Ladies and gentlemen, thank you for standing by, and welcome to the AIB Group Plc Trading Update. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. Also must advise that the call is being recorded today, Tuesday, 12th May, 2020. And also must advise that you already have seen the RNS relating to AIV's trading update.
The forward looking statement contains And that RNS also covered this call. And I would now like to hand over the call to your first speaker today, Mr. Colleen Hunt, CEO of AIB. Please go ahead.
Thank you. Good morning, ladies and gentlemen. You are all very welcome to today's briefing on AirView's trading for the Q1 of 2020 and our response to COVID-nineteen. I will begin by providing an overview of the economic backdrop as well as sharing some of the highlights of the quarter's activities Before passing you over to our CFO, Stono Cowen, who will take you through the group's financial performance in more detail, I will then have an opportunity for questions and answers. As you're all aware, COVID-nineteen has thrown our country into a state of crisis, Just as it has worldwide.
Indeed, the IMS has noted that the global recession triggered by the pandemic is like no other Due to the shock being so large and sudden, as well as the fact that there is a continuing high degree of uncertainty about its duration and intensity. Large parts of the world economy have been put into lockdown to control the spread of the virus. Without knowing the scale and duration of the virus outbreak, The length and extent of lockdowns in how countries exit them, as well as the speed and strength of the subsequent pickup in economic activity, A wide range of outcomes are possible for GDP. The most comprehensive set of economic forecasts published since the onset of the pandemic I have come from the IMF in its semiannual warrant economic outlook, which is published in April this year. In terms of the Irish economy, the IMF is expecting GDP to contract by 6.8% this year, followed by growth of 6.3% in 2021.
Meanwhile, the ESRI and Central Bank of Ireland are forecasting that Irish GDP could decline by 7.1% and 8.3%, respectively, in 2020. They have, as yet, not published forecasts for 2021. The European Commission is forecasting an 8% fall in Irish GDP this year and growth of 6% next year. Meanwhile, the Department of Finance is projecting a large reform of 10.5% in GDP in 2020 with growth rebounding by 5.8% next year. And all agencies say that these projections should be taken as scenarios rather than forecasts.
Unemployment has already risen sharply as a result of the lockdowns, but should start to fall back once restrictions Property prices can be expected to fall in 2020, 2021, Given the scale of the shock that economies suffer and the sharp rise in unemployment, however, the recession to go deep is expected to be short. The sectors most exposed and impacted are those that have not been able to operate due to restrictions. For instance, tourism and travel, hospitality, leisure and non grocery retail. Ultimately, the shape of the recovery arm and elsewhere will depend on when restrictions are relaxed or lifted. Another key aspect here and elsewhere will be limiting the permanent scouring from the recession in terms of the Consumer business confidence as well as preventing widespread bankruptcies, large scale job losses and system wide financial strains.
The mitigating measures being taken by government, ECB and the banking system are crucial in this regard. As a financial institution at the heart of Ireland's economy, we are one of the principal bodies which are being relied upon to sustain economic well-being through this crisis. To achieve this, AIB must be on the strongest possible footing with a solid balance sheet, a robust capital structure and a controlled cost base. The steps taken in recent years were made with a view to positioning us for any headwinds that may come in the future. As specified in the trading update, we have a strong capital base with a robust pro form a fully loaded CET1 ratio of 16.2%, well in excess of regulatory requirements.
We did not foresee COVID-nineteen and the impact on the global economy coming, It is clear that we are well positioned to face the uncertainties and the difficulties that lie ahead. Since the beginning of this pandemic, our entire unrelenting effort has been focused on putting supports in place to deal with the shock inflicted on our customers and the economy generally, Thanks to the investments we've made in technology in recent years,
We
have a modern, resilient and flexible IT infrastructure, which means that we are without question and by a margin, the largest and the most digitally enabled provider within the Irish Banking market. This has underpins the delivery of our digital banking services while also enabling 7,000 of our 9,500 staff to work remotely during these unprecedented times. We remain open for business and we are available to our customers through all our channels, physical and digital. The experience today shows the response of our people has not been found wanting and has been one of energy, creativity and resilience. It has reinforced our organizational purpose and has enabled us to put a suite of customer supports in place, which are detailed in this morning's trading update.
I would like to take this opportunity to note some key highlights. We've processed close to 50,000 payment rates so far And our AIB and EBS branches remain open to our customers, except for those locations and campuses who are closed following advice from the health authorities. On the 6th March, we shared details of our refreshed strategy with you, but clear to our medium term financial targets To have a cost base of no more than €1,500,000 in 2022, a CET1 ratio ahead of 14% And an RoTE of more than 8%, and we remain committed to those targets. We delivered a solid underlying operational performance in the Our funding and capital position remains strong and the measures taken in responding to COVID-nineteen demonstrate our resilience Both financially and operationally as well as our commitment to supporting our customers, communities and the country through this crisis. I now go hand you over to Donald to bring you through the details of the financial performance.
Okay. Thanks very much, Colin. In our Q1 trading update today, in addition to our usual Q1 financial performance, we wanted to give you some additional disclosures and color around how we're assessing the Financial impact of COVID-nineteen on the organization. As Colin outlined earlier, the high degree of uncertainty around COVID-nineteen In terms of duration of the virus, length of lockdowns, subsequent recovery periods, makes it pretty difficult to estimate the financial impact, Well, each week we tend to get a little bit more information than the previous week. AIB has come into this in a strong position.
We have a high quality balance sheet, 86% of loans in Stage 1, 89% of those are strong and satisfactory by our own internal ratings. But the sectors which we know will be vulnerable to COVID-nineteen, similar to most other countries around the world, I would expect Hotels, bars, restaurants, etcetera. And that's around 10% or 11% of our balance sheet exposures. We can run through that later. Although in Q1, 83 percent of those highlighted sectors were in stage 1, but we do expect to see some downward staging migration Due to the impact of COVID-nineteen, which will come through the balance sheet in Q2.
Q1 2020 ECL charge is €210,000,000 which is based on annualized cost of risk of around 136 basis points. Half of this charge relates to a change in the macro scenario probability ratings as we started to see the economic impact of COVID-nineteen coming through. Q1 is based on a set of old scenarios that we've used in IFRS 9, 70% downside, which was a global slowdown and a 30% severe scenario, which we have set out Key economic indicators in the statement. The reason that we used existing macros to define The Q1 ECL is we wanted to ensure that those changes fed through to the balance sheet and impacted all of the staging In the different sectors, but obviously as we look to H1, We're going to have a much more comprehensive suite of COVID only future scenarios and macros associated with that, And then we'll be able to update you with associated probability weightings. In Q1 2020 P and L, AIB has had a solid income performance.
NII was 5% lower than in Q1 2019 due to lower customer loans. Net interest margin was 2.19 percent, which is 6 basis points lower than the exit NIM at 2.25 And this is due to just the expected and guided headwinds. Other income was €119,000,000 which is 21% lower, Primarily due to the impact of interest rate volatility on customer derivatives positions. What I would say in the income space is March 6, we would have guided for 2020 an interest income number of €2,000,000,000 for the year. We have effectively withdrawn or actually withdrawn our guidance for 2020 given the uncertainty of the environment.
With respect to that outlook, what I would say is there's a couple of moving parts. Subsequent to our results on March 6th, we had a rate move in the UK, which is a little bit larger than what we had expected. And then beyond that, I think the income position is going to be very much driven by balance sheet movements. And I'll come on to that now in a second. With respect to other income, the lower amount from ex VAs, this is a fairly Short, sharp and immediate effect that we saw at the end of March, just with respect to mark to market of counterparty exposures.
I do expect that to normalize as the year goes by. And indeed, already that is beginning to normalize. Well, there's no doubt in Q2 that we will see lower other income activity or items. That's purely because of the fact that business has effectively slowed down. But then It will obviously be incumbent on management to ensure that any of the fee suppressions that have been put in place for customer solutions are switched on and We can get back to that much more normalized type of run rate and environment.
In relation to costs, modest increase year on year 1.6 percent versus 2019, very much driven by previously guided depreciation. A lot of moving parts on costs at the moment. 70%, 80% of our staff are working at home. And so obviously that It creates reduced costs across a number of different areas, but obviously you get additional costs Relating to technology, etcetera, etcetera. Overall, certainly happy with the medium term guidance of €1,500,000,000 Obviously, management are looking at all investment planning items in detail to see where we can plan and replan To make some savings on costs, but also just to adapt to the reality of reduced bandwidth in the organization to work on big projects.
In Q1 2020 on the balance sheet side, AIB has had a solid performance, particularly in the Irish franchise. Our new lending in mortgages was up around 11%, and personal lending was up 12%. We also gained market share in the mortgage Business up to 32.9 percent. Offsetting this, we did see some decreases in lending in Our wholesale business and in our UK business, primarily in the syndicators and international finance area, which was a Fairly conscious decision from Q3, Q4 as of last year. And the management team continued to focus on the quality of our balance sheet.
Balance sheet wise, for the rest of the year, there's a lot of items in the mix, probably not as similar to how UK banks or even your other European banks are looking at this. In terms of headwinds, what I'd say is, I mean, given we've effectively closed down for a quarter, the overall mortgage market is going to be affected by that. I think some recent analysts in Ireland have estimated a mortgage market of around €6,000,000,000 versus our previous estimate of €10,000,000,000 or €11,000,000,000 And AIB's share of that is obviously 33%. So that is going to be a headwind. But obviously new business is down, but redemptions are down.
We're getting more balance sheet, albeit de minimis from RCS. And a large part of the jigsaw, which we haven't entirely worked through as of yet is the requirements on banks in Ireland to help reboot the economy. So there's a fair amount of analysis out there from Central Bank and other bodies trying to define a quantum of liquidity required To get businesses going again in the Republic of Ireland, and that's anywhere between €6,000,000,000 €10,000,000,000 in all forms of capital. So AIB is obviously as a pillar bank going to have a large part to play in providing liquidity support to its customers. But a lot of this is going to be dependent on finalization of all of the government measures and government support schemes, similar to what has happened in the UK with the CBILS scheme, etcetera.
So that is going to require a change in legislation and that's going to require a new government and that hasn't happened as of yet, but I'll let Colin talk about that a little bit later. But that's obviously going to be a potential area for growth as well. So the balance sheet question really is very much aligned with the interest income question. And it only gets absolutely clear Where that has gone to land, but you should have an idea of the moving parts there. Capital and funding, overall, very strong liquidity In fact, our liquidity position is getting stronger through this crisis.
And with people not at work and receiving government payments, our retail current accounts are So we finished the quarter with a launch to deposit ratio of around 83%, and obviously our CET1 position is very strong at 16.2% as at the end of the quarter. So I'll leave it at that and hand it over to Colin.
Thank you. Thank you, Donald. So in summary, on the back of prudent lending decisions and balance sheet remediation in recent years, AIB entered this crisis in a position to create robustness. Given the strength of our capital position in our franchise, we are well positioned to assist our customers and the economies we operate in through this period of great uncertainty. While 2020 will undoubtedly be a difficult year, the fundamentals of our group remain healthy and we are up to 2021 and beyond with confidence.
So our first question is from the line of Rahul Sinha from JPMorgan. Thank you. Please ask your question.
Good morning, gents. If I
can have a couple of
questions to kick off. The first one really is to trying to understand the pressures on the top line or on the income line. I was wondering if you might be able to Tell us what is the impact of moving fees on your other income and any more color you can provide In terms of perhaps the April run rate in terms of activity levels that you have seen across the business, And how do you think about this from a perspective that a lot of this could be effectively temporary workers A sort of more medium term headwind. So that's the first question on the other income line particularly. And then the second question is just going back to this tractor mortgage.
I just wanted to check if there was any change in terms of your assumptions from the Q4 level as well as sort of new guidance for below the line calls. Is there anything new within that you have made in terms of assumptions? Thank you.
Okay. I will take the top line issue. In terms of other income, I think we see we obviously see the impact on Fees, commissions has been very short term in nature, very much aligned to the Length of time that different businesses have had to be locked down. So really I would isolate the issue as we see it within the Q2. Obviously, even though everyone is working from their bedrooms, etcetera, there's obviously a baseline of Fees and commissions that do still continue to come through.
But I would say for the quarter, it would be fair to assume that they're down 50% Versus a normal month, that's just because you don't have transaction fees, you don't have FX fees, things like that. But we do expect when business restarts that this is going to switch on very quickly. So we don't think that this is any kind of a permanent item for the bank. We had a number of different initiatives in the fee space where we were looking to make and introduce different fee structures, etcetera. We felt just as COVID growth that it was not the right time to introduce those, Not because we're not committed to doing this.
It's just at the time of very over the certainty and sensitivity In the country, we just didn't want to confuse matters anymore. And so obviously, we'll be looking to switch on all of those types Programs and initiatives in Q3. So I would expect Q2 other income to be down, but then Q3, Q4, very much that we're getting back into business. That was it on the other income side. On the balance sheet side, in terms of volumes, It's like, obviously there's very little new lending taking place.
Pre committed transactions That were signed up legally, let's say pre COVID are all closing. Obviously, we are operating at Full tilt, albeit from bedrooms and front rooms. And so we still aren't seeing some of those business flows come through. What you're seeing is probably more in the mortgage area where people are backing off a little bit. A, I mean the market is effectively closed, so there is no And there's probably not even a capacity to register security.
But certainly as it pertains to housing, The fact remains that the market there is still a housing shortage in Ireland. Indeed, the last general election that we had in Ireland Was won and lost over housing and frankly the lack of housing availability for large numbers of staff. So there is a huge onus on banks, Government, etcetera, the industry, to ensure that that gap is going to get filled and it is going to have to, because that is a really Big item I would say from a political perspective, but I'll let Colin touch on that later. And then overall balance sheet wise, although there's been lost income from the just through the lack Of businesses being open, when they do reopen, I mean, there is going to be significant working capital requirements. We've been working closely with all of the government bodies.
Some businesses are simply going to require equity before we And that has been understood and reflected in the fact that the government announced a €2,000,000,000 equity fund to be managed by ISAF. That's good news for us, okay. If ISF is going to be able to provide equity for some of our mid large cap companies, we're very happy to support that with senior debt as well. So quite a few moving parts on that, but overall the balance sheet is actually in a pretty good position. I'll hand it over to Colin actually on the tracker item.
Yes. So we obviously announced In February, the taking of a provision of $300,000,000 in calendar 2019 in relation to the Financial Services and Pensions Ombudsman Decision that's pertaining to 5,900 impact to customers. And there's no change in the provision Relating to that taken in 2019, the exceptional costs range that we're putting out today is very much relating to the ongoing institutions and operation costs associated with that tracker mortgage examination As we work through the enforcement phase and we are very committed to concluding the enforcement There is also a sum of money included in that for voluntary severance programs as we rightsize our workforce
Thank you. Next question is from the line of Timon Hughes from Goodbody. Thank you. Please ask your question.
Hi, Colin. Hi, Donald. 2 or 3 for me, if you don't mind. Just in relation to I'm sorry to kind of come back to medium term targets, but I suppose if there's less new lending certainly in the short term, potentially the balance sheet starts to shrink. So I suppose just in relation to delivery of those targets the medium term.
I mean, you alluded to on the cost side around possible phasings. But how should we think about maybe some of the moving parts, Particularly given a key component of it would have been loan book size. So that's the first one. 2nd, in relation to the impacting capital from widening spreads in Q1. Can we take it that, that kind of partially reversed in Q2, which is a little bit of help?
And then I suppose, thirdly, in relation to impairments, you mentioned the ECL impact change in terms of the forecast changes that you could show for the COVID scenario would impact in Q2 and the Q2 charge would be higher. Just to be clear, if that's the case, When do we start to see, given that payment breaks are in place, I suppose, in terms of your impairment number, the underlying deterioration, The migration between the stages, could that be kind of as close as H1? Or do we kind of have to still wait for H2? Do you think potentially on that? Okay.
I'll take the first of those. As we prepare to launch our 3 year strategy on the 6th March In a different world, out to the end of 2022, we gave a huge amount of time Over many months considering what were the right targets or the right metrics to guide the organization, to guide our operations and our strategy Over a 3 year planning horizon, we believe that those targets remain absolutely appropriate in terms of cost charter CET1 and RTE.
And I would like to
very much emphasize that for us, the endpoints that we spelled out On the 6th March, it's still the same, but the path to that endpoint will be different Because of COVID-nineteen, but the endpoint in terms of 2022 is very much reiterated today.
Okay. Question number 2 on fixed income securities. Obviously, between Feb, March, things moved quite aggressively. Overall on the fixed income portfolio, what's effectively happened there is end of the year, the portfolio would have been around €200,000,000 in the money As at the end of March, it would have been minus €100,000,000 out of the money. So a swing of around €300,000,000 which is where you're seeing CET1 charge.
So obviously things have normalized quite a little, quite a bit in April, May, it seems now for the last while with government support that certainly sovereign Corporate spreads behaving themselves quite well. So I think we can expect to see that begin to normalize a little bit. I I think, I'd say at the moment, you're talking 10, 15 basis points back since the end of March in that area. But We would reasonably expect to see that normalize going forward. In terms of ECL, okay, I think in the trading statements, I accept that I've given you quite a number of different items Here to think about.
But I think the best way for you to look at ECLs and how we're approaching it is as follows, okay. Number 1, always start with the macro scenarios. What we've tried to do here is show 2 things. Number 1, the macro environment that we envisioned that created the initial Macro charge of €104,000,000 Okay. So you can see that on the tables Q1 ECL macroeconomic scenario.
The reason that we used old existing scenarios is like I mentioned earlier that they were all set up in the system and I wanted to get all of the FX down into the account levels to ensure that the coverage levels were appropriately calculated. But beside that, okay, and underneath this, we've shown the COVID-nineteen based scenario. So this is effectively management's view of how we think the COVID COVID item is going to play out over the next number of years. So I think that's pretty much in line with what most commentators would say. For the half year, what we're going to do is we'll obviously have a broader set of specific COVID scenarios.
What you can expect to see there is a V shaped recovery as the upside, the U shaped recovery as I've outlined here, A severe scenario, which will be pretty much in line with what the EU forecasts I've effectively defined another scenario which will probably be base plus a heartbreak, okay. So when we calculate all those with a sign different weightings to them, so all things being equal, you would then expect to see a further macro charge in Q2, Albeit no greater, I wouldn't expect than the charge that you saw in Q1. So that's number 1 On the macros, in terms of asset quality, what we've tried to do here is break out some of the What we do consider to be the directly highly impacted sectors, okay. So these are obviously subsectors of what you In our AFR, but it's kind of the devil is in the detail on this stuff, which is why we wanted to break it out in a little bit more detail. So you can see that the sectors that we're all kind of aware are going to come under pressure, hotels, bars, restaurants, etcetera, etcetera.
These are all typically in business type of areas. So the way in which we manage ECL and credit manage these positions is actually through Case by case type of analysis. It's predominantly not driven solely by macros. I think you can reasonably expect through Q2 that items in here will move, say, once in Stage 2, just given the fact That's the environment that the environment has changed. So you need to think about that as well.
And obviously, one of the key inputs here as well It's the modifications table. Another thing was specifically your question. And the reason I wanted to break this out and show it in this way is just to give you an idea for the number of accounts who are seeking payment breaks or looking for A 3 month or a 6 month moratorium. I'm probably pleasantly surprised with the percentages. Obviously, unemployment in Ireland has hit 28%.
So you could have imagined a scenario that could have been a little bit worse than that. Assuming that a lot of those workers are in lower paid jobs, they're not typically mortgage holders, But that's a proxy really for a portfolio of customers, should we say, where I think we've been naive to think that there won't be a Staging move at some point in the future. But just to be clear, for Q1, we've effectively kept all of modification customers In their same stage. Technically the way this works is you can ask for a 3 month break, you can ask for a 6 month break. In these retail books, you only really move into stage 2 or stage 3 if you trigger, For example, a greater than 90 day DPD trigger.
Now arguably, if you give someone a moratorium in March And you rolled it over in June. In September, that's effectively when you put the clock to 0. So I could say to you that you're not going to see the impacts of that until Q1, 2021. What we will look to do, however, for the half year is look at this book. We'll be able to see who has looked for Cayman Break 2.
And then within that cohort, because typically these are our customers, we'll be able to see if they're back at work, if they're in a sector which remains And I would look to make some form of an ECL adjustment at the half year and explain What the methodology is to how we got there? I'm sure we'll be wrong, but I'll do it in such a way that It's fairly coherent for analysts and investors to understand. So they're the 3 moving parts. Everything is moving quite quickly, but I've tried to give you as much information as I can there, certainly how we think about ECLs and how we think about the building blocks.
So that's great. Just one follow-up, just If you're able to do it or not, I mean, if you can't at this stage, it's still kind of a work in progress. But any sort of sense around You've given your base case macroeconomic assumptions kind of the extremities around the adverse. How we should think about that even on the GDP number if you're able to do it or if it's still a whip, That's fine, but any knowledge would be great.
I think in some ways, I want to validate this With the EU data as well, but I mean I would say most commentators would be saying in EU severe is down 12%. We haven't agreed yet on what a severe Irish scenario is. So I don't want to be guessing. But the unusual thing about this COVID crisis and you guys all know this is typically the recessions are long drawn out and it's Slow grind, whereas this is just short, sharp impact. So No one really knows what the effect is going to be.
If you tell a model unemployment is 28%, it's going to go nuts. It's going to throw out Strange numbers, okay, because no model is able to understand that the government has very generously decided To pay everyone 80% of their previous wages or indeed an amount of €350,000,000 So like That's obviously the difficulty with that stuff as well. So you're always trying to balance all of these things off. But you can rest assured that we'll have a severe scenario that will be immediately recognizable
Next question is from the line of Andrew Kus from Citi. Thank you. Please ask your question.
Yes, good morning. Thank you for your comments around the space migration in particular. A couple of follow ups, 1 on net interest income, 1 capital. On net interest income, we've seen a very divergent outlook between the UK banks and Bank of Ireland versus The Continental European Bank, largely driven by the magnitude of the move in dairy base rates, which you alluded to. But obviously, your UK business is somewhat smaller than Bank of Ireland.
So intrigued on your view on the NII path From here, given the size of your UK business relative. And secondly, on Capital, I just wanted to clarify. The 16.2% fully loaded number you provide is excluding any IFRS 9 transitional add back, I believe. Is that correct?
Yes, fully loaded.
Okay. You know me and Aaron?
Sorry. Yes. So two good questions. As I look at the European banks, It seems to be a feature with the larger ones anyway, given their business models that they are guessing Reasonable bounces in interest income driven by facility draws, etcetera, etcetera, okay? The business model certainly of AIB and I can't exactly talk about Bank of Ireland.
We don't really have that customer grouping. I don't have big large facilities outstanding to FTSE 100 Companies or DAX Companies. Our companies are much more domestically focused and don't have those kind of facilities. So we don't see immediately a big RWA From our committed facilities. So I mean, obviously the good news there is I can't get drawn on a facility to an industry that I don't particularly like.
But then obviously from the interest income perspective, it makes this a little bit more difficult. But we do in our own way, we have very granular facilities outstanding. We are seeing jaws in the SME space. We are seeing jaws in the corporate space Through March, through April, I also suspect in May. So I think that is going that's An underlying feature at the moment in the balance sheet.
Obviously, I mentioned the big movers like the mortgage market where we're effectively going to miss a quarter of the year in terms of volume, but I think a more interesting area is going to be how Irish banks approach lending to their economy to support the economy. Obviously the bigger countries in Europe, UK came out very strong, very With comprehensive government support measures, okay, obviously to ensure confidence in the system, etcetera, etcetera. From an Irish perspective, I mean, the last time they shot out of the blocks with guarantee items, it ended pretty badly for them. So The approach that they're taking is really to sit back, wait and see what's happening in Europe, see what European funds are going to become available, Ensure that they're able to dip into those to maximize value and that ultimately we need to find the most appropriate way That we can use those guarantees as efficiently as possible to transmit cash back into the system. Like there is mean, the Central Bank did its own statistics, which just said the SME market is going to need €5,000,000,000, €6,000,000,000 We've done our own analysis on the corporate market, which we think is €3,000,000,000, 4,000,000,000 So there's certainly going to be an amount of liquidity, which is going to be required to get businesses going.
And we are very happy to support that liquidity, but what we're not going to do is obviously give money to people where we don't think it's coming back. So working through the T's and C's on those government guarantee items is going to be Very important and probably a little bit of a game changer for the Irish banks between now and the end of the year. Notwithstanding the fact that there will be some high risk sectors looking for cash, which might be become difficult, Mid cap, mid grade corporate SMEs are going to need cash to restock and get going. That very much plays into certainly our position in the Irish market. We would have 30% or 40% of the corporate and SME market in Ireland.
So we will We think we'll capture quite a bit of value. In the UK, we have a small business. I think there's optionality there. We'll be able to pick and choose as we have in the past, The different areas where we want to play, it's not still going to be an area of identified Double digit growth. I think we want to wait and see how Brexit plays out or not before we absolutely commit to that.
We have a I'd consider it a nice little niche SME business, which we think will perform reasonably well this year.
Okay. The next question is from the line of Derek Queen from KBW. Thank you. Please ask your question.
Hi, good morning. Thanks for the update. A few questions from me. So first one, just on the negative impact on other income in Q1 From market volatility, if you could just maybe quantify that or indicate how much has come back As of today. And just a clarification on your comment of the 50% decline in fee income in Q2.
Is that versus last year's number? And the second question on provisions, the 136 basis points in Q1, Do you think that's indicative of what an annual charge could look like? Or is it more just a front loading or updating of the macro provisions? And a second clarification here. The outlook for a higher provision charge in Q2, is that in reference to the 106 million related to the macro scenarios or is it relative to the 2.10 overall credit charge this quarter?
And then just a broader question on follow-up on the credit guarantee scheme.
As you
said, yes, the Irish government is starting out with a more cautious approach versus other countries. And The relative size of the scheme or measures announced so far are very small relative to the overall corporate loan book and certainly very small compared to other countries, you've indicated that you'll be cautious in supplying credit To the economy, would you need to see a bigger scheme to be providing larger amounts of liquidity and credit and to the economy.
Okay, Darragh. Colin here. I'm going to kick off with your last question in relation to the credit guarantee scheme. I think if you look at the totality of the government support for business, About €6,500,000,000 is what's proposed at the moment and that is probably ballpark center of the European field In terms of total GDP, the credit guarantee scheme itself is going to require primary legislation. We're in the unusual positioned that we don't have a government at the moment.
We have an active government, but we're awaiting The translation of results of the general election from February into the formation of the new government and that is expected To happen over the course of the next number of weeks, I imagine that for the new government, one of its priorities Will it be the primary legislation surrounding the new credit guarantee scheme? Because we shouldn't be in sight of the fact that SMEs are a massively important contributor
to
our employment. Over 1,000,000 people in this stage are employed in businesses that we would characterize As small and medium sized. So if you really want to Accelerate the recovery. You're going to have to see a significant uptick. Well, first of all, obviously stabilization of the SME sector and then a significant uptake and acceleration out of the crisis.
What I can say in relation to the design of the CGS, we won't know its final design until such time as that legislation appears. But the industry here, we are committed to working constructively with the government In ensuring that the scheme, when it is finally designed, is a scheme that has the maximum input The maximum impact on a sector that is pivotal from the point of view of recovery of And I believe that government is very open to that collaborative engagement With the banking industry here, Laurent.
Yes. Just very quickly then on the other items, The XVAs, I think the charge for Q1 was €25,000,000 €30,000,000 I mean that's effectively a live Derivatives book with nonlinear features, what I can say there is that number 1, we hedge it proactively With both interest rate options and credit default swaps, 2, I would say more than 50% of that has now normalized. And 3, there has been no underlying credit issues With the underlying credits that are associated with that. So then the April, May, June other income items, I'm kind of making a bit of a guesstimate there as to how the next couple of months will play out. But I think if you would Even considered, I think the best comparator is just to divide and normalize Q1 by 3 and then versus that run rate and probably 50 percent down for Q2 and then Q3 looking to get back to a more normalized type of run rates.
In terms of ECL for half 1, there will be an impact from Macos. There will be an impact from bottom up analysis of cases. On the items for the payment breaks that I have isolated and shown you here, I could, if I so wished, drag that out into Q1, 2021 and wait and see what happens. I'm not going to do that. I am going to look at the payment breaks and I am going to make some form of a Analysis around what potential scar tissue can be relating to those modifications.
It is fine for the Accounting bodies and the regulators to say, look through the cycle, you don't need to Treat these as NPEs and we welcome those kind of statements. But at the end of the day, if we think someone is going to struggle to pay us back, We need to be sure that we are recognizing that. And where I can identify weaknesses, I will look to provide for that and I do not want to be talking about this in 2021 2022.
Sorry, just on the higher provision charge, is that reference to the 106 or the 210?
Thank you. The next question is from the line of Chris Kent from Autonomous. Thank you. Please ask your question.
Good morning, both. Thank you
for taking my questions. Q1 revenues, please. Your largest domestic PD yesterday in effect guided for Total underlying revenues in 2020 to be down about 16% year over year. This is a Pretty clear outlier, I think, in a European context relative to the guidance from pretty much all of your European peers. So I'd like you to comment directly on what you think the equivalent figure might be for AIB.
Just listening to the way you're talking about things today, obviously, 2Q other income pretty low, but you're expecting that to meaningfully bounce into 2H. And then on the lending side, You're talking about a missed quarter in the mortgage market, but you sound pretty upbeat on the outlook in terms of corporate lending, If you get a guaranteed lending facility up and running, I just would like you, if possible, if you could comment on that directly. And then a sort of related point and coming back to an earlier question, you're sticking to the 8% ROCE guidance, you're sticking to your 1,500,000,000 Cost guidance for 2022, I think implicitly that would require to get to that 8% ratio. I think implicitly you need something in the Mid to high $2,000,000,000 territory for total revenues. Is that where you're still expecting it to land given what you're talking about on the balance sheet in terms of some near term pressures on loan growth?
Thank you.
Okay. Yes. Again, with respect to Bank of Ireland, I know you want me to compare and contrast, I just don't think that will be appropriate. Other than to say, we have fundamental differences in our business model. On the face of this, we're big banks in a small country.
But I think one of the main Differences is they have a life insurance business. I think that might have had a material effect On their results for Q1, we obviously don't in the insurance space, we operate more of a brokerage type of model. So I would say that that's One particular item in terms of the outlook and how they see the world. It's Very there's a range of different outcomes. I can see the headwinds.
I can see where the tailwinds are going to be as well. It's possible in these times as we're working from our bedrooms To be particularly pessimistic, I wouldn't say the environment is great with 28% unemployment, But it is going to be incumbent on us to ensure we support our customers as the economy needs to reboot. I mean, this is the last crisis was arguably for actually of the bank's making and this This item is certainly not ours and we very much want to be a part of the solution and that is going to mean giving business support to our customers, okay. And we do that through debt facilities. So we will be very committed to finding a way to do that as efficiently as possible From a liquidity perspective, from a capital perspective, etcetera.
On the medium term targets, so let Colin talk about The 8% on the €1,500,000,000
Thanks very much indeed. Look, as I said earlier, we gave a huge amount of thought What were the appropriate targets? And obviously, the targets weren't built for COVID. But the environment, as we move ever closer To 2022, we'll clearly have less of a COVID impact on us. And I think that it's worth Taking into account that we said we were going to have a cost line below 1 point 5,000,000,000.
And certainly, there will be Potentially scope for us to have that number somewhat below €1,500,000,000 rather Marginally below €1,500,000,000 as we come to the end of 2022 because clearly the crisis is going to have an impact On how we organize ourselves and how we operate the business over the years ahead, but I do think it is fairly important at this juncture That we continue to use those targets as guides and propellers
In terms of taking out incremental costs, I could just pull that point up. I mean, I guess one of the areas where AIB has surprised negatively in recent years has been the below the line Exceptional charges and obviously today you're guiding for, I guess, probably a bigger number that is in consensus again. I know we haven't had a consensus Recently, but how should we be thinking about that prospectively? Like what's the right number for people to be thinking about below the line if you're potentially looking take out additional costs, which I assume may involve additional restructuring charges above and beyond what you might have pointed us to previously. Thank you.
Yes. I'm going to hand over to Donald, but at a general level, I think that COVID is going to mean That there are 3 secular trends that are out there and have been for many, many years are going to be accelerated. We're going to see greater agility in terms of how we work, so more remote working. The importance of digitization of our processes and our products It's going to be highlighted like never before. And the sustainability agenda, which is becoming of greater importance globally, Has been boosted further at the consequence of COVID.
So those three themes, which have been there for 20 years, are going to become ever more important over the course of the next number of years. And that is going to have a meaningful impact as it should have on the execution of our strategy out to the end of 2022 and indeed beyond. In relation to the highest Exceptional that we've seen in recent years, it's largely been driven by legacy items. And we were very, very determined To fix the problems created by the last crisis before we went into the next one. We ran out of time because COVID arrived on our doorstep and brought forward a sharp decline in the economic activity, which we thought was some way out and we never thought to look at anything near as sharp as this.
Our commitment to dealing with the legacy issues remains undimped. And I am comfortable Dash, the scale of exceptional costs that we have put through the accounts Because of the speed of because of past because of restitution for the past that, that will be sufficient To deal with this issue once and for all. Donald? Yes. Look, the costs From restitution, it hurts me a lot more than it hurts you, Chris, I can tell you.
But we just need to draw a line under this. We really felt 2020 was the year of concluding this item. And then we get a decision From the FSPO on one case that reopens it for a cohort of 5,900 and it's That's going to require another huge lift from the organization to go back and fix all of those. And it's just going to push out the final closure of Tracker mortgage review. So it's really painful stuff at any point in time.
There's between 300, 400 people working on all of those So it is absolutely top of mind with management to just get those large items Through the system agreed and finalized. And I think about the discussions with the regulatory bodies, I think Reasonably positive. It's in their best interest and ours to close out particularly the tracker item In its totality, but unfortunately, it is not the timeline is not in our hands.
Okay. Thank you.
Thank you. The next question is from the line of Martin Ratgev from Goldman Sachs. Thank you. Please ask your question.
Yes, good morning.
Many thanks for the presentation and
the comments on the question. I was just wondering if you could give us a steer on how you're thinking about the progression of your core Tier 1 ratio from here. Obviously, the comments on other income being weaker, at least for the time of the health crisis And the comments on provisioning, but just looking at your starting position now at 16.2%, it still seems that At least starting this all together, it wouldn't fall too much, but I was just wondering if you could give us a little bit of a feel on where you see this troughing potentially this year. And related to that, The dividend for 2019 was canceled at the end of March. I was just wondering how you're thinking about capital return from CSL if In a couple of months, we have better visibility from today's perspective.
How would you imagine to return to shareholder
Okay. Thanks for that question. Obviously CET1 strong starting point, 16.2%. We haven't really majored in any of the documentation on some of the forms of Regulatory relief that are available to banks, but obviously those items are available for us To utilize, albeit we wouldn't feel that we need to go overboard on that. What do I mean?
Things like Using derogations for SMEs, you can get reduced risk weightings there. I think that's going to be something which will have a positive effect on capital. The debate externally over how to treat Capital investments are intangibles from technology software spend. We've spent a lot of money in the past in this area. So I think there's definitely upside for us there.
So we call that technical of nature. And one of the headwinds going to be, I think, For the half year twenty twenty, I'll certainly try to create a clearer picture as I possibly can on what the The outlook is going to look like and you can see from our U shape recovery, I mean this is a fairly Severe Q2 2020 scenario in which we're currently living. But this time next year, we equally expect to be in a very strong environment. So back to continued growth In all of our core markets, so much more accretive on an overall level, I would say. But again, quite a few moving parts in there.
The headwinds may well be on potential ECLs. I think then the tailwinds are going to be on some of those regulatory items. And obviously, This is the first call I've done in all my years in AIB where no one's talked about NPEs. But obviously, our NPE strategy On our execution of our strategy, which we talked about on the 6th March, that has not changed. It is vitally important for us That we resolve the NPEs from the last crisis before we start to deal with whatever COVID throws at us.
And in terms of prioritization, I would say equal weighting goes to Reduction of those legacy NPEs, okay, because they are the ones that immediately from 2020 could attract calendar provisioning Discounts, so I want to avoid that. And just as importantly, however, this COVID item plays out with our customers, We will have really strong engagements with all customers to ensure that They don't move into Stage 3 because we've spent the last 10 years Dealing with Stage 3 customers, and it's a tough slog for customers, for banks, for everyone. So we'll be working hard As we are now, to ensure that, that doesn't happen, okay? And simple enough stuff in the retail space, early warning indicators around payments. We will have call centers operational, making sure individuals are aware when payments needs to be made so that we don't have any Lazy tripping of parameters that create new NPEs.
So in conclusion, NPEs are Very, very top of mind for us as they always have been. And they will play a part in how the capital trajectory evolves going forward. We certainly are committed to ensure that the NPE plan that we outlined on March 6, Certainly, 2022 will remain the case. And for items for 2020, We are very focused on continuing that reduction.
Okay. Conscious at the time, so we'll take the last question now comes from the line of Aman Wakar from Barclays. Thank you. Please ask your question.
Good morning, guys. I had a couple of questions I wanted to ask. To all around capital, a couple of points of clarification. First of all, can I just follow-up on that point? So regarding calendar provisioning, I mean, is it your expectation that calendar provisioning is set to go ahead in 2020 as things stand?
I mean, do you see any chance that actually that could get delayed? I guess, any other kind of regulatory burden being increased across sector seems to have been delayed given the current situation. Can I also ask regarding TRIM? I think you're continuing to show Your CET1 ratio pro form a for the impact of TRIM. So can I just clarify when exactly will TRIM affects Your balance sheet and your RWAs, etcetera, that would be really useful?
And then finally, it was on actually, sorry, no, 2 more. So on Pillar 2A, I've mentioned that you're still talking about a 3% Pillar 2A. Is there any reason why that number has not come lower given the kind of European wide Rule changes around AT1 and Tier 2, is that because you don't currently feel like you have enough AT1 and Tier 2 to fill that bucket? And then finally, just on risk weight inflation. I guess it might be related to your answer on TRIM.
But I mean, can I confirm, is it reasonable to expect minimal prospects of RWA inflation from here given the high start point On your mortgage book in terms of its density, I think you standardized for the remainder of your book? Is that a reasonable interpretation of things? Thank you.
Okay. Four questions. On the Canada provisioning side, I think that's an interesting question. My base case internally is that it will apply And I want to keep the pressure on all of my colleagues and the system to ensure that we execute All of our plans so that we do not have to seek any derogations from the regulator with respect to legacy NPEs. Some of these NPEs are on our books.
There's been no engagement for 7, 8 years. So enough is enough on that. But I think others if Push if they requested me get that pushed out, but not planning to ask for anything. On TRIM, we I think like a lot of things in the regulatory system, they are they're remaining in the system. I suspect that's a euro wide structure.
We're pretty sure that the letter is coming at some stage. It wouldn't be appropriate to not exclude us, but we haven't got official confirmation there. On the P2R, good question. In the you can see in the overview that I've certainly kept our P2R at the same very Elevated level. I'm not going to change that until such a time as I'm comfortable to Say what I am going to fill it with and when I'm going to fill it.
So it's a capital management Capital makeup question. I don't need this afternoon or any time this quarter To go and issue a huge amount of AT1 or Tier 2, so I won't. My plan for 2020 It's to refi the existing hybrids that I have in the OpCo into the HoldCo to make that a little bit more efficient. And I'll wait and see what markets are like at that time. And if they're strong, then I might do a little bit more and utilize some of that capacity.
I think there's a benefit for me of around 1.3%, which on the face of us, obviously, I don't think I need for any Stress test type of reasons, but obviously as time goes by in terms of capital optimization, that is definitely something that we will look to do. But until I have a fully formulated plan, I wouldn't be kind of talking about doing that. Then in terms of RWA inflation, obviously linked to the balance sheet question, what we see this year if we're going to get growth, Which I think we will from one part, which is going to be in the reboot area. You'll see a small amount of RWA inflation there Just from lending into that sector, but beyond that, I don't see anything on the horizon That's of a particularly negative nature.
Just to be crystal clear on that then. So thank you very much. Just to be crystal clear, then just as things stand, given the AT1 and Tier 2 that you have as of now, do you think you can realize that 1.3% Benefit on Pillar 2 are, albeit I appreciate you just choosing not to kind of embed that in the disclosure right now. But as things stand, you don't need to issue additional notes, etcetera, etcetera to verify that benefit.
Yes, yes, obviously, I mean,
you can write what you want. I mean, it's a regulatory rule that's there for all to utilize most banks in Europe hands. I would just rather Pull the trigger and show its usage when I have a plan associated around issuing. And I just I don't feel at this moment in time that I need to make any assumptions around that, so I'm not.
Okay, perfect. Thank you very much.
Sorry, I think the analysts from Goldman Sachs had actually asked about the dividend and I didn't answer that question. My apologies. Obviously, just pre the AGM, guidance came out from the Eurozone To effectively stop whole banks from paying dividends from the prior year, done on mass and we would have complied with that. A little bit too early to say how this is going to pan out. I suspect we will be given a fairly clear instruction from the regulator at a later Hard to know exactly how it's going to play out.
I would be confident enough that However, the year pans out for European banks. AIB from a capital perspective is going to be in a very strong position. So if there's any conversations around dividends, I think we would expect to be a part of that conversation. But I think that The regulators seem to have corrals themselves very, very tightly in this area. And I think we'll be operating under a guideline where they Clear instruction and we will fall into line, stroke comply.
Okay. Ladies and gentlemen, there you have it. Thank you very much indeed for giving us your time this morning. I know these are Truly exceptional circumstances and we look forward to conducting these sorts of briefings and engagements
So that does conclude our conference for today. Thank you all for participating. You may all disconnect.