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. To ask a question during the session, you will need to press star one on your telephone. Also, I must advise that the call is being recorded today, Tuesday, the 12th of May, 2020. Also must advise that you already have received the RNS relating to AIB's trading update. The forward-looking statement contained in that RNS also cover this call. I would now like to hand over the call to your first speaker today, Mr. Colin Hunt, CEO of AIB Group. Please go ahead.
Thank you. Good morning, ladies and gentlemen. You're all very welcome to today's briefing on AIB's trading for the first quarter of 2020 and our response to COVID-19. 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, Donal Galvin, who will take you through the group's financial performance in more detail, and we'll then have an opportunity for questions and answers. As you are all aware, COVID-19 has thrown our country into a state of crisis, just as it has worldwide. Indeed, the IMF has noted 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 and 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 have come from the IMF in its semiannual World Economic Outlook, which was published in April of 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 larger fall 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 start to be eased and businesses begin to reopen. 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, though 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 in Ireland and elsewhere will depend on when restrictions are relaxed or lifted. Another key aspect here and elsewhere will be limiting the permanent scarring from the recession in terms of the effects on consumer and 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 forma fully loaded CET1 ratio of 16.2%, well in excess of regulatory requirements. We did not foresee COVID-19 and the impact on the global economy coming, but 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, while also ensuring the health, safety, and well-being of our staff.
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 underpinned 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 to date of 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. We'd like to take this opportunity to note some key highlights.
We've processed close to 50,000 payment breaks so far, and our AIB and EBS branches remain open to our customers, except for those locations and campuses that closed following the advice from the health authorities. On the 6th of March, we shared details of our refreshed strategy with you, including our medium-term financial targets to have a cost base of no more than EUR 1.5 billion in 2022, a CET1 ratio ahead of 14%, and an RoTE of more than 8%, and we remain committed to those targets. We've delivered a solid underlying operational performance in the first quarter. Our funding and capital position remains strong, and the measures taken in responding to COVID-19 demonstrate our resilience, both financially and operationally, as well as our commitment to supporting our customers, communities, and the country through this crisis.
I'm now going to hand you over to Donal to bring you through the details of the financial performance.
Okay. Thank you 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-19 on the organization. As Colin outlined earlier, the high degree of uncertainty around COVID-19 in terms of duration of the virus, length of lockdowns, subsequent recovery periods, makes it pretty difficult to estimate the financial impact, but 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 one, 89% of those are strong and satisfactory by our own internal ratings.
The sectors which we know will be vulnerable to COVID-19, similar to most other countries around the world, I would expect, hotels, bars, restaurants, et cetera, and that's around 10% or 11% of our balance sheet exposures. We can run through that later. Although in Q1, 83% of those highlighted sectors were in stage one. We do expect to see some downward staging migration due to the impact of COVID-19, which will come through the balance sheets in Q2. Q1 2020 ECL charge is EUR 210 million, which equates to an annualized cost of risk of around 136 basis points. Half of this charge relates to a change in the macro scenario probability weightings, as we started to see the economic impact of COVID-19 coming through.
Q1 is based on a set of old scenarios that we had used in IFRS 9, a 70% downside, which is a global slowdown, and a 30% severe scenario, which we have set out the 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. 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&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%, which is six basis points lower than the exit NIM at 225, this is due to just the expected and guided headwinds. Other income was EUR 119 million, 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, at March 6, we would have guided for 2020 an interest income number of EUR 2 billion 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 6, we had a rate move in the U.K., which is a little bit larger than what we had expected.
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 XVAs, 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. Indeed, already that is beginning to normalize. 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.
It will obviously be an 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% versus 2019, very much driven by previously guided depreciation. A lot of moving parts on costs at the moment. 78% of our staff are working at home, so obviously that creates reduced costs across a number of different areas. Yes, you get additional costs relating to technology, et cetera. Overall, certainly happy with the medium-term guidance of EUR 1.5 billion.
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, where new lending and mortgages was up around 11% and personal lending was up 12%. We also gained market share in the mortgage business up to around 32.9%. 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. 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 dissimilar to how U.K. banks or even other European banks are looking at this. In terms of headwinds, what I'd say is, 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 EUR 6 billion versus our previous estimate of EUR 10 billion or EUR 11 billion. AIB's share of that is obviously 33%. That is going to be a headwind. Obviously, new business is down, but redemptions are down. We're getting more balance sheets, albeit de minimis, from RCFs. 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.
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. That's anywhere between EUR 6 billion and EUR 10 billion in all forms of capital. AIB, obviously, as a pillar bank, going to have a large part to play in providing liquidity support to its customers. 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 U.K. with the CBILS scheme, et cetera. 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.
That's obviously going to be a potential area for growth as well. the balance sheet question really is very much aligned with the interest income question, and I don't think it's absolutely clear where that is going to land, but you should have an idea of the moving parts there. Capital and funding. Overall, very strong liquidity position. In fact, our liquidity position is getting stronger through this crisis. With people not at work and receiving government payments, our retail current accounts are actually growing. We finished the quarter with a loan-to-deposit ratio of around 83%, and obviously our CET1 position is very strong at 16.2% as at the end of the quarter. I'll leave it at that and hand it over to Colin.
Thank you. Thank you, Donal. In summary, on the back of prudent lending decisions and balance sheet remediation in recent years, AIB entered this crisis in a position of great robustness. Given the strength of our capital position and 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 look to 2021 and beyond with confidence. We'll open now for questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Again, as a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Once again, star one should you wish to ask a question. Our first question is from the line of Raul Sinha from J.P. Morgan. 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 try and understand the pressures on the top line, on the income line. I was wondering if you might be able to tell us what is the impact of waiving 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. How do you think about this from a perspective that a lot of this could be effectively temporary workers and sort of more medium-term head rate?
That's the first question on the other income line particularly. The second question is just going back to this tracker mortgage. I just wanted to check if there was any change in terms of your assumptions from the Q4 level, as well as the sort of new guidance for below-the-line costs. 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 obviously see the impact on fees, commissions as being very short term in nature, very much aligned to the length of time that different businesses have had to be locked down. really, I would isolate the issue as we see it within the second quarter. Obviously, even though everyone is working from their bedrooms, et cetera, there's obviously a baseline of fees and commissions that do still continue to come through. 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. we do expect when business restarts, that that is going to switch on very quickly.
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, et cetera. We felt just as COVID broke, that it was not the right time to introduce those. Not because we're not committed to doing it, just at a time of uncertainty and sensitivity in the country, we just didn't want to confuse matters any more. Obviously we'll be looking to switch on all of those types of programs and initiatives in Q3. I would expect Q2 other income to be down, but then Q3, Q4 very much where we're getting back into business. That was it on the other income side. On the balance sheet side, in terms of volumes, 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. We still are 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. I mean, the market is effectively closed, so there is no transactions and there's probably not even a capacity to register security. Certainly as it pertains to housing, the fact remains that there's 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.
There is a huge onus on banks, government, et cetera, 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. I'll let Colin touch on that later. Overall, balance sheet wise, although there's been lost income just through the lack of businesses being open, when they do reopen, 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 can give debt, and that is being understood and reflected in the fact that the government announced a EUR 2 billion equity fund to be managed by ISIF. That's good news for us, okay?
If ISIF 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. Quite a few moving parts on that. Overall, the balance sheet is actually in a pretty good position. I'll hand it over to Colin actually on the tracker item.
Yeah. We obviously announced in February the taking of a provision of EUR 300 million in calendar 2019 in relation to the Financial Services and Pensions Ombudsman decision as it pertained to 5,900 impacted customers. 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 restitution 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 phase as expeditiously as possible. There is also a sum of money included in that for voluntary severance programs as we rightsize our workforce over the years ahead.
Got it. Thank you very much.
Thank you. Next question is from the line of Eamonn Hughes from Goodbody. Thank you. Please ask your question.
Hi, Colin. Hi, Donal. Two or three from me, if you don't mind. Just in relation to, and 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. I suppose just in relation to delivery of those targets over the medium term, 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? That's the first one. Second, in relation to the impact on 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?
I suppose thirdly, in relation to impairments, you mentioned the ECL impact change in terms of the forecast changes, that you put through 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? That's it.
Okay. I'll take the first of those. As we prepare to launch our three-year strategy on the 6th of March in a different world, out to the end of 2022, we gave a huge amount of time, over many months, to considering what were the right targets or the right metrics to guide the organization, to guide our operations and our strategy over a three-year planning horizon. We believe that those targets remain absolutely appropriate in terms of the cost targets, CET1 and RoTE. I would like to very much emphasize that for us, the endpoint that we spelled out on the 6th of March is still the same, but the path to that endpoint will be different because of COVID-19. The endpoint in terms of 2022 is very much reiterated today.
Okay, question number two on fixed income securities. Obviously, between February and March, things moved quite aggressively overall in the fixed income portfolio. What's effectively happened there is end of the year, the portfolio would've been around EUR 200 million in the money, as at the end of March, it would have been -EUR 100 million out of the money. A swing of around EUR 300 million, which is where you're seeing the CET1 charge. Obviously things have normalized quite a little, quite a bit in April, May, and it seems now for the last while with government support that certainly sovereign and corporate spreads are behaving themselves quite well. I think we can expect to see that begin to normalize a little bit.
I'd say at the moment you're talking 10-15 basis points back since the end of March in that area, but you would reasonably expect to see that normalize going forward. In terms of ECL, okay, I think in the trading statements, and 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 one, always start with the macro scenarios. What we've tried to do here is show two things. Number one, the macro environment that we envisioned that created the initial macro charge of EUR 104 million, okay. 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 effects down into the account levels to ensure that the coverage levels were appropriately calculated. Besides that, okay, and underneath it, we've shown the COVID-19 base scenario. This is effectively management's view of how we think the COVID item is going to play out over the next number of years. 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 have effectively defined, and another scenario which will probably be base plus a hard Brexit, okay. When we calculate all those, we'll assign different weightings to them. 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. Okay, so that's number one on the macros. In terms of asset quality, what we've tried to do here is break out some of what we would consider to be the directly highly impacted sectors, okay.
These are obviously sub-sectors of what you see in our AFR, but the devil is in the detail on this stuff, which is why we wanted to break it out in a little bit more detail. You can see that the sectors that we're all kind of aware of come under pressure, hotels, bars, restaurants, et cetera. These are all typically business type of areas. 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, from stage one to stage two, just given the fact that the environment has changed. You need to think about that as well. Obviously one of the key inputs here as well is the modifications table.
Another thing was specific to your question. 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 three-month or a six-month moratorium. I'm probably pleasantly surprised with the percentages. Obviously, unemployment in Ireland 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. That's a proxy really for a portfolio of customers, should we say, where I think we'd be naive to think that there won't be a staging move at some point in the future. 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 three-month break, you can ask for a six-month break. In these retail books, you only really move into stage two or stage three if you trigger, for example, a greater than 90-day DPD trigger. Now, arguably, if you give someone a moratorium in March and you roll it over in June, in September, that's effectively when you put the clock to zero. 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 a payment break, too.
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 to be impacted. 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. They're the three moving parts. Everything is moving quite quickly, but I've tried to give you as much information as I can there, certainly in how we think about ECLs and how we think about the building blocks.
No, that's great. Just one follow-up, just if you're able to do it or not. If you can't at this stage, or it's still 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 WIP, that's fine. Anything you can add should be great.
I think, look, in some ways, I want to validate this with the EU data as well, but I would say most commentators would be saying an EU severe is down 12%. We haven't agreed yet on what a severe Irish scenario is. I'd only be guessing. The unusual thing about this COVID crisis, and you guys all know this, is typically the recessions are long drawn out and it's a slow grind, whereas this is just short, sharp impact. 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 EUR 350.
That's obviously the difficulty with that stuff as well. you're always trying to balance all of these things off. you can rest assured that we'll have a severe scenario that will be immediately recognizable as a severe case.
Okay. Thanks very much.
Next question is from the line of Andrew Coombs from Citi. Thank you. Please ask your question.
Yes, good morning. Thank you for your comments around the stage migration in particular. A couple of follow-ups, one on net interest income, one capital. On net interest income, we've seen a very divergent outlook between the U.K. banks and Bank of Ireland versus the continental European banks, largely driven by the magnitude of the move in BoE base rates, which you alluded to. Obviously your U.K. business is somewhat smaller than Bank of Ireland. Intrigued on your view on the NII path from here, given the size of your U.K. business relative. 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?
Fully loaded.
Okay. You want me to
Sorry. Yeah, good question. 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 getting reasonable bounces in interest income driven by facility draws, et cetera. Okay? The business model certainly of AIB, and I can't exactly talk for 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. We don't see immediately a big RWA inflation from our committed facilities. Obviously the good news there is I can't get drawn on a facility to an industry that I don't particularly like. Obviously from the interest income perspective, it makes this a little bit more difficult.
We do in our own way, we have very granular facilities outstanding. We are seeing draws in the SME space. We are seeing draws in the corporate space through March, through April. I also suspect in May. I think 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. 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, U.K., came out very strong, very early with comprehensive government support measures, okay, obviously to ensure confidence in the system, et cetera. From an Irish perspective, the last time they shot out of the blocks with guarantee items, it ended pretty badly for them.
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. 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. The central bank did its own statistics, which just said the SME market is going to need EUR 5 billion-EUR 6 billion. We've done our own analysis on the corporate market, which we think is EUR 3 billion-EUR 4 billion. 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.
What we're not going to do is obviously give money to people where we don't think it's coming back. 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'll be some high-risk sectors looking for cash, which might become difficult. Mid cap, mid grade corporates, 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. We think we'll capture quite a bit of value. In the U.K. 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. I'd consider it a nice little niche SME business which we think will perform reasonably well this year.
Thank you.
Okay. The next question is from the line of Daragh Quinn from KBW. Thank you. Please ask your question.
Hi. Good morning. Thanks for the update. A few questions from me. The 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. Just a clarification on your comment of a 50% decline in fee income in Q2. Is that versus last year's number? The second question on provisions, the 136 basis point 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? A second clarification here, the outlook for a higher provision charge in Q2, is that in reference to the EUR 106 million related to the macro scenarios, or is it relative to the EUR 210 million overall credit charge this quarter?
Just a broader question and follow up on the credit guarantee scheme. As you said, the Irish government is starting out with a more cautious approach versus other countries. 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 into the economy? Thank you.
Colin Hunt 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 EUR 6.5 billion 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 position that we don't have a government at the moment. Well, we have an acting government, but we're awaiting the translation of the results of the general election from February into the formation of a 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 be the primary legislation surrounding the new credit guarantee scheme, because we shouldn't lose sight of the fact that SMEs are a massively important contributor to Irish employment. Over a million people in this state are employed in businesses that we would characterize as small and medium-sized. 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 uptick 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 that legislation appears.
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 impact on a sector that is pivotal from the point of view of recovery of the economic fortune of the state. I believe that government is very open to that collaborative engagement with the banking industry here in Ireland.
Yeah, just very quickly then on the other item, the XVAs, I think the charge for Q1 was EUR 25 million-EUR 30 million. That's effectively a live derivatives book with non-linear features. What I can say there is that, number one, we hedge it proactively with both interest rate options and credit default swaps. Two, I would say more than 50% of that has now normalized. Three, there has been no underlying credit issues with the underlying credits that are associated with that. 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.
I think if you would even consider, I think the best comparator is just to divide a normalized Q1 by three and then versus that run rate, probably 50% down for Q2, and then Q3, looking to get back to a more normalized type of run rate. In terms of ECL for half one, there will be an impact from macros. There will be an impact from bottom-up analysis of cases. On the items or 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 am not going to do that. I am going to look at the payment breaks, and I am going to make some form of an 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." We welcome those kind of statements. 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. Where I can identify weaknesses, I will look to provide for that, and I do not want to be talking about this in 2021 and 2022.
Sorry, just on the higher provision charge, is that reference to the EUR 106 million or the EUR 210 million?
I'd say the EUR 210 million.
Thank you. The next question is from the line of Chris Cant from Autonomous. Thank you. Please ask your question.
Good morning, both. Thank you for taking my questions. Two on revenues, please. Your largest domestic peer 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. Could I please invite 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, Q2 other income, pretty low. You're expecting that to meaningfully bounce into 2H. 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. Then a sort of related point, and coming back to an earlier question, you're sticking to the 8% RoTE guidance. You're sticking to your EUR 1.5 billion cost guidance for 2022. I think implicitly, that would require, to get to that 8% RoTE, I think implicitly, you'd need something in the mid to high EUR 2 billion territory for total revenues. Is that where you're still expecting 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. Yeah. Again, with respect to Bank of Ireland, I know you want me to compare and contrast, but I just don't think that would be appropriate, other than to say we have fundamental differences in our business model. On the face of it, we're big banks in a small country. 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. I would say that that's one particular item. In terms of the outlook and how they see the world, 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. The last crisis was arguably, or actually, of the bank's making. This item is certainly not ours, and we very much want to be a part of the solution. That is going to mean giving business support to our customers, okay? We do that through debt facilities. We will be very committed to finding a way to do that as efficiently as possible from a liquidity perspective, from a capital perspective, et cetera. On the medium-term targets, I'll let Colin talk about the 8% and the EUR 1.5 billion.
Thanks very much indeed. Look, as I said earlier, we gave a huge amount of thought to what were the appropriate targets, and obviously, the targets weren't built for COVID. The environment, as we move ever closer to 2022, will clearly have less of a COVID impact on it. I think that it's worth taking into account that we've said we were going to have a cost line below EUR 1.5 billion. Certainly, there will be potentially scope for us to have that number somewhat below EUR 1.5 billion rather than marginally below EUR 1.5 billion 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 as a business over the years ahead.
I do think it is very important at this juncture that we continue to use those targets as guides and propellers for all the business decisions that we make.
In terms of taking out incremental costs, if I could just follow that point up. I guess one of the areas where AIB's surprised negatively in recent years has been the below the line exceptional charges. Obviously, today, you're guiding for, I guess, probably a bigger number than is in consensus again. I know we haven't had a consensus recently. How should we be thinking about that prospectively? What's the right number for people to be thinking about below the line if you're potentially looking to 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.
Yeah. I'm going to hand over to Donal, but at a general level, I think that COVID is going to mean that there are three 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 digitalization of our processes and our products is going to be highlighted like never before. The sustainability agenda, which is becoming of greater importance globally, has been boosted. 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. 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 height of exceptionals that we've seen in recent years, it's largely been driven by legacy items. We were 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 cyclical decline in economic activity, which we thought was some way out, and we never thought we'd get anything near as sharp as this. Our commitment to dealing with the legacy issues remains undimmed. I am comfortable that the scale of exceptional costs that we have put through the accounts because of restitution for the past, that that will be sufficient to deal with this issue once and for all. Donal?
Yeah. Look, the costs from restitution, it hurts me a lot more than it hurts you, Chris, I can tell you. 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. That's going to require another huge lift from the organization to go back and fix all of those. It's just going to push out the final closure of the tracker mortgage review. It's really painful stuff. At any point in time, there's between 300, 400, 500 people working on all of those restitution items. It is absolutely top of mind with management to just get those large items through the system, agreed and finalized.
I think that the discussions with the regulatory bodies, I think, are reasonably positive. It's in their best interest and ours to close out particularly the tracker item in its totality. Unfortunately, the timeline is not in our hands.
Okay. Thank you.
Thank you. The next question is from the line of Martin Leitgeb from Goldman Sachs. Thank you. Please ask your question.
Yes, good morning. Many thanks for the presentation and the comments on the earlier question. I was just wondering if you could give us a steer on how you're thinking about the progression of your quarter one ratio from here. The comments on other income being weaker, at least for the time of the health crisis, and the comments on provisioning. Just looking at your starting position now at 16.2%, it still seems that at least adding this all together, it wouldn't fall too much. I was just wondering if you could give us a little bit of a steer on where you see this trending potentially this year. 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 here.
If in a couple of months, we have better visibility from today's perspective, how would you imagine to return to shareholder distribution from here? Thank you.
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. 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 weighting 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 or 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. We call that technical of nature. One of the headwinds going to be, I think, for the half year 2020.
I'll certainly try to create as clear a picture as I possibly can on what the ECL outlook is going to look like. You can see from our U-shaped recovery, this is a fairly severe Q2 2020 scenario in which we're currently living. This time next year, we equally expect to be in a very strong environment. Back to continued growth in all of our core markets. Much more accretive on an overall level, I would say. 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. Obviously, this is the first call I've done in all my years in AIB where no one's talked about NPEs.
Obviously our NPE strategy and our execution of our strategy, which we talked about on the 6th of 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. In terms of prioritization, I would say equal weighting goes to reduction of those legacy NPEs, okay. They are the ones that immediately from 2020 could attract calendar provisioning discounts. I want to avoid that. 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 three, because we've spent the last 10 years dealing with stage three customers, and it's a tough slog for customers, for banks, for everyone.
We'll be working hard, as we are now, to ensure that that doesn't happen, okay? 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 need to be made so that we don't have any lazy tripping of parameters that create new NPEs. In conclusion, NPEs are very top of mind for us, as they always have been. 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 the 6th, certainly out to 2022 will remain the case. For items or 2020, we are very focused on continuing that reduction.
Thank you.
Okay. Conscious of the time, we'll take the last question now. Comes from the line of Aman Rakkar from Barclays. Thank you. Please ask your question.
Morning, guys. I had a couple of questions I wanted to ask. Two, it is all around capital, a couple of points of clarification. First of all, can I just follow up on that point? Regarding calendar provisioning, is it your expectation that calendar provisioning is set to go ahead in 2020 as things stand? Do you see any chance that actually that could get delayed? I guess any other kind of regulatory burden being increased across the sector seems to have been delayed given the current situation. Can I also ask regarding TRIM, I think you are continuing to show your CET1 ratio pro forma for the impact of TRIM. Can I just clarify when exactly will TRIM affect your balance sheet and your RWAs, et cetera? That would be really useful. Finally, actually, sorry, no, two more.
On Pillar 2A, I've noticed 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? Finally, just on risk weight inflation, I guess it might be related to your answer on TRIM, but 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 risk 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 calendar 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 seven years, eight years. Enough is enough on that. I think others, if pushed, if they requested me, get that pushed out, but I'm not planning to ask for anything. On TRIM, I think like a lot of things in the regulatory system, they're remaining in the system. I suspect that's a Euro-wide structure. We're pretty sure that the latter is coming at some stage.
It wouldn't be appropriate to not exclude it. Official confirmation there. On the Pillar 2, good question. You can see in the overview that I've certainly kept our Pillar 2 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. It's a capital management, a 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 is to refi the existing hybrids that I have in the OpCo into the HoldCo to make that a little bit more efficient.
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 around 1.3%, which on the face of it, obviously, I don't think I need for any stress test type of reasons. Obviously as time goes by in terms of capital optimization, that is definitely something that we will look to do. Until I have a fully formulated plan, I wouldn't be talking about doing that. 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.
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. Thank you very much for that, by the way. 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 2R, albeit I appreciate you're choosing not to kind of bed that in your disclosure right now. As things stand you don't need to issue additional notes, et cetera, to realize that benefit?
Yeah. Obviously, you can write what you want. It's a regulatory rule that's there for all to utilize. Most banks in Europe have. I would just rather pull the trigger and show its usage when I have a plan associated around issuing. I just 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 analyst 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 all banks from paying dividends from the prior year, done en masse, and we would have complied with that. 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 stage. 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. If there's any conversations around dividends, I think we would expect to be a part of that conversation.
I think the regulators seem to have corralled themselves very tightly in this area, and I think we'll be operating under a guideline where they give clear instruction, and we will fall into line and still 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 in normal circumstances as we move closer to the end of this year. Thank you all very much indeed for your time.
That does conclude our recorded conference for today. Thank you all for participating. You may all disconnect.