morning, ladies and gentlemen. I'm Colin Hunt, CEO of AIB. And on behalf of all my colleagues across the group, I want to welcome you to the presentation of our interim results for 2021. I'll be updating you on the strategic progress we've made in the 1st 6 months of this year and on our plans for the years ahead. And then Donald Galvin, our CFO, will bring you through the financial details of the performance in the first half.
In December of last year, we presented our plan to transform AIB Group, and we also presented our updated financial targets out to the end of 2023. And today, I am pleased to report that the execution of that transformation plan is proceeding at pace as we prepare AIB for a post COVID reality. The group is already benefiting from an improving economic outlook, and the outlook is brightening as the vaccination program rolls out At PACE. As the Irish banking landscape is reshaped, our strong customer franchise, our national physical presence and our attractive digital offering position us very well for the periods ahead. At the same time, the robustness of the group underpinned by a very strong capital position with our CET1 ratio standing at 16.4% at the end of June.
We are now well embarked on our strategy, which is being implemented at pace. I'll update you in some detail in a few moments on that. We're also reporting good cost discipline across the group with total cost down by 1%, notwithstanding a rising depreciation headwind, and we reduced our total headcount by 3% to just over 9,000 FT feet
feet feet feet feet feet feet feet feet feet feet feet feet
feet feet feet feet Es. We've also made good progress in the various inorganic initiatives, which we have already announced to the market with the Gobelty acquisition, the Great West Lifeco JV and the purchase of the Ulster Bank corporate and commercial loan book, adding to our product and services range, our lending base and our customer numbers. And we continue to make great progress on the imperative of sustainability with our energy and climate action area once again demonstrating the strongest growth rate across our lending book. Turning now to the economic backdrop. The outlook for growth has improved materially since the start of the year.
With the Central Bank expecting the economy to expand by more than 8% this year and by more than 5% in calendar 2022. Improving business sentiment that has also been reflected in various PMIs with those indices now well into expansionary territory for both restructuring and services. Yesterday, we announced in relation to our own manufacturing index that the new orders component had reached a record high for the 3rd consecutive month. And earlier this morning, we announced that the services PMI, the AIB services PMI, reached a high we haven't seen in 2 decades. After a lost Q3.
We've also seen a very strong recovery in terms of output within the construction sector. Very strong performance in terms of commencements in April May, allow us now to forecast with confidence that we will have 27,000 commencements this year, the best outturn since 2,008. And meanwhile, household balance sheets remain in rigorous good health with debt to disposable income levels roughly half of their post GFC peak and of course, household deposits continuing to build something that is reflected in the shape of our own balance sheet. Our confidence in the outlook is very much bolstered by the success of the national vaccination program. 72% of Irish adults are now fully vaccinated, 86.5% of Irish adults have now had at least one jab.
And to borrow a phrase from the CEO of our Health Service Executive, Paul Reid, the pace of vaccine rollout has given us a glide path to some level of normality where we can rebuild society and our economy. We are seeing an improvement in the labor market as the economy reopens. I understand now it was announced yesterday that the number of people receiving the pandemic unemployment payment is at the lowest level since that was introduced at the start of the crisis. And that underlying improvement in economic activity has already been reflected in terms of our own data in terms of card spend and also we're seeing some promising developments in our mortgage applications pipeline. So with the COVID emergency beginning 2 EASE.
Thanks to a successful vaccination program. AIB Group is strongly positioned on foot of our leading personal and business customer franchises. The quality and growing popularity of our digital technology with more and more of our customers now active on those platforms and mobile interactions pushing above 2,000,000 per day on occasions during the first half of this year. At the same time, while we have commenced a process which will see 21 of our branches being amalgamated in the Republic of Ireland in this calendar year, we will retain the largest distribution network across the country, and we remain committed to having a strong physical presence in the communities that we serve. Combining that leading customer franchise and the quality and ever increasing functionality of our digital offering, we are well set now to benefit from the impact of the various strategic initiatives that we are heavily engaged on as we seek to improve the quality and range of our products and our services.
Turning now to the details of the implementation of our Strategy 2023, which we announced in December of last year. We're pleased to report very good progress. Our plan to take out €230,000,000 in cost is well on track as we transform AIB's operational efficiency and build an ever more sustainable business model. On our branch network, we've already amalgamated 6 branches this year and we've announced our intention amalgamator for the 15 branches as we move towards year end. At the same time, we are in ongoing constructive dialogue with Unpost with a view to deepening that important 20 year relationship.
On our end to end credit project, we are making good progress on the centralization, simplification and automation of our credit management processes. And we've already seen a reduction of 25 FTEs in this area in the first half on foot of that initiative. On completion, we expect this project will deliver something of the order of €35,000,000 in savings on an annual basis by end 2023. We're also well advanced on our plans to reshape our working environment. With a new hybrid working model being rolled out from September, with staff working between 2 3 days per week from the office.
We've physically exited 1 of our Dublin office buildings, and we expect to commercially exit that building ahead of year end. On our in sourcing project, we have filled over 100 digital data and change management roles. That's a competitive sector of the labor market, but we are very much committed to pushing ahead with this initiative and we are targeting annual cost savings of 35,000,000 here by 2023. In Britain, we previously announced our intention to exit our SME business when we presented our strategic refresh back in December. We've now moved beyond Phase 1 bids there, and we're entering a binding bids phase with a number of interested parties.
In Northern Ireland, our moves to improve the operational efficiency of that business we'll see us closing 8 branches in that market, and we've launched a voluntary severance program on foot of these changes. And finally, we continue to make progress on reducing our NPE legacy. We've had 2 portfolio sales in the first half of the year, and our NPEs, a proportion of gross loans, 6.5% at the end of the half, very much remain on track, very much remain committed to that 3% target for the end of 20 23. In December, we outlined our plan to reduce our cost base to less than €1,350,000,000 on an unchanged business basis. And leaving aside the impact of the inorganic initiatives on our costs, we're continuing to target that level.
And we are making good steady progress across the various work streams as I have already highlighted. On the M and A front, we've concluded a commercial agreement with NatWest Group on the acquisition of €4,200,000,000 in performing corporate and commercial loans from Ulster Bank. That acquisition is now going through regulatory and competition authority clearance, and we expect to see those assets coming onto the group balance sheet through 2022. On Goodbody, we are awaiting final regulatory clearance. We've received clearance from the competition of IRG, and we're looking forward to welcoming its customers, its staff and their capabilities, products and services into AIB Group.
We expect that transaction to complete ahead of year end, and we're very excited about what our businesses will achieve together over the years ahead. That positions us very, very strongly to address comprehensively all the needs of our growing customer base. And finally, we have concluded an agreement with Great West Lifeco to establish a joint venture to significantly enhance our product offering in life, pensions, savings and investment products. We're going through a regulatory approval process there as well, and we expect to launch those products and that joint venture to market in the second half of next year. Sustainable Communities is and remains one of the key strategic pillars of AIB Group.
It is central to everything that we do. We continue to make great progress on the E in ESG. We've already made net zero commitments in relation to our own operations and to the future shape of our lending book. We issued €750,000,000 in green bonds in May of this year. We've enhanced the attractiveness of our green product range, Green Lending product range, including the launch of a Green mortgage offering through Haven, our broker channel.
Our Energy, Climate Action and Infrastructure team continues to report the highest growth rate in terms of new lending across the group with 40% growth in the first half of this year on a year on year basis. We're also making good progress on the S. Today, we have launched A Social Bond Framework, which complements our existing green bond framework. We're committed to supporting the building of new homes, including more than 1200 social housing homes. We continue to invest in the communities that we serve through AOB Together partnerships, and we remain a key partner of many initiatives, including FoodCloud, which is dedicated to reducing food waste across the country.
G, governance, is the most important single component of the ESG agenda, and everything else flows from this. Key area of focus for our board. We have a dedicated sustainability subcommittee of the board, which supervises our work in this vital area. In addition, we have made a number of important external public commitments, including as a signatory of the UN Global Compact, and we've recently launched our sustainable lending framework to guide our activity here. SOW.
Today, we are reporting on a 6 month period in which we executed our plan at pace and with determination. For the second half as an organization, we are focused on the continued implementation of that transformation plan to drive €230,000,000 in costs out of our business. We're focused on the completion and integration of the various inorganic initiatives already announced. We'll continue to advance our contribution to the sustainability and support all our customers and their transition to a greener, lower carbon future. And we will deliver sustainable profits and in so doing, create real shareholder value and the capacity for future distributions.
So as I conclude my remarks before handing over to Donal, the clarity of our plan, our progress on its execution and an improving economic outlook allow us today to announce revised medium term targets. Firstly, cost target of less than €1,475,000,000 which is our previous target of less than €1,350,000,000 plus the impact in full of the Gubari Ulster Bank and Life JV transactions. Secondly, an appropriate capital target for our business for CET1 of greater than 13.5% and a new return on tangible equity target of greater than 9%. These are our new targets to 2023. This is how our progress will be measured, and we are united in our determination to deliver upon them in the interests of all our stakeholders.
We have a very clear plan. We are demonstrating our ability with every passing week and we are ambitious and optimistic for the future of our business. Donald?
Okay. Thank you very much, Colin, and good morning, everybody. I'd like to bring you through the financial performance for the first half of twenty twenty one, which we feel is a good set of results, in line with expectations, I'm optimistic for the second half of twenty twenty one. AIB had an operating profit of €373,000,000 Which is very much in line with the first half of twenty twenty. This equated to a profit after tax of €274,000,000 Which includes an ECL writeback of €103,000,000 We had total income of €1,183,000 And that's made up of net interest income of €881,000,000 which is down 9% and other income of €302,000,000 Which is up 37%.
Our costs were €739,000,000 for the first half of the year, down 1%, well managed and in line with expectations. Our FTEs reduced 3% versus June 2020 to 9,003 At the end of June 2021. Performing loans of €54,900,000,000 are broadly stable, And that's including new lending of €4,500,000,000 which is up 3% versus the first half of twenty twenty. Our non performing exposures were €3,800,000,000 or 6.5 percent of gross loans, which decreased by 12.5% in the 6 months. That includes a series of portfolio sales executed in Q1 of around €600,000,000 Our strong funding position has been compounded by excess liquidity.
Customer deposits of €88,300,000,000 increased by 8%, and we drew down a further €6,000,000,000 of TLTRO At the end of June 2021, to contribute to higher cash balances held at the Central Bank of Ireland of €32,000,000,000 Our ML target is now exceeded after the issuance of €750,000,000 of a green bond in Q2. And our capital fully loaded ratio was 16.4 percent and on a transitional basis it's 19.3%, comfortably ahead of all regulatory requirements. On the income statement, I'm not going to go through all of this line by line because I'm going to break out some of the key items later. For us, obviously, the profit after tax is a key metric of €274,000,000 I would just draw your attention to the bank levies and regulatory fees, Which was €71,000,000 for the first half of the year. Obviously, these are at more elevated levels given the amount of liabilities that are being generated on our balance sheet And deposit guarantee scheme fees, which are associated with that.
So we think that line for the rest of the year will be around €125,000,000 And indeed, on a go forward basis, I would suggest that you use that as the base costs. Net interest income is down 9%, which has improved from the Q1 of the year when it was down 13%. Number of moving parts here as ever. My focus is really around net interest income, and I'll talk through the moving parts now. We obviously had a benefit on the liability side of €65,000,000 €33,000,000 of that is coming from customer accounts On a negative deposit pricing strategy, €15,000,000 of that is the benefit of the TLTRO, which we drew down in 2020 and booked the benefit in 2021.
And €12,000,000 is related to wholesale securities or wholesale debt, which has been refinanced at lower levels. On the flip side, minus €82,000,000 was related to lower customer loans income, and that is more, I would say, A loan volume issue than a margin or a rate issue. €41,000,000 is related to investment securities income. Obviously, as higher yielding assets mature and we reinvest at lower levels, there is a reduction. And lastly, You can see the impact here of those balances building up at the Central Bank of Ireland, where we had a cost of €28,000,000 for the first half of the year for excess liquidity placed with the Central Bank at lower interest rates.
So for the second half of the year, our expectation is that the investment securities drag will dissipate. Customer loans drag will dissipate somewhat as our loan volumes increase. Our cost of liabilities and the improvements that we're making there will continue to improve. At the end of the year 2020, we had around €4,000,000,000 on negative rates. At the half year, we had €9,000,000,000 or €10,000,000,000 which attracted negative rates.
Our policy at the time was to charge balances greater than €3,000,000 and that is where the €10,000,000,000 quantum is related to that. As we go through the second half of the year, we will reduce the threshold of negative rates down to €1,000,000 for all customers, And that will bring an additional €5,000,000,000 of customers into scope for negative deposit pricing. As I mentioned previously, we have maximized RTLTRO drawdown capacity from €4,000,000,000 up to €10,000,000,000 The reason for that is we are increasingly confident, needless to say, of reaching all of the new lending criteria. And that will have a benefit That will straddle between 2021 2022, obviously, at the discounted rate. So for net interest income for the year, we would Be comfortable to reiterate our guidance of down 5% year on year.
Other income, €302,000,000 Which is up 37%. I think within this, the key component is the fees and commission line, which is up 10%, very much showing as the economy reopens, as individuals, businesses learn to live with COVID reopen, We are obviously seeing that return on the fees and commissions line. So we're very happy with that outturn of €212,000,000 In the other items, our business income lines, we had a strong first half of the year. Within this, We had some revaluation gains on our core Visa share position, which was around €20,000,000 to €25,000,000 In addition, we have a strategy to invest in various domestically focused venture capital PE funds, And returns were very strong in the first half of the year from those funds. But as we go into the second half of the year, I think We wouldn't consider those equity gains to be something that you should consider to be perpetual.
But on the fees and commissions line, We do think that there's good momentum there, and we should expect to see a similar performance for the end of the year. So overall, for other income, I would say that Our guidance there will be €500,000,000 and we're happy with that. There might be a couple of percent upside to that. And indeed, if when the Goodbodies transaction closes, which is likely to be somewhere late Q3, early Q4, There will be a benefit coming into the fees and commissions line, which will obviously be in addition to the numbers I discussed. Costs down 1%, very much in line with expectations.
Factors that are In this, you can see the movement in our headcount from 9,300 down to 9,000. With all of the initiatives that Colin would have outlined earlier, We would expect to see a continued downward trajectory on that staff cost line. Exceptional items are €191,000,000 made up of a few items. Legacy restitution costs of €124,000,000 euros 25,000,000 of that would relate to our legacy Dawn tracker mortgage items. And €100,000,000 of that Relates to a provision that the bank made at the first half of the year, and this is to cover a legacy investment fund item, Which was sold by the bank between 2,002 to 2,006 to our high network customer base.
And on the back of legal proceedings, we have decided to take a provision to manage this customer group in their entirety. But I would say it's a very tightly defined group of 2,500 customers. The total quantum So then these funds was GBP215 1,000,000 and we're being conservative to take a provision at the half year and we will have To look to conclude this before the end of the year. Additional items relate to our strategy implementation program of €44,000,000 We had exceptional costs related to the inorganic items of €16,000,000 and we had a small loss of €12,000,000 on portfolio sale disposals. So when I look at costs for the year, I think we'll be very much in line with the consensus on our own guidance of €1,500,000,000 Again, there will be an impact to that if and when or when the Goodbodies business It's brought on to our balance sheet in Q4.
And I think for exceptional costs, what I would say is for 2021, They will be approximately €350,000,000 For 2022, they'll be approximately €200,000,000 as all of those restitution costs disappear. And then for 2023, we expect all of these exceptional costs to be de minimis As the restitution items are in the past and all of our cost takeout programs are concluded. In ECLs, we had a writeback of €103,000,000 with a coverage level of 3.6%. Obviously, from December 2020, we were very we felt we were very conservative and forward looking with our provisioning approach. So what's happened in the last 6 months, you can see on the left hand side here that the movements that have led to this write back.
The economic environment has undoubtedly changed for the better, and our expectations are heightened. So we had a small write back, Which was related to macroeconomic assumptions. I would say the main part of the write back though is related to recoveries and redemptions. Obviously, When you have high provision levels and your customers continue to repay principal and interest, you will naturally just see those redemptions coming through. So we finished the year with a write back of €103,000,000 or the half year with €103,000,000 And that incorporates a post model adjustment.
What I've tried to do on the right hand side here is really just look at the ECL stock and try to explain that and break that out a little bit more. So from the end of the year, we had an ECL stock of €2,500,000,000 That's reduced down to €2,100,000,000 the main area of reduction there was us utilizing ECL stock as we executed portfolio sales in the first half of the year. So the €500,000,000 of PMAs that remain, I would say that 50% are related to pre COVID legacy items And 50% are related to COVID related items. So obviously, as payment breaks matured and we had PMAs relating to them, As payment break matures, those PMAs get written back. We are remaining conservative and cautious for the second half of the year.
We want to wait and see what the impact is going to be on individuals and on businesses as government supports have been withdrawn. We do think that that's something that will play out between H2 and H1. But overall, we feel we're very adequately provided at 3.6%. I think for the end of the year, we would expect towards the second half of the year, we need to wait and see, obviously, how the environment plays out. We need to see exactly what the impacts are going to be when those government supports are withdrawn, Particularly items like unemployment, but we think there'll probably be a small write back in the second half of the year, but not as large as it has been for H1.
Overall on the balance sheet, it's a quite a similar story to the last number of reporting sessions. We're seeing an increase in our balance sheet, very much driven by the liability side. As you can see, our customer accounts from €82,000,000,000 up to €88,000,000,000 deposits by banks from €4,000,000,000 up to €10,000,000,000 which is very much related to TLTRO. And then on the asset side, naturally with the excess liquidity, You're seeing that being placed back with the Central Bank. So loans to Central Banks have increased from €27,000,000,000 up to €43,000,000,000 And the other moving parts around performing loans and non performing loans, I'll come into come on to in a second, but broadly stable.
So here's the net loan position. We have new lending of €4,500,000,000 redemptions of €4,900,000,000 A little bit of FX movement and obviously a portfolio sale in the first half of the year. Given the improved economic environment and looking at pipelines for our businesses. We certainly see new lending for the year not being less than our previously guided amount of €10,000,000,000 If I was to go through segments, I would say all segments are performing well. I would say the pipeline is very strong, Notwithstanding the fact that parts of the UK business were exiting, corporate and SME business is overall quite strong.
Mortgage market performance this year in the market and for AIB has been strong, and we expect to see that continuing. And the only area where there's probably muted growth is the In the consumer lending space, credit cards, personal loans. Given the series of lockdowns that have taken place, the ability The spend of the requirements has not been as great, obviously, with the buildup of liabilities as well. But overall, very optimistic second half of the year in terms of new lending. Nonperforming exposures, as a quantum moved from €4,300,000,000 down to €3,800,000,000 redemptions and flow to NPEs effectively netting off and then a portfolio sale of €600,000,000 making the main reduction.
Management is very focused on reducing NPEs I believe that 3% target, and we believe we have the ways, means and track record to do that. Funding and capital. Again, just to break out a little bit further the liability side. The wholesale increase is really driven by TLTRO. And then I would say the deposits increase is evenly split between retail type accounts and corporate SME accounts.
Our key liquidity regulatory metrics, LCR and SFR, very comfortably above all minimums. We've met our MREL target. We have a total quantum of €6,600,000,000 of MREL eligible debt issued post the €750,000,000 that we executed in Q2 of 2021. TL Chirot, as I mentioned, we would have drawn down an additional €6,000,000,000 at the end of June, bringing that total quantum to €10,000,000,000 fully loaded capital, 16.4%, which is up 80 basis points. So I'll just try and break this out a little bit.
110 basis points of this increase is due to capital generation. We took a 30 basis points dividend accrual, which is really a signal from management about the commitment to begin to return capital to shareholders after the COVID year. There was an RWA reduction of 60 basis points, and included in that is benefits of SME 501, around 10 basis points portfolio sale of around 10 basis points and then lower volumes and credit grade movements gave a positive 30 basis points. So all in all, that gives us strong buffers to MDI SREP of 10.19%. So that's 6.2% on a fully loaded basis 19.1 percent 9.1 percent on a transitional basis.
For the second half of the year, we're going to see strong capital generation, And we think there's a capital tailwind or some additional SME 501 benefit of around 20 basis points. So our capital target revision Is now at greater than 13.5%. We feel that that's the appropriate CET1 target for AIB. And the reasons for that Our capital stack is now optimized with 81 and Tier 2 buckets filled. Our SREP P2R reduced from 3% down to 1.69% on the back of that issuance.
And that leaves us with a buffer of greater than 3% from Schrep to the medium term target of greater than 13.5%. We think that this more accurately reflects the risk profile of the group, but we'll obviously look to explore further RWA efficiency measures as we go forward. With respect to distribution policy, we obviously monitor all regulatory developments, and things are becoming a lot clearer in that area. Management's focus has always been for 2021 to return to profitability and to ensure that we're able to implement our existing dividend policy, which would allow for a 40% to 60% dividend payout. So that's obviously a payout in 2022 from 2021 results.
And we'll obviously look at the balance between dividends and buybacks at the appropriate time, which will be early in 2022. What I tried to do here on the capital slide below is from the existing position at 16.4% you to the 2023 end state of 13.5%, look at the main moving parts. I I think the inorganics initiatives that Colm has talked to will have an impact of around 180 basis points. We think 10 basis points to 15 basis Points of that will be associated with Goodbody in 2021. And the main bulk of it will be related To the onboarding of the Ulster loans, which will happen throughout 2022.
We think we'll continue to make RWA efficiencies. We'll be capital generative. I will distribute profits to shareholders. So as Colin mentioned, we've revised our medium term targets. And there's really two main things that have given us the confidence to commit to these new targets.
On the organic side, there is undoubtedly an improved economic outlook in our core markets. The landscape is changing very quickly and evolving very quickly. And we believe that, that will give us further loan book growth Further fee income opportunities over what we would have expected at December when we set these targets. CET1 target, as I mentioned, is adjusted to 13.5%, which we feel is appropriate for a bank with our risk profile. And lastly, the inorganic items that Colin would have talked to, if I was to bundle those together, we believe by 'twenty three, there'll be a revenue impact of around 2 €30,000,000 an RWA impact of around €5,800,000,000 noting that we're dealing with a live book here.
On all of these initiatives on a stand alone basis are RoTE accretive. So obviously, I would say the costs On the CET1 target, our inputs to a model to show an RoTE. We're comfortable committing to this greater than 9% target. Within the costs, I would note that When we look at costs of $14,75,000 that would exclude regulatory levies, it would exclude exceptionals, But it includes all of the inorganic items that we have talked about. And indeed, the change in cost target from 1.35 To 1475 is predominantly driven by the cost of those inorganic items.
And in addition, a small amount of €15,000,000 which we have attributed to further growth, which we believe is forthcoming in the coming years from our core market. So thank you very much, and I shall hand it over to Q and A.
Thanks, Olin. We'll go to the telephone lines now.
And your first question comes from the line of Ralph Finner at JPMorgan. Please go ahead. Your line is open.
Good morning, gentlemen. Thanks very much for the presentation and for the questions. Maybe 2 sort of broader ones and a quick one. Firstly, on the impact of the acquisitions and particularly Alstorp. Could you give us a sense of the quality of the book as you were seeing it?
Just I recognize that the risk weighted asset density on your portfolio is much higher for the same assets than it was for NatWest. I was just wondering if there is some scope for optimization and whether that $230,000,000 and $100,000,000 sort of NII guidance for the Ulster impact sort of includes a look through of any sort of stabilization in that portfolio. Second year on Goodbuddy. I was wondering if you can give us some sense of the top line momentum within that business recently. Obviously, Wealth and Equity businesses have been doing quite well across the sector.
So for some of us who are less familiar with the inner workings, it would be useful to get a sense of how much momentum they're carrying inside Goodbody. And then just lastly, I wanted to go back to the sort of question around excess capital, noting that the business is very strong in capital generators, and you still got a lot of room above your 13.5% sort of new target. So how would you Think about further acquisitions. There have been some comments in the press about you looking at further books versus The sort of need to return capital back to shareholders given ratio of share price trades. Thanks so much.
Thanks, Raoul. I'll give some comments in relation to those questions, and I'll let Donald take over then. Look, we obviously have great detail now in relation to the loan book that we're taking over from Ulster. And when you combine that loan book with our existing AIB loan book, we're actually very, very happy with the complexion. It actually looks very, very good from a diversification and risk balance across the group, the enlarged group.
In relation to Goodbody, I'm not going to put any metrics on this, but I can say that they have had a very, very good first half of the year and they are performing well ahead of where we would have expected them to perform. So the acquisition that we made and that we the commercial agreements that we concluded with them are looking very good from our perspective now on the back of very, very solid performance from our future colleagues and their customers in that business. And lastly, you asked question in relation to excess capital and future inorganics. And we've been really, really busy on the inorganic front. Our focus now is very much So on integrating the businesses that we are either acquiring or that we're forming in a greenfield way, such as the joint venture with Great West Lifeco.
We are aware that there's market speculation out there. We don't comment on market speculation, good, bad or indifferent. And what I can say, we have a strong capital position. We are generating capital at a good pace. This is an evolving banking market, and we remain very alert to the opportunities that may arise as that market evolves.
We've got 2 simple filters to apply to this. Firstly, is it strategically coherent? Does it fit with our existing strategy? And secondly, would any future acquisitions be accretive to our enhanced RoTE target? And they're the two lenses that would apply to every potential opportunity that may or may not arise.
Yes.
Look, we've We moved into and closed a transaction with Ulster Bank. We're buying a corporate and business loan book in the middle of a pandemic. So that's not always entirely straightforward. But on the comments, we're very comfortable with the mix and the makeup. Obviously, as we integrate the portfolio, what will happen is Their IFRS 9 PDs and ours will have to be reconciled.
But that's going to be a 2022 event. And part of the deal. We're buying a performing loan portfolio. We're not buying NPEs. So we're very comfortable the With the discussions around the quality of
the loan book. Thanks so much. If I can just follow-up, in terms of risk weighted asset density, there's obviously a gap between where your book sits and where that book was and not less. I'm just wondering, Does that converge over time? Or do you think that just stays and you look to optimize that over time?
Good question. I think there's 2 parts to it, okay? There's the on balance sheet RWAs, which are related to the loans, and we do think that we'll be able to make as we implement the SME 501 benefits. But also, as you know, there was a large off balance sheet part to the transaction. That's really related to larger exposures with larger wholesale accounts.
So as we onboard these customers, we'll have to, on a case by case basis look at the overall relationships and ensure that we're able to generate sufficient cross selling opportunities out of these relationships. Indeed, the construct in Ulster was cross selling, let's say, NatWest type product. So now that we have the Good Bodies business, we'll be able to look at this on a line by line item and see if it stacks up on an overall customer rare
Got it. Thank you very much.
This question is from Eamon Hughes from Goebbate. Good morning, Eamon.
Questions. Can I maybe just pick up a little bit around this one short term, 1 medium term around what you're seeing kind of in the underlying mortgage market? And also On the SME market, I mean, we always get a lot of detail on the mortgage side. And I suppose, look, there's been poor take up on the credit guarantee scheme. But I suppose, over the last, say, 2 months or so, what you've been seeing, particularly in terms of maybe application and approval data around SME and, as I said, also on the mortgage and how you think You could perform into H2 on that side.
Also maybe kind of slightly related, are you seeing Further kind of accumulation on the deposit side? Or are we starting to see people spend? I mean, Colin, I think you mentioned earlier around kind of you can see card activity. Some maybe some color around how that's been progressing incrementally over the last, let's call it again, 6 to 8 weeks. And then maybe finally, just on RWAs.
Donald, you flagged there maybe in the Q and A the first question, but also it was in the presentation around RWA efficiencies from here. I mean, some of that might be in relation to the Ulster Bank book as it comes on board. But also, is there something underlying in the business? I mean, historically, EBS books getting standardized. Is there anything else that we could think that might help you over the next sort of 2, 3 years in relation to that sort of ROCE target?
Thanks, Eamon. On the short term outlook in relation to the mortgage market, we have seen a very encouraging momentum in terms of our pipeline, our applications pipeline and our approvals pipeline. And we look forward to that having a material impact on our drawdowns and on our drawdown share of the market as we move towards the end of the year. And of course, the mortgage market in total will be substantially greater than we would have expected at the start of the year. And we now think it will be somewhat over €10,000,000,000 we are seeing an improvement in SME sentiment.
There's no question about that as the economy reopens, and that is inevitably going to lead to improved demand for those products. At the moment, we're sort of seeing mixed patterns across the various SME groups with better performances coming from the smaller businesses and the medium businesses at this stage, but we performance to become closer aligned in the second half of the year. And we haven't yet detected any significant let up in the flow of deposits, notwithstanding the opening reopening we've seen of the economy. We have already announced that we are going to move all our customers to a €1,000,000 threshold for the charging of negative interest rates, and that will be applied as we move into the Q4 of this year. Moment negative rates are applied to all business customers with credit balances excess of €1,000,000 and all personal customers with credit balances in excess of €3,000,000 but we will align both those thresholds at €1,000,000 in from October onwards.
Yes. So I think on the RWA efficiencies, we are going to be very comprehensive in ensuring that we have available regulatory benefits, particularly in this SME space. So we would have had benefits in 2020. We will get benefits in 2021. We don't think that there's any model change benefits coming our way in the short term.
I think you can probably expect to see RWA efficiencies as things progress. If the environment pans out as we think it is, those benefits will come in over time. Naturally, as NPEs reduce down towards the 3% ratio, obviously, there will be RWA benefits there as well. The And we've reduced our capital target of 13.5%. We've announced a series of inorganic items, which will Utilize around 180 basis points.
So I mean, AIB will become a lot more efficient and proactive in managing its capital going forward.
Okay. Thanks. Dermot Sheridan from Davy. Your question is next, Dave. Good morning.
Colin, good morning, Donald, and thank you for taking my questions and the presentation this morning. A couple of questions, if I may. Firstly, just around dividend accrual. I wonder if you could just help us. Clearly, the regulations require you To make that accrual on the basis of the upper end of your payout, how should we think about that when you come to formulate a final decision towards the end of Towards the end of the year in terms of where that might fit within that range.
And then just in terms of the form that, that payout may take, I mean, ultimately, are we looking at this From a perspective of an agreement with your main shareholder in terms of a buyback or if that Cannot be done at this point. Is it a cash dividend? Secondly, just around the impairment line, and I appreciate your comments, Domo, around the conservatism that you've put in. It just feels like there's still quite a significant amount of post model adjustments there. And so I just wonder over what time frame we might see those kind of unwind to the extent that the economic outlook that we see today kind of continues to bear.
And just finally, on net interest income, please. It looks like we're reaching an inflection point either Some point in this quarter or in the last quarter, momentum on negative rates on new lending coming through in the second half We'll help that significantly. Just in terms of if we look into 2022 then, those will obviously be still very relevant factors. To what extent are some of those negatives? Are they still something that we need to bear in mind?
Or do you see that as being kind of much more 2021 impact and having much less of an impact in 2022. Thank you.
Okay. Thank you very much, Dermot. On the dividend accrual. It's fairly automatic. It's the upper end of our dividend policy, so 60% attributable profits, and that's the accrual that we took.
I'd say that's quite formulaic. The reality of the situation will be in 2022, sit down, I'll present something to the Board, I'm having discussion with the regulators. I will agree what the appropriate level is. Whether it be a buyback or whether it be an ordinary dividend, I mean, I think it's Too early to start getting into that. We are largely ambivalent ourselves.
We will work with our stakeholders to see what is the most appropriate thing. From our perspective, the focus has always been in 2021 to return to profitability, to put ourselves in a position to pay as strong dividend as possible. So I'm not going to get into a conversation around ranges. On the impairments, the PMAs of €500,000,000 I would say that's It's certainly a reduction from the end of the year from €700,000,000 down to €500,000,000 Like I said, the The PMAs are split evenly between pre- and post COVID. As we look to reduce our NPE ratio, you will see the pre COVID PMAs reducing as we utilize those to get that NPE level lower.
We're particularly focused on the legacy NPEs. These are the ones that attract calendar provisioning, etcetera, etcetera. And so we're very, very motivated to look at those. The big question is clearly what do you do with the COVID related PMAs? So I mean, mechanically, I'll tell you what can happen, okay?
We have a couple of million customers in the country. Some are getting government supports. When that government support is withdrawn, one has to naturally assume That either individuals or businesses will find themselves in some form of distress. They'll naturally move through our stages, naturally come through into stage 2, stage 3. And as we see all of that emerging and we can see exactly what the impact is going to be on the PMA side, you should expect to see that PMA being unwound.
So don't look at that PMA related to COVID as a nailed on right back to come back. It will disappear, but our expectation is that it will Coming through from just underlying activity. And the other PMAs, like I said, should reduce over the life to 2023 as we get our NPEs lower than 3%. I think your last question was around NII. And I think if you look at the guidance I would have given on new lending and what it's going to be for the second half of the year, we are optimistic beyond 2021.
There are significant amount of growth opportunities in the market. So we do think by the end of Certainly, 2021 on a net basis will be in a growth type of environment. The thing that's harder to predict is Exactly where liabilities are going. How long will it take for this excess liability position to normalize, should we say? Much as I'd like it, I don't see it all disappearing this summer.
So I think it's going to take a number of years for that all to work its way through the system. So in that period of time, we will have that excess liquidity drag that we are that we'll be fighting against. But I do think the The new lending opportunities will more than outpace that. So I do that's where we see the momentum coming out of 'twenty one into future years.
Okay, thank you. Our next question is from Aman Rookard, Barclays. Good morning, Aman.
If I might, just around the guidance that you've very helpfully given us on the acquisition. So thank you very much for that. Could I just Make clear, the GBP 230,000,000 revenue uplift, does that include the JV contribution? I would have guest that, that might have come through as an associate income line, so not necessarily on revenue. So I guess that's the first part.
And then if at all possible, are you able to give us a breakdown of the revenue and maybe even cost By each of the transactions, so how much is coming from Goodbody, Ulster and JV? I guess it'd be really helpful because it allows us to kind of benchmark our expectations for those acquisitions versus kind of what you're saying today. And then just finally around business income, that has obviously been really strong in H1. I think your guidance for full year does actually imply a slowdown In the actual business income run rate in H2. So I wanted to test whether that was okay.
And What does that actually tell us about the run rate into next year? What kind of what should we be expecting from business income, AIB stand alone, into next year? Thank you.
Thank you, Aman. I'm going to let Donald make an executive decision into how open and transparent he's going to be with these disclosures. Total.
Yes. I mean, obviously, as we outlined the new targets, it was important for us to disclose From a revenue perspective, in particular, what our expectations were going to be to help you solve for the RoTE target. So I think the What's in the marketplace for income related to the inorganics looks to me to be a little bit shy. And I'm not going to break them out separately, but it's more like circa 230. I think consensus is a little bit lower.
But indeed, I think on the cost side, you're a little bit light as well. So I'm really just trying to adjust that to the more normalized level. With respect to the Great West Lifeco income expectations, you're right, where you will see that in the future as an associate and as a JV, but to enable the JV and for AIB to live up to all of its commitments on Effectively distribution all of this. There will be some small costs related to the Lifeco, which are going to come on to our balance sheet, But really not significant at all. You are right.
You will expect to see that in the future coming through the JV line. It's not going to be set up until 2022. So I would say the expectations for returns on that are more medium to long term, whereas I would say Ulster and Goodbody is much more 2021, 2022 and 2023 related, so within this financial plan life cycle. On business income, look, it's always difficult To predict when you get these gains. So effectively, what I've guided for is flattish in that other income for the second half of the year, Which would be a base case assumption, which really lands you overall on total other income of around €500,000,000 With a little bit of upside there.
And then obviously, the benefit of the Goodbodies acquisition when it closes and comes onto our balance sheet will peer in the other income line. So if you put those together with consensus, that should land you with the year end number. And obviously, we will have growth into 2022 with the full year's benefit of good bodies as we acquire and we bring on board all the Ulster loans. It's not all just interest income. There's other income there as well.
So we do think that all of the business lines will benefit from these inorganic items.
Okay. Our next question is from Andrew Coombs from Citi.
Good morning. Just a couple of clarifications from me, please. Firstly, on the revised return on tangible equity midterm target. Can you just confirm that your through the cycle cost of risk assumption is not changing, the The uplift is purely because of the growth opportunities you see and because of the change in the capital requirement. That's the first question.
And second question on the net interest margin, we're talking about an inflection point. Can I just do a back of the envelope exercise here? I mean, it looks like you're talking about the second half NIM being broadly in line, if not That's more than the exit run rate. But within that, you flagged that you've taken the TLTRO drawdown in June. You're going to change the threshold at which you're charging on deposits.
So there's kind of a couple of benefits coming through, which would suggest that there are still headwinds offsetting those. So I guess, can you just give us a feel for quantification to those two measures and the underlying drag that you still expect to persist? And then a final one, just it's been kind of addressed before, but if you could just clarify your thoughts on use of excess capital given the change in CET1 requirement and how you do think about buybacks versus more inorganic opportunities?
Okay. I think our RoTE assumptions, we did not assume any benefit From the euro rate environment, which is the one which impacts us mostly. So that's effectively negative fifty basis points over the life of the plan. So that was assumption 1. 2, on our cost of risk assumptions, we didn't make any unusual cost of risk assumptions over and above what I've previously guided to allow us to get to that 9% number.
So the ways that we will get and exceed the 9% target Is to implement all of the inorganic opportunities, maximize all of those revenue opportunities. And indeed, on an organic basis, particularly in our core market, Execute and Capture all of the opportunities, which we believe are going to be available to us in our domestic market with the size of our franchise. On the net interest margin, like you said, the benefits are quite clear with respect to TLTRO and negative rates. The headwind is simply the excess liabilities. I can there's certain levers that are in my control.
There's other levers that are outside of my control. We have a huge franchise in SME, in retail. And if liabilities in the system grow, then liabilities are going to grow on my balance sheet. Currently and in the short term, that's certainly going to be sitting with the Central Bank at a negative rate of 50 basis points. Over and above those two measures that I can clearly point to, with increased lending in the second half of the year expected to be up around €5,500,000,000 the They're the best self help measures that we can make.
And obviously, the acquisition of the Ulster book was a loan only acquisition, again, reducing the deposit. So we're very focused on ensuring that we're able to utilize our liquidity and capital position on a sensible basis. I think then on the excess capital position, I'll flip that one across to Colm to Havagamish.
We have demonstrated our capability, our strong capability over the past number of quarters in terms of originating acquisitions and delivering them. We have a determination to return the capital that we generate on an annual basis in line with our ordinary dividend policy. We will continue to be alert to opportunities that may arise. I'm not going to speculate on what they are. Some of them I might not even be aware of, but where we do consider further inorganic activity, it will be very much Align to our strategy and it will be very much focused on ensuring that any further activity we engage in is supporting the business on delivering an ROTE north of 9%.
But we have a big job ahead of us. We've got a big transformation plan that we are implementing across the business, and we're doing it bang on track and very happy with the progress there. And of course, we also have 3 significant inorganic initiatives already that we are working to integrate into our business. So we have a strong capital position. We have a determination to return to distributions when it is safe to do so with the agreement of a regulator.
And we remain alert to the evolution of the banking landscape here in the Republic of Ireland. And our next question is from Chris Can't from Autonomous. Good morning, Chris.
Good morning. Thanks for taking my questions. I have one sort of number question, please. On RWAs, I think at the strategy update. You talked about a €52,000,000,000 to €53,000,000,000 RWA base when you were thinking about your medium term targets.
Obviously, there's a few things going on with the inorganics. You're talking about further efficiencies and seem a bit more upbeat on organic growth now. So does that number now shift to something like €57,000,000 €58,000,000,000 is that the sort of bright ballpark that we should be thinking about? That will be the first question, please.
Yes, good question, Chris. What I tried to do in the medium term slide is outline the RWA impact of the Ulster book as we currently see it. And the way that's going to play out is we've identified a portfolio, we have an agreement, now we need to just Transfer it onto the balance sheet. So we're going to have to wait and see exactly between now and then if there's any refis, increases, etcetera. But Definitely safest to use €5,800,000,000 overall for all of those inorganic items.
So that's going to be day 1 effect. Obviously, once we have those assets on the balance sheet, then we're able to review them to see if we can make further efficiencies, whether they are self help items like implementation of SME 501 or whether they're just customer relationship issues. Historically, in AIB, when we were faced with large syndicated deals with, let's say, large corporates. We often shied away from those because we weren't able to generate additional cross sell opportunities for dealing with some of these larger customers. So the strategic rationale of the Goodbodies acquisition was to ensure That on top of very vanilla cross sell products like trade finance, FX, we now have some advisory, we now have some ECM, we now have some DCM capabilities.
So we do expect to be able to make those relationships work in the future from a total customer perspective. And if we can't, well then, we'll obviously look to adjust RWAs through reductions.
So if I I mean, if If I think about the 5.8 a little bit against that for some sort of the 5 0.1 impacts and any efficiency savings you have on that relationship book, the off balance sheet stuff. It feels like 57% to 58% is about right. And then if I kind of work through your guidance and think My way back up the P and L. Your underlying, I guess, pre revenue guidance, it feels like that's Maybe 2% to 3% ahead of where you would have been thinking in December pre M and A. Is that the sort of improvement in the environment that you're flagging.
Some of the language around the outlook loan growth seems quite a lot more upbeat than you've been in the last 18 months certainly.
Well, look, I think that the environment certainly has improved. And more importantly, the range of outcomes is the That really is the key. So there's an improved macroeconomic environment. I think we feel in our core market in Ireland, Definitely, there's a changing landscape and there's lots of moving parts at the moment. But as the largest player in Ireland, we feel that we will be a beneficiary As the economy reemerges in all of the different sectors, whether it be mortgage, retail, SME, corporate, across the board.
So yes, we are a little bit more optimistic on the outlook certainly than this time last year when we hadn't Much line of sight on what a pandemic meant. And here we are a year later, definitely a lot more comfortable with our with our understanding of the outlook, which is what has allowed us to change the targets and commit to them.
Okay. Thank you.
Okay. Thanks so much indeed. We're gone past our allotted time and we're going to bring this session to a close. I just want to finish by thanking you all for joining us this morning. And we look forward to updating you on our progress later on this year.
So thanks again, and we'll talk soon.