Good morning, and welcome to the presentation of our financial results for the first six months of 2022. As usual, I will spend a few minutes on the execution of our strategy before I hand over to our CFO, Donal Galvin, who will bring us through the financial details. Then, as usual, we will have time for questions. Clearly, geopolitical tensions, increasing inflation pressures, tightening monetary policy, and deteriorating growth outlooks have combined to create a more uncertain and volatile business environment. But against that difficult and challenging backdrop, we have continued to make progress on the implementation of our strategy, and we are announcing a solid financial performance in the first six months.
While growth in the Irish economy will be dampened compared to expectations at the start of the year, we're still expecting a real expansion of between 4% and 5% in 2022, and that buoyancy is reflected in EUR 5.4 billion of new lending in the first six months of this year, representing an increase of 20% on the prior year period. Our green lending continued to grow in line with our strategic ambition, and it represented 23% of new lending in the first half, while we also significantly increased new account openings as Ulster Bank and KBC customers seek a new banking relationship. This solid performance in terms of lending activity together with an ECL write-back underpin our PBT outturn for the first half of EUR 537 million.
Meanwhile, we continue to benefit from a very strong capital position, with the Group's CET1 ratio standing at 15.3% at end June. Importantly, this outturn fully accounts for the capital impact of the acquisition of the Ulster Bank corporate and commercial loan book. We have now migrated the first two customer tranches and some EUR 650 million of associated loans to AIB, with EUR 180 million reflected in the end June loan book outturn. We continued to implement our transformation plan, which is designed to future-proof the cost base of the organization, and it put us on a path to deliver sustainable returns into the future.
Good progress was also made on legacy items, with a EUR 400 million loan portfolio sale effectively resolving the issue of long-dated NPEs, which now stand at 0.6% of gross loans, while the overall level of NPEs stood at 4.2% at end June. We are well on track to reach our NPE target for next year of circa 3% of gross loans. The CBI's enforcement actions regarding tracker mortgages are now concluded, representing another key step forward in resolving the issues of the past.
Meanwhile, we continued to set the pace for sustainability in Irish financial services, with highlights including establishing science-based targets for 75% of our lending portfolio, issuing our first social bond and our third green bond, and we were very pleased to see our progress on this important agenda being recognized externally with Sustainalytics now ranking us in the top 5% of over 1,000 banks globally. Turning to the domestic economy, while forecasts are moderating on the back of global developments and higher inflation pressures, the outlook remains relatively positive, with modified domestic demand expected to grow by some 4% in real terms on average over the period to the end of 2024. The strength of the domestic economy and the extraordinary post-COVID rebound are neatly reflected in the labor market.
Unemployment is now below 5%, while the total numbers at work in Ireland are higher than at any time in the country's history. Reflecting the same aggravating factors which are evident across the world, Irish inflation is at levels not seen in decades, and it's having distortionary and confidence-sapping impacts on households and businesses. That said, PMIs for both manufacturing and services, they've moderated somewhat, but they remain in expansionary territory. The Irish economy enters this period of marked uncertainty in a position of strength with personal and business balance sheets in good health, as highlighted here in the slides with household deposits at all-time highs and leverage levels at multi-decade lows. At the start of December 2020, we set out our revised strategic ambition for the business to the end of 2023, and we're now at the halfway point on that plan's implementation.
The strategy is designed to simplify, strengthen, and streamline our group in the interests of all our stakeholders, and we made good, steady progress again in the first six months of this year. We've effectively resolved the issue of legacy NPEs for once and for all. We continued to advance our cost savings plan in an evolving inflation environment. We plugged product and service gaps, particularly in savings, investment, and capital markets. We're now on an asset growth trajectory driven by organic activity and inorganic initiatives, and we're successfully recruiting new customers as the Irish banking landscape goes through a period of unprecedented change. We have a clear path now to the end of 2023 to reshape our business to deliver sustainable returns into the medium term, and we will have further progress to report over the course of the coming quarters.
Staying with NPEs, we have a very strong track record built over many years. While NPEs increased as a percentage of gross loans in 2020, on foot of COVID impacts, they've now resumed a downward trajectory and crucially came under the 5% threshold in the first half of 2022. Importantly, from a go-forward perspective, the issue of long-dated NPEs is now effectively resolved. We have a clear roadmap to our 3% target for end of 2023, with associated benefits in terms of both cost and capital. In terms of our transformation plan, we enhanced our long-standing agreement with An Post across 920 locations nationwide, increasing customer choice and complementing our own network. We've also significantly enhanced the range of digital account opening solutions in the first half to assist customers migrating to AIB.
On end-to-end credit, good progress is being made on customer, staff, and core banking system changes, with phased delivery underway. While the rollout of the future target operating model will commence in this half, we are running somewhat behind plan as we reprioritize projects to allow us to maximize the opportunities arising from the departures of KBC and Ulster Bank. This is a very important project to improve both our credit operations and our customer service, and we look forward to reporting on further progress here over the coming quarters. Our future of work project is now complete, with our property footprint reshaped and resized while our hybrid working model is now implemented. On the change delivery workstream, over 350 digital data and change specialist roles have now been insourced, and we remain on track for our 2023 deliverables.
The U.K. transformation program is now successfully concluded with our exit of GB SME complete, a decision which is validated not just in terms of cost savings, but also increased concerns about the outlook for the British economy. Finally, on legacy simplification, as I said already, legacy NPE is effectively now addressed with headcount in our Financial Solutions Group halved since 2017, while our ZBB cost management approach is embedded across our business. On new lending, we had a strong performance in the first half, up by EUR 5.4 billion or +20% on the comparable period in 2021. We had particularly strong performances for mortgages, up 44.5% year-on-year for the group, 59% in the Republic of Ireland, with property lending up 54% on the same basis. Personal lending was ahead by 16% as post-COVID consumption made its impact.
Overall, in corporate and SME, there's a mixed performance with strong domestic corporate lending offset by ongoing weak demand for credit from SMEs weighing on the overall outturn. While in the U.K., new lending was 41% lower, reflecting both our exit from SME lending in Britain and a lean towards increased caution in that market. We continue to retain leading market shares in key products as highlighted on the slide here. Mortgage market share 31% in the first half, and that's likely to move higher in the second half as the momentum we're seeing in applications flows through to actual drawdowns. On the inorganic side, we're well-embarked on our strategy of positioning AIB as a complete financial services group. Goodbody is now fully part of the group and adds materially to our products in wealth management and capital markets.
We're making good progress on our JV with Great-West Lifeco, which will add to our product suite in life, pensions, savings, and investments, and we expect to see that new offering being launched to market ahead of year-end. Our partnership with Ulster Bank is going well, and we were delighted to welcome new customers and staff to AIB. We are adopting a multi-tranche approach to loan migration. We've now completed two migrations successfully. We're on track to complete the migrations in the first quarter of next year. In the first half, we also reached agreement with NatWest on the acquisition of Ulster Bank's performing tracker mortgage portfolio, involving 47,000 customers and EUR 5.7 billion in loans.
We are currently going through the necessary regulatory approvals for this transaction, and we expect the economic interest to transfer to us in the second half, with physical migration to a third-party servicing platform expected in May of next year. As previously disclosed, the acquisition was priced at 95.15% of par value. We've seen a significant increase in new account openings this year as KBC and Ulster Bank customers look for a new banking relationship. We've seen more than a doubling of accounts opened at AIB in the first half of the year, representing an estimated 47% market share of migrating customers. Our success in this area is driven both by the quality of our digital offering and the fact that we are physically present in 95% of the locations which KBC and Ulster are leaving.
We now expect our customer base to exceed three million when all migrations are complete, an increase of over 10% on the position just four years ago. Our leading digital propositions are accommodating significant growth in peak daily digital transactions, which reached 2.9 million in 2021, a near doubling from the 2017 outturn. 74% of our personal customers are now digitally active, while daily average usage of the AIB mobile app has increased by 15% year on year. Our ability to meet the digital needs of our customers is underpinned by significant investment in technology going back 10 years. We've taken a modular approach to technology transformation, which is seen as focusing in different periods on different priorities. We now have a modern, digital, and customer-focused IT infrastructure.
Through this strategic cycle and the next, we will continue to invest up to EUR 300 million per annum to enhance customer experience and efficiency while simplifying our technology and modernizing our platforms. Some recent improvements include upgrades to our two largest transaction processing systems, which will help us to seamlessly scale the growth we're experiencing today in digital transactions while focusing on cybersecurity and resilience capabilities. We're now running the most modern mainframe architecture globally, and we're doing so in a way which is aligned to our sustainability ambitions with our primary data centers now operating off green energy. On the sustainability front, we continue to set the pace domestically.
In terms of our own operations, we've reduced our CO2 emissions by 70% off a 2009 base, and we're making real progress in supporting our customers on the transition to a greener future with EUR 5.9 billion deployed in green lending since 2019. This represents an area of huge opportunity for the group, and we expect it to become an ever more meaningful part of our business over the years ahead. On the liability side, we've raised EUR 3.5 billion to date from ESG bonds over four separate issuances, and we were the 19th bank globally to issue bonds in both the social and green space. In concluding, we are alert to the changing banking landscape and operating environment. With the interest rate cycle turning, inflation pressures evident, heightened geopolitical risks, and global macroeconomic uncertainty.
Against this backdrop, our priorities for the next six months are growing our loan book sustainably and responsibly, welcoming new customers to the group, implementing our transformation plan at pace while maintaining our credit and cost discipline, and embedding our various inorganic initiatives. Given the changing banking landscape and the evolving operating environment, our medium-term targets are under review, and we will update the market in due course. We see upside potential to our RoTE target with the significant momentum we're seeing in income offset to some degree by cost inflation. Our strategy is working, and we look forward to delivering sustainable returns in the interests of all our stakeholders over the years ahead. Donal.
Thank you very much, Colin, and good morning, everyone. For the first half of 2022, we have seen a strong underlying business performance and have delivered a solid profit outturn. That's really due to four things, an accelerating net interest income, a good cost control, a growing loan book, continued strong capital and funding position. From an asset quality perspective, non-performing exposures are significantly reduced, and our provision coverage remains conservative. On the income statement, we've a profit after tax of EUR 477 million. It's really just two things that I'd like to draw your attention to here. Our total income is up 8%. Just specifically looking at the bank levies and regulatory fees, they are EUR 101 million.
Mainly growth here, based off liabilities and guarantee scheme fees attached to that. We see those fees being around EUR 150 million for the end of the year. On net interest income, EUR 895 million, which is up 2%. Cost of liabilities are a benefit of 2 basis points. Investment securities up 2 basis points. It's really just the impact of reinvestment at higher rates. Customer loans are flat, representing small growth in the balance sheet, but asset pricing remaining very consistent. I'd say most importantly, the cost of excess liquidity and that drag being only EUR 3 million. Within that, there's obviously an enduring cost to the euro balances, which is EUR 20 million, offset more or less by the uplift in U.K. rates and the benefit there of EUR 17 million.
If I can just remind you of the guidance that we gave on the third of March with respect to our rate expectations and outlook. We had imagined an ECB deposit rate of - 50 basis points at the 3rd of March and a Bank of England rate of 1%. The guidance for full year 2022 will be 10% or up 10%, and that's imagining a year-end rate in ECB land of 1% and a Bank of England rate of 2.75%. Overall, net interest sensitivities again wanna show effectively the impact on the balance sheet over time of the change of liabilities and the impact that that is having on our sensitivities.
For the half year, we have a sensitivity to 100 basis points increase in rates of EUR 369 million. Euro sensitivities has really primarily been driven by that steady increase in liabilities. Notwithstanding the fact that we were expecting to see a reduction post the COVID era, it's actually continuing to grow, especially with the changing market environment. As I would have talked about previously, we look at our interest rate management from three perspectives. We look at our managed rate books, which is really swap-based, so we're already beginning to see these impacts. We look at official rate portfolios, which is really based off ECB balances and assets such as tracker mortgages.
Lastly, we have our managed rate portfolios, which would be things like variable mortgage rates and customer deposit pricing and liabilities. Other income is EUR 379 million, which is up 26%, and that includes EUR 33 million for Goodbody's. Net fees and commissions of EUR 286 million are up EUR 74 million, or 35%. What we've seen really in the first half of the year is a very strong rebound in activity in the retail and business level. Customer accounts have increased, card-related income have increased, and then business activity has increased, so we're seeing increases from foreign exchange. There are some other items impacting other income.
Gains from equity investments, which we typically have, and there's maybe just one item here that I would call out, which is particularly non-recurring in nature, and that's EUR 26 million in respect of the forward contract to acquire the corporate and commercial loans from Ulster Bank. Overall, very strong momentum in the business, and we see a year-end outturn of EUR 700 million for our other income. Costs were EUR 782 million, up 6%, but an underlying increase of 1%, if we're to incorporate Goodbody's. This reflects the wage agreement, which we would have agreed with our unions, which is 10% over a three-year period, inflationary pressures, and cost to onboard new customers from KBC and Ulster Bank, which Colin would have alluded to in his earlier part.
Costs are expected to land at EUR 1.6 billion for full year 2022, which is around EUR 50 million higher than what we would have previously expected. I would say 2/3 of that amount would be related to the temporary onboarding of staff to facilitate the onboarding of as many customers from KBC and Ulster Bank as we are able to achieve, and the remainder would be general inflationary pressures, which we are seeing in the environment. Exceptional costs are EUR 168 million for the half year, and I've really tried to split these into two categories, legacy and strategy. The strategy items would really just be the continuation of our strategic cost takeout plans, also including one-off inorganic acquisition costs.
The legacy items would include things such as the tracker fine and the conclusion of that, and the difference between the prior guidance of 250 and current guidance of 300 for exceptionals is related to an adjustment for a Belfry property fund, which we now think we have provided for in full. On a go-forward basis, we think that the exceptional costs will be very much related to the strategic items that Colin would have referred to, and overall for the year, costs we expect to be EUR 1.6 billion. We have an ECL write-back for the first half of the year of EUR 309 million, and there's a number of moving parts here. We've a couple of non-recurring items, one large one being a provision release on the sale of an NPE book of around EUR 100 million.
We're seeing continued repayments and redemptions from our customers who had been impacted by COVID, and we've unwound a number of those COVID-related NPEs related to individuals or businesses as things have normalized and as all of these customers emerge. The second half of the year, visibility is a little bit uncertain, so we're gonna maintain our guidance of a small charge for the year. The items which will be coming our way in the second half of the year will be threefold. Number one, I think the underlying cost of risk for business as usual will be around 25 basis points, in line with what it was in the first half of the year.
We'll be onboarding all of the Ulster corporate and commercial assets, so there will be a day-one ECL impact of up to EUR 100 million, just depending on the timing. In Q3 and Q4, we're likely to make an adjustment for some cost of living effects. We have a little bit more work to do there, but given the uncertain environment, we felt it was prudent to maintain our existing guidance on a small charge for the year. Overall, I would say the environment and the asset quality remains strong. Balance sheet-wise, you can see the overall balance sheet increased from EUR 128 billion to EUR 132 billion, very much liability driven. You can see deposits increasing from EUR 93 billion to EUR 96 billion.
We actually see by the end of the year, this trend continuing up to around EUR 100 billion as we continue to onboard and welcome customers from KBC and Ulster Bank. The balances that we hold with central banks have continued to grow. With the ECB, we have a balance of EUR 38.1 billion, which is inclusive effectively of EUR 10 billion of TLTRO, and we also have EUR 5.6 billion on deposit with the Bank of England. Loan book growth strong in H1. We're beginning to see that growth that I would have talked about in quarter one. Overall up EUR 800 million. That really is across all of our core segments. The only area where we would see some weakness versus expectation is in the U.K. business, but that is as much a view on the U.K. environment as it is around business growth.
Previously I would have guided 5% CAGR from now out to 2024, and that would have been excluding the inorganic items. If I now include the inorganics and the Ulster corporate loans and the tracker book, which is expected to come onto our balance sheet in 2023, we see an overall compounded asset growth of 8% per annum. If I was to break that down on an annualized basis, it would be something like 6% 2022, 13% or 14% for 2023, and then 6% in 2024. Obviously, that lumpy amount in the middle of 2023 being reflective of the onboarding of the Ulster tracker portfolio. Non-Performing Exposures 4.2%. Less than that 5% target we had a number of reporting seasons ago declined by 22%.
Very focused on getting to the new target of 3%. Legacy NPEs are effectively addressed, and they've been reduced to EUR 300 million, and the remainder is really COVID-impacted sectors where we'll continue to work with all of our customers. I would say it's really in sectors that we feel should be resolvable in a fairly mutually beneficial manner in the corporate business space, et cetera. We will drive towards that target. On funding and capital, very strong liquidity metrics. In terms of MREL, we've met our MREL target. We've issued EUR 5.4 billion of eligible MREL securities. We executed a EUR 1 billion social bond and a EUR 750 million green bond in the first half of the year.
On a go-forward basis, given the higher balance sheet that we see, we think we'll be doing two or three benchmark issuances per annum. I would have mentioned previously, we have maintained a TLTRO balance of EUR 10 billion. Overall capital position remains strong. If I was just to walk you here from the year-end position of 16.6%, we've had strong profitability, 90 basis points. Calendar year provisioning release really linked to that NPE sale of 10 basis points. We have a small charge on investment securities of 20 basis points given the changing rate environment. We have a 20 basis points charge for the EUR 91 million buyback that we did earlier this year, and we've taken on board the full CET1 charge of 130 basis points for the Ulster Corporate and Commercial portfolio.
That leaves us a position of 15.9% and then effectively a regulatory dividend deduction of 60 basis points brings us to 15.3% at the half year. On the outlook for capital, obviously our SREP P2R, we would have updated you that it had reduced by 25 basis points to 2.75% from 3%. There's countercyclical buffer changes in the U.K. and Ireland. Half a percent for ROI, potentially increasing to 1.5% in 2024. In the U.K., the countercyclical buffer has increased from 1% to 2%. Overall, that's a buffer of 3%, from SREP to our target CET1 of 13.5%.
As I look to the future, the main moving parts that I can see, inorganic initiatives of around 70 basis points charge, primarily the Ulster tracker book. Profit generation, we see as being continuing, with continuing strength. We will continue to focus on generating RWA efficiencies across our entire balance sheet. We'll have a small charge for organic RWA growth, which I have talked about previously. Then we will have distributions to our shareholders. We have our CET1 ratio of 13.5%. As I would have talked about previously with respect to capital return, our focus for 2022 has very much been to close out on all of the inorganic items that we have talked about, not just agree to transact, but get formal regulatory approval and get the assets onto our balance sheet.
Our focus will be on ensuring that we have as strong a return for 2022 as we can deliver, and we will use our normal distribution policy payout range of 40%-60%. Throughout 2023, as more certainty becomes clearer in the environment, we will look to move towards that 13.5% CET1 target. Just to wrap up all of the guidance that I gave you for 2022, NII is expected to grow 10%. Other income will be around EUR 700 million. Costs are expected to be EUR 1.6 billion. For cost of risk, we expect a small charge. Reg fees, EUR 150 million. Exceptional costs of EUR 300 million. Loan growth for 2022 of 5%-6%.
Colin would have alluded to the fact that we're going to take away our medium-term targets and have a look at those. This is really due to the evolving environment that AIB is looking at. We have two banks exiting our domestic market. That is going to give us growth opportunity and customer acquisition opportunity. We have a rising interest rate environment, particularly in our core euro market, but we have inflationary pressures, and we have uncertainty. But overall, the benefits on the growth and the rates will outweigh any of the headwinds. We see upside potential to the 9% RoTE target. We will be able to enhance shareholder value and deliver more sustainable returns. Thank you very much.
Thank you, Donal, for bringing us through the numbers. We're now going to go to the phone lines for questions, and I understand our first question is from Grace Dargan in Barclays. Over to you, Grace.
Maybe you could just give a little bit more color. What's your assumptions on TLTRO repayment in that sensitivity and around your managed margin? I know you talked about that previously. Secondly, on other income, there's obviously a few moving parts in H1. I know you've called out the EUR 26 million. I think now particularly you've got better oversight of Goodbody post-completion. Is 2H 2022 a good implied run rate kind of going into 2023 and beyond? Should we think, be thinking about other drivers there as well? Thank you.
Hi. Thank you very much, Grace. On TLTRO, we obviously have maintained our TLTRO balances, but in the interest income guidance, I haven't incorporated any potential benefits for how that could be treated or not by the ECB. We'll await the next ECB meeting in September for an update there. I think on other income, the best way to think about it is really the reason I drew attention to the forward contract with Ulster is that's probably the main one that we see as non-recurring. I would exclude that on anything on a go-forward basis, and I think the rest we would see as being, you know, reasonably consistent.
Thanks, Donal. Next question is from Diarmaid Sheridan in Davy. Over to you, Diarmaid.
On the medium-term targets, obviously you've given us a couple of pieces there to think about, the updated rate sensitivity, the higher compound loan growth, et cetera, and some of the costs. You know, I suppose when you think then in terms of the impairment line, obviously you've said maybe there's a little bit that will need to be reflected into the second half of the year around cost of living. But as we look through that beyond into 2023, I suppose what like would we still expect a 30 basis points kind of through-the-cycle charges being normal? You know, just trying to size how the various different impacts will flow through into ultimate profitability and returns, I suppose. Then secondly, maybe just on the dividend and distribution comments, Donal.
I mean, if I picked you up correctly, are you indicating that to the extent that you have everything completed through the back end of this year, maybe early next year, that you're in a position at that point to look to return surplus capital and start moving to the 13.5% ratio by, you know, during 2023? Or do we have to wait until the end of 2023? I know it's a timing point, but it's somewhat important. And then just finally, if I may, just on mortgage pricing, I suppose, to what extent do you think you can stay at kind of current levels just given the increase in base rates, the increase in market funding costs? Is that something that you'll have to reflect?
You know, just curious around timing there. Thank you.
Yeah. Thank you, Diarmaid. I'll just kick off with some commentary on mortgage pricing, and then I'll hand over to Donal for the other questions that you raised this morning. We've had an exceptionally strong mortgage performance, 59%, 31% in market share. We see what's coming through in terms of applications. We're performing very well in this space, and we have a strategy of having a complete product suite and having a competitive product suite. We reacted to the first 0.5% increase in interest rates, the first increase in official ECB interest rates in 11 years by choosing not to pass on, where we manage the portfolio, not to pass on to other variable or fixed rate products.
Obviously we are expecting to see further interest rate increases over the course of the next number of quarters. The timing of that is uncertain, but it looks like we'll be having further rate increases in September. As we see those official rate increases coming through, we will be considering the appropriate pricing for all our products right the way across the mortgage suite. We'll keep that pricing under review on a very regular basis. You know, we have an ambition, a continuing ambition to be Ireland's largest provider of mortgages, and we will continue to maintain a competitive position cognizant of official interest rates.
Yeah, on the other items, I'm quickly gonna shoot back. I think I neglected to answer a question from Grace around managed rates assumptions in our sensitivities. It is a static analysis that we do, but there's loads of moving parts in it. I would say for the sake of simplicity, what we use is a 50% pass-through assumption on deposits and on variable mortgages. So that's that. On the dividend, I've tried to be as consistent here as I possibly can be, and said that throughout 2023 or at the end of 2023, we will look to move towards that 13.5% target.
The speed at which we review that and update the market, I expect will be largely driven by the environment in which we are operating in. With respect to the targets for 2023, look, I think asset growth, I've been really clear on what my expectations are for the future from an organic and an inorganic perspective. Indeed, we are seeing those amounts coming through. On the rate side, I think it really depends on your own view on interest rates. The bulk of our portfolio and sensitivity is to official rates and market rates, as opposed to managed rates. It's quite formulaic, and a lot, nearly all of those benefits will flow through. That's from the rates perspective. Obviously, there's associated headwinds.
You know, MREL issuance has increased costs, et cetera, et cetera. I'll let you figure out what that is gonna be. In terms of costs overall, we've had this year, you know, the unusual activity with respect to the leaving banks. You know, the cost increase of EUR 50 million really predicated around bringing in 700 people to help us acquire all of these customers. I don't expect that to go beyond 2022 and Q1 2023. We do have a lot of other strategic items which will be coming through and the benefits flowing through in 2023. Obviously we have an inflationary environment, and is it permanent, is it transitory, et cetera? We'll wait and see.
I mean, we do obviously believe that it will normalize over time, but we don't think that there will be huge upward cost pressure, anything like the actual headline rate of costs. Cost of risk is a very interesting one. 25 basis points for the first half of the year, and that's again what we see for the second half of the year. Really strong recovery post-COVID. I think the macro environment Colin would have outlined for Republic of Ireland being quite strong now and into the future. Obviously, if other large economies in the world slow down, it's gonna have an impact on Ireland at some point in time. We don't see it currently, but who is to know what's gonna happen in those years ahead?
If you run the numbers on the asset growth, and if you run the numbers around whatever rate environment that you want to see, you're gonna see jaws that are kind of I would say growing or moving in different directions at a markedly different pace. As we go into 2023, we really think that we'll have a strong trajectory from the asset side and the rate side.
That's great. Thank you.
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The next question is from Chris Cant at Autonomous. Chris, good morning.
Just wanted to come back on two things you mentioned during the discussion, please. On the Ulster Bank commercial book, you said that there'd be EUR 100 million or up to EUR 100 million day one impact from that. Has that changed your view of the kind of combined capital impact across ECL and RWAs for that portfolio? Just, I didn't read, again, it was a split of the ECL versus RWA, but it does feel a little high, the EUR 100 million figure. Is it that the capital cost of that transaction might now be higher than you previously guided, please?
On the other thing you mentioned around the three-year pay deal you've done with your union staff members, do you now feel you've got visibility on the staff cost component of your cost base, or at least reasonable visibility given you know the sort of pay escalation component, not necessarily the headcount? How much pressure are you seeing then in the kind of general and administrative costs, excluding the amortization and depreciation? I'm just trying to think about breaking down your cost base. If you kind of know the pay schedule for the next three years and the amortization depreciation is really just a function of past investments, the bit of the puzzle we're missing then is the G&A costs. Thank you.
Thanks so much indeed. I'll just refer to the pay deal that we concluded in earlier this year. That's a three-year pay deal. We were very eager to provide our staff with certainty in relation to the evolution of pay for non-managerial grades over the course of the next number of years. We were very eager to do a three-year deal. Given the array of uncertainties that are out there, we concluded that. It went to ballot in May, and it was passed, and it involves a pay increase in 2022, 4%, a pay increase in 2023 of 3% and a pay increase next year, the following year of 3% as well. It also involved, of course, a lift in entry-level salaries.
We're very happy to have been able to conclude that deal and very happy that deal was passed by ballot by our workforce in May of this year.
Yeah, on the Ulster Bank position, what I would say is we have incorporated in other income a one-off gain of EUR 26 million, which really represents a revaluation of the transaction and its impact. So I think that's the reflection of how we feel about this being good or bad. Look, we obviously bought a portfolio in the middle of a pandemic and now we're looking to onboard it. So I would say that the credit quality is improving, or better than what we would have imagined. So then to your question of EUR 100 million seems quite high.
I'm obviously being conservative on that number. I said up to EUR 100 million, because the quantum and the timing of all of those assets is not entirely certain. Effectively, when we onboard assets in similar grades, similar sectors, we're gonna have to reconcile them to our own grades on our own ECL levels. I would say for some sectors, we would have elevated stage two cover, et cetera, et cetera. I don't see this as being problematic really at all. It's just gonna be an onboarding item. Once they're onboarded, I'll be able to describe it a lot better. It certainly isn't a number that I was trying to disclose as being something in any way that was troublesome, 'cause that's certainly not the case.
Okay, thanks. On the sort of pressures you're seeing on the general admin costs, could you give a sense of what you're feeling there in terms of the inflationary pressure?
Yeah, I mean, that's, I would say that the, you know, the three-year deal, 10%, we think represents fair value. As we look forward, we've got a strange environment in banking in Ireland. You know, we have a couple of incumbent banks who need to scale up to onboard assets and customers. We have some exiting banks who have scaled up to offboard the same customers. I would say there's excess capacity in the system overall. You know, everything is running at quite a high level. That's all we believe gonna play out in the second half of the year.
The impact on the cost or the increase in the cost that you're seeing is definitely that G&A impact that you talk about, whether it be for the resources to help us onboard or everyday items. Paying lighting and heating for branches, getting bills for data centers, et cetera. Small amounts everywhere you're seeing seeping in. I don't think that incrementally increases every year. I mean, it depends on your own view on some of these things as well. We probably think that we have or will be in or around these levels at worst, and are more likely to subside going into 2023 and into 2024.
Okay. Thank you, Donal. Our next question is from Raul Sinha at JP Morgan.
Thanks very much for taking my questions. I've got two. One for Colin, one for Donal, actually. I guess the broader point I wanted to ask about was, you know, you're flagging a second upgrade to your targets, very substantial in the context of medium-term, you know, improvements that you've already delivered. There is a lot changing inside the bank as well as in Ireland. The reason for sort of waiting before you tell us about what the new medium-term trajectory looks like for returns, can I check if that relates to any externality that you might be waiting for in terms of clarity from the regulatory side, or perhaps clarity in terms of the rate environment, or is it just economic uncertainty?
Just to understand, you know, what are the sort of external inputs that you might be waiting for a little bit more clarity on, if there are any, in terms of updating us on the medium-term trajectory as it looks like going forward. The second one for Donal, just on capital, when we look at the moving parts from here, obviously, you've got the countercyclical buffers coming in on the MDA. I also note that in the notes, there's a comment on Basel for operational risk, RWA inflation.
I was just wondering if you might be able to throw some light on what that might be in terms of numbers, and how you think about the resilience of the capital target against some of the pressures you're seeing on the MDA side, especially as we think about 2024. Thank you.
Okay, thanks. Thanks so much, Raul. In relation to the delay in upgrading the targets, well, there's two elements to it. One is we are dealing with a very fast evolving environment at the moment. The primary driver of this is that we don't arrive sort of ideally at these numbers. These numbers are built on fact, or they're built on science, they're built on hard forecasts for the future evolution of our business. We're currently in the process of upgrading internally or updating internally our own outlook. That has to go through various levels of governance. We will consider it over the course of the next number of months. It has to go through various mechanisms internally before it produces the numbers that we can communicate with you.
We want to communicate them with you once we have validated them, once we have clarity in relation to the future P&L and balance sheet shape of the organization. Absolute clarity, and it has been through appropriate governance. There's absolutely nothing in the way of external considerations here. This is an internal process. Once it concludes, once we have science and hard facts behind our new targets, we will communicate them with you.
Yeah. Just to follow on from that, I mean, the acquisition of the Ulster tracker portfolio with an associated cost in and of itself would have been an addition to the medium-term target. Was there any point in changing that? We didn't wanna do that without changing the others. Obviously the main return for us is the 9% target. An amount of that is obviously going to be getting very firm on your view on interest rates as well. We're feeling very comfortable with asset growth, rate impacts, ability to manage costs. But when we do deliver the numbers, we just wanna be absolutely certain that we're gonna be able to deliver them to our shareholders.
With respect to the capital targets and the capital items, Basel, anything from op risk relating to Basel, we believe, not actually going to be significant. If it's a surprise, it'll be a surprise for everyone. Certainly nothing worrisome from an AIB perspective. With respect to overall, let's say modeling updates and decisioning from the ECB, nothing positive or negative really to update you with. When I mention RWA efficiencies, what I'm really talking about there is certainly in the short term just ensuring that we have taken or, you know, utilized benefits of any derogations, such as SME 501.
Obviously as we go into 2023 and beyond, and I think I would've talked about previously looking at more securitization technology, SRTs, to try to make some efficiencies overall. But we still have, you know, a large amount of external assets to onboard, and the focus is going to be to onboard them as efficiently and as safely as possible, so we generate the growth and returns, and then we can look to optimize that, I would say in the future.
Great. Thank you.
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The next question is from John Cronin at Goodbody. Good morning, John.
Hi Colin. Good morning, Donal. Thanks for taking my questions. Just a few from me, please. One is on ECL. Again, just on the EUR 309 million write back in H1, look, I see your guiding, and you've covered that in your presentation, to a full year charge, with the approximate EUR 100 million day one ECL charge. I mean, look, I guess, you know what I'm grappling with a little bit is, you know, the conservatism around that, given the very high stock of PMAs. Do you feel, I guess, on balance, as well as the very high provisions taken in FY 2020, do you feel on balance that this is, you know, you're just being pretty careful here in the context of the economic uncertainties?
My second question is on deposits. How would you expect deposits to evolve in H2? I saw they were down in Q1 but up strongly in Q2, so some guidance there would be helpful if you could. Thank you.
Our general approach to ECLs has been consistently conservative, cautious, and forward looking. That very much underpinned the decisions we made in 2020 in relation to ECLs. We are dealing with a very uncertain environment, and we deliberately adopt an ongoing conservative stance. The ECLs movement we saw in the first half of the year, Donal has explained the facts driving that movement. We are, though, continuing to grapple with uncertainty in relation to inflation, in relation to growth globally, in relation to the evolution of monetary policy. It is right and appropriate, given the fog that is out there, that we continue to adopt a very conservative and cautious stance on ECLs. It's the right thing to do from a medium-term management perspective. Donal.
Yeah, on deposits, like I would've mentioned, grew really strongly throughout COVID. We would've expected naturally for these deposits to be spent, but they've continued to grow actually. We believe that they will towards the end of the year continue to grow even faster. That is really due to the fact that all of the KBC and Ulster Bank customers are looking for a new current account home, new credit cards, new overdrafts, et cetera. We're very focused on ensuring that we're able to, you know, offer a compelling product and onboard as many of these customers as we can. Indeed, the actual number I would've mentioned earlier was liabilities, deposits going from EUR 96 billion up towards EUR 100 billion.
That would be incorporating what I would see the existing organic growth in the AIB customer base as well as some of these onboarded customers as well.
Thanks so much indeed, Donal. That brings us to a halt this morning. Can I say thank you to you all for joining us today. I know that this is a really busy results day, so I'm very grateful to you for the opportunity to present our results as we approach the very end of July. Can I wish you all a pleasant summer and a pleasant break, and we look forward to being back in touch with you formally ahead of year-end with a revision to our medium-term targets. Thank you.