB reached 30% of gross loans.

Sustainability is core to our mission, and will continue to play a central role in our strategic development as we prepare to enter our next planning cycle. Supporting all our customers and their transition to a lower carbon future creates significant opportunities for remunerative and risk-conscious capital deployment, both domestically and in selected international markets. We continue to make progress towards meeting the ambitious 2030 targets we've set ourselves, not only in terms of lending, but also in relation to our own emissions as a business. And we're looking forward to the autumn energization of our first solar farm in Wexford under our corporate power purchase agreement with NTR, which is key to our own net zero ambitions. We remain the leading ESG issuer domestically, and our peer-recognized leadership in this space is creating new advisory opportunities for the Group. We were delighted with the further reduction in the state's shareholding in June, which returned AIB to majority private ownership, and we, taking into account the partial relaxation of government remuneration restrictions, have updated our remuneration policies to provide healthcare for our colleagues from next year, and a variable remuneration scheme of up to €20,000 to be paid next year on foot of this year's performance. And accruals for this scheme are reflected in our costs outturn for the first half.

So, we have delivered on our commitment to transform the Group, more customers, more lending, more products and services. These are the underpinnings of our performance, to ongoing and sustained investment in our digital infrastructure. We will continue to enhance the quality of our customer experience and the operational efficiency of the Group. And of course, we remain disciplined in our underwriting and rational in our pricing because that's in the best long-term interests of our customers and our shareholders. While the 2023 performance of AIB will be regarded as truly exceptional, with a ROTI above 20%, we are very confident in the ability of our franchise and our business to generate very strong returns over the years ahead. The capital that we expect to generate will be deployed to invest in our business, both organically, as well as potentially through small earnings accretive bolt-on acquisitions, should such opportunities arise, while being very firmly committed to delivering progressive returns to our shareholders. The Group is now in its most robust position in decades, and we're committed to building on that strength in the interests of all the stakeholders that we serve. We've had an exceptionally strong start to this year, and we're set to deliver superior returns over the years ahead. Having restored AIB, we will invest all our energies in ensuring the Group remains sustainably strong for decades to come, and we look forward to updating you on our plans for the next phase of the Group's development and our medium-term targets to 2026 when we close out this year.

I'll hand over to Donal now.

Donal Galvin

Thank you very much, and good morning, everyone. We obviously finished 2022 with a lot of - a very strong trajectory. So, I'm going to run through the financial highlights for the first half of the year. We had a profit after tax of €854 million, total income of €2.2 billion, and that was made up of interest income up 98% and other income up 15%. Our costs were €897 million, which is up 15%, and the amount of employees in AIB rose to 10,000, at just over 10,000 staff. That gives us a cost income ratio for the half year of 41%. Our gross loans are now €62.8 billion, which is an increase of 3% from the end of the year. That's made up of two parts. Firstly, organic growth at 2% in the underlying business, which Colin would've talked to. And in addition, we onboarded some additional Ulster corporate loans of €700 million. The tracker portfolio, which Colin alluded to, was executed in July or onboarded in July at around 80%. So, that's not included in those numbers.

Our asset quality remains very strong and our ECL coverage is at 2.6%, with an MPE ratio of 3.3%. Our funding position is very strong. We saw an increase, a slight increase in customer accounts in the first half of the year. And overall, all of our liquidity ratios are very strong. And given the strong underlying performance, our CET1 fully loaded ratio is 15.7%. In terms of the income statement, there's nothing really here that I won't touch on a little bit later other than to run through some of the key financial metrics here. Net interest margin, 2.94%, a return on tangible equity, 21.5%, and earnings per share for the first half of the year at €0.31. In terms of net interest income, obviously huge number of moving parts here, given the speed at which rates have moved, which if I was to break these down into the main blocks, our liability costs would've increased up to €273 million. That's broken down into pay costs on deposits of around €77 million, and then €196 million really on wholesale liabilities where we hedge all of our issuance.

In terms of customer loans, there's obviously a benefit there of 33 basis points, and that's on a net basis. The underlying customer loans were up around 81 basis points, and our structural hedge is incorporated here, and that's minus 48 basis points. There's a strong benefit from our investment securities of €258 million. Our strategy has always been to asset swap all of our bonds. So, this really sees the impact of the rising rate environment and indeed on the balances held with the central bank, there's a benefit of 116 basis points or €695 million.

Overall, our guidance for 2023, we're happy to upgrade it from €3.23 billion to greater than €3.6 billion, and a net interest margin of greater than 2.9%. I think this slide is a really important one, just to really give a sense of the underlying factors that are going to impact NII for 2023 and indeed into 2024. We've assumed an ECB deposit rate at 3.75 at the end of the year, and we've also assumed a Bank of England rate of 5.5%. The other key ingredients into this, I would say is loan growth and loan growth assumptions, which I will touch on later. But overall, we see 10% growth in 2023 and around 3% growth per annum on an organic basis going forward. In terms of deposits, what we're seeing in terms of flows or movements from current accounts into more term deposits or term deposit accounts, in the first half of the year, our deposit beta would've been less than 10%, though we have been introducing more and more liability products for our customers, and we are beginning to see customers slowly transition into these products. And by the end of the year, we probably see an exit deposit beta of just under 30%. But then as I look into 2024, we think that we'll be able to manage it and hold it in or around that level.

Another key part of the interest income equation is related to our structural hedge. Obviously, I would've talked to this at the end of the year about our plan to term out duration and increase the quantum of the hedge. So, what I've tried to do here is break down the half year and show the quantum and the average yield for euros and Sterling, and where I see the exit yields and the exit quantums for the end of 2023. So, obviously, at the end of 2022, our quantum was around €20 billion. This has increased to €32.2 billion. We do see that increasing to €33.1 billion, but there's a lot going on underneath the surface here. As we go into 2024, we think that the duration, particularly in Euros, we want to maintain at or above 4.3 years. The yield is obviously going to continue to increase as we continue to reinvest at higher yields. And the decay that we see for in 2024 is around €10 billion s, and that's obviously going to be replaced with more hedges that are at the money. So, overall, like I would've said, we wanted to slowly extend the duration of the hedge, and you can see with the older swaps maturing being restruck at higher levels. As we go forward, that is going to provide a lot of support in a changing interest rate environment.

Very strong other income, particularly on fees and income, fees and commissions. Probably two areas that I would draw your attention to. Number one is the impact from the forward contract from the tracker portfolio, and that was around €125 million, €126 million in the first half of the year. Obviously, as that transaction matures and comes on our balance sheet, that will come out of other income and into interest income, but really the driving force behind the fees and commission and the trajectory that we're seeing there, it's generated from the increase in new accounts and new customers where we have 635 new customers, which Colin would've alluded to. So, we do see really strong trajectory coming into the second half of the year. And overall for this year, we see other income around €780 million.

Costs are €897 million, which is up 15%. Two main areas here. I would say on the staff side, we're seeing and have seen salary inflation from 2022 into 2023. We've increased our headcount by around just over 1,000 people. And we've also included an allowance for variable pay, which Colin would have alluded to in 2023 of around €30 million, and that will be for the full year. Overall, in G&A expenses, we're seeing inflationary pressures coming through here, not per se from an AIB perspective, but from external suppliers. And obviously, we have an expanded product range and expanded number of customers that we need to manage. Exceptional costs were €130 million, legacy items and strategic items, which we believe are primarily concluded now. So, we'll maintain our guidance for the full year on exceptionals. And as we look to the future with respect to positive things or headwinds, we obviously have a larger customer base, and we need to manage those. We need to onboard all of the inorganic initiatives, which we have effectively concluded in July. The inflationary environment, though still there and reducing, is having an impact. And like I said, there will be an impact in 2023 and 2024 from variable pay and insurance, but we do obviously have the benefits from our transformation program still accruing. So, our full year costs were expected to be circa €1.8 billion, with a cost income ratio in the low 40s.

In terms of ECL small charge for the first half of the year, maintained our cover rates at similar levels to the end of the year. I think that the credit story as I would say or see it is, retail consumer portfolios are remaining very resilient, notwithstanding the fact that rates have moved and net disposable income have changed or reduced. We're keeping a close eye on this, but certainly very few signs of deterioration to date. On the positive side, the businesses or the industries and sectors that were most heavily hit by COVID or impacted by COVID, they've all rebounded very strongly. So, we're talking leisure, hotels, et cetera. And we're seeing really strong performance in that area. And then the one area where I would say we're pretty focused on is specific areas in the real estate world, and more specifically in the office space or in the residential investment space. And in the first half of the year, we would've moved around €2.3 billion of assets from Stage 1 to Stage 2 in these sectors. Obviously, this is a yield impact on valuations, tighter interest rate cover ratios, but this is just a prudent forward-looking approach. Our overall LTV in our commercial real estate portfolio is around 54%, but we're just being cautious and very focused on that particular area. But for full-year 2023, maintain guidance here, 30, 40 basis points through the cycle and more likely to be at the lower end of that range for 2023.

In terms of balance sheet, not really too much changing overall at the half year. The larger change will take place in Q3 as we see the impact of the Ulster tracker portfolio come on board. But overall, for the half year, €45.5 billion held with central banks, €31.2 billion at the ECB, and around €4 billion with the Bank of England. Loan book movement. Overall, we've seen 3% increase in the first half of the year, and for the full year, we see that being greater than 10%, which is slightly more than what we would've imagined at the last quarter. Our funding position remains very strong. Loan to deposit ratio, 59%. LCR 164. NSFR 158, and you can see that the largest part of our liability base is in our retail banking franchise. It is in customer deposits. And within those customer deposits, around 53% of those will be covered by various guarantee schemes. So, very strong from a liquidity perspective. And from the MREL perspective, ratio is 31.4, and that's in excess of our requirements. Our CET1 outturn is very strong, 15.7%. That's a 5.1% buffer ahead of SREP and a 5.9% ahead of SREP on a transitional basis. Few moving parts within that, obviously really strong financial performance. So, 150 basis points of capital generation, 40 basis points charge for the buyback that was executed in 2023, 50 basis points reduction for the acquisition of the Ulster tracker portfolio. And we've made 100 basis points charge with respect to a dividend, which is at the upper end of our policy payout range. And there's a 40-basis point impact for RWAs for redeveloped and approved models mortgage and corporate space. We did make some efficiencies at 20 basis points which is part of BAU, but overall a really strong outturn in CET1.

So, we're going to wrap it up now. Guidance for the year, just to pull it all together, we see net interest income greater than €3.6 billion, net interest margin greater than 2.9%, other income around €780 million, cost of €1.8 billion, cost of risk at the lower end of the 30 to 40 basis point range, and a ROTI of circa 20%. When we're to think about distributions, no significant change here from what we've talked about before. Obviously, the focus for us has really been on business performance, organic capital generation, being mindful of all regulatory developments, and really driving that performance for 2023. So, in 2024, from 2023’s profits, we would look to pay ordinary distributions utilizing our normal dividend policy and consider additional distributions to move from our CET1 towards our medium term target. As we move to our next strategic cycle, with a continued focus on creating shareholder value and sustainable returns, we will review our medium-term targets and update these in due course. Thank you very much.

Question-and-Answer Session

A - Colin Hunt

Thank you, Donal. And now we're going to go to the lines for some questions. Our first question this morning is from Raul Sinha at JPM. Good morning, Raul.

Raul Sinha

Good morning, Colin. Good morning, Donal. Thank you very much for taking my questions. Can I have two please to start with? The first one is just on NII just thinking about the very strong momentum you've got. You've yourself described the performance that AIB will deliver this year as somewhat exceptional. I think last call, you were keen for us not to upgrade the 2024 NII expectations too much. I mean, obviously looking at this performance and even triangulating what you're saying around deposit beta with your hedging activity, it appears that there should be a little bit more of a follow through into 2024 in terms of the NII upgrade. Would you care to comment on that? And maybe if you don't want to talk specifically about 2024, could you talk about the stability of NII from a medium-term perspective? That's the first one. Shall I give you my second one, or do you want to take that first?

Colin Hunt

Give us the second one. Yes.

Raul Sinha

In terms of the second one, I guess the ordinary dividend, again, going back to the exceptional nature of profitability this year, the ordinary dividend payout potentially should be towards the low end. Just thinking about whether or not you want to maintain a progressive dividend as well over the medium term. So, should we think about the mix within your distributions to be weighted predominantly towards buybacks, perhaps greater than 50% in terms of payout from buybacks and perhaps towards the low end of your payout ratio for the dividends? Thank you.

Colin Hunt

I'll briefly speak about the second question first before I hand over to Donal to address the first one. We have an established ordinary dividend policy, 46% payout of distributable profits. We're not going to provide guidance at this stage in relation to the exact level. That is obviously going to be the subject of board debate when we actually conclude 2023. We have consistently said that we wanted to embed the inorganic acquisitions. We wanted to complete the transformation program. And in 2024, we would look to begin the process of returning our surplus capital to our shareholders, subject to a supportive economic environment, subject to regulatory approval and subject to a board approval. And our intention is to do that or start that process in 2024 out of the 2023 performance.

Donal Galvin

Yes, hi, Raul. I think with respect to the NII, the outlook, certainly from my perspective, is all very much in line with what my expectations were with respect to asset growth, with respect to how we've increased our structural hedge. The great unknown is really around behavior, customer behavior, and as we brought on online more products of different durations, et cetera, trying to estimate what the behavioral aspects of that were going to be. So, we've seen kind of a low flow from current accounts to term accounts in the first half of the year. We do think that it is going to increase in the second half of the year, but like I said, as we go into 2024, I still see the betas close to that exit level. So, as a result of that, and given the very strong performance of 2023, as we go into 2024 and 2025, the trajectory is certainly stronger than what we would've imagined the last time we spoke.

Colin Hunt

Thank you, Raul. Our next question is from Alastair Ryan at Bank of America Merrill Lynch. Good morning, Alastair.

Alastair Ryan

Yes, good morning. So, just to press on things you don't want to answer again, but nice problems. First, on the bad debts, I mean, the bad debts in the first half is all management overlays again, which are now a very high proportion of your total loan loss reserves. And given the strength of your book and the strength of the economy, I'm trying to see where your bad debts might come from in the second half. It doesn't - it feels like your number's very conservative there. And secondly, just on the capital, it almost feels like you need to be distributing. If you're only growing at 3%, you're going to need to be making very high distributions to keep your capital ratio flat rather than going down. So, I suppose to ask the question in a way you might answer, why is there only 3% growth in the loan book, given the capital generation from next year onwards? Thank you.

Colin Hunt

In relation to the provisioning, the bulk of what we're seeing and what we're reporting in the first half of the year is a PMA. It's our best judgment as to what may happen in terms of the credit environment as we move through the back end of the year. It's very much in line with our conservative approach. We have a very conservative approach to underwriting. We have a very conservative approach to the assets we choose to put onto the balance sheet, and we have a very big conservative approach to provisioning. And we strongly believe at a philosophical level that that is unquestionably the best way of running the bank and the long-term interests of all our stakeholders. It is a reflection of the fact that we are dealing with an evolving monetary policy environment, and we haven't seen the full impact of the tightening monetary policy yet, and we are still dealing with a uncertain global economic environment.

Donal Galvin

Yes, I think the question around the return on tangible equity and how that evolves over time, we want to deal with all of our medium term targets together very comprehensively. And we will do that in due course. The trajectory on income is certainly a little bit more than what we would've expected the last time we spoke. And we are cognizant of the fact that our return on tangible equity and our return on equity, that gap is widening. But what we do have now, I think, is a very good view of where ECB rates are going and where they're going to stop. So, the outlook for 2024 and 2025 is certainly a lot more certain than there has been for a while. We have concluded all of the inorganic items, so we certainly feel like we have all of the key ingredients now to look to the future with a good understanding of the baseline so we can address all of the capital structure in its entirety with respect to investment in the business and obviously return to shareholders.

Colin Hunt

Thank you very much. Next question is from Chris Cant at Autonomous. Good morning, Chris.

Chris Cant

Good morning, both. Thanks for taking my questions. If I could just again ask on the NII outlook into 2024, please. So, when I think about your guide for this year, the greater than €3.6 billion, the sort of quarterly progression applied in the first half, I guess you're pointing to an exit run rate post that 30% beta assumption of something like €3.6 billion as of kind of the 4Q exit run rate. If you are then expecting the deposit beta and deposit trend component of the NII walk to be sort of stabilizing into 2024, and you've got €10 billion of positive structural hedge churn plus a bit of loan growth, should we be then expecting 2024 NII to be sequentially higher, or is there something else that you are worrying about taking a bite out of the NII as we look into 2024? It feels like absent a significant unhedged rate move from the ECB downwards, we should actually be expecting probably some growth year-over-year into 2024.

So, that would be the first question, please. The second is on cost. I know towards the back of the slide, you sort of flagged, you're going to be revisiting the guidance and the targets in due course, but I think formally, you're still guiding to a sub €1.75 billion cost number for 2024. I presume that that isn't really what you are now expecting absent some other cost program that you are thinking about impacting year-over-year. Because I think previously you were saying sub €1.75 billion for this year and next. You're now saying circa €1.8 billion for this year, but then still sub €1.75 billion for next. So, just wanted to understand how we should be thinking about that. Is that guidance now effectively a bit stale on 2024 costs, please? Thank you.

Donal Galvin

Okay, Chris, thanks very much. I think overall, if I look at the cost picture in 2023, we've effectively revised guidance on the income side up around €630 million. And then today, we've obviously adjusted costs for 2023 up around €50 million. So, for 2023, I think we're all pretty comfortable with that. Our transformation program is still in place. The €200 million takeout, 50% of that is completed prior to 2023. 25% of that concludes in 2023. And then the last 25% of that will conclude in 2024. So, the main impact in cost that we're seeing in 2023 is from the increase in FTEs. And if I was to speak just at the highest level on that, we probably see that quantum plateauing in 2023 and then 2024, 2025 and beyond beginning to reduce again as we get all of the customers onboarded. The new item is as Colin alluded to, the change in variable pay and also the introduction of insurance for all of our staff members, which was announced last November by the Minister for Finance. So, we need to take that into our thinking. But we will take a provision for 2023 of around €30 million for that, and then just try and understand that a little bit better for the future. So, that certainly is new. But look, overall, our customer base is higher than it's ever been before. So, our goal really is to maintain and improve our customer service. We need to bring our expanded product suite to our enlarged customer base, and that's going to be a huge focus for us as we go forward. And we're going to drive efficiencies through digitization and simplification. So, thematically, they're the things that will be on our minds for the outer years. And then I've tried to give you some specifics that have impacted us for 2023. In terms of NII, I think that 2023, if we're to talk about peak NIM, et cetera, 2023 will definitely be the peak year. And that really is just because the speed at which rates move and the benefits that we're seeing particularly in the first half of the year and going into the second half of the year, they're just not likely to repeat again. The hard thing to predict is the behavioral side. And I've really tried to give you an understanding of our current thinking there around the deposit beta. But you're right around the structural hedge as we go forward, 2023 into 2024. With the churn there at new rates, that will be a marginal benefit on an overall basis. But 2023 will be the peak year, but the impact in 2024, 2025, I don't see as being too material.

Colin Hunt

Thank you. Next, we're going to John Cronin at Goodbody. Good morning, John.

John Cronin

Good morning. Thanks for taking my questions. Just firstly, look at clarification one on the deposit pass-through. So, does that exit second half less than 30% beta relate to the entire suite, the €103 billion, or just the interest-bearing component? So, just a clarification there. Secondly, perhaps another clarification on rate sensitivity on the table at the back end of the presentation, you outlined that a 100 bps reduction in offices rates would drive a €288 million head to Euro NII. On that, look, is there anything you can tell us around on assumptions you're making within that disclosure around fixed and variable mortgage rates pass-through of lower rates? Are you assuming it's just automatically passed through or are there different assumptions? And then thirdly, on the RWA efficiencies that you mentioned, I know we've kind of spoken about this before and it's obviously a 2024 or later kind of timeframe. But if you - is there any kind of directional sense roughly that you could give us in terms of the potential sizing of CET1 capital ratio benefit that you could generate through those efficiency programs perhaps over a long period of time variance? Thank you.

Donal Galvin

Hi, John. Thanks very much. Just to get through these. When I talk about beat, I look at the entire deposit portfolio, so it's everything. I don't try and segment it down. In terms of the IRBB assumptions, I haven't highlighted these specifically. I've been really focused on my assumptions around pass-throughs in a rising rate environment. And in terms of focusing on the downside sensitivities, I don't really want to go into much detail on those because I really want to work through and validate some of those assumptions directionally. It's obviously correct. Structural hedge has increased from €20 billion to €32 billion, and it's extending a duration. So, it’s certainly a lot less. But I'm just not comfortable with any of the assumptions in a falling rate environment just yet. I'm still really focused on the asset side and the rising rate environment. In terms of SRT, we have organizationally focused on the inorganic activities and now they have concluded. I've included in the slide basically my intention to execute an SRT transaction in the first half of 2024. What I would say is, it’s certainly not my intention to do a jumbo portfolio type of SRT. I think these types of products, this is a capital management tool. I want to be able to introduce it and be able to execute transactions on a multi-year basis. So, you can expect to see multiple SRTs over the coming years and quantums probably not in the particularly large size, maybe targeting €1 billion per transaction. And I would say, like it depends on the portfolio which you're focusing on. Some are going to have different impacts, but we'd certainly look to be targeting on a €1 billion transaction, something like a 30 basis point benefit. But I'll be able to update closer to the time when we're closer to deal time.

Colin Hunt

Thank you. Now we're going over to Diarmaid Sheridan in Davy. Good morning, Diarmaid.

Diarmaid Sheridan

Thank you. A couple of questions if I may. So, first of all, just around the loan book and the guidance of greater than 10% growth. I guess if we include Ulster Bank, that looks like you're not assuming much more by way of growth in the second half. So, just curious to see what you're seeing at the moment and what particular parts of the portfolio are - commercial real estate is obviously going to be a struggle in the second half of the year, but what areas are growing relative to what areas are a little bit more stagnant. And then maybe just a follow on from John's last question there around risk-weighted initiatives. I mean, obviously, if we look at your mortgage portfolio and now that you've got trim reflected. You have a very high risk-weighted density on that portfolio. You also have quite a material standardized component from mortgages. So, at what point in time does that begin to normalize I guess to an extent? The system across Europe is much, much lower than that. When we look at kind of lending in Ireland, LTVs are not massively out of line with anywhere. And we've got micro-credential rules which cover a very significant proportion of the book. So, when are you going to start to see benefits of that relative to what the IRB model today indicates you need to employ on those portfolios? Thank you.

Colin Hunt

Okay, thanks, Diarmaid. In terms of the various parts of the loan book, personal lending very strong in the first half, up 29%. Business lending up 12%. Within that, the strongest performing part was again, our energy climate action and infrastructure division, which increased its total new lending by about 25%. Mortgage growth, pretty flat. And the key driver there is the absence of switcher activity more than anything else. And we don't expect to see switcher activity picking up in the back end of the year either. And what you've seen in the first half in terms of CRE lending down 20% half one over half one, I think that's probably broadly indicative of the trend we'll see as we move towards end 2023.

Donal Galvin

Yes. And look, Diarmaid, on the risk weightings, the way that we would tend to think about this is clearly never to make positive assumptions about RWA improvements because one can only set oneself up for negative surprises. So, obviously, as new businesses originated and operated on new models over a period of time, there is a benefit, okay, but it is a multi-year benefit. Really, the rationale for me wanting to introduce let's say more capital-efficient technology like SRTs, is to be able to optimize the capital in different portfolios at different times, et cetera. So, I might look at a corporate portfolio. I might look at a mortgage portfolio. It'll just give us the flexibility to be able to manage where, let's say the market may price risk versus where we have a different risk waiting internally. Historically, in years gone by, I've steered clear of executing transactions like this. The cost I felt at the time was prohibitive at a time when our capital was particularly strong. But as we go, as we move into the future, I want to get more efficient on the capital. I want to have all of the different levers that are available. And if risk is priced different in capital markets versus obviously our own risk weightings, well, then that's the way in which we'll be able to narrow that gap.

Colin Hunt

Thank you. We're now going to Grace Dargan in Barclays. Good morning, Grace.

Grace Dargan

And maybe if I could just come back on the beta. So, the implied just less than 30 by the end of the year, that's a really significant step of in H2. So, it'd be interesting to hear what kind of mix shift you are assuming to get there. Are you assuming any kind of underlying pass-through on current account savings? It just seems very difficult to get to that kind of below 30%. And then secondly, on the structural hedge, you've given some really helpful commentary. Maybe you could just probe a little bit more on that. So, appreciate you don't have a kind of evenly rolling hedge, and you've called out the €10 billion next year. But maybe what do you expect to be reinvested in Q3, Q4 this year? And what is the yield on the subset of those swaps being reinvested in H2 and in 2024? And I guess in particular, one UK bank disclosed that they've effectively pre-hedged some of their structural hedge. Would you do that? Would you be prepared to do that? Interested for your thoughts? Thank you.

Donal Galvin

Okay. Thanks very much, Grace. I think overall on the structural hedge, the bulk of the activity for 2023 is all but complete. And really what I tried to do in the slides was show you the exit stage, which will encompass all movements. As I go to 2024, difficult looking at quantum. Sometimes you would rather duration over quantum. But the hedges that we will do throughout 2024, in Sterling, it's very formulaic. every month we just rehedge it 10 years, okay? And we maintain that duration of around five years. Whereas in Europe, which is our core market, with all of the retail behavioral stuff, it can be a little bit more nuanced. But obviously, to maintain a duration greater than 4.2 years, you're going to see a hedging activity, I'd say between three and eight years at a weighted average of around 5%. And then the timing of that will probably be fairly straight line on a quarterly basis throughout 2024. So, then in terms of yields, it really depends what kind of forward curve you want to imagine. In terms of the betas, look, it’s very hard to predict. I would say for H1, within Ireland overall, the deposit betas were very low. All of the banks are introducing different saver products at different levels. There hasn't been that much movement, perhaps because there wasn't much certainty around let's say peak ECB rates. I just have to imagine that as time goes by, we will see a normalization of behavior to an extent. And our certainly management's best view at the moment is in line with that exit beta of just less than 30%.

Colin Hunt

Okay. Thank you, Donal. We're now going to Seamus Murphy at Carraighill. Good morning, Seamus.

Seamus Murphy

Good morning. Yes, good morning. Sorry, Donal, I just want to come back please, if you don't mind, just to the related questions to your peak name assumption in 2023, I suppose. I was just looking at your average balance sheet on Page 31, and when we think about the customer spread, it’s broadly flat since ECB started to raise interest rates. I think it's about 30 basis points, and that's primarily due to a sharp on loan margins rather to three-month driver. So, like in other banks in Europe, we look at which are driver-sensitive to customer spread has expanded significantly. So, I suppose in your case it has not, and most of your upside coming from all the items in your balance sheet. But when we think about that as we look forward, then assuming that the majority of your balance sheet or your loans are contractually linked ex your fixed rate mortgage book, then surely the customer spread would have to rise if we assume a flat deposit beta, sorry, an exit kind of like a 30% deposit beta entering into the second half - into the first half of next year. So, I suppose the question is, it really seems impossible to call peak NIM if you do have a repricing on your loan side and your customer spread should rise over time. And the second question then, I suppose a similar question in relation to the peak NIM assumption in 2023, it was just structural hedge. I know people have asked about this a bit, but my understanding was that you had, I think €20 billion at the end of 2022, and €14 billion of that had a very short material of 18 months. Now, I do appreciate that the new additions to the hedge will be a drag, because yield curve is inverted for the additional €14 billion that you're targeting will be a drag to NIM. But if you're the new additions, like in terms of the €14 billion that's rolling, I think that you previously said that cost you €400 million to €500 million of NII in the current year, but that comes back. So, therefore, really, we should be thinking about an additional €300 million to €400 million of additional upside on your NII. And so, when I add those things together, unless we see a really, really sharp rise in the deposit beta way above your expectations, and it's very hard. I mean, maybe my maths are completely wrong, but it's very hard to see how NII doesn't grow more substantially into 2024 relative to what you're calling out on the call this morning. Thank you.

Donal Galvin

Yes, I think you've - well, you've certainly done the sums correctly there, and I've given you the moving parts with respect to maturities and new hedging activity overall. In 2023, there was those maturities at lower yields, and we are moving the weighted average yield on that portfolio more at the money, certainly in euros. Sterling, obviously 3% away from rates. So, look, that as it's described, and the effect there will naturally be positive. And the extent of that will be down to what happens on interest rates. I just don't want to - it would be incorrect of you to run away on the net interest income side. So, there will be an improvement on the SHP, but there is going to be increased costs related to paying away on liabilities and deposits. We haven't really seen it yet, but there's an inevitability to it. And indeed, it's something that we will be encouraging our customers with a different product suite, and moving to that more normalized ALM position, which we are moving towards quite carefully and cautiously. But for me, that's the key focus for sustainable underlying profitability, 2024, 2025, getting to that more normalized ALM position and putting in place various protection measures to protect against, let's say the range of possible outcomes in a changing rate environment.

Colin Hunt

Thank you very much indeed. We're now going to Borja Ramirez at Citi. Good morning.

BorjaRamirez

Good morning. Thank you for taking my questions. I have two quick questions. Firstly is a follow up on deposit beta. Your loan to deposit ratio is at 59%, so it's one of the lowest in Europe and below your domestic peers. So, I would expect your deposit beta to be below your peers, given you have a bit maybe more flexibility in terms of managing deposits. And also, I understand that with regards to the evolution towards second half of the year, is it correct to assume that deposit beta should be quite stable there or a slow increase into the summer season? And also, if you could give details on the latest developments given the increase in the deposit rates. What have been the customer trends in terms of moving from - into your new liability products? Thank you.

Colin Hunt

Thank you very much indeed. In relation to customer behavior, we haven't seen that much migration from demand deposits into the fixed products that are out there yet. But we are expecting it to happen as we move through the summer into the autumn and towards year end. And that is one of the - that behavioral assumption is one of the driving factors behind what Donal has been talking about in relation to beta expectations as we exit 23.

Donal Galvin

Yes, with respect to the LDR 59, that's going to change obviously in Q3 with the onboarding of the old stratas, but still very low. We're in a small market but it's still a competitive market, and obviously we will look to ensure that we're able to price assets, liabilities fairly for all of our customers, and obviously ensure we do that at appropriate levels to make sure that all of our balance sheet is working on an accretive basis.

Colin Hunt

Thank you. Now we're - the last question of the morning, we're going to Andrew Stimpson at KBW. Good morning, Andrew.

Andrew Stimpson

Morning, everyone. Thanks for taking my questions at the end. Two for me, please. Firstly, on commercial real estate and then one on returns. On commercial real estate, I know you've shifted to Stage 2 though. Have you had to take any actions on any of those exposures yet? Have you had any covenant breaches or waived the covenants or anything like that? I'd be interested in the color there. And then on the second one, and I have to say, I really hate it when analysts do what I'm about to do, so you'll have to forgive me please, but one of the things we've heard from bank investors is whether the government or anyone else will allow banks to make such high returns. Has there been any sort of guidance, pushback, anything like that from any supervisors, regulators, local officials who are going to raise their eyebrows at a 20% return on tangible? I know that's an annoying question. It's great to see a bank produce great returns like this, but nevertheless, that is a question that I think is going to come up. Thank you.

Colin Hunt

On the returns, we are characterizing the ROTI that we expect to deliver in 2023 as exceptional. And I certainly am not aware of any eyebrows being raised in any quarter in relation to the exceptional performance that we have delivered and the very strong financial results that we presented today. There is a direct and symbiotic relationship between how strong this bank is and the strength of the Irish economy. And we are not alert to or aware of any signs that the success of the bank is generating concern at regulatory or political levels.

Donal Galvin

Yes, just specifically on the commercial real estate question, as we look through the overall portfolio and we're trying to look at areas that are going to be impacted by higher rates, typically valuations lag what we all imagine is going to happen, okay? And I think given that rates have moved 4% in around 12 months, we can figure out at a total level where valuations should go. So, we've really just looked at some of our transactions that are maturing in 2023 and 2024, and we're imagining what the impact is going to be on those from a higher rate environment. So, we make a number of different assumptions. And ICR cover breaches are going to be an inevitability of banks that lend to commercial real estate if they were underwritten at tight levels in the first place. So, any change to that would be a significant increase in credit risk. So, we've really been quite front-footed on this. I know there's a spotlight on this segment from the market. We're very happy to highlight our portfolio. We'll work with all of our borrowers. We're going to ensure that we are able to continue to lend through the cycle to all of our customers. But in terms of actual real deterioration, we're not seeing any of that. This is just a forward-looking view on those parts of the real estate sector.

Colin Hunt

Okay. So, there you have it. We've just moved past the top of the hour. Thank you very much indeed for your questions and for your attendance here this morning, and we very much look forward to getting back to you all in the autumn when we present our update for the third quarter. Thank you.

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