Good day, thank you for standing by. Welcome to the AIB Group plc Medium Term Targets Update conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there'll be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Colin Hunt, CEO. Please go ahead.
Good morning to you all, and welcome to our investor and analyst update as 2022 draws to a close. Colin here, and I'm joined this morning by my colleague, our CFO, Donal Galvin. As usual for these sort of events, I'll kick things off with an overview of the strategic context and the macroeconomic backdrop, then Donal will bring you through all the financial details. Of course, we will have time for questions. On this day, two years ago in the depths of COVID, we set out a plan to strengthen, to streamline, and to simplify AIB.
We laid out a blueprint to transform the group to deal comprehensively with legacy issues, to complete our product suite, and to position ourselves to take advantage of what were at that point, anticipated changes in the banking landscape here in Ireland. Two years on, the progress that we have made on the implementation of those plans, a changed economic and financial industry environment and the monetary policy normalization process, which is now underway, means that it is appropriate at this juncture to reset our medium-term targets. For 2024, we're targeting a ROTCE of greater than 13%, a CET1 ratio above 13.5%, and a cost base below EUR 1.75 billion, with a cost-to-income ratio circa 50%.
For the year immediately ahead, we're expecting cost-to-income ratio of less than 55%, progressive dividends, and a ROTE greater than 10%. We are confident in our ability to deliver against these targets. Notwithstanding the fact that we're continuing to deal with continued global macro uncertainties, we have the plans in place to do that. Turning to the economy, the economic backdrop. For the array of global uncertainties and higher price pressures have seen momentum easing, Ireland is still expected to be a material outperformer economically in 2023, with real growth as measured by either GDP or Modified Domestic Demand remaining comfortably in positive territory.
Confidence in the continued expansion of the Irish economy is supported and underpinned by tight labor market conditions with total employment at an all-time high, a support of fiscal stance and continuing decent FDI flows with Ireland's attractions as a location and destination for U.S. investment, enhanced and augmented by Britain's departure from the European Union and its single market. On the pricing side, on the inflation front, while headline rates have followed the same trajectory as in neighboring countries and are undoubtedly having a dampening effect on confidence levels, we are expecting the distortion effects of higher inflation to moderate as we move through 2023. Meanwhile, the balance sheet of households and businesses remain in very good health, with real leverage levels at multi-decade lows and deposits continuing to build. Ireland enters 2023 in good shape.
That said, given uncertainty internationally, at AIB, we will maintain a conservative approach to our underwriting standards as we move through the economic cycle. Looking back over the past four years, we've made significant progress in delivering on our ambition to get a part of our customers' financial lives to our own product development as well as business and portfolio acquisitions. At the same time, we have successfully positioned ourselves as the unrivaled champion of the sustainability agenda in Irish financial services. We've consolidated our digital leadership, we've driven an ongoing transformation program through our business. We've reshaped our property footprint, we've exited underperforming businesses, we've adopted hybrid ways of working successfully.
There's obviously further work to be done on delivery of our transformation plan to the end of 2023, but we continue to make good and meaningful progress, and it remains a key priority for the board and the executive committee. Focusing on sustainability now for a moment. We continue to advance towards our 2030 targets with a corporate PPA now signed, which will see 80% of our electricity needs being met from renewable energy sources, while the portion of new lending, which is green or transitional in nature, is now running at 24%. We continue to believe that the vital switch to a low-carbon future creates a huge opportunity for us to deploy capital at scale in an environmentally supportive and risk-conscious way. I've often remarked that the most extraordinary feature of this business, of AIB, is the strength of our customer franchise.
Some 40% of personal business customers in this country choose to have their primary banking relationship with us, and that market position, which underpins our plans and our prospects, will be further boosted by our success in attracting customers from the departing Ulster Bank and KBC. We estimate that some 48% of the migrating customer flow from Ulster and KBC to the three remaining retail banks is coming to AIB, and we're now well set to grow our customer base above 3 million. As the year draws to a close, as we bring 2022 to an end, the group is in its strongest position in decades. We've rebuilt our product suite. We've seized the opportunities presented by the imminent departures of Ulster and KBC. We've dealt comprehensively and conclusively with legacy issues while maintaining exceptionally strong capital and liquidity positions.
We are very optimistic about our business, and we look forward to AIB delivering sustainable and progressive returns to our shareholders consistently over the years ahead. I'll stop at this juncture and hand over to Donal. Thank you.
Thank you very much, Colin, and good morning, everyone. I just want to start off with the medium-term targets trajectory. We would have set targets a number of years ago, in fact, two years ago to this day, in the depths of COVID, with a very uncertain outlook. We think the evolution of our of our targets, particularly our return on tangible equity, reflect the change in the external environment and indeed the domestic domestic banking market in Ireland. In terms of overall, our balance sheet composition, and the impact indeed of these external factors, we are continuing to see organic growth on the asset side, a continuation of the growth in our liability base.
We think that this is going to slow in the coming years, but our loan-to-deposit ratio at the half year was obviously 59%, which gives a good idea of the construct of our balance sheet. Overall, you would have seen the sensitivities for all of our main currencies and exposures. Obviously, as we move into 2023 and 2024, these sensitivities will become more alive. You know, we're obviously seeing all of the changes with respect to market rates and official rates. Obviously as we move into 2023 and 2024, pricing of assets and liabilities will become a much more important factor.
That's something that I'll look to go through more detail on in our year-end presentation. In terms of our cost targets, we have maintained a hard cost target of EUR 1.75 billion or less than EUR 1.75 billion. We think that this does allow external observers to reconcile our cost base more appropriately, and internally ensures that we maintain our cost discipline. The cost-to-income ratio, circa 50%, we really wanted to add this onto the cost story so that we can articulate clearly the growth in income significantly outperforming the impact on costs. The environment is inflationary, as we know.
Specific to Ireland, Irish inflation between 2021 and 2024 is estimated to be around 20%. We will have all of our inorganic initiatives fully embedded by 2023, all costs headcount related to that. We will have an enlarged balance sheet, obviously from our organic and inorganic acquisitions, and we will have a significantly larger customer base of over 3 million customers. Throughout the year, we've been working hard to rebalance priorities and resources, really to maximize on the opportunity that we see in the marketplace. To be more specific about that, it really is about the origination of new customers to the bank from those exiting customers. There's a huge focus on that in the organization, and we are committed to capturing as much of these new customers as is possible.
With respect to our CET1 target, greater than 13.5%, no change to that. This is a 2% buffer to regulatory requirements, excluding P2G, obviously, but represents the amount of capital management feel we require to run the business in the environment in which we operate. We've got really strong profits, business momentum, from 2022 going into 2023. That will provide organic capital generation. We do expect to see RWA increases from this growth. There's always regulatory headwinds, typically in the areas of the unknown, new buffers. We are trying to incorporate all of the buffers as we currently know them. Obviously as the environment evolves, this can change.
With respect to RWA efficiencies, you know, we always look to ensure that we're making or taking the benefit from all of the available reliefs within the CRR, and that will be ongoing. Naturally, within our overall capital stack, we assume that our AT1 and Tier 2 buckets are always filled. That's really what gives us the comfort to reaffirm that CET1 target. Obviously, having a target of greater than 13.5% on a Q3 CET1 of 15.4% requires us really to fill in for investors what our intentions are with capital. I would say that we feel we have captured the inorganic opportunities that are available in the market, so we don't see any more significant inorganic activity.
Really from that base, it allows us to think about what the end state capital position is going to be and really how we want investors to think about distribution. For 2022, obviously we're nearly there, we'll utilize our existing policy of 40%-60% payout ratio, and we'll assess the balance between dividends and buybacks at the end of this year. In recognition of the current environment, AIB intends to propose distribution within its normal dividend policy for 2022, and that will be in quarter one of 2023. Beyond 2022, subject to a supportive economic environment, an annual board, and required regulatory approvals, in the coming years, AIB will seek to move towards the CET1 target by prudently increasing levels of distributions, supplementing cash dividend with share buybacks where appropriate.
We feel as management and the board of AIB that this pathway is realistic, conservative and clear. I'm sure we will be able to go into a little bit more detail around that in Q&A. If I look at the ROTCE target of greater than 13% in 2024, quite a few things really behind this. There's really strong revenue momentum in 2022 coming into 2023 and 2024, you know, from the geared balance sheet for rising rates, from the onboarding of the inorganic activities, from the growth in the balance sheet from organic activities, we do see sustainable loan book growth going forward.
Our customer base is growing quite strongly, particularly given all of our efforts to onboard all of the customers who are with the departing banks. Going forward, we feel that this will really support our fees and commission line. We've executed a number of ROTCE-enhancing inorganic activities. Underpinning this, we feel we have strong asset quality, and we're conservatively provided, coming into an environment of higher rates, inflationary impacts, and somewhat of the unknown. Specifically, for 2023, we've tried to just create a bridge house to that 2024 number, we will target a ROTCE greater than 10% for 2023, and as I said, with really strong revenue momentum from 2022.
That's the high level overview of the targets. I'll hand it back to Colin to wrap it up.
Thank you so much indeed, Donal. In wrapping up and concluding the slide presentation, I just want to take a moment to underline our investment thesis. This is a strong organization. We have a track record of delivering on business transformation in a very clear and ambitious strategy for our future development. Our balance sheet is clean, it's robust, and we are focused through our approach to capital deployment on keeping it that way. We are in a leadership position with a soon-to-be complete product suite in a consolidating market with a solid economic backdrop. The group is transforming, and it is well positioned for the future, with value and sustainable returns being delivered to our shareholders. That is where I will stop and turn the microphone over to the floor.
Thank you. As a reminder, to ask a question, you will need to press star one and one on your telephone and wait for your name to be announced. Once again, star one and one if you would like to ask a question. We will now go to your first question. One moment, please. One moment. Your first question comes from Raul Sinha from JP Morgan. Please go ahead.
Good morning, Colin. Good morning, Donal. Thanks very much for the update. I've got two questions to start with, if I may. The first one is on the profile of the capital return trajectory. Just given, you know, what you're saying about the multiyear journey towards your target, how should we think about, you know, the profile of this? Is this kind of back-end loaded, mostly coming in 2025, or is it going to be in equal steps, 2023, 2024, 2025? The reason I ask this is because if I look at consensus ex-expectations, I mean, consensus has got CET1 broadly flat at 15%, so not really any significant decline in terms of capital. That's the first question, and that would imply obviously quite back-end loaded.
The second one is just on asset quality. Just sort of triangulating that with the return target of greater than 10% for 2023, are you signaling that you are more cautious on the asset quality outlook for 2023 versus consensus? Thank you.
Okay, thank you very much, Raul. Look, I think on the distribution side, the way we're thinking about returns in the 2023-2025 period is twofold. You know from 2021, you know, paying effectively EUR 0.045 of cash or EUR 0.078 in totality, you know, we will look to grow that cash dividend on a sustainable and growing basis. Okay? That's, that's underpinning, I would say the capital return. Then above that, we will look to pay out within our dividend policy of 40%-60% and obviously beyond and above that in the 2023-2025 period. We don't expect to ever seek to make a payout greater than 100%.
Indeed, we feel in the 2023-2025 period, I wouldn't call it back-ended or flat. I'd probably, you know, our current thinking is really that that will just be upward sloping. Really to land us on that endpoint, which allows us on an annual basis really to look at the environment and make that decision. It, it's gonna be subject to, you know, an annual board discussion. It's gonna be subject to, you know, regulatory approval vis-a-vis a buyback. We feel that we have, you know, a very strong business trajectory. I would say within the capital return universe, we are very much focused on buybacks over cash per se.
I think given the price-to-book valuation at the moment, that makes a lot of sense for us. Indeed, anything really under one makes sense. I think within the way we look at or think about the buyback priorities, in this order is one, you know, our preference would always be a directed buyback. Two would be a, you know, a form of participating type of buyback, which we executed this year. Lastly would be an on-market buyback. You know, naturally, that requires the agreement and the participation with the government. That's certainly how I would describe management's intentions with respect to capital returns. On asset quality, I would say two things.
Number one, you know, the ROTCE target for 2023, do not read into that we are getting nervous around asset quality. I don't think our position on that has changed. The Irish environment continues to be strong. The inflationary impacts and high rate environment will inevitably have an impact on credit quality. You know, we have signaled a small charge for 2022. You know, in the 2023 to 2025 area, I think we're still in the view of a cost of risk in the range of 30 to 40 basis points.
You know, to date, there's been very little stress in the portfolio, but I would say that the speed at which the rate changes have taken place, it's unlikely that we are gonna start seeing that stress until Q1, Q2 next year. Look, again, the government have, similar to COVID, provided or are putting in place lots of support measures at household on a business level, you know, which are quite significant. These are things that we have to consider when making our guidance estimates for cost of risk. I'll plan to do that obviously in our year-end presentation.
Yeah. If I could just add briefly to that, like our ethos has been to maintain a very conservative and cautious approach to asset quality. We take that approach very seriously, and it is applied both to our underwriting standards and to our approach to provisioning. We're unapologetic about that. It is unquestionably the right thing to do. Our book is underwritten to very robust standards, and we are very happy with how it is performing, and how it is likely to perform over the months and years ahead.
Okay. Thank you.
Thank you. We'll now go to our next question. One moment please. Your next question comes from the line of John Cronin from Goodbody. Please go ahead.
Good morning, Colin and Donal. Thanks for taking my questions. I just few as a follow-up on capital return, you have alluded in the past to prospects of RWA efficiency through the likes of synthetic securitizations, for example. We did see one of your peers, submit some CET1 capital over the years as they completed such trades. I suppose, is that a possible source of upside over the medium term, I suppose, over the next three years, in the context of what the size of potential distributions to shareholders could be within the parameters of what you've spoken to today?
In a balance in relation to the kind of upwards point with respect to capital returns, that's 100%. The second one is just a complementary point really. Look, based on your comments, obviously, Donal, look very little credit to stress to date. You know, it's gonna be later realistically when we, when we see the full impact of the uptick in the rate environment. Is it fair to say therefore that, look, given your guidances for a small ECL charge, in FY 2022, that you would be substantially, expecting to substantially bulk up on overlays were you to get there?
Then thirdly, just on loan pricing, obviously it's quite a topical point, and you've moved to a significantly greater extent in terms of fixed mortgage pricing relative to peers. Notwithstanding your comments around the greater pool of customer inflows and the fact that your natural market share is now gonna be significantly higher than it was historically, given the changed landscape. You know, are you happy in some respects to see some flow share in this environment, given your higher pricing? I suppose what I'm getting at really is look, your view on risk and your lens to peers. Thanks.
Thank you, John. I'll take questions for you, and then Donal can deal with one and one and two. Monetary policy becomes ineffective unless the financial system plays its role in transmitting monetary policy. We take a very rational approach to responding to monetary policy decisions. We take a very rational and considered approach to responding to official interest rate changes. We will continue to do precisely that because it is the right thing to do for our customers, and it is the right thing to do for the institution. You know, we have a exceptional market shares, as you know, but we want to write business that is sustainable and is reflective of the prevailing monetary policy environment.
That's what we've done to date, and that's what we will continue to do.
I think, John, with respect to, you know, expectations for a small charge in 2022, you know, that's still very much our expectation. You know, we are not seeing any flows to stage 3 of significance. You know, some of the areas that we will be looking at, you know, and we're trying to be forward looking. I mean, effective funding costs have changed. We think it's an inevitable outcome that, you know, real asset levels are going to adjust downwards. You know, looking at that, where are the potential weaknesses in the portfolio, try and make an adjustment for that.
You know, understanding the rate environment and the inflationary environment together with government support, its impact on net disposable income, and then for borrowers who might be most affected by that. They're the kind of things that we're looking at for year-end 2022. They'll be very much forward-looking types of analysis as opposed to there being any actual stage movements. I think lastly around RWA efficiencies. We, you know, historically have not engaged in any forms of balance sheet securitization. I think I've said before that it's definitely something that we want to look at in the future. I wouldn't encourage you to take potential upsides for that.
Our history has been that, you know, regulatory headwinds and RWA efficiencies have moved in tandem, should we say. You know, there's a bit of uncertainty, I think still, around Basel IV implications for operational risk. You know, it's impossible to predict the future there. You know, we have not incorporated SRT benefits in any of our projections which have allowed us to present these medium term targets. That's the best way I could describe it.
Thanks. That's very clear.
Thank you. We will now go to our next question. One moment please. Your next question comes from the line of Diarmaid Sheridan from Davy. Please go ahead.
Good morning, Colin. Good morning, Donal. Thank you for taking the call and providing the information you have. A couple of questions, maybe just switching focus slightly from those earlier. Just around the lending targets that you had set out earlier in the year, the 5% compound growth. Is that still something that you'd be comfortable with? I'm just mindful of, you know, as you rightly point out, the two kind of big factors that have changed are, you know, some of the big changes that we've seen in the Irish market in terms of who's lending and who may not be at this point in time. Secondly, some of those macro headwinds, you know, particular, you know, there was large levels of growth in maybe some of the more corporate type areas.
How should we think about that type of loan growth that you would have set out earlier in the year? Secondly, just around the cost piece and the chart is very useful, Donal. Thank you for that. The final two blocks that you set out in your chart there, I just wonder how to what extent are they permanent, and we should think about those as being kind of ongoing features of the cost base? Are there still some element of temporary kind of cost one-off elements that you're still seeing in the context of that changed market? I suppose also in the context of the initiative that you had set out two years ago in terms of taking costs out of the business. Thank you.
Hi. Yeah. Overall, I would say that we've, you know, we are not looking to change any of our guidance. I think on loan growth for me, I mean, the environment is still supportive. We know we're operating in an environment where two banks have left. We do still see a lot of momentum in that area. The area that's unknown for us is, if we choose to price, products in a certain way that suits our return profile, and others who might have a different strategy do not, you know, could that have an impact on market share or on asset growth? I think the answer is clearly yes. Is that something that we would be concerned about?
Not necessarily. As Colin pointed out, we have a quite rational approach to margins on lending products. I think in wholesale markets, spreads have fully, you know, moved quite a bit wider. I think that we will maintain our approach in that area, and then we'll have to wait and see what the how the external environment evolves. That's the only thing I would say that we're looking at, but it wouldn't be a cause of concern. I think on the cost side, as you can appreciate, there's a few things going on. You know, the external environment and, you know, how long inflation endures.
If I was to pick one area or, you know, external input that I'd love to know, you know, that would probably be the one. That will help define what the trajectory is going to be. You know, we've utilized, you know, for our forecast here, what current expectations are, so we'll have to wait and see how that transpires. I mean, 2022 was quite acute, I would say, on the hiring front in Ireland, generally across all businesses. We do think that that is probably going to slow down somewhat as business activity slows down globally.
I think specific to your question on our cost take-out program, obviously, we had in December 20 identified EUR 230 million of cost savings. Of that, 30% would be complete and done. 50% of that we would feel is very much on track. 10% of that we have delayed, 10% of that we have effectively canceled. The delayed part is really down to one specific project. You know, we'd always talked about trying to simplify the end-to-end process for business credit. Naturally we've, you know, we're onboarding a large business credit portfolio from Ulster. We've just adjusted timelines to allow us to onboard all of those customers, and then we'll be able to continue to execute that program with the new assets.
With respect to the canceled programs, it's a small amount. It's quite specific to the environment in Ireland overall and some of the initiatives we were thinking about with respect to, you know, our branch footprint throughout the country, and how we were thinking about that. Overall, those cost programs are still very much on target and very much a focus for the organization. Then of course, alongside that is the new block of work, which is onboarding all of the, you know, the customers of the departing banks. That's an area where we're really focused. You know, we have taken on board quite an amount of temporary workers.
What we need to see is how many of those we feel we need on an ongoing basis to ensure not only do we onboard the customers, but obviously that we can serve them with a full product suite throughout their financial lives.
Very good. If I could just add one thing, I suppose, to that, just for the avoidance of any doubt, we are very pleased with how the business is performing, and we have good visibility on a pipeline of high-quality lending opportunities as we turn into 2023. You know, the business is performing well.
That's great. Thank you.
Thank you. We will now go to our next question. One moment, please. Your next question comes from the line of Chris Cant from Autonomous. Please go ahead.
Good day, guys. Thanks for taking my questions. I had a few if that's okay. If I could just follow up on the last point around costs to begin with and in terms of delivering on the previous cost program. I guess going back to your 2020 cost guidance. You're talking about 1,500 headcount reduction by 2023. I know you've got some M&A in there. If I allow for the M&A, I think pro forma, that would have implied, I think, a count of about 8,400, there or thereabouts, on your old plan post the M&A. What headcount are you expecting to be running in 2024, please? Because I think implicitly it's going to be something like 1,500 in that.
I'm just struggling to reconcile that against the comments you just made around delivering on the maturity of the cost initiative that you've been talking about previously. I'm struggling to tie those two things together. If I could just ask on RWA, please. You indicated that you're not expecting to distribute more than 100% of earnings in any fiscal period. I'm not entirely sure I understand why, but, taking that assumption, what RWA growth are you assuming out to 2024? If I think about your previous guidance and the sort of things that Ben shared last summer, which included most of the M&A, I think you were talking about implicitly something like EUR 59 billion-EUR 60 billion of RWAs in 2023, including the pre-announcement trap a bit.
What are you now assuming for 2024? I guess it must be a bit higher than that to avoid a situation where you don't need to distribute more than 100% of earnings in order to get down to the capital target. What RWA number should we be thinking about for 2024? On revenue please. I mean, I've been trying to reconcile your cost income figure for 2024, the circa 50%, and the cost number you've given with the sensitivities and the revenue guidance you've given for this year, specifically NII, and I'm struggling. I guess simplifying the issue, how close to 50% is the circa 50%?
I mean, are you assuming 50% there or thereabouts, or is there quite a lot of bandwidth around that circa 50%? The only way it sort of makes sense when you're giving that sensitivity on this is if it's actually kind of more like mid-high 40% rather than circa 50%. Thank you.
Okay. Thanks very much, Chris. Look, I think with respect to, you know, a walk of headcount from prior years to today, that is, that's probably going into more detail, frankly, than I even have at my fingertips. That's... Look, that will be something that, you know, I'm happy to delve into at, you know, at the year end and go through that walk. You know, as you rightly say, there's a headcount impact from the inorganics, and obviously there's gonna be a headcount impact from the onboarding of the customers, and it's just not clear to us right now, you know, what quantum of that endures and what quantum of that is temporary.
You know, given that uncertainty, you know, we've come up with a cost target to 2024 that we feel captures all eventualities in that area. If I'm to look at RWAs, I don't... I think that, you know, the asset growth expectations, and even if I, if I look at consensus in the outer years, I think that's bang on the money. I would, I think no miss there or difference of opinions. Then with respect to distributions, I think it's the environment, you know, is still uncertain.
You know, as we all know, you know, conflict on the eastern border and, you know, I think most of us are trying to bed down our own macro positions in U.S., Europe, et cetera. There is uncertainty. You know, we feel, you know, obviously as a large pillar bank in Ireland that it's incumbent on us to manage the business prudently. From the capital return story, that's really why we wanted to be quite clear on our expectations and also realistic about timing as well. That's, that's the reason for that one.
Then on revenues overall, I wouldn't back solve a cost-to-income ratio to that being the an outturn for revenue in 2024. Needless to say, you know, management teams set targets that they expect to beat. You know, there's always, you know, in different line items, amounts of variability. I think what you should take from the call is that 2022 business momentum is very strong, going into 2023. We're very comfortable and confident with our growth and our financial performance in the coming years. Try not to get, I think, caught up on, you know, a couple of percentage points above or below 50%.
Really we wanted to put that there as a guide to show the trajectory in income versus the trajectory in costs.
That's helpful. Thank you. In terms of not back solving off of the 50%, if I come at it slightly differently, what ECB deposit rate are you assuming in your 2020 thinking?
Well, I think, look, the interest rates that we're imagining, certainly for Euroland, I had assumed a year-end ECB DEPO rate of 1.5% for 2022. I think that is gonna be probably a little bit higher. 2023, 2024, we've assumed an ECB DEPO rate, if I think of average balance levels throughout the year, like 2.75% to just under 3% in Euroland. I think that's one of the key inputs. I mean, we probably feel that, you know, the terminal rate in ECB land is between 2.5% and 3%, we shall see how that is going to pan out.
Look, I think in 2023 and 2024, we're going to be moving out of, you know, theoretical sensitivity tables into the real world with respect to rates, liabilities, and pricing. Obviously, given, you know, we have a very large liability base, the strategy to our liability pricing is going to be really important. I think it's just a bit too early. That's something I plan to talk about really at year-end. As we sit here today, I would say the liability side on the pricing side, you know, hasn't really been adjusted.
Okay. Thank you.
Thank you. We will now go to our next question. One moment please. Your next question comes to the line of Grace Dargan from Barclays. Please go ahead.
Hi. Good morning. Thank you for taking my questions. A couple on revenue, if I can. Firstly, I guess you touched on it in the presentation, but could you quantify the revenue opportunities, both thinking about NII and fees from the KBC and Ulster Bank exits? That's thinking more around the acquisition of the customers and that deposit base rather than the inorganic side, which I think we understand. What benefits from that you're also factoring into your 2024 ROTE target. Secondly, just thinking about your sensitivity, whether you could just give us a view on the size of the assets and the liabilities that make up your market rate, official rate, managed rate bucket that you talk about. Thank you.
Hi, Grace. Thanks very much. Look, I think I've given guidance for 2022 on other income, and we're very comfortable with that number. If I look at consensus in the outer years, that would seem to be pretty reasonable, and would be in line with our own expectations. Couple of moving parts though on other income, which I'll kind of just reiterate from prior years. You know, we have fees and commissions in there, which is obviously the stable amount, and then there's always other items which impact that. You know, undoubtedly with more customers, the fees and commission line will be a larger component.
We don't really budget or guide for let's say one-off gains that appear in other income. But I would say that I think you should expect to see a more robust underlying fees and commission line. Just to, you know, reiterate, the consensus looks pretty reasonable for us. Overall, I don't think I've broken out the balance sheet in the way in which we characterize the assets and liabilities. Other than to say, I mean, I think our, you know, our balance sheet, our total balance sheet at the half year was EUR 133 billion of assets. You know, our customer loans were probably around EUR 60 billion.
You can reasonably see there that the part in the middle that makes up the difference is, number one, a securities portfolio of around EUR 20 billion. Number two, deposits with central banks of around EUR 40 billion. Both of those asset classes or both of those groupings are all rate sensitive, okay. EUR 20 billion securities portfolio is asset swaps, okay. As Euribors move, that's all generating higher income. Obviously, within the central bank balance portfolio, that's obviously a floating asset as well. Incorporated within that is obviously a quantum of EUR 10 billion of TLTRO. Obviously we have got the update from the ECB on how that is going to be treated.
We haven't concluded on this as of yet, but it's our expectations that we will repay the EUR 10 billion of TLTRO before the end of the year, and that will obviously have a, you know, a knock on impact on the overall balance sheet.
Perfect. Thank you. Maybe just quickly coming back on the fees and commissions, would you think about scaling that kind of linearly with customer growth, or we shouldn't think about it that way?
Yeah. Look, at the moment, you know, really, and this is almost related to the cost question, what started off as an exercise to, you know, operationally onboard customers very quickly becomes A segmentation analysis on new customers and what their needs are. You know, and I think that's probably what we're trying to size at the moment. I think it's quite easy to take quantums from customers and multiply out, let's say simple current account fees. I think it gets a little bit more interesting, when you when obviously you look at, you know, the possibilities of further sales. We haven't incorporated any benefits, let's say, from that in our thinking or that. Said another way that wouldn't be represented in consensus.
You know, we haven't, we haven't concluded on that analysis yet. Again, you know, something we would expect to update on at year-end.
Thank you.
Thank you. We will now go to our next question. One moment please. Your next question comes from the line of Robert Noble from Deutsche Bank. Please go ahead.
Morning all. Thanks for taking my questions. Can I ask what's the ROTE guidance sensitivity around your base rate assumption if it was maybe 50 basis points lower than you think? Presuming you say that the sensitivity tables become less relevant. If you could give us an idea of what the 2024 sensitivity is around that. As rates get to that level, how do you see the tracker book performing as the rate on that approaches the fixed book rate? Is that something that you've thought about or what will change going forward? Lastly, your slides kind of show the majority, and I think everyone thinks this anyway, the majority of the revenue increase comes through in 2023, but your ROTE guidance is. Well, I won't say floor, but it's relatively low.
How far can you exceed the 2023 ROTE guidance is the question. Thank you.
Okay. Yeah. Look, quick rule of thumb, income, EUR 100 million of income is 1% of ROTE. That's the best way to think about it. I think on the tracker portfolio, that's obviously, that's a, that's a cool question. It is somewhat related to the margin. You know, some trackers were written on very low margins. Some trackers were written on higher margins. You know, if you imagine a, you know, a REFI rate of 3%, you know, in 2023, if you're on a 50 basis point margin, you know, I'm not sure if you'll change. If you're on higher than that, you might consider it. It is hard to know.
The tracker books in Ireland Inc., I would say are mature and very seasoned. Given most of them were written in the early 2000s, they're probably in the latter end of their life. I would say customers in that, in that phase of a mortgage are less likely to switch. Indeed, to date, in our own tracker book, we have not seen too much, let's say, switching out of trackers to other products. In the Ulster tracker portfolio, which we are looking to acquire, to date, we do not think that there has been significant changes there either. You know, that is subject to change.
From our perspective, you know, if people move from tracker to fixed, from an AIB perspective, that's okay, provided our fixed rate levels are all accretive from a return on equity perspective, which obviously drives, you know, a lot of our pricing decisions. That is obviously something that we do take into account.
Rob, it's also worth reminding ourselves that the book that we're proposing to acquire from Ulster in terms of the tracker book there, is being acquired at a significant discount to par.
Yeah. I think you asked the question as well on 2023 ROTE greater than 10%. Again, I reiterate, you know, these are medium-term targets. You should expect management to present targets that they have confidence in beating. I think the 2022 trajectory, as I said, is really, really strong going into 2023, which would give us a large amount of confidence in indeed doing that.
Great. Thanks very much.
Thank you. We will now go to your next question. One moment please. Your next question comes from the line of Guy Stebbings from BNP Paribas. Please go ahead.
Hi. Morning. Thanks for taking the questions. First I just want to come back to the 10% or waiting 10% ROTE next year and cost assumptions underpinning that. I appreciate you giving cost income guidance, in sort of EUR million terms, should we be thinking about linear progression towards the 1.75 in 2024? Is it a much larger jump in 2023 and then more of a plateau? I mean, if I think about the breaking 10% ROTE target, it would seem to imply a big jump next year, but then some of your comments around, you know, confidence of exceeding targets maybe that I shouldn't read as much into it as that.
The second question was just around regulatory headwinds and capital and sort of, I think, comment around on certain capital. I mean, can I assume you're talking specifically around countercyclical buffers, possible changes to the G, albeit those could go in either direction versus current expectations or is there anything else? You commented you're happy with the consensus RWA, so I assume not, but wanted to check. Related to that, just quickly. Why not pay out over 100% if the circumstances make sense? I mean, if performance in 2023 is stronger than expected, do you find yourself above plan, risks are receiving at that point in time, is there something that stops you paying out above 100%? Is it board appetite or something else?
I appreciate it might not be your central plan, but there's certainly a scenario which would seem to imply you would need to pay out over 100% to get the capital target down. Thank you.
Okay. I would firstly say on the regulatory headwinds, definitely nothing specifically on the table that would give me a reason for concern or anything that I think needs to be adjusted. Really my caution here is simply around, you know, the environment, you know, the fact that buffers can change. You know, I have very little control over that. Obviously we're, you know, working through IRB programs and our experience there has never in fact been that we've had RWA reductions post-inspections. There's nothing again that I have visibility on specifically that is going to have a negative impact there.
You know, over time, you know, I think that is just our experience that we do have regulatory headwinds. We manage those, we deal with those. Obviously we continue to always look at efficiencies as well. I think on the distribution side, it's somewhat academic. Okay. I mean, we've set out our capital plan. The reason we've defined it as such is we think that this is the most realistic, clear, pathway that we can present to investors, analysts, and indeed our own stakeholders, you know, being the regulator and the board. This is I think what we feel is a very credible base case. Obviously if the environment changes up or down, things can change.
Really our, trajectory and our projections here are around the base case, around the macro environment panning out, as we expect. You know, things can change a lot in two years, as we well know.
Okay, thank you. That's very clear. Just on the cost point for next year, able to give us any sense in terms of nominal cost base terms for next year, how we should be thinking about the move from 2022 exit to 2024 guidance. Thanks.
Yeah. Look, I'm really steering clear of any guidance beyond what I would've done at Q3. I think that, you know, again, if I look at consensus, endpoints, you know, is bang on the money reaffirmed today. I think that for 2023, you know, I would say the gap isn't really that material. I think you could adjust it either which way. The 2023 results, okay, or the 2023 ROTES will really be defined by the top line, and that trajectory coming through on the top line, on exactly how the rate trajectory pans out, which is now becoming a lot clearer.
I'd probably focus a little bit more on 2023 and bearing in mind my 2022 guidance was greater than 15% NII. you know, and I'd imagined a, you know, a rate environment or a rate end rate of 1.5%. like the end point of 2022 onto 2023 is gonna be really strong.
Okay, that's helpful. Thank you.
Thank you. We will now go to our next question. One moment please. Your next question comes from the line of Eoin Mullany from Berenberg. Please go ahead.
Good morning all. Thank you for the presentation. I just want to come back on the cost point. You know, Q2 you said that sort of two-thirds of the EUR 50 million increase in costs was due to temporary staff for onboarding, and now in your guidance for 2024, you do have sort of, you know, that growing customer base in there. Should we think about that sort of EUR 35 million or so you guided to for the temporary onboarding as becoming permanent? Or is, you know, is that embedded within your EUR 1.75 billion and potentially that could fall away if, you know, you're able to deal with those new customers with your existing resources? Thank you.
Oh, yeah, I think that's exactly it. I mean, really we're trying to, you know, ascertain the headcount required to ensure we can service these customers on an ongoing basis. I think at the time we were looking very much at the in the moment exercise over account opening. You know, I think the range of possibilities here with this enlarged customer group is clearly greater than just opening accounts. Then we get onto the question of, you know, the products. You know, are they all on the automated platforms? Do we have to have more bodies to, you know, let's say, physically contact, sell? That's the stuff that we're working through.
We certainly in our cost guidance, given ourselves the capacity to pivot either which way, and we will adopt the approach that we feel is going to be most appropriate or suitable for our customers and indeed for the bank.
Very clear. Thank you.
Thank you. We will now go to the next question. One moment please. Your next question comes from the line of Borja Ramirez from Citi. Please go ahead.
Hello and good morning. Thank you very much for your time and for taking my questions. Two quick questions, if I may. The first one is regarding the announcement of the Central Bank of Ireland regarding targeted measures to ease the mortgage lending rules that was announced in October. Does this provide an opportunity for faster mortgage growth? Also if you could give some more details around the potential opportunity. My second question would be following up on the rate sensitivity, could you please provide details on expected deposit beta going forward into 2022 and 2024? Thank you.
Okay, just taking the first one there. I think like we're obviously fully aware and we note the changes to the macro-prudential rules. I'm not really gonna say too much at this juncture other than to say that we have very deliberately taken a conservative approach to underwriting. That is unquestionably in the best long-term interest of every stakeholder that we serve at AIB. We are very conscious of where all the pricing decisions that we have made, which have been soundly and rationally based. And we will see how that impacts on our performance in market share terms as we turn into 2023 when the new macro... Sorry, in 2022-2023, when the new macro-prudential rules come into play.
That said, at this juncture, given the fact that we have announced rate increases already, we remain very happy with the pipeline of applications that are flowing through to AIB. The mortgage market is changing at pace in terms of obviously the rule changes, but there's also a very significant change in terms of the number of players who are active in the space and the relative balance between the broker and direct channels. There's a huge amount of factors at play here. You know, ultimately, we have got a responsibility to deliver product that is sustainable. We've got a responsibility to underwrite to an appropriately conservative standard. We also have an obligation to price rationally and for the medium to long term.
That's what we've been doing, and that's what we continue to do. Donal?
Yeah. Just quickly on the deposit betas. Certainly in our sensitivity table, okay, the assumption we basically use is 50%. Like I mentioned earlier, I think we're kind of approaching the time to move out of sensitivity tables and into the real world of liability strategies. Throughout 2023, I think, you know, from an AIB perspective, you know, we will be, let's say switching back on all of the normal liability products that kind of historically we have had. You know, obviously since 2014, negative rates in Euro land, these products haven't really been dust at all for a while.
I think going forward, 2023, 2024, those products, that pricing, you know, mixed with consumer behavior around that, is going to be really, really important. We certainly feel that the sensitivities and the methodology behind the sensitivities stack up. You know, we are certainly as I look out, our consensus, you know, versus my own views and where rates are going, that would all seem to be at least in line.
Thank you. There are currently no further questions. I will hand the call back for closing remarks.
Thank you very much indeed. Thank you all for your time this morning. Thank you for your questions. There's very little else for me to say at this juncture. I would like to say on behalf of Donal Galvin, myself, the IR team, and indeed all of us at AIB, I'd like to wish you a very happy and restful festive season. We look forward to speaking to you in the spring when we present our full year results for 2022. Thank you.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.