Good morning and welcome to TSB's strategic update. For those of you who don't know me, my name is Cecilia Romero, and I'm head of Shareholder and Investor Relations. Before we start, let me just quickly run you through today's agenda. Our executive team will be spending the next 90 minutes going through various presentations with you. We will start with the introduction by our Sabadell CEO Jaime Guardiola. We will then continue with a review of the different pillars of TSB new strategy and our financial outlook for the next three years. That will be presented by different members of the executive team of TSB, led by its CEO Debbie Crosbie. Post presentations, we will have a live Q&A session for 30 minutes, and the possibility to ask questions will be only available to those that are with us in the room today.
At around 1:00 P.M., we will be serving lunch. Now, without further ado, I would like to open the floor for Sabadell's CEO, Mr. Jaime Guardiola.
Thank you, Cecilia. Good morning, everyone, and thank you for being here. I would like to begin by sharing a few relevant highlights of Sabadell today. We are the fourth largest banking group in Spain, with EUR 148 billion gross loans, 25,000 employees, and 12 million customers across our geographies. We have a rich heritage shared with TSB and have grown significantly in recent years. Between 2000 and 2013, we grew our size by seven, and we became a key player on the consolidation of the Spanish banking industry. In 2014, we had sufficient national scale to become more international in our outlook. It was at this point that we acquired TSB, and I will explain more of the rationale for that later on. Our current strategic plan, Sabadell 2020, has a strong focus on profitability, and we are working hard to create more value for our shareholders.
It will be helpful to share the group progress in 2019 and go through the five aspects that define the good performance of this year. Overall, our business performance has been good, and core banking revenue has shown resilience in the low-interest rate environment. This year, we have made good progress in our NPA reduction and have executed several institutional sales. In addition, we have already received the necessary authorizations and are on the right track to close all the NPA institutional sales announced in 2018 by the end of this year. We have also good progress in reinforcing our capital position. The fully loaded CET1 ratio pro forma increased by 71 basis points in the nine months to the end of the third quarter. In the U.K., TSB is regaining commercial momentum and is ready to start a new chapter of growth, as we will discuss today.
Finally, we have made good progress in shareholders' value creation. In the nine months to the end of the third quarter, we have generated circa 7% increase in our tangible book value per share. Let me quickly go back to 2015 and remind you the rationale for the TSB acquisition. In 2015, we have an international growth strategy and acquired TSB as a key part of this strategy. The acquisition was attractive in many ways. The U.K. banking market was very attractive, having a well-defined and stable regulatory framework and good future growth prospects. The strategic fit was clear. TSB had a retail focus and product range aligned with Sabadell's expertise. TSB was a strong challenger bank franchise in the U.K. and provided a sound basis to drive further growth. Sabadell expected to generate revenue benefits by accelerating the development of TSB franchise.
In addition, there was potential for savings, mainly through the expected full migration to the Proteo technology platform. Since acquisition, we have faced adverse market conditions. For instance, Brexit uncertainty, increased competition due to the ring-fencing of retail banking activities, and lower interest rates environment. 2018 was a challenging year for TSB as we moved to our new IT platform. Migration was a very complex project. The design and build of the TSB new platform took place over a period of almost three years. The go live led to unexpected problems. We have been working closely with regulators and others to ensure that the proper lessons have been learned from the migration. Last week's publication of the Slaughter and May report, along with other pieces of information and reports that have been commissioned, contributes to those lessons learned.
The post-migration situation resulted into a slight slowdown in volumes in 2018, which in 2019 are growing again. Nevertheless, TSB's business model has enabled strong growth over the last five years. Customer lending has grown by circa 42%, and customer deposits have grown by circa 21%. After a complicated 2018, TSB entered 2019 determined to regain its position as the leading challenger bank in the U.K., and it has made significant progress to deliver on each of its 2019 focus areas. The third focus area is the IT platform. The technology performance is now stable, achieving 90.8% service availability. Furthermore, the IT platform has started to provide new functionality and create competitive advantage. The second one is to regain commercial momentum. TSB is back on track from a commercial perspective, seeing good momentum and volume growth in customers, loans, and deposits.
The third one is to rebuild the reputation of the business. In terms of customer satisfaction, TSB Bank's NPS ratio, as well as mobile NPS ratio, have improved this year, and mobile NPS is back to pre-migration level. The fourth one is the leadership team. TSB has made significant changes in its leadership team. A group of experienced senior banking executives have joined TSB to form a smaller and more focused executive committee. What does the future look like for TSB? TSB now has all the ingredients to help it succeed with its new strategy. TSB has a low risk and simple balance sheet with an indemnity to protect it from legacy conduct risks. Our IT platform is now delivering real benefits to customers and to TSB.
It provides quicker time to market with a digital and customer-centric mindset, and is a fully open platform ready to deliver open banking and partnerships. Furthermore, there is a scope for significant efficiency improvement since TSB has a high cost-to-income ratio compared to its peers. However, with the right operations and technology in place, there is a real opportunity to drive costs down. Delivering simplicity and efficiencies will be top priorities for the coming years. In addition, TSB has the appropriate infrastructure and the capability to grow efficiently and deliver positive jaws. As I already mentioned, TSB has a renewed leadership team. Let me introduce you the first of today's speakers. Debbie Crosbie joined TSB in May this year as the new CEO. She has led the development of the strategic plan we are presenting today.
Debbie was previously the executive director and chief operating officer in another U.K. challenger bank. She has designed and implemented significant turnaround strategies and oversaw the rapid development of new digital capabilities. She has a well-deserved reputation in the industry for delivering change at pace and with precision. Since she joined in May, Debbie has already made an exceptional contribution. I'm very confident of her ability to deliver on the plan we are presenting today. I will now hand over to Debbie, who will introduce other members of her team and the new strategy for TSB.
Thank you, Jaime. Good morning, everyone. I'm delighted to be here, even with the croaky throat. When I joined TSB six months ago, I already knew the power of TSB's brand. Since joining, I've really been struck by the passion of the people in TSB to deal with customers, and also the very powerful partnership that TSB enjoys with its parent group. Before I get going, I want to introduce three members of my executive team who are going to help me set out our strategy today. First of all, I'd like to introduce Robin Bulloch. Robin is our customer banking director. He's going to cover the customer pillar of our strategy. He's going to talk about how we focus on our customers, how we change our channel mix, and deliver a new range of innovative products to grow our business.
Robin will then be followed by our Chief Operating Officer, Suresh Viswanathan. He will cover our new IT platform and how this delivers a competitive advantage for our business. He'll describe our plans to increase our digital capability, and he'll also cover how we will drive much greater efficiency through our business. Then last but certainly not least, our CFO, Ralph, will set out the impact of our strategy on our financial plans. First, before I move to the future, I just want to give you a quick reminder on the challenging economic conditions in the U.K. On top of the market condition challenges that Jaime already outlined, we're also navigating more challenges. U.K. banking is highly competitive, and never before has there been such a focus on operational excellence and resilience for U.K. banks. Fintech models have attracted rapid customer growth.
They still face tricky questions on how they will deliver sustainable profits and steady income streams. In TSB, we already have a very strong foundation. We've got 5 million customers, 3 million of whom already have their everyday banking relationships with us. TSB is a very strong brand. It's known right across the U.K. We have a low-risk balance sheet with strong net interest income. Our balance sheet reflects our prudent approach with low cost of risk, few non-performing loans, and an average LTV for mortgages that's well below the market. Recently, I'm delighted to say that we have returned to growth on both sides of our balance sheet. Our retail business has nationwide reach, and we're now extending our business banking capability throughout the U.K.
The challenge for TSB is now to unlock greater value by leveraging our strong brand, capitalizing on our significant national presence, continuing to grow our business safely, and delivering much greater efficiency across our business. This morning, I'm going to set out the changes that we will make as part of our new strategic plan. However, before starting to talk about the future, I just want to anchor you on a few of the key starting points in TSB. First of all, our net interest income. TSB delivers a strong net interest income with a loan yield and retail funding base that opens a wide spread relative to peers. Our net lending is weighted towards mortgages, which is the bedrock of U.K. retail banking, whilst our strong PCA current account franchise with long-tenured retail deposits maintains our low cost of retail funding.
Our mortgage portfolio is low risk and prudently underwritten. We still have considerable growth potential. Our buy-to-let exposure is in line with the market. We have fewer tracker and interest-only mortgages than the market. Our average LTV is low. Our mortgage presence is well diversified geographically. We have a high penetration in Scotland. We are broadly in line with the rest of the U.K. market. In summary, we have a low risk, well-diversified mortgage portfolio with good upside for prudent growth, funded by our retail low-cost funding base. Great foundations to build upon. Before I go to the future, I want to tackle head-on the impact of migration in 2018. With the publication of Slaughter and May report last week, the migration is once again fresh in our minds. Jaime's already spoken earlier about how the migration impacted TSB installed growth.
For our customers, our people, and our shareholder, it was a very difficult period. Despite this, as you can see from the slide, our customer relationships were remarkably resilient. Just to give you a sense of that, only about 6% of people using the current account switching service to leave their bank prior to migration were TSB customers. You can see that immediately after migration, this did jump to 11%, but you can see that immediately after migration, that proportion returned to historic levels. Migration hit our mobile customers the hardest, and our mobile NPS fell from 51 down to - 17, but you can see again, recovering to historic levels within less than a year. There's no question that migration stalled the business, but you can see that it's behind us now, and the time is right for TSB to move on.
Part of a new start for TSB is a new purpose. Since joining TSB, I've invested a great deal of my time with our people and our customers, and I thought very carefully about how we respond to the challenging market changes in the U.K. environment. Therefore, how do I develop a blueprint to how I lead and transform TSB, one that speaks to our customers and very importantly, aligns everything that we do in TSB to deliver our strategic plan. At the heart is our purpose, money confidence for everyone, every day. We've conducted extensive research of our target market, and our customers tell us that what they want is confidence from a bank that's on their side, a bank that takes the worry and the hassle out of banking and is designed around customer needs.
That's their needs, not the products and services of banks. That is what we think of in TSB as money confidence. Our purpose is supported by three strategic drivers. These are our strategic outcomes, and these will drive everything that we do in our business. They will drive alignment, they will drive focus, and they'll drive agility throughout TSB. Our ability to deliver with pace will be critical in this transformation. When faced with the rapidly changing customer preferences and of course, a volatile economy, I believe that it's more important than ever that we have a purpose that connects our people emotionally to our business. Business models are undergoing rapid change. Consumer expectations are changing. The boundaries of banking are blurring. I need to ensure that we're ready to respond, to compete not just for today, but to build a business that's competitive for tomorrow.
The three strategic drivers in our blueprint provide the clarity to ensure that our execution focuses on transforming TSB into a business that's competitive and relevant for the future. Most importantly, this is a cultural transformation to a data-led, customer-focused business. Focused, fit, and fast demands us to be agile and responsive in our organization design. It demands us to become expert in the delivery of change, flatten our organizational hierarchies, and acquire better skills in technology and data. If we get this right, as a mid-tier bank, our size becomes a competitive advantage whilst the larger incumbents still grapple with complexity and legacy. Every experience money confident, this concept challenges us to think about differentiation in all of our customer experiences.
Our aspiration in TSB is to use this as a foundation to drive experiences beyond traditional banking through the use of open banking and partnerships. Our new IT platform easily enables this. You're going to hear lots more about this from both Robin and Suresh. Digital inside and out. Importantly, this is not just about customer, this is about efficiency. It's about how we run our business. Digital technology and automation reduces errors, increases efficiency and responsiveness. It creates new opportunities for TSB to compete. To help you understand how does this come together and the vision that we set for a business, we've put together a short video to let you understand how we see TSB.
[Presentation]
He will cover how we'll become a simpler and more efficient bank, leverage value from our new platform, simplify how we run TSB, and transform the way we work to deliver GBP 100 million in net cost savings. Over a three-year period, we will take out costs from the business in a safe and sustainable way to maintain our attractive low-risk income. Which brings me to the third pillar, operational excellence, which I'll cover now.
When I joined TSB, I was aware of the significant media attention that our IT stability was going to get given the history of migration. Since migration, there's been an absolute focus on ensuring that service for our customers is strong. You can imagine how disappointed I was on Friday when, due to a processing error, some customers did not receive payments on time. Suresh will cover more on that incident later. In my mind, there's no acceptable level of customer disruption, and we are very focused on reaching 100% availability. I want to give you some context. In the last 12 months, our service performance has been very strong against our peer group.
The published FCA data on service disruption, and that covers the interruptions to telephone, mobile, and internet banking, shows that we have had fewer incidents than most peer banks. We are aiming for an even stronger performance in the future. One of the ways that we will secure that is through the execution of this strategy. I'm very passionate about execution. We will deliver our planned commitments. We have a very clear, straightforward plan, which I'm very confident we will deliver. Our risk management framework is key. We have a strong change governance and control. From the stability of our IT platform to our prudent capital and liquidity management, we are putting in place an operational framework that will help us transition to a more competitive bank that delivers efficiency through a strategy of digital inside and out.
Jaime's already mentioned it's worth remembering that we enjoy a legacy conduct indemnity from our previous owners. Accountability for our future conduct risk is clear. Our Customer Banking Director owns all of our customer experiences for both business and retail. We listen to customers, we ensure good conduct is at the heart of everything we do. Operational risks benefits from the same organizational clarity under our Chief Operating Officer, Suresh. We have prioritized IT resilience and cybersecurity, we are making sure that organizationally we own the control of delivering it. We're streamlining the partners we work with in IT. We are transitioning away from the current myriad of diverse players managed today on our behalf by SABIS to taking direct control in the U.K. with clear accountability for everything in IT transitioning to our Chief Operating Officer, Suresh.
We will be partnering with a small number of larger industry leaders. This approach not only brings cost savings, but importantly, it reduces risk. This is a joint program of work that we are undertaking together with our parent group. It is already significantly advanced. You might be surprised that I started with this pillar. For me, safety and security of delivery is fundamental to the execution of this plan. I also expect that any misstep that we make will continue to be magnified. Too many mid-tier banks have been blown off course by self-inflicted wounds. We are very focused on ensuring that does not happen again to TSB. The migration has produced many useful lessons. Now with that, I'm going to hand you over to Robin, who's going to talk you through the customer pillar of our strategy. Thank you.
Thank you, Debbie. Good morning, everybody. I arrived in the business three months ago now. The one thing that has really struck me and indeed, if I'm honest, surprised me is just how positive everyone has been about our new banking platform. It is clear to me now that as a challenger, this is a source of genuine competitive advantage. The platform is more than able to support our existing five million customers and our plans for growth. We already have a suite of core banking products and an increasingly strong digital presence. Our mobile app continues to improve with a strong app store rating for its functionality. It is also important to note that we will maintain a geographically dispersed branch network serving roughly 90% of postcode areas across Scotland, England and Wales.
Customer advocacy for our brand has recovered strongly across both retail and business in the last 12 months, our business is growing, we are well-placed to be an effective challenger bank. We undertook extensive research with over 6,000 customers and non-customers covering both personal and small businesses. Looking at who we attract, who we retain, and the areas of strongest commercial opportunity, we have the greatest resonance with three core segments that collectively we have called the aspiring middle. Made up of working families, money balancers, and variable income customers, this group have a wealth of unmet needs and present clear opportunities where we can help. They make up 67% of our current base and a slightly lower percentage of the U.K. population. At TSB, we are particularly well-placed to grow this segment. We already over-index in this area.
They spend twice as much with their primary bank than other segments and, as a result, have a higher risk-adjusted income. Substantial growth is expected in the variable income sector by 2025. Finally, and importantly, they have a series of unmet, simple needs. Our plan is to be mobile and digitally focused for all, simplifying the TSB service and purchase experience whilst building a series of new propositions across all our channels. This will have particularly strong appeal to our target segment, more of which I'll come onto now. Our customer research told us that there is a stronger appeal for service-led current accounts compared to credit interest accounts.
87% of our customers said they would open a service-led account that helps them manage their money, save for the future, and save on their spending, compared with a much lower 57% of customers who said they would be attracted to a current account purely for credit interest. It is also worthy of note that the market is growing twice as quickly for paid-for accounts than for standard accounts. We have taken all of this on board when designing our new current account range, starting with a new free-to-use account which will help customers make more of their money every day, including alerts, savings options, and ways to save as you spend. For a small monthly subscription, offer additional benefits to help reduce the risk of unexpected costs. Finally, an added value account offering solutions such as insurance on travel and breakdown with a competitive fee.
The new non-credit interest and fee-based current accounts will improve our funding costs and diversify our sources of income. More importantly, will appeal to more of our target segment than our existing products. Turning to savings briefly, we have a loyal customer base. Our plan is to continue steady growth in our personal savings balances through the plan period. In addition to the ongoing management of the book across volume and margin, we plan to build savings account opening through the mobile app, stay competitive in the ISA season, make further improvements to the use of customer data to be more proactive in offering savings accounts. Finally, customers have told us in research that they would like to earn more interest if they are able to leave their money on deposit without touching it. We plan to respond to that.
We're introducing a series of improvements to our lending offering throughout the plan period. We will improve upon the high-quality service to our brokers by building seamless connectivity, allowing smoother and faster systems and decisions. Digital product transfers will be launched in the next few weeks, which will aid customer retention, and we will build a digital mortgage sales journey in 2021. Getting a loan or a credit card will be significantly quicker through a new mobile sales process that we plan to introduce next year. Furthermore, we will enhance our use of customer data to make the most suitable offer to our customers who are looking to borrow money. Unsecured loans to non-customers will be relaunched in the next two months.
Looking to our target segment, the appetite for an instalment credit product for lower-ticket lending has researched very strongly, we plan to launch this toward the end of next year. We also intend to look at referral opportunities to partners in cases where we are not able to lend. All of our retail lending will be supported, for the first time, by new customer-level decisioning within our existing risk appetite. We believe these new plans and other smaller enhancements over time will help drive sustainable growth in our lending. Our plans for business banking are ambitious. Importantly, we have the opportunity to be competitive, particularly in savings, without the challenge of cannibalizing our existing book.
We've already made several moves to grow our business banking franchise, including the launch of 25 months free banking, a 1% interest rate on savings, a 20-minute application process, and partnerships with Square, Enterprise Nation, and Funding Options. We are seeing momentum in all areas of the business right now, including new lending. As an indicator of the strength of our offer, we are gaining between 20% and 25% of our target segment customers from the incentivized switcher scheme. To further support our plans for growth, we plan to develop a straight-through deposit account opening process to allow immediate credits to customers' accounts, and all of this will be supported by up-weighted marketing in the period ahead. These initiatives will deliver a low cost of funding and contribute to the diversification of our lending income. Branches will remain an integral part of our multi-channel offering.
We have invested in three new flagship branches in the last 12 months, but we acknowledge that our customers are doing more and more online. We will change the shape of our network. At present, we have more than double the number of branches per 10,000 customers compared to the U.K. average. We conducted a detailed review and analysis of our current estate, including its usage, its profitability, alternative TSB branches, the needs of vulnerable customers, and the accessibility of ATMs and the post office. This review has identified 82 branches for closure next year, leaving us with an estate of 454 branches at the end of 2020. These closures will have a minimal impact on our overall product sales over the planned period, particularly as up to 80% of our sales are expected to come from the digital channel by 2022.
In response to this change in customer behavior, we will be investing over GBP 120 million in our digital capability, considering both CapEx and OpEx. This will include increased automation in branches to help meet these changing needs. We work in an industry with new and emerging opportunities through data and digital to better reach and connect with our current and future customers, and we're using this to transform TSB marketing and customer communication. I would say we're adopting a retailer mindset as we develop the TSB brand and propositions in a way that is fit for a new era in banking and relevant to our customers. We're investing in our data and analytics capability to better reach our current and future customers and to leverage the opportunities presented by open banking.
We're working with a range of new expert agencies covering data insight, creative, and media to develop winning campaigns and offerings. We'll relaunch the TSB brand and our new propositions through a major campaign in quarter one next year, including extending our award-winning partnership with Pride of Britain. Across all our product lines, I believe our market share assumptions to be prudent, and we have a winning plan. We have a clear segment whose needs we will meet. We have a clear set of changes to our offering and plan. In the key areas of mortgages and retail savings, we will enhance our propositions for customers and remain competitive with projected market shares in line with either current or historic levels. Personal current account growth will be supported by a new suite of products that research strongly with our target market.
Our new and better application process online and on mobile will remove much of the friction that customers experience today. The growth in unsecured lending is, in large part, a return to our historic share as we reintroduce capability that existed before. With the introduction of streamlined mobile and digital experiences, tailored offers, and our instalment credit product, our market share projection is well within reach and, importantly, within our current credit risk appetite. Our subscale business banking franchise, allied to our strong brand, allows us to compete effectively for new business customers, and we are already seeing momentum in this area. We will involve our marketing and insights from customer data to ensure we proactively engage with our customers on propositions that resonate with them.
To conclude, the initiatives that I have talked you through today are underpinned by the flexibility and scalability of our new platform, delivering an improved experience for our customers and balance sheet growth. I would now like to hand over to Suresh, who will take you through our plans to simplify the business.
Thank you, Robin. Hello, everyone. Good morning. My name is Suresh Viswanathan. It's just been 100 days for me as Chief Operating Officer of TSB, and today what I thought I'd share with you is my learnings around the architecture of the company. I'd then like to share with you a perspective of where we are taking the business in the next three years between 2020 and 2022, what are we planning to invest our money towards, what that will deliver, and then the so what of doing all of that. Firstly, turning to the architecture of the company. The first area to camp on this slide is what we refer to as our data center footprint. What's interesting about TSB is that it's a multi-cloud hosted company, and we have no captive data centers, i.e., we don't own and manage data centers as a bank.
Let me try and bring that to life a little bit for you. Today when a customer of ours calls us into our contact center, the call actually lands in the BT cloud. If they identify themselves to us using their card details, that actually gets picked up in the First Data cloud. The customer relationship management platform, Microsoft Dynamics, runs in the Microsoft cloud, their balances and transactions are hosted in the IBM cloud and the mortgage platform in the Unisys cloud. In other words, we are orchestrating across service providers to deliver to our customers. Relative to competition, what this gives us is significant speed and cost advantages, as we don't have to keep investing in our infrastructure to keep it up to date. We can rely on our partners and their skills to help us accelerate.
This is one of our significant competitive advantages as we deliver Strategy 2022. The second aspect of our platform is a single layer of connectivity. In tech speak, this is called microservices. In plain English, the way you should think about it is that to access the rich content that's embedded in all of our back-end platforms, mortgages, cards, et cetera, we now need to learn to speak just one single language, and the connectivity layer provides just that for us. As you can see from the picture in front of you, whether it's the branch layer or the telephone banking platform or the internet platform, they all need to connect just once to this single microservices layer rather than worrying about understanding the complexity of each of the back ends. Once again, this gives us significant speed advantages.
Net net, what I'm trying to get across to you is we have speed in the architecture by design. Our job over the next three years is to primarily deliver functionality on the mobile platform so that customers can access all of TSB on the go. A lot of the functionality we want to make available on the mobile platform already exists today in other channels. We are committing, as you've heard before, GBP 120 million in digital, which includes CapEx and OpEx, towards enhancing the mobile platform. As you can see from the architecture, we don't need to spend too much money enhancing the connectivity deep into the back ends. It's largely to be spent on the mobile platform itself. The final leg of our architecture is our ability to rapidly connect to the external world.
We already have a fully functional open banking stack that runs out of Amazon Web Services, and we have partnerships with the likes of Square, which our customers really, really like. Our job between here and 2022 is to make sure that we're able to scale our partnership engagement model so more partners can offer their content to our customers. Let me briefly cover the issue that affected some payments into TSB accounts, that were delayed in the early hours of Friday last week. We quickly identified and rectified it by around 11:30 A.M. that morning. We have no doubts that we will experience issues as the rest of the industry does, and quite rightly, we will be under the spotlight. What we will make sure is that we recover quickly and ensure that there is minimal impact to customers as we move forward.
Just to recap the slide for you, we believe we can go at pace. We have to optimize for cost, but speed is designed into the architecture, and we're putting around GBP 120 million into the digital platform so that customers can use us on the go far more than they can do today while we ensure operational resilience. I'll now turn to what is it that we're planning to do in this timeframe. At a macro level, there are three things that we are trying to accomplish. Number one is to increase mobile adoption for our customers. Right now, 56% of our active customer base uses our digital platform, and we're looking to increase this. As Robin mentioned, we are implementing new marketing tech stacks. This will help us to generate targeted marketing campaigns for our customers based on what we know about them.
The second aspect where we want to radically enhance the way customers engage with us is in the space of digital servicing. Even today, there is a lot of capability that is available deep in our back end platforms. As an example, oftentimes we misplace our cards, and while we are full of angst until we find the card, in that moment, we would love to be able to freeze the card and then unfreeze it when we have discovered where we had misplaced our card. Functionality like this is actually available in the back end. Our big to-do over the next three years is to make sure that customers can self-serve. The third area, of course, is to increase our digital sales journeys from where they are to over 80% by 2022.
We're very confident, given the architecture and our focus on operational excellence, that we will manage to deliver these capabilities over the next three years. None of this is going to happen without fixing the way we work to adopt more agile practices and to ensure that our colleagues are up to date with their digital and data skills through our new digital academy. Finally, turning to the so what. Adil, can I have the Yeah, thanks. What's the so what of all of this? The so what is that by 2022, after taking restructuring costs of GBP 180 million during the period 2019 to 2022, we will deliver a net cost saving of GBP 100 million per annum. It broadly breaks out into these three areas.
Number one, what is it that we do with the branch network by way of optimization? Number two, as our customers use us on the mobile substantially more for servicing and sales, how do we run our organization in an efficient and productive way? Number three, by effectively managing our spend with our third parties. With that, I'm going to hand you over to Ralph for him to take you through the details of the financials. Thank you.
Thank you very much, Suresh, and good morning. You've already heard from my colleagues the cornerstones of our strategic plan, and I'm going to set out how the strategy translates into a financial plan for the coming years. Firstly, a financial orientation on TSB, which has, as you heard from Jaime and Debbie, experienced some significant expenditure and business disruption across the preparation phase of the IT migration, and then in the recovery phase after migration in April 2018. In the second half of 2019, we have seen a return to healthy organic growth in customer assets and liabilities, and our future plans assume that we continue to grow at rates largely within those achieved between 2015 through 2017 by key product category.
You will know that TSB forms an important part of Sabadell's balance sheet with around 25% of both lending and deposit balances. That it makes very little contribution to profit, and that is the key issue that we will resolve through the strategy. In line with other U.K. banks, our customer net interest margin, defined as NII as a percentage of total lending, has seen some mild softening with ongoing mortgage market pressure and the dominance of secured lending in our overall mix, reducing from 2.9% in 2018 to 2.8% in the first nine months of 2019. We expect our net interest margin to be reasonably resilient from here, as I will go on to explain.
More fundamentally, TSB's cost-to-income ratio has been persistently high at 85% for year-to-date 2019, and this will be addressed decisively in the strategic plan. Our capital and liquidity levels are robust and give TSB a solid platform for the future, as well as capacity to manage TFS expiry, as I will explain shortly. Moving to the economic backdrop to our strategic plan, our economic assumptions are in line with consensus and presume a broadly stable environment to what we see today, characterized by an element of ongoing political and global uncertainty, continuing low policy rates, ongoing competitive pressure in key product markets, and regulatory changes which, without thoughtful management response, will adversely impact income lines. These have been taken into account in our planning.
TSB's financials are mostly sensitive to three of the macro drivers set out on this table, namely house prices impacting secured lending impairment provisioning, unemployment with primary impacts on unsecured lending provisioning, and interest rates, both base and swap rates, which underpin net interest income and TSB's structural hedging program. At present, we have a program of around GBP 15 billion rolling on a one 60th basis every month with the five-year swap rate the key reference point. Our plans assume ongoing modest house price growth, broadly stable unemployment levels, and no change in the Bank of England base rate. Therefore, crucially, our plan is not dependent on improvements in base or swap rates from current market implied levels. Forecast profitability improvements are going to be delivered through primarily transformed cost efficiency, where we have significant scope for improvement.
We will reduce the cost base by a net GBP 100 million per annum after absorbing the effects of increased amortization from investment and expected inflation. The bulk of the remaining uplift is delivered by mid-single digit annual balance sheet growth, broadly matched on both sides of the balance sheet from similar start points and a moderately increased level of earnings diversification towards unsecured lending. It is our view that these origination levels are appropriate for TSB and drive the optimal return profile. We will not chase market share, but similarly will take incremental opportunities where they make financial sense. This balance sheet growth will translate into a gross operating income compound annual growth rate of 2% throughout the plan, or 3.5% when excluding 2019 non-recurrent income, which includes GBP 16 million related to TSB's contract with Visa and GBP 20 million from gilt sales.
This target also assumes a lower level of fee income in the forecast period due to changes in regulation and a normalized level of trading. At a high level, we anticipate delivering profit after tax, excluding in year restructuring charges of circa GBP 130 million-GBP 140 million in 2022 from current levels of around break even. This implies an underlying return on equity at TSB level of about 7% in 2022. Suresh and Robin have explained in detail our path to a significant improvement in cost efficiency. In financial terms, over the course of the plan to 2022, we will incur branch and FTE restructuring charges of around GBP 180 million, which will be more or less equally distributed across the length of the plan. We will invest in digital capability, as you've heard.
After absorbing the impacts of OpEx and amortization from investment and wage and contractual inflation, we will deliver net cost efficiencies of around GBP 100 million by 2022 versus 2019, which will also drive an improvement of 15 percentage points in our cost-to-income ratio. We do not anticipate any business restructuring expenditure beyond 2022. I briefly touched on TSB's forecast balance sheet trajectory earlier. Lending to customers is forecast to grow at a compound annual growth rate of 5%, with more or less linear growth across the plan horizon. The key point to reinforce is that although we will modestly shift towards more unsecured lending, we will do so carefully and within current risk appetite.
As a reminder, TSB was not selling unsecured lending in certain channels for large parts of 2018 and 2019, which means that the proportion of unsecured lending on the balance sheet fell from around 8% at the end of 2017 to 6% by the end of Q3, 2019. Our planned targets are returned to about 8% by the end of 2022, with restored and additional functionality. Business banking lending will start to feature, but is not expected to be a major driver in this phase of our strategic plan. On the deposit side of the balance sheet, we see significant headroom to grow business banking deposits materially and economically, starting from a low base.
While the absolute scale of the RBS Incentivised Switching Scheme has not to date been significant, our overall share of those switching has been encouraging at 12% or 25% of the segments that we actively participate in. Focusing on risk, we have stressed that we will operate within the parameters of our current risk appetite. TSB's cost of risk is expected to increase from around 16 basis points to just under 30 basis points in 2022. This change is predominantly driven by business mix and not by any foreseen underlying deterioration in the books, as evidenced in the figures on this page. The anticipated cost of risk is still well within levels experienced historically. As flagged earlier, TSB's cost of risk is most affected by house prices and unemployment rates, the sensitivities for which are set out on this page. Moving now to our funding plan.
TSB's funding plan actively addresses TFS expiry and the roll-off of balances from now to 2022. We currently have around four and a half billion of TFS drawings, as we prepaid GBP 1.6 billion last week using excess liquidity we were holding. We will repay GBP 3.6 billion in 2021 and the remaining GBP 850 million in early 2022. We intend to issue wholesale debt at frequent intervals, both covered bond and RMBS. Additionally, unsecured debt transactions are scheduled throughout the length of the plan and will be subscribed by Sabadell as internal MREL. Aside from wholesale issuance, the funding plan is characterized by growth in retail and in particular business banking deposits, as outlined earlier, which together for non-wholesale are forecast to grow by around GBP 4 billion over the next three years.
We expect the blended cost of funds for TSB to rise by around three basis points from 55 basis points to 58 basis points in 2022, including some mitigation from propositional and pricing shifts in customer deposits, which Robin outlined in his presentation. Our key liquidity ratios remain robust throughout the plan. With regards to net interest margin, we have already touched on the major drivers. Firstly, the rate environment, and here we would place more emphasis on the impact of swap rates on structural hedges rather than base rates, which is expected to remain flat over the plan horizon. The transition from higher historical to lower forward rates is expected to have a small negative impact on overall net interest margin between 2019 and 2022. Secondly, the evolution of higher wholesale funding costs, which partly funds TFS replacement.
Third, the positive impact of loan mix shifting more towards unsecured lending. Lastly, the dynamics of the U.K. mortgage market, which we expect to remain competitive as it is currently. The net of these drivers is a modest softening of net interest income as a percentage of total average lending from current levels into 2020, with broad stability in subsequent years. Overall net interest margin, expressed as net interest income divided by average total assets, is expected to be broadly stable as surplus TFS cash reduces. We have set out TSB sensitivity to rates at the foot of this page for a forward 12-month period. A 25 basis point parallel shift up or down from current levels reflects a GBP -12 million- GBP +10 million exposure or opportunity. That said, we believe we have made reasonable assumptions on this front, tracking closely to current market implied levels.
When we pull it all together, in 2022, we expect TSB's profits to improve from the current broadly break-even position in 2019 to a profit after tax of circa GBP 100 million and around GBP 130 million-GBP 140 million, excluding the last tranche of restructuring costs, which we don't anticipate recurring in 2023 and beyond. At these levels, TSB's underlying return on equity will be above 7%. A few quick points to make on capital. Firstly, TSB's strategic plan is self-financed, requiring no additional capital from our parent. Secondly, in 2020, TSB will adopt a 90-day definition of default on the mortgage portfolio from the current 180-day measure. In addition to organic risk-weighted asset growth, this methodology change is expected to result in a CET1 ratio of circa 16% by the end of 2020, versus the current level of around 21%.
This ratio remains at levels that we are very comfortable with and which give sufficient room for growth and in time dividends to our parent. It is also important to highlight that the impact in RWAs related to this change in default definition was already included in the group's capital ratio in the second quarter of 2018, therefore will imply no impact at group level. With that, I'll hand back to Debbie to wrap up.
Okay, thank you, Ralph. You've heard a great deal about TSB's starting point. A reminder, we already have 5 million customers, a resilient brand that recovered strongly from the migration impacts. You've heard a lot today about our IT platform and the competitive advantage that it will drive for us in the future, our low-cost funding, and our low-risk mortgage portfolio that already delivers strong returns. We are confident there is more value that we will unlock in the business. We focus very heavily to be clear on our target market segment, we are very confident that we are relevant and attractive to this segment and what they are looking for a bank for the future. We're developing products and the customer journeys and the distribution channels to sustainably grow our balance sheet. We've covered we will transform our branch network.
We will invest in new locations where it works, but overall, we were reducing our branch footprint much more in line with the rest of the market. In our head office locations, we will redesign our organizational structures, we'll change the way we work, and we'll simplify our business in TSB to make us much more efficient and agile. We'll leverage our new platform to respond to the changing needs of our customers, but when we take out costs, we will do it safely and sustainably. We're investing GBP 120 million in digital to make sure that all of our services are designed to be digital first and unlock the potential of our platform, driving efficiency and experiences that our customers tell us they want. We will preserve our balance sheet quality while delivering sustainable income growth within a controlled risk appetite.
By 2022, we will deliver GBP 100 million of net cost savings, improved profitability, and an ROE above 7%. To be clear, that is not the end of our ambition. While this transformation is significant for TSB, we have a very clear, a very straightforward plan that is credible, and importantly, we will pace delivery to ensure that we de-risk execution and manage risk. I have got an excellent leadership team who have impressive track records of already successfully delivering similar or more complex programs in some of the best-performing financial services firms in the U.K. and internationally. Very importantly, I have the correct support and alignment of our board in the U.K. and of our parent group. Thank you. I'm now gonna hand you over to our Group CFO, Tomás Varela, who will take the Q&A.
Thank you. Thank you, Debbie. We are now going to open the floor for questions. I will be directing who goes next for the questions. There will be two members of the team that will be giving you a micro, so the person who is given the micro will be putting the question. May I also kindly ask you to limit your questions to a maximum of two per person, and also state your name and your firm's name because some people may not be acquainted with other people. Please, the first question. Yes, Alvaro.
Classical.
Alvaro Serrano with Morgan Stanley. Thanks for the presentation. I have two questions, one on the cost plan, the GBP 100 million cost cutting. Obviously, the ultimate goal of having a modern platform is cost leadership, presumably over time. If I look at your cost targets, it does look like you still have a cost base higher than peers. I wonder how you're looking at cost benchmarking, cost per branch, or cost per assets, ROAEs. If I think about those metrics, you're still above. Are you still in investment mode? Is there more to look forward to? Can you help us think of how ambitious the GBP 100 million is? Second, on your margin assumptions, on the front book, I think you've given a bit of a clarity. On your SVR book, what assumptions are you assuming on attrition there and the headwinds from that book?
Thank you.
Look, I'll start with cost and then we'll get Ralph to unpack the net interest margin assumptions. I think what you've got to be clear about is the start point for TSB is hugely challenging. What we are doing is we're taking 15 percentage points off our cost-to-income ratio. I just want to go back to what I said in the presentation. This is not the end of the cost story for TSB. We want to make sure that we pace delivery and execution so that we do this very safely and sustainably for the future. You can expect that as we roll forward, there will be significant more cost savings and cost optimization to come.
I will really stress that this plan is about de-risking execution and doing it in a way that we're investing for the future so that we've got a business that's credible and it's relevant as we move ahead. I'll maybe let Ralph unpack the question on net interest margin.
Yeah. I think your main question relates to the SVR and HVR books within TSB. Currently, the level is about 21% of total balances. We are forecasting that that erodes to about 12% or 13% by the end of 2022, and that's fully accommodated financially and in our NIM forecast.
Thank you. I think next was Paco, and then Marta.
Yes, hello. Francisco Riquel from Alantra Equities. Thank you very much for the presentation. two questions for me, one on income and another one on costs. On income, when I look at the numbers, you are planning to grow the loan book by GBP 5 billion with a stable NIM of 2%. This gives me GBP 100 million of incremental income during the period. However, when I look at slide 45, there is only an incremental net profit of GBP 10 million. I would like you to help me reconcile the numbers, because the new lending growth is coming with a very low single-digit ROE. What are the headwinds I should consider between the new lending growth and the margins? What other revenue headwinds have you considered in the planned costs or provisions in general, or if there is any degree of conservatism here in this plan?
I think there are two main points there. The first one that notwithstanding balance sheet growth of around 5% CAGR, it indicates not quite like for like NII growth. Secondly, the level of gilt gains, which we don't expect to recur in 2020. Similarly, there are regulatory impacts which crystallize fully in 2020. There's an initial step down from 2019 into 2020, and I think those impacts collectively would account for your differential.
Okay, thank you. On the second question on the cost side. You are coming with a three-year restructuring plan, so obviously it's a long timeframe. When you merge two banks, typically this is the timeframe for a merger to obtain synergy. This is a standalone story. I hear you want to do it safely, if you can please give us details on the milestones of the restructuring plan. I just heard that the plan on the branch network is going to be done next year in 2020. What other milestones shall we monitor during this plan?
Look, I think what we've flagged today is clearly the changes that we'll make in 2020. There will be further changes to our branch network that we're not going to talk about specifically today, and there's two reasons for that. One, if we're going to announce further changes, we talk to the people impacted first. Secondly, which is really important, is that it's critical that we do this responding to customers. We believe that 2022 will be a very strong start, but you should expect that there will be more changes to the network in the outer years of the plan.
Marta.
Marta Romero from Bank of America, Merrill Lynch. Got a few specific follow-ups on net interest income, and then another one on costs. On net interest income, thank you. You've told us the attrition you expect on your HVR, SVR book. Can you give us the actual yield on the blended book and how much is HVR? Also, your Whistletree portfolio, how much is it contributing to your net interest income today, and how much do you expect it to still contribute by 2022? On Oh, sorry. This is very specific. On your cost of deposits, you've announced you're currently running at 40 basis points. This is pretty much in line with the industry. You've suggested you're going to be tweaking your offer. How low do you think you can go? Moving to costs, sorry, following on Alvaro's question.
It looks like when you look at the metric, cost to lending volumes, you could have been a little bit more ambitious. Do you think a tight capital position at the parent was a constraint when defining your cost savings plan? Thank you.
I'll try to remember all of that. You might need to remind me, though. The revisionary rate, blended it towards the end of it, because it will also include a business banking revision rate. There will always be something. We expect to blend to around 350 basis points by 2022 from current levels. I think that's slightly different to where it is. In terms of how much remains on the Whistletree portfolio, we expect that to be about GBP 900 million by the end of 2022. You asked a question about our blended deposit cost. This is customer deposit cost, where current level is about 40 basis points. We do see opportunity there, and this links back to Robin's presentation. We think we can probably, on the current account repricing, probably go to something like 33, 34 basis points. I think that hopefully answers most of your questions, Marta.
I'll maybe just follow up on costs again. Look, we are ambitious to go further here. We're very thoughtful, though, about the path and the execution. What we set out is a plan that importantly is self-funding. The restructuring of TSB means that it's really important to pace this, I think, as a self-funded plan and do it safely and securely. Beyond 2022, as I've outlined, there will be more to do.
As well as Sophie.
Yeah. Hi, it's Sophie from J.P. Morgan. I just wanted to ask a couple of clarifications. On page 42, you mentioned you expect mortgages cost of risk to go from -1 basis point to +1 basis point by 2022. Is that the correct way of reading it? That you only expect 1 basis point cost of risk for your mortgage book?
Yes. Historically, we have experienced extraordinarily low levels of impairment on our mortgage portfolio. The reason it goes from a negative one basis point in the current financial year is that we have had impairment stock releases, particularly on the Whistletree portfolio on the close book. Clearly, that is not expected to recur. Probably a point to make on cost of risk for year- to- date 2019, is that given those impairment stock releases, a better underlying proxy would be 19 basis points for this year, excluding those stock releases, comparing to a sub 30 basis point. The major point to reinforce that is a mix driver moving from that 19 basis points of underlying into a sub 30, and it reverts back to the levels of cost of risk that we experienced back in 2016, 2017. Entirely in line with our expectation and behavior on the books.
Okay. Thank you. How should we think about in case there would be a hard Brexit? How do you think this number would change?
It depends on the period of manifestation and how quickly any kind of deviation on the macro assumptions crystallize. The cost of risk sensitivities that we've laid out on this page assume an immediate transmission mechanism, which is likely to be much more pessimistic than reality would pan out as. I would characterize it that way. I wouldn't expect an immediate shift in these metrics on the macro environment should a hard Brexit occur. I think our macro scenarios broadly accommodate that.
Okay. I had another follow-up question. You mentioned that the change of definition to 90 days review on the mortgage book, that's going to have a 5% impact on the core equity Tier 1 ratio on TSB. How should we think about the impact on Sabadell, the parent?
It has no impact. It's already been accommodated. The definitional shift from 180-day definition of default to 90 has been fully accommodated in Sabadell's numbers already.
You will remember, Sophie and all, that we reported in the second quarter of 2018 an impact. A step-up in group RWAs that included already this add-on anticipating the impact that TSB would have standalone and will happen next year.
Thank you.
Welcome. More questions. I think there, I can't see very well who is raising their hands. Dara and okay.
Hi, Daragh Quinn from KBW. Could you give us an update just where we are in terms of the regulatory investigation into the migration and what kind of timeline or magnitude of fine we could expect, and at what stage? How would that interact with insurance policies that the group might have to cover losses from 2018?
Okay. In terms of the regulatory investigation, that's ongoing. We don't have a firm timeframe. Our expectation is that that will conclude next year. That's absolutely at the discretion of the regulators. How do we think about the fines through insurance? The plan has taken no account of any insurance recoveries, and equally has not taken account of any fines. Whilst we shouldn't conflate the two, the plan considers neither.
Good afternoon, Stefan from Citi. If I may ask you a couple of questions on the IT spend. You are targeting GBP 120 million. I understand that's the cumulative through 2022. Can you give us the split between OpEx versus CapEx? Any breakdown in terms of front loading to 2019 or 2020 versus 2020 to 2022? The IT spend that you expect post all these issues have been resolved. IT spend as a percentage of total cost or IT spend as a percentage of total revenue, just to kind of see what's your run rate in terms of IT spend after all this has been cleared. Lastly, some color on the relationship between Proteo U.K. and Proteo Spain. Thank you.
Okay. I'll maybe start and Ralph can comment on the numbers. Look, our GBP 120 million, I think the point that's really critical here is that the heavy lifting in terms of creating a modern, flexible platform is behind us. This GBP 120 million is about exposing new and better functionality for our customers. I'll let Ralph cover the split between OpEx and CapEx. We're very confident that this absolutely adequately provides for what we need and the spend, and in terms of how it's phased, you should think about is more or less equally phased throughout the plan.
Yeah. We made the points on most of the execution being broadly linear across the plan. Debbie's right that the split of the GBP 120 to OpEx and CapEx is around 50/50, and they've been fully accommodated in the numbers. OpEx fully had taken account of in year, in the year of spend, and any CapEx through the amortization has been absorbed.
Just to clarify, if I may. In case that this is not clear, but I think it's been said already, but regardless of the split between this 50/50 between CapEx and OpEx, the guidance on cost savings includes already the amortization impact of the CapEx. It's all in. Okay.
Just your question about the relationship with Proteo U.K. The Proteo platform was always developed by our parent group that was specifically for the U.K. It was based off of the technology that Sabadell have run very successfully for many, many years. The platform was always developed for the U.K. market. What we're changing is that at the moment, the model is that it's delivered to us as a service from SABIS, and we are in the process of moving that service delivery under the direct control of the U.K. team. You shouldn't think of any platform changes, any changes to any infrastructure. It's purely about how that service is delivered.
The benefit of that is it's about bringing it closer to our customers and making sure that we can respond more quickly to the change in the market, and was frankly always part of the plan that the group had for U.K. and TSB.
Okay. Same table, guys to the left. There.
One of my questions was not answered.
One of your questions was not answered?
There was a question in there that I didn't hear an answer to. Going forward, IT cost as a percentage of the total, what are you expecting from 2022 onwards on an ongoing basis? Thank you.
We're not going to disclose the individual amounts. What we're very confident is, though, that of the GBP 100 million net cost savings, I think you need to be very careful with those percentages because they absolutely are influenced by the scale of the bank. We believe that in terms of the competitiveness that we'll drive, it will absolutely drive and deliver for us a very competitive cost base in the future.
I think Ignacio Ulargui wanted to make a question as well.
Thank you. Yeah. Hi, this is Ignacio from UBS. A couple questions from me.
Oh, sorry, Ignacio.
Going to try to.
I was confused. Sorry. It was the other Ignacio. Sorry.
Sorry, Ignacio. Ignacio. Yeah. I'm going to try to ask the question around ambition of the cost plan in a different way. In a situation where revenues are below expectations, can you step it up, the GBP 100 million net cost saving between now and 2022? The second question is whether you can give us a little bit of color on the unsecured lending growth in terms of yield, product, customer versus non-customer, a little bit of indication on that. Thank you.
You want to take it?
Yeah, you want to take it first?
No. On you go.
I think we always have more scope in terms of the plan. Debbie's outlined that we are totally committed to this plan. If one of the lines doesn't fully cooperate, we might have some additional scope on the cost line, which we think we can find, which probably won't require restructuring. The normal sort of discretionary pots that we'd be able to look at. We'd expect some mitigation to be available. Just to reinforce on the unsecured plan, it'll be mostly geared towards our normal unsecured lending products at rates similar to today. We will reintroduce functionality which brings in non-current account customers. As we call them, non-franchise unsecured lending. That will come on stream. I think Robin, do you have any sense on the split on those?
Yeah. Broadly, the introduction of lending to non-franchise customers will add about 0.6 to our market share of flow. We have an expectation that by having slicker, quicker, better digital and mobile journeys, that that will add about another 0.8 of our flow. On top of that, we've got the counter offers to customers, tailored offerings to customers and the instalment credit product, and that makes up the difference up to our 4.4% share of flow.
I think what is really important that people understand is since migration, that type of lending has been off sale for any digital channel. This is about reintroducing and going back to where we were before migration. What you shouldn't read here is this is a big change in our business. It's about reintroducing better functionality that has been off sale for a while.
Okay. I think Benji had also.
Yeah, hi, it's Benji at Jefferies. I just wanted to confirm in terms of the target set out and the uplift of TSB profit from GBP 14 million-GBP 130 million-GBP 140 million. Does all of that flow through to Sabadell group? Is there any dyssynergies at the group level in terms of how the IT platform, et cetera, is delivered to TSB? Just in terms of the second question, in terms of the GBP 100 million of net cost savings, could you just maybe detail what the underlying cost inflation is that you're embedding in those targets? Thank you.
I'll take the first one. Yeah, about the first one. We will disclose the targets for 2020, Sabadell's targets for 2020, in January when we present our results for the year-end. In general terms, the performance of TSB in the fourth quarter of this year is within the guidance that we gave in terms of capital for year-end at group level. The plan that we are presenting today, in general terms, fits with the group financial planning also and our capital path for the coming three years. There is no surprise or no change. The plan is self-funded, and as has been said already, it doesn't mean that it has been designed so to accommodate any capital impact. It's just that it's the way in which it's been thought to be better suited and prepared for a successful execution and delivery.
In general terms, this is well embedded in several plans. Okay. The second one.
Yeah. The GBP 100 million is stated after absorbing about 1.5%-2% of wage and contractual inflation per annum. That's the underlying inflationary rate.
Sorry, just wanted to follow up on the first question, just to be clear. My point was more around service fees between TSB and Sabas or things like that, whether there's any loss of income at the, from Sabadell point of view, that's not netted off in, obviously, the savings that TSB itself is generating.
Okay. No, this is absolutely transparent. It translates directly at group level. Okay. Sorry for that. I think now, yes, Nacho Ulargui.
Exane.
Exane now. Sorry, Nacho.
Hi, I'm Nacho Ulargui from Exane. One question following up a bit on the unsecured lending. The fact that you are coming back to where you were before. In terms of timing and risk, does the full 30 basis points or below 30 basis points increase in the cost of risk coming from unsecured lending, or there is more to come from business lending?
Yeah, it is not all driven by unsecured. There is a bit of an uptick for business as well. You can see that our origination plans on business is not that significant, as I said, not from a balance sheet perspective on the lending side, but it is about GBP 300 million-GBP 350 million between 2019 and 2022. It does come at a slightly richer cost of risk, and that is being factored in. It is not all coming from unsecured lending.
Andrea.
Yes. Good morning, Andrea Filtri from Mediobanca. Just one question to be split between the TSB and the Sabadell management regards capital ratios. Could you explain us why TSB needs to run on such hefty CT1 ratios? This is for Tomás, are there any constraints to upstream the capital or any special requirements from the JST on where the capital sits? Thank you.
Andrea, for the first one, I may say something, I think it's for Debbie and Ralph as well. This is the level that TSB has been running. The focus hasn't been on the capital ratio so far. In terms of constraints, I don't see constraints other than the regulators approval at a given point where this makes sense and can be considered, no constraints at all. Debbie.
Look, we're very comfortable with the capital ratio that we're running, and that's both at the moment and then post the change. We, as a U.K. ring-fence bank, work very closely with the group, and any views that the group has in terms of the evolution of the capital, we'll work together. We're very comfortable with the levels we're running. I don't know.
Nothing more to add.
Yeah. They have a question.
Thank you. Elsa Dargent from M&G. Just one question. On slide 43, you mention on your funding plan that any unsecured debt is to be subscribed by the parent. Does that include your Tier 2, and does that mean you're not going to try to refinance it on the market?
Sorry, can you say that again? Just the latter part.
I was wondering what your plans were for your existing Tier 2?
Yeah.
If that will have to be financed by the parent rather than the market.
I might be wrong, but I don't think we've got any Tier 2 assumed. I think it's only internal MREL.
Yeah. Anyway, since the group is single point of entry. Any MREL issuance by TSB needs to be undertaken by the parent. It doesn't mean that this doesn't have any impact on the MREL requirements at group levels whatsoever because they are set at group level. Regardless of what the internal MREL requirements at TSB are. Okay. Sure.
Hi there. It's John Cronin from Goodbody. Thanks for taking my questions. My first one is on the decision to expand more aggressively into the domain of business banking. Just curious around that, is it as simple as you're quite strong on the deposit side and haven't matched that in a lending context? Interested to know specifically in terms of your ambition there and how challenging or what kind of opportunities you see in the short-medium term to expand that book in the U.K., particularly in Brexit context. My second question is, look, stepping back here, you've set out a 7% ROTE expectation at the conclusion of this plan. I appreciate there may be some more in the mix in terms of cost saves. However, look, still sub 10%, arguably sub-scale. What are your longer term thoughts around that from a group perspective? Thank you.
Okay. I'll start with business banking and then you might want to comment from group. Hi, John. One of the great things about TSB is the reach of the brand in business banking we already know has got very high non-customer consideration. What you see is us growing and much focused on the liability side of the balance sheet. Despite the fact that business banking is highly competitive, we already are seeing great momentum. I can tell you that I'm very confident that the business current account offer and the business deposit offer that we've got out there will be very successful, and I think, as I said, we've got great early momentum. We are ambitious in lending, but we're cautious.
We're building capability, and as Ralph's outlined, we will be doing some lending, but what you're going to see is it very slow and prudent entry into over the life of the plan we will increase this, but we will increase it at the rate that we develop our capability, and we onboard much more sophistication in our underwriting skills. What you read here is a very thoughtful and prudent entry into the lending side with very strong ambition on the liability side of the balance sheet. I don't know whether you want to sort of.
Yeah. Okay. From group, what we've already always said is that it's within our risk appetite to support the design and deployment of the business and SMEs strategy in TSB. We are very aware of the differences between the Spanish market for SMEs and the U.K. We are very comfortable and satisfied with the plans for business development, of business banking development in this plan. Of course, there is a potential for expanding this in the future, after this plan ends. I don't know if there is something, John, something else that you wanted me to cover, in respect to group. Sorry if I missed something.
Can I have a go? Look, John, the next three years is about creating a really strong business that gives both the group and TSB the confidence to explore other options in the future. Clearly, where we're getting to at the end of the three years is not the end of the journey. This whole plan's been put together to clean the business up, give it more efficiency, prudently grow it, absolutely there will be more ambition for taking the business forward after that three years.
Thank you.
Another question there.
Hi. Good afternoon. Sofia Barajas from CaixaBank. Just a quick question on the core deposits and brand intangible amortization you mentioned in the presentation. If you could confirm the net impact, also the base.
Sorry. Sorry. We can't hear you well from here. Could you speak up? Sorry.
Yes. Sorry. On the core deposits and brand intangibles amortization you mentioned in the presentation, if you could confirm the net impact, the pace at which you expect to book it, and then when should this charge disappear? Thank you.
It's intangibles.
It's intangibles.
Intangible and.
Sorry. I can repeat the question if needed. Sorry.
This comes from the depreciation of the intangibles that we have for the TSB brand and the core deposit franchise, as you mentioned. This is GBP 40 million this year. By the way, this, as you know, doesn't hit capital because it's already deducted from capital. The amortization period of these intangibles ranges between eight and 12 years. I seem to remember that this goes to half of it, more or less in 2021.
Yeah. It's on page 37. As Tomás says, it's GBP 40 million pre-tax per year from 2019 to 2022, and then GBP 23 million and GBP 5 million respectively in 2023 and 2024. It's set out on page 37 at the bottom. Sofia, did we answer the question? Is that it?
Is that it? Yeah? Cool.
Fernando here.
Hi, thank you. Fernando Gil de Santivañes from Barclays. I have a question on the branch restructuring, which is, you have been transforming the hours of opening and moving clients from one branch to another in, if I am right, 93 branches so far. What has been the erosion or what has been the reaction from customers to these kind of movings, going forward? You're planning to close 82 branches next year, and I want to know what has been the reaction from customers. Thank you.
The immediate reaction from customers, they were not particularly pleased about it. In reality, they have been appreciative of the fact we've continued to maintain a presence in these locations. The customer footfall has stayed stable, so the customers have adjusted to the revised opening hours. I think you should expect that we will continue to review opening hours alongside our ongoing review of our representation across the U.K.
I will add that that's one of the reasons why this plan is paced. Everybody understands that any change to a branch network in the U.K. has to be very carefully managed. Frankly, that's one of the reasons that we've paced the plan in the way that we have. We anticipate that there will be some challenges, but what the plan allows us to do is manage these challenges at a pace that we are confident we can execute.
Now Iñigo, here.
Iñigo Recuenco from Abaco Asset Management. I have two related questions. You mentioned the restructuring cost, GBP 180 million, that runs over four years if I understand correctly, and the cost savings of GBP 120 million over three years. Should we assume a linear assumption for both restructuring costs and cost savings, so just completely linear on both accounts? Second, could you elaborate and expand a bit on the IRR metrics, I assume this is the way you look at it, of branch closures and staff layoffs? How do you think about that in terms of IRR? What kind of target IRR we should expect we'll get as a shareholder equity investor?
Yes. On your first question first, are the restructuring charges and commensurate cost savings broadly incurred and recognized on a linear basis? The rough answer is yes, it is how it's going to crystallize. In terms of IRR, we've looked predominantly through the payback lens. The two big buckets of restructuring costs are on FTE, where payback is typically over one year. If we look at the branch closures, we tend to include any branch related costs, such as the dilapidations, decommissioning, et cetera. Also the FTE component of branch reduction. What we see is that typically payback is within three years for branch reduction. Which is the nature of the way these property aspects are in the U.K. I think that provides us with comfort that it's a reasonable payback profile.
Any more questions?
Hi there. It's Harry Harutunian from Olive Tree. I haven't heard anything about skin in the game from management in this plan. How is your remuneration linked to any of these targets? The second thing is there any appetite in this plan for inorganic growth?
Do you want to start? Well, let me tell you that, as you'd expect, all of our reward structures comply with U.K. regulation. Absolutely, the executive team will be properly motivated by a scheme that means that we have to deliver. It will be very much based on the U.K. standard.
It's fully aligned with the group remuneration policies and supported.
Sorry, I don't think you can hear me. Sorry.
Inorganic.
Inorganic? Inorganic. Inorganic growth?
Yeah. Is there any appetite for portfolio acquisitions or anything like that in the U.K.?
We are actually committed to this plan, which is organic. We don't have any other plans in terms of inorganic opportunities. We've always managed inorganic deals or opportunities in terms of shareholder value when the opportunity has been clear. This is not the case so far. We don't see any options. I don't have a sight on whether this could happen at some point or not, but it's not the case now. Any other questions? No questions. I think then we can consider this session finished. Thank you very much for coming. As you know, our investor relations team will be always available for your questions or your follow-ups. Thank you again. Have a good day. Bye.