Good morning. Welcome to our results announcement for 2022. As usual, I will start with an update on strategy and the economic backdrop. Donal will bring us through the financials before we will have some time for questions. I described 2022 previously as a hugely important hinge year for AIB, the year which would see us making significant progress on our strategic ambitions, grow our customer base and our lending book, expand our product range, conclude on legacy issues, and maintain our robust capital and liquidity. I'm very pleased with how my colleagues across the group rose to the challenge of the year and delivered what I think is appropriate to describe as a strong performance. We are now very well-positioned to deliver for our stakeholders in 2023 and beyond.
Given the scale of our exposure to our core market here in Ireland, there is an obvious symbiotic relationship between the well-being of the domestic economy and the performance of AIB Group. Last year saw a very solid performance by the Irish economy. While we expect headline rates of growth to moderate, decent clips of expansion are expected in both 2023 and 2024. Reflecting that solid economic underpinning, we saw new lending increasing by 22% in 2022, with momentum building as we move through the year-end into 2023. We've delivered profits after tax of EUR 765 million, and we're proposing a 79% increase in distributions to EUR 381 million in the form of cash dividends and a directed buyback, with discussions with the state now well advanced. Our balance sheet metrics remain strong, supported by a disciplined and conservative approach to credit underwriting.
After a huge effort over many years, we're no longer a high NPE bank, with NPEs falling to 3.5% of gross loans at the end of 2022, and we're well on track to reach our medium-term target of 3% later on this year. Our forward-looking and ambitious strategy is being implemented at pace as we deliver on our commitments to strengthen, simplify, and streamline AIB. Our product range has been significantly enhanced, and we're presenting that broader suite of products to our customers in the way that they choose, with the great majority of our engagements now digital. We positioned ourselves to be a significant beneficiary from the departures of Ulster Bank and KBC, with AIB proving to be the most popular banking home for migrating customers in 2022.
Thanks to the strength of our existing domestic franchise and our success in attracting migrating customers, we now have more customers here in our core market than at any point in our history. At the same time, we consolidated our leadership position in sustainability, with green lending growing by 65%, while we also issued 3 ESG bonds. Again, we're pledging to do more, a lot more, not because we can, but because we must. Turning now to the growth environment, the Irish economy has been remarkably resilient in the past number of years, with Modified Domestic Demand expanding by over 8% in real terms last year. Ongoing geopolitical tensions, tighter monetary policy, and the distortionary impacts of higher inflation are dampening influences, growth is expected to remain comfortably positive through 2023 and 2024.
Total employment is at all-time highs, with 220,000 more people at work now than pre-pandemic. Labor market conditions remain tight, with the unemployment rate hovering just above 4%. The output deficit in the housing market continues to narrow in 2022. Supply is expected to remain short of estimated annual demand this year. Domestic activity is underpinned by very healthy deposit levels, while household leverage has continued along a downward trajectory, with debt-to-disposable income ratios standing at less than half the level seen in 2010. Meanwhile, encouragingly, both manufacturing and services PMIs have ticked up of late, adding support to our expectation of a solid growth turn, a growth outturn in 2023. I'm very conscious that we are in the final year of a three-year plan to transform the group.
In December of 2020, in the depths of the COVID crisis, we laid out a strategy to make AIB stronger, more resilient, more operationally efficient, more forward-oriented, with a fuller product suite, and I'm pleased with the progress which we've made on all fronts. Today, our reshaped business is well-positioned to deliver on our medium-term targets, which we updated in December. We're very confident that our business will deliver sustainable returns for our shareholders over the years ahead, with our medium-term RoTE target set to be comfortably exceeded this year. Our expanded customer franchise, strong mortgage market activity, and a solid economic backdrop saw new lending increasing by 22% last year. This growth is underpinned by robust underwriting standards, a conservative lean, and well-considered and appropriate responses to increases in official interest rates.
We remain the country's largest provider of mortgages by a good stretch. We were pleased to report a 48% increase in new mortgage lending in 2022. We also reported solid growth in our corporate and personal loan books, while our green lending expanded by 65% as we make meaningful progress towards reaching our 2030 sustainability targets. We remain committed to playing a leading role in financing the vital green transition. We believe that this presents us with a very significant opportunity to continue to expand our loan book in a responsible, risk-conscious, and remunerative way. The Irish banking landscape is going through a once in a lifetime transformation. At AIB, we've responded to this opportunity with energy, ambition, and determination.
We've acquired two substantial loan books from Ulster Bank, which positions us as the country's leading bank for homeowners and businesses, while we've seen more customers of Ulster Bank and KBC Ireland choosing to bank with us than with any other financial institution. We're well embarked on the migration of the Ulster Bank corporate and commercial portfolio, with some 70% of the drawn facilities now on our balance sheet, and we expect to migrate the tracker mortgage portfolio of more than EUR 5 billion in the first half of this year. At the same time, our total customer numbers have increased to 3.2 million, further underpinning the core strength of this group, which is our extraordinary customer franchise.
Meanwhile, the relentless shift to digital continues, with the number of daily mobile interactions now almost double their 2019 level, while we are continuing to enhance the range of our products which are sold digitally. We've also taken great strides forward in our plans to significantly enhance our savings, wealth, and investment offerings to our customers. Goodbody, which we acquired in the autumn of 2021, is now well-integrated in the group, while we are delighted to be announcing the launch of AIB Life, our joint venture with Great-West Lifeco. We're very excited about the potential of this digital offering to deliver quality products to our customers and growing profitability to our shareholders over the medium term. Sustainability is core to our mission. 2022 saw us making real meaningful progress against our ambitious targets.
I've already mentioned the growth in green lending last year, and we're well on track to comfortably exceed the EUR 10 billion lending target which we have established. We're working at pace on reporting and transparency in this space, and financed emissions targets have now been set for 75% of our loan book. At the same time, we're making great progress on reducing our own carbon footprint, and we were delighted to complete a Corporate Power Purchase Agreement, a first for Irish business, with NTR plc, which will see 80% of our energy requirements being provided by two solar farms in County Wexford. We've also issued two green bonds and the Irish banking industry's first social bond, further underscoring our continuing leadership in sustainability. There's so much more to be done. We're still in the foothills of this enormous opportunity.
On foot of our strong financial performance and our confidence in the group's future success, we're pleased to be proposing significant increases in distributions for 2022. A total of EUR 381 million proposed for the year, representing a 50% payout ratio in line with our ordinary distributions policy. We will continue with this policy over the years ahead while maintaining optionality in the split between cash dividends and buybacks. Meanwhile, the state's shareholding continues to fall as the state makes use of participation and buybacks, its own trading plan, and accelerated book builders to reduce its presence on our share register. We look forward to the group becoming a majority privately held company once again, with obvious benefits for our free float. AIB is in its strongest position in decades, but there is so much more to be achieved.
Our core responsibility as a management team is to maintain and augment that strength so that we can fulfill our obligations to the customers and communities we serve. We've made huge progress in delivering against our strategic ambition for the group, and we look forward to this exceptional customer franchise delivering for all our stakeholders over the years ahead. Strong and steady are our watch words as we continuously position the group to be a profitable force for economic progress in the countries we're privileged to serve. Donal.
Thank you very much, Colin. Good morning, everyone. We're delighted to be able to deliver a strong set of results for 2022 with really strong momentum going into 2023. I'll just call out some of the key financial highlights from my perspective. Interest income up 20%, other income up 25%. Gross loans have grown by 5% in the year, up to EUR 58.4 billion, from EUR 58.4 billion to EUR 61.2 billion. Our NPEs reduced to 3.5%, which is the lowest level, obviously, over the last number of years. Our funding position remains very strong. Throughout the year, we actually accumulated an additional EUR 10 billion of liabilities.
In terms of CET1, our capital position is very strong, with a fully loaded ratio of 16.3%, comfortably above all regulatory requirements. As Colin said, we're delighted to propose distributions of EUR 381 million. I'm gonna go through some of the more details of the income statement later, but I just wanna draw your attention to some of the key metrics on the bottom left-hand side. Net interest margin has obviously improved year-on-year. Cost-income ratio has reduced down to 57%. Our return on tangible equity is 9.6%, and our EPS and DPS performance has been strong year-on-year. In terms of net interest income, I'm gonna walk you through the moving parts here. That's obviously up 20%.
That's EUR 365 million from 2021. That's really impacted by the liability side. Cost of EUR 101 million, which really reflects the cost of our MREL issuance. EUR 40 million reduction, let's say, from the TLTRO benefit no longer existing for the banks, and a small residual benefit from the negative deposit pricing strategy, which has obviously now been withdrawn. On customer loans, we see a benefit of EUR 111 million really from the higher rate environment and an increase in average loan volumes, including the Ulster Bank and corporate and commercial loans. Investment securities benefits of around 12 basis points for EUR 127 million, driven by the higher rate environment, given that we asset swap all of our investment securities.
Lastly, cash loans to banks really driven by excess cash deposits held with the ECB and benefiting from that ECB deposit rate, which is changing. We've repaid the TLTRO for EUR 10 billion in full, and our Q4 exit NIM is 2.18%, which gives us a really strong trajectory coming into 2023. Our guidance for net interest income is greater than EUR 3 billion for 2023, with an associated net interest margin of greater than 2.40%. Just to try and talk through that guidance a little bit more on the moving parts. NII greater than EUR 3 billion, NIM greater than 2.40%. We've assumed a year-end 2023 ECB deposit rate of 3.5%, that's kind of anchoring the endpoint.
The asset income we expect to continue to be driven higher by the rate environment. On liabilities, deposit beta is expected to evolve throughout 2023 as we bring online more type of saver products for all of our customers. The volume impact, particularly from inorganic acquisitions, will drive NII higher, and there'll be a drag from the structural hedge throughout 2023, primarily from some decisions that we made earlier in 2022. All in all, really strong momentum coming into 2023. Another positive, I would say, is on the other income area, really driven by strong fees and commissions, up 25% year-on-year.
The increase really driven by higher transaction volumes from the recovery in the economic activity and the onboarding of customers from banks exiting, and also higher card interchange fees. In other income, we have a benefit from a forward transaction from the Ulster Bank transaction. Behind this, and I think what's really given us a lot of positive momentum, is the 450,000 customers that we've managed to acquire throughout 2022, which are obviously going to get embedded on the AIB platform, and increase the overall activity in this area. For 2023, our overall expectation, our guidance is EUR 750 million, but within that we see strong growth in the fees and commission line of at least 10%.
Costs of EUR 1,659, that's a 5% increase on an underlying basis or an 8% increase overall. Shouldn't be too many surprises here. Salary changes and inflationary impacts coming through. We have the full year impact of Goodbody's being digested in 2022. We have the cost to onboard customers from the exiting banks, where we really put together a fairly comprehensive team to try to ensure that we could welcome as many of these customers as they were moving from the exiting banks. Depreciation obviously changes year-on-year, that's got a EUR 21 million increase for 2022.
In terms of FTEs, they're up 8%. This is really reflecting higher business volumes overall on the platform, some insourcing activity that we would have completed particularly in our technology area, the initial transfer of some Ulster Bank staff post the acquisition of the corporate and commercial portfolio. Exceptional items are EUR 231 million, slightly less than what I would have guided previously. That's really just due to the delay of some of our strategic cost takeout programs. The bulk of those were taken in the first half of the year.
If I'm to look ahead, thinking about the headwinds and the tailwinds that are gonna impact costs, we have a larger customer base, largest ever in our history, and we have to conclude on one last piece of inorganic activity, which is the take-on of the Ulster tracker portfolio. Inflationary pressures generally still remain, albeit they are reducing or abating somewhat. We have already booked and benefited from EUR 100 million of cost savings, and we think that there's another EUR 100 million of cost savings to be delivered throughout 2023 and 2024 from some of the strategic items that we would have outlined previously. Overall, for 2023, costs are expected to be less than EUR 1.75 billion. In terms of ECL, as guided, we have a small charge for the year of EUR 7 million.
I'm just gonna walk through this from the stock perspective, to begin with. We obviously started the year with an ECL stock of EUR 1.9 billion. We'd have managed a couple of NPE sales, which would have impacted the overall ECL quantum by around EUR 200 million. We've had redemptions and repayments from non-performing exposures. We've released all of our COVID PMAs. Obviously, through COVID, the environment was very uncertain, and it was fair to say that the endpoint was a little bit more benign than what we had imagined, primarily due to the amount of government supports at an individual on a personal level. I can say that all of those PMAs related to COVID have now been released.
Lastly, in the second half of the year, as we were looking at the rate environment evolving, High inflation, 3% move in interest rates in six months. It's inevitably going to lead to some form of weaknesses on the credit portfolio in the future. We've made a very conservative forward looking approach to this and made a post-model adjustment of EUR 250 million to capture that. At the end of the year, the ECL stock is EUR 1.6 billion. The cover level is 2.7% of gross loans, which is obviously down year-on-year, reflecting really that the legacy NPE book has reduced even further.
If we're to look at that in P&L terms, first half of the year, obviously we would have seen write-backs. That was really driven by gain on sales and portfolio sales. Also in the earlier part of the year where the macroeconomic environment was looking slightly better. Second half of the year, somewhat different. Great uncertainty from the war in Ukraine, inflationary pressures. Macros have changed. We see a charge there. The onboarding of the Ulster Corporate and Commercial loans to date, as they've come on board, we've booked an ECL charge of EUR 48 million for that. You can see here the impact of the post-model adjustment that we made in the second half of the year.
That is really encompassing personal and business areas in sectors where we think there could be weaknesses for people maybe that could be impacted by that higher rate environment, et cetera. If we look at the staging composition, I'd say it's very strong, and it's improved throughout the year. What you can see in terms of coverage levels is really quite consistent, except for our stage three cover, which we increased slightly from 27% up to 34%, really to make sure that we could come into 2023 in a really strong provisioning and balance sheet perspective.
Obviously only a couple of months into the year, in 2023, it's fair to say that, despite the fact that the rates have moved quite quickly, we're not really seeing any weakness in any of our key portfolios to date. Again, it's probably too early to say and to see those effects and as they work throughout the portfolio. Overall we expect a cost of risk through the cycle of 30 or 40 basis points, and I would say for 2023, probably more at the bottom end of that scale. In terms of balance sheet, I would say it's a consistent story now for the last number of reporting seasons. You know, we really are just continuing to see liability-driven asset growth.
Notwithstanding the fact that we repaid EUR 10 billion of TLTRO, you know, our balances with central banks still remains the same. We've EUR 32.6 billion with the ECB and around EUR 4.6 billion with the Bank of England. Loan book growth for 2022 really positive from our perspective. You can see from the organic business we've had growth with respect to new lending versus redemptions. Obviously on the inorganic perspective, we've seen growth as well from the onboarding of the Ulster Corporate and Commercial portfolio. Year-on-year, up 5%, notwithstanding the fact that we would have delivered the balance sheet somewhat from Non-Performing Exposures.
Really what I'm trying to do here is give you an indication of where we see the growth in the portfolio in some of the key sectors. Mortgages, 2021, 2022, somewhat flattish, obviously reduced by an NPE sale. As we go into 2023, obviously expecting a large increase here as we onboard the Ulster tracker portfolio. Personal markets, probably flattish or slightly up, given the changing market environment. On the corporate side, strong growth in the year, obviously, as we onboarded all of the Ulster customers and loans, offset obviously by reductions in the U.K., where we exited the SME and certain sectors. For 2023, we expect to see small growth there, but nothing like what we saw in 2022. Commercial and SME, for 2022, probably flattish reductions again in the U.K.
The Irish business, I would say, was somewhat flattish. For 2023, you are gonna see growth here as the remainder of the Ulster Corporate and Commercial portfolio is probably more in this segment, commercial SME customers. Energy, climate action, and infrastructure has been growing quite rapidly over the last number of years. This pace of growth we expect to continue as we focus on all areas with respect to sustainability. In the property world, between the U.K. and Ireland, again, large growth between 21 and 22. Large demand in all segments, I would say of that market.
As we look to 2023, we think that the appetite or the demand in the commercial real estate type of area will probably level off or subside, We see continued demand and growth in the housing space, whether that's social housing, student housing, affordable housing, private housing. AIB will be very focused on supporting the government's initiatives around its housing plans. Our NPEs were at 3.5% at the end of December. Very strong performance from our team there. Really draw your attention to the breakout between the pre-COVID and the post-COVID NPEs. pre-COVID, let's call them the legacy NPEs, EUR 200 million. Substantially resolved.
They were historically a more difficult area to manage, just given the fact that there's a lot of legacy items in there. As we look to the end of 2023, as the organic and inorganic balance sheet grows, we are very focused on ensuring we reach the year-end target of 3%. Funding and capital overall, we have really strong funding ratios. An LDR of 58%, LCR of 192%, Net Stable Funding Ratio of 164%. Our MREL ratio is at 33.7%, already in excess of our target. We obviously issued four transactions throughout 2022, three of those either green or sustainable.
As we go into 2023, we've already issued one transaction, and on any given year, we expect to do two or three type deals. Really, strong position from a funding perspective. I think if you look at the makeup of the liability side, I think what's interesting to see is really just this effect of customer accounts. You can see year-on-year an increase of around EUR 10 billion, and that's in the retail and in the business space, and it's really that liability base which is giving us a large momentum coming into 2023, given the success of the various teams onboarding all of those, the customers from the departing banks. Our CET1 ratio in December was 16.3%.
That's comfortably ahead of our SREP buffers at 6.1% on a fully loaded basis or 7.7% on a transitional basis. Within 2022, the moving parts were 150 basis points of capital generation, and then reducing by 20 basis points for the share buyback completed in the earlier part of this year. 90 basis points for Ulster Bank corporate and commercial loans. 40 basis points is related to a movement in investment securities reserve, and obviously 30 basis points reduction for our cash dividend. We come to 15.9%, and then the buyback which we have just announced today will be reduced from to leave at 15.9%.
As I look to 2023, and try to figure out or guide around the headwinds and the tailwinds, we think inorganic activities will have another 70 basis points impact, that's gonna be the Ulster trackers and also some investment related to AIB Life. We've updated today an outturn from a TRIM inspection for AIB mortgage model, where that will have a 30 basis point CET1 impact, as our risk weightings will go from around 27% to around 32% on the AIB mortgage product. We do have two further inspections underway which I expect to complete this year, and they're in the business world, SME, smaller business, and also large corporate models. I'll update you later in the year as that evolves.
We are now proactively exploring capital efficiency initiatives, and really looking at two main areas: corporate assets overall and mortgages within ROI. Unlikely we'll execute anything this year, but certainly we'll be operationally in place to be able to transact. I'll again be able to update you with that later in the year. In terms of the distribution outlook, Colin obviously gave a good overview of distributions to date. Our existing dividend policy is a 40%-60% payout, and we always assess the right balance between dividends and buybacks on an annual basis. For 2022, our distributions were EUR 381 million, and that's a split between cash dividend and an approved buyback of EUR 21 million.
Anything above the 40%-60% payout policy will be subject to the relevant economic environment, which the board reviews on an annual basis, discussions with regulators, and in the coming years, AIB will seek to move back towards the CET1 target by prudently increasing levels of distributions, supplementing cash dividend with share buybacks where appropriate. As Colin has alluded to, we're in an evolving environment. two banks exiting, rising interest rates, but the environment is uncertain and there are inflationary pressures.
Gives us a lot of confidence to guide in 2023 for interest income of greater than EUR 3 billion and NIM of greater than 240, other income of EUR 750 million, costs of less than EUR 1.75 billion, and a cost of risk through the cycle of 30-40 basis points. We look to enhance shareholder value and deliver sustainable returns by delivering on our medium-term targets, which is obviously costs of less than EUR 1.75 billion, a CET1 of greater than 13.5%, and a RoTE of greater than 13% in 2024, which Colin alluded to earlier, we would look to exceed in 2023. Thank you very much, and I shall hand it over for questions.
Thanks very much indeed, Donal. We're now going to go to the phone lines. I understand our first question this morning is from Grace Dargan from Barclays. Good morning, Grace.
Maybe if I could ask one on the structural hedge and then one around your cash balances and NII. Firstly, on structural hedge, why are you calling out as a headwind on one of your NII slides? Then secondly, I guess around the size of the hedge, do you have any updated thoughts about building that capacity from here, given your commentary around deposits this morning? Then the second question on cash at central banks. It looks like that balance is just shy of around about EUR 40 billion. I guess to make some assumptions around average ECB rates and kind of pass through to customers, that could be earning you something like 20%-25% of your guided full year 2023 NII. How enduring do you think that this benefit is going forward? Thank you.
Donal?
Thank you very much, Grace. I've incorporated in the appendices on slide 32, a slide that I think gives some source material for this conversation. Specifically with respect to the structural hedge, really what I'm trying to do here is outline the year-end 2021 position and the year-end 2022 position, and the rates that are associated with that. I'd say income related to the structural hedge in 2022, was around EUR 80 million. In 2023, this is gonna move from being a contributor to being a drag. We entered into around EUR 13 billion of swaps in Q1 and Q2 of 2022, as the sensitivities increased due to the increase in liabilities, really to manage those earning at-risk limits.
The duration of those swaps was around 1.3 years, as at the end of December 2022. They're starting to mature in Q4 of 2023. If you were to think about what our strategy is here with respect to rollovers, et cetera, I'd say we have EUR 5 billion of swaps to mature in 2023, and we have around EUR 6.5 billion of swaps to mature in 2024, and we look to replace those with swaps probably with average lives of around 18 months. Certainly as a minimum, I think we'd be keeping the existing hedge quantum where it is at the moment, but we may consider increasing this.
We have capacity to do another EUR 10 billion or EUR 15 billion worth of swaps, and it's just under consideration at the moment what we want to do, whether extend the duration of our hedging or not. Within our guidance, what I've included is obviously all of the drag from this existing SHP book and obviously all of the impact of the rollovers that I've just talked about. I think with respect to central banks and passthroughs, et cetera, if I look at our liability base overall, okay, approximately EUR 111 billion, around 10% of that is linked to market rates, and that's really just all of our MREL issuance, which I would have touched on earlier. That's kind of floating along with market, and that's fairly easy to estimate or predict.
90% or around EUR 102 billion are customer account type of products. Within that grouping of EUR 102 billion, I'd say around 70% would be considered retail consumer type of accounts, and around 30% would be considered more, more business, or wholesale type of accounts. The current account makeup, or the customer account makeup is very heavily weighted towards current accounts, so EUR 63 billion at the moment. What I'm expecting to see is migration from current accounts into more demand accounts or time deposit accounts as the year goes by, as we increase the product offering for different savers in different spectrums. We do expect to see that liability mix change.
For the guidance that I've given, if you assume customer accounts as being a totality of EUR 102 billion, we would expect a deposit beta of less than 30%.
Thanks so much indeed, Donal. The next question is from Rahul Sinha from JP Morgan. Good morning, Rahul.
Back to NII. I was wondering if you could help us unpack the trajectory in 2023 between the acquisitions. Obviously, you know, you still got, I think, some benefit of NII in 2023 coming from acquisitions inorganic. Also, I think there's a shift between other income or non-NII and NII, if you could comment on that. Versus the pure rate sensitivity, and obviously you've talked about the structural hedge just now. We can kind of do our own math in terms of, you know, how NII would pan out if your 3.5% assumption looks too conservative. The second question is just around this IRB model, the fact that the risk density has gone to 32% from 27%.
Obviously, it does come as a surprise, just given, you know, the very high starting point in terms of risk density. I was just wondering if you could maybe comment on where you think medium to long-term risk density would end up on the mortgage book. You know, do you expect that to be relatively sticky at this 32% level, or do you think that now that you've had this review, there might be a little bit more sensitivity to improvements going forward? Thank you.
Sure. Yeah, look, overall, I would say on the NII, it's hard to break it down into individual components. Really what I've tried to do here in Appendix 2 is represent our overall sensitivity table. I think the first time I would have incorporated that was probably around Q3 2021. I think if you were to look at those sensitivities and follow rate moves, that's been a very accurate predictor of exactly how our interest income has panned out. I really talked through the liability side and what the makeup of that is. Really what I'm saying there is as we bring on board more deposit type products, it's still not clear to me really what kind of movements overall we can expect, okay?
You're talking about, you know, consumer behavior here as well. That's just something that we're going to have to track over time. You can make your own assumptions within there, and I gave you the overall deposit beta assumption on the liabilities. If you looked at the asset side, we have EUR 122.5 billion of assets. And it's important to note that 75% of our assets are floating, so floating to whether it be official rates or market rates. Okay? No mystery there. That's straightforward. The remaining 25%, what's incorporated in that, is around EUR 30 billion. That would be standard variable rate mortgages, there's around EUR 6 billion-EUR 7 billion of that. The remainder is fixed rate product, primarily fixed rate mortgages.
What I'd say in there is that the duration or the weighted average life of those fixed rate loans is 3%, and the yield on those loans is 3%. I think between the assets and the liabilities, and also the color I've given you on the structural hedge, I think you should be able to put those together and get a reasonable NII breakout. Specifically over and above what's on the balance sheet today, you know, organically things are growing in line with, you know, with prior months. You know, the Ulster Tracker portfolio is going to come on board in Q2 of 2023. Obviously it's linked to the ECB refi rates, that's going to have an uplift.
That's gonna be the only change, material change I would say to the balance sheet throughout 2023. On the IRB model, it's a good to have clarity on this. It's good to have closure on this. One could, you know, look at risk weightings and mortgages throughout Europe and say that it's high or it's low. I think the reality is that it reflects the history of mortgages in Ireland, particularly from the global financial crisis. I think from our perspective, we're happy to have this concluded. I think that the focus now is really going to ensure that we're able to roll out IRB models for all of our main portfolios.
There's an impact from model inspections can be from a reg perspective, CET1 RWA, but there's a lot of benefits relating to better modeling for risk management purposes overall. I don't think on the mortgages side that we're gonna have any further surprises given that the EBS portfolio and the oncoming tracker portfolio from Ulster will be risk-weighted at standardized weights.
Commercial is all done? Okay. Sorry, Donal, I just wanted to follow up on the inorganic piece. I just wanted to check if on the NII piece, is there going to be a transfer between non-NII and NII during 2023, and how much that might be?
Yeah. I mean, once the CCPC approval came through, we would have booked a forward contract for that. I wanna take a little bit more time to actually break that out, but it's more related to income earned from once the contract was signed, as opposed to, you know, any future earnings being impacted. I'll update that, I think, probably at Q1 or at the first half of the year.
Great. Thank you very much.
You're gonna have to wait a few months for the details on that, Rahul. Next question is from John Cronin, at Goodbody.
Morning, Donal. Just a few basic ones from me, please. Deposits growth, plus EUR 5 billion in 4Q . I guess anything you can say on experience in the year to date, conscious there were quite a lot of balances still sitting at the exiting banks at year-end. How you expect that to evolve. Second one is, just a point of clarification really. On the deposit facility rates, you're saying you're using an EMH 23, 3.5% rate to underpin the guidance. Can you give us the average rate? Just a point of detail that could help modeling.
Thirdly, on the securitization that you referred to, as possible actions probably post 2023, anything you can say at this stage, or is it way too early to talk about in broad terms possible capital and risk weight benefits that those could bring? Thank you.
Okay. Thanks so much indeed, John. I'll just take the first one. In relation to the customer migration side, we were delighted with the performance of the business last year in terms of our success in attracting customers into AIB. 450,000 new customer accounts opened. We estimate roughly 49% of the migrating customers from Ulster Bank and KBC coming to us. The vast bulk of that is now done. We're through all the surge activity, and of what's remaining, we would expect to be getting a similar share. Important to note that the big lift that this involved for the group is now done, and we're thrilled with our success in being the clear winner from the migration of those customers. Donal.
With respect to the rate, I mean, really what I was trying to show is point to point. I wouldn't get overly confused over averages that I've assumed. You know, 2% goes to 3.5% off the relevant ECB meetings. So 3.5% is the endpoint. You know, if you think rates are going to go higher or lower, I think I would just urge you to use the sensitivity table to adjust that one up or down. Really just looking at the market and tracking those market expectations. I don't have any other information other than looking at forward curves from the market. With respect to securitizations, something we've talked about for a number of years.
I mean, historically, although it made sense from a capital perspective, it just didn't make sense to me from an interest expense perspective, paying away high coupons for securitizations. I think that the balance sheet is in a different position now. You know, we are growing organically, we are growing inorganically. We do need to develop better capital management tools. For me, the most appropriate ones are SRTs. Which means we do need to have an ability to transact on an ongoing basis in various asset classes. The two which are most obvious to me will be mortgages and corporate. Work is underway. We've got pretty good visibility on portfolios.
We kind of just need to weigh up, you know, which type of transaction is most efficient, you know, from an operational perspective to execute, or what's most effective from a capital perspective to save capital. I think in the coming years, you should expect to see transactions from AIB in the market in mortgage and in corporate world. That become part of our overall capital management strategy.
Thanks, Donal. Next question now from Chris Cant at Autonomous. Good morning, Chris.
On the hedge.
Sorry, Chris. Can you go from the top? We missed the first few words there.
Sorry about that. I think when you talk about the structural hedge, you're looking at it slightly differently to how other banks generally talk about this and provide disclosure around this. I think when you're guiding to a negative year-over-year, you're talking about the net NII, whereas others talk about growth. I think when you're talking about the notional on slide 32, you're just talking about your hedging derivative positions, whereas others would include other effective hedge positions beyond just the interest rate swap book, specifically in terms of the substance of the hedge. The first question is, am I right in thinking when you're guiding to a negative, you're talking about the net NII rather than the gross? Therefore that's really what's driving that comment on the slides.
With regards to the overall notional position of the hedge, should we be thinking about the circa EUR 12 billion fixed rate Irish mortgages as being effectively part of the hedge as well, when we're trying to compare the size of your structural hedge to some of the peer banks? The final point of detail on the hedge, the yield that you show on slide 32, are those the year-end yields? Because I guess, you know, rolling those into new swaps, it would be a positive in terms of the gross interest income from the hedge. I appreciate the net does go down, but just trying to align what you're saying with some others. The second one would be on headcount.
How do you expect this to evolve within the cost guidance over the next couple of years, please? You indicated at the December update that you'd provide some more detail here. I'm just trying to understand how many additional heads beyond M&A you're now expecting the bank to be running with relative to your previous plans. You know, the previous strategic plan would have had the headcount coming down quite materially. I appreciate the need to pro forma that for M&A, but it feels like maybe there's quite a sticky add-on of what we thought were gonna be temporary heads to get to this cost guidance. Any more detail there would be appreciated. Thank you.
I'll deal with the headcount question, Chris, and then I'll hand over to Donal. The initial headcount target was set for a very different business. It was set for a business that hadn't acquired the Ulster Bank portfolios, hadn't acquired Goodbody, hadn't set up the JV with AIB, with Great-West Lifeco, and hadn't increased headcount to welcome 450,000 new customer accounts. We did increase our headcount beyond those targets in order to accommodate a transformation of the business. That's now done in large part. We remain very focused on operational efficiency, and we do see opportunity for headcount reductions as we move in, move through this year and into 2024, particularly as we see the benefits of the digitalization of our internal credit processes being felt.
It remains very much a priority for us. I'm not making any apologies today for the fact that we did raise our headcount numbers to account for the M&A activity, but also, on a temporary basis, to allow for a surge in account opening. A surge which has served the group extraordinarily well. Donal.
Thanks very much. What I was really trying to do here on this slide is to try to make things crystal clear, and I do accept that different banks represent these things differently. As you rightly say, on the asset side, where I show EUR 122 billion, incorporated in that is around EUR 20 billion of fixed rate loans with an average life of three years and a rate of 3%. There's the asset side of the balance sheet. Okay? Naturally, you do need to overlay if one chose the impact of the structural hedges. When I'm isolating structural hedge here, this is only derivatives standalone only for interest rate hedging purposes. What I've included here is the average received fixed yield for the year.
If you can then see if the fixed rate is, as I've outlined here, where is the floating rate, what's that drag gonna be in 2023? Hopefully I gave you enough information to see that the impact of those swaps on that EUR 13 billion that we put on early in 2021, they will all start to revalue, reprice from Q4 2023. That's all in the guidance, okay, of greater than 240 and NII greater than EUR 3 billion. Really, the question for us is, it's more we have capacity to do more hedge. We want to, or I want to get a better understanding of what the likely movement could be between current accounts, time deposit accounts, et cetera, et cetera.
That's something which is under active consideration, and I would expect to have things concluded on that before the end of the year.
Thanks so much indeed, Chris.
Sorry. Sorry, I meant to say the half year, not the end of the year.
Thanks so much indeed, Chris . We're now going to go down the road to Diarmuid Sheridan at Davy. Good morning, Diarmuid.
Thank you for taking my questions. A couple of questions, please. Firstly, just looking at your return targets, which obviously you set out in December, 2023 looks like it's going to be materially above the greater than 13%, which was set for 2024. I just wonder were you minded to look at those and revise maybe your ambition, or is it just simply too early to look at where 2024 may play out at this point? Secondly, just coming back to the structural hedge, Donal, just in terms of those rollovers that you provided for 2023 and 2024, it's very useful, so thank you for that.
Just in terms of the duration that you're guiding to put on, if we're getting towards peak rates in the next six, 12 months, would it not be something that you would assess and say that perhaps you would add additional duration to lock in those rates rather than, you know, having greater sensitivity at the shorter end at that point, you know, in terms of that? Or is it just simply too early because the deposit balances, you want to see what the behavior of those are? Thank you.
Thanks so much indeed, Diarmuid. Let me first of all deal with the ROTE target. This is a medium-term target. It was set after very significant review, challenge, debate across the organization and indeed with the board of AIB Group, and it was set in a medium-term context. You are correct. We do expect it to be materially exceeded in 2023. It is a medium-term target, it is a through-the-cycle target, and we don't intend to be changing those medium term targets on a high-frequency basis. It's now set. We set it in December. As we said, it'll be materially exceeded this year, but it is very much a target for the medium term and for through the cycle.
With respect to the structural hedge, you know, we want to replace the swaps, okay. That's fairly formulaic with short duration because that will just allow us a little bit of time to see how the environment plays out. The bigger question is the one, as you say, you know, is now the time to significantly reduce the overall interest rate sensitivity of our balance sheet, okay. What I'm saying is we have capacity to do another EUR 10 billion or EUR 15 billion of swaps at much longer dates, and that would really extend the duration of the balance sheet overall. Over the last number of years, I would say we have been purposefully exposed, you know, to a large degree to higher rates to a higher rate environment. That was a position that we actively accumulated.
Naturally rates have moved quite quickly, and we're a large beneficiary of that. Obviously the time comes to review that position and see if the right thing is to lock that in and extend the duration, you know, for the next number of years. I just wanna make sure, you know, that we're looking at all, at this, in the round, you know, that we're kind of doing things that are helpful for sustainable returns, managing our capital position, et cetera, et cetera. If you're thinking about it, you can assume that we are as well.
Thank you.
Thank you very much indeed, Diarmuid. We're now going to Robert Noble at Deutsche Bank for the next question. Good morning, Robert.
Morning. Thank you for taking my questions. Can I just ask on RWAs and capital, please. Why are the RWAs down in the second half on a higher loan balance? I think in December you said you were happy with 2024 RWAs and consensus. Is that still the case as you sit here today? Secondly, on the capital target of greater than 13.5%, 200 basis points buffer , is there any pressure or how do you feel like that's still appropriate given Bank of Ireland's moving to 300 basis points buffer, and what would make you change the stance here? Thanks.
I would overall, RWAs probably impacted for the end of 2022, slightly less than expectation. Probably more so because the speed at which the Ulster book was acquired was not as fast as what we thought. A little moment to that will feed into 2023, but not to material. As I look to RWAs, via consensus anyway for the outer years, I do think that's still pretty much in line. Probably has to be adjusted upwards, maybe EUR 1 billion for that mortgage RWA adjustment. Otherwise, I would say that trajectory is pretty much in line. With respect to the capital ratios, I mean, we reiterated greater than 13.5% in December.
We don't have any information to hand that would give us cause for concern on that number. Look, different banks have different conversations with regulators. I mean, let's see. The only thing on the horizon that I can see which could have an impact on the Euro system, let alone AIB, is the out turns of the EBA stress tests, which will come out in July. You know, we haven't even run any of those calculations as of yet. Obviously look, management buffers over minimum capital is a decision for each and every bank and every board to take. Yeah, we're still happy with our 13.5%.
Same as the ROTE target. We went through a very robust governance process internally here at AIB. Lots of debate, lots of challenge on that target, and we're very happy with it.
I just follow up on the RWAs. They physically fell in H2. It wasn't the RWAs came on slower, but they actually fell. I was just wondering what the movements were there.
Nothing, nothing overly, nothing particular. It wasn't an RWA relief type of transaction. Probably just more some NPE disposal type of activity, high RWA type stuff. Look, we'll get onto you later, and I'll be able to reconcile that a little bit more precisely, but nothing of particular relevance that I would like to call out.
Thank you.
All right. Thank you very much.
Thank you very much, Robert. We're now going to Ali Woods from Morgan Stanley. Good morning, Ali.
You set out a payout policy of 40%-60%, dependent upon economic conditions, that could go higher. Could you give us an idea of what these type of conditions could be in which you could have a higher payout policy? Secondly, in the U.K., we're seeing sort of extra pressure on deposit margins and mortgage margins. Can you talk us through a bit more about your outlook for your U.K. business?
Okay. The 40%-60% relates to our ordinary distributions policy. What we're referring to there in relation to economic conditions relates to dividends which may be paid at some juncture outside that over and above that policy. On the U.K. business, we're really happy with how it has been reshaped in the past number of years. We've took a very deliberate and difficult decision to exit our SME lending business in Britain. We have a very, very clear focus in Britain in terms of the corporate sectors that we're eager to support. We're very happy with our franchise in Northern Ireland. Huge work done there in the past number of years in improving its cost efficiency.
We'll have more to do over the next number of years in terms of improving the experience of our customers, not least in relation to how they engage with us digitally. Very happy with how the U.K. business has been repositioned. The engine of growth for this bank in the next number of years will be the business we have here at our core in Ireland and the opportunities presented by the transition to a lower carbon future internationally. Donal.
Yeah, I mean, just with respect to the payout policy, what would the conditions be, where one would look to pay out over 60%? You know, we look at this on an annual basis. I think the conditions that we'd wanna see is obviously strong, sustainable returns on a go-forward basis, both our board, but on the regulator, and any concerns over asset quality or items like that, just really off the table. We do feel like quite a number of these items have already been concluded. I think we'll work through this year. We'll complete the EBA stress test. We'll work really hard to make sure that we can deliver on the, on the guidance and the numbers that we've just outlined today.
That really puts us in the best possible position, you know, to talk about payout policies, you know, in scope and even beyond.
Right. Thank you very much.
Thank you very much. We're now going to Omar Keenan from Credit Suisse for a question. Good morning.
Good morning, everybody. Thank you very much for taking the questions. I just had a question on long-term, I guess, deposit pricing strategy or medium-term. I just wanted to inquire really how you're thinking about cumulative deposit pass-through through to the end point of this hiking cycle. I guess if the terminal rate is 3.5 or for this year, and we end up maybe around 2.5 or three in a couple of years' time, how do you think the endpoint deposit beta will look at, like at that point? Just in relation to your comments on 2023, you mentioned expecting a deposit beta of 30%.
Is that an assumption, or do you think it's a realistic assessment of what might happen? I guess if that's on the overall book, then it implies something quite materially higher on the interest-bearing accounts. Just last question, sorry, another one on the structural hedge. Is there any way you could give the exit gross income on the structural hedge from 2022? Thank you.
Thanks so much indeed. Before I hand over to Donal, I just wanna just take a minute or two to talk about our philosophy in terms of how we respond to official interest rate changes. We've obviously had an increase of 300 basis points in official ECB interest rates since July of last year. We have been very conscious of the need to balance the impact of that on our borrowers and on our depositors. We've increased our fixed rates by, I think, up to 175 basis points in an AIB context. We've increased our standard variable rate by 35 basis points, and we've introduced a range of deposit products and eliminated negative interest rates as well. We're very conscious of that balance.
We're very conscious of the challenges that are out there. We're very conscious of the fact that we're likely to be looking at further interest rate increases as early as next week. We will continue to take that considered and measured approach in terms of how we respond.
I would just say the comment around deposit beta, firstly, all customer accounts is in scope. Secondly, less than 30%. Within that, this is why I tried to break out retail consumer versus wholesale, you are gonna have differentiated pricing from different customer segments based off different durations, et cetera, as we go through 2023. It's just very early days, given that the rate cycle has moved so quickly. For 2023, I'm happy to say, less than 30%. You know, anything beyond 2023, I mean, it's, we really are gonna have to, with the benefit of, you know, looking at some behavioral items, have a better view of that.
Obviously, like I said before, as the year progresses, the focus will be to ensure for the 3.2 million customers we have, that we have a range of different options for different products, different tenors, et cetera. All of that is gonna emerge throughout 2023. I think with respect to your comment on the SHP, you know, if you look at the numbers here, and you multiply them all out, you'll see that effectively there was a benefit in 2021 from the structural hedge, as I've described it, of around EUR 80 million or EUR 90 million. Then for 2022, the drag from the Structural Hedge Program standalone, as I've defined it there, would be just under EUR 500 million.
obviously, that would be repricing from Q3 of this year, and stroke normalizing as we go into 2024. That impact is incorporated in the Net Interest Income number of greater than EUR 3 billion.
Yeah, just check. Sorry, just a quick follow-up. That drag of under EUR 500 million, that's the net impact?
Yes.
Okay, that's very definitive. Now we're going to Borja at Citibank. Good morning.
Hello, good morning. Can you hear me?
Yes, we can. Yep.
Thank you for taking my questions. I have two, if I may. One is on the deposit beta of under 30%. Is this the average of the year or is this the year end? My second question would be just to clarify the structural hedge impact on the NII. If I understood well, the benefit in 2021 was EUR 80 million-EUR 90 million, and the drag in 2022 is under EUR 500 million. Is that?
Just to understand in a simplified way, this is the difference between what you are receiving in terms of fixed yield that is in slide 32 of your presentation and what you would be paying as part of the swap, which would be at the variable interest rate. Would this be correct? If not, could you kindly explain? Thank you.
All yours.
That's why I've really tried to isolate it here, okay? What you're seeing here is a nominal, a receive fixed, and then pay float to where the market is now. It's the difference between those two, hence the drag, and I'm just isolating that, okay? Obviously, the benefit from the higher rates would sit in, you know, parts of the liability base, asset base, et cetera, but just trying to be helpful to break that down for you. Your question on the deposit beta, is that an average or a year end? It would be less than obviously, the deposit beta will increase as the year progresses, and overall, you can call it on average less than 30%.
Thanks very much indeed, Donal. Thanks to you all for your questions and for your virtual attendance here this morning. It's now 10 past the hour. I think we'll draw matters to a close, and we look forward to engaging with you over the days and weeks ahead. Thank you so much.