Good morning, ladies and gentlemen. You're all very welcome to Moses Street for the presentation of our annual results for 2019, for our investor update and for our strategic refresh. As usual, we start with the forward looking statement, which I would ask you to commit to memory very quickly before moving on to the agenda for the day. It is a packed agenda. I'm going to kick off with a very, very quick overview of the highlights of the year just finished.
Donald will then bring you through the detailed financial results for 2019. I'll be back then to talk about our strategic update for the period to the end of 2022. And then Donald will bring you through the refreshed and renewed financial targets, outlook and guidance for the period ahead. We'll have an opportunity then for questions and answers here in the room and and over the phone. And hopefully, we will have you out the door by no later than 11 Before we start, I need to do something I've got to when we presented the interims, which was to ask you all to turn off your mobile phones.
So 2019 was a year of very steady progress for the bank against a challenging and difficult backdrop. We strengthened our customer proposition and our digital leadership, introducing ever more competitive products, particularly in the mortgage space where we reduced interest rates in the fixed products on 2 occasions, led and improved our customer experience and also enhanced our existing leadership in the fintech space. We engaged in very, very high quality new lending with a key focus on credit management. And more than 98% of the new loans we put onto our balance sheet in 2019 were graded strong and satisfactory. We saw a very significant reduction in our NPEs from close to 10% of gross loans at the start of the year to just over 5%, 5.4% at the close.
And in so doing, we reached at a very important pre IPO commitment that we made to our investors. And we're planning further reductions. We had a renewed focus on costs. And in the second half of the year, we reduced the headcount of the bank by 5%. We made major advances on the sustainability agenda, put it at the very, very heart of our strategy, and we also made significant progress on culture and accountability.
And that sustainability commitment is now manifest very clearly in a climate action fund of €5,000,000,000 the introduction of a green mortgage, the publication of a green bond framework and also we're able to report a 20% production in our own carbon footprint as a business since 2014. We simplified our structure to deliver on this strategy, and we made significant management changes. We now have a renewed and refreshed executive committee. And we've continued to deal with legacy issues and a change in regulatory environment with particular reference to the tracker mortgage examination. So steady progress made across a number of fronts, but there's more work to be done as we embark on the next phase of our strategic development, which will see the bank being simplified, streamlined and strengthened in the interests of all our stakeholders.
I'm now going to hand you over to Donald to bring you through the details of the results for last year.
Thank you very much, Colin, and good morning, and welcome to you all. I'm going to go through the 2019 financial results. Firstly, just pulling out some of the key items that I want to mention for 'nineteen. Net interest income over €2,000,000,000 for 2019 and a net interest margin of 2.37%. And within that, we would have seen strong asset yields and reducing liability yields.
So we're very happy with that. Net performing exposures of €3,300,000,000 represents an NPE ratio of 5.4%, which is in line with our expectation of the milestone of the 35%. On the year, NPEs reduced by €2,800,000,000 which is a reduction of 45 Which is a huge, huge lift from the nonperforming workout unit. CET1 ratio fully loaded, 16.4%. This includes a dividend of €217,000,000 and 0 point 0 $8 per share, which we feel is a very strong capital outturn.
Now just to run through the income statement. Overall, like I mentioned, interest income year on year, pretty Stable, down 1%. Other income, pretty consistent year on year. I'd really just draw your attention to the ECL number of €16,000,000 And although it's not that large a charge, it does signify a change from prior years. We've been benefiting for the last number of years from a strong macro Irish environment, from the fact that there were write backs coming through our P and L.
But obviously, as our NPEs reduced quite significantly, the write backs no longer are going to be coming through the balance sheet. And going forward, we do see a more normalized environment where we see and we'll use cost of risk type metrics to define that number. Obviously, exceptional items, €592,000,000 for the year, largely driven by a €300,000,000 provision for a tracker provision that we would have made recently. So they're the key financial income statements. Net interest income and net interest margin.
This is a really important slide, and there's quite a few moving parts on it. On a headline basis, our net interest Margin would have reduced from 2.47% down to 2.37%. So obviously, a 10 basis point reduction. But I'd like to really just break this out into 2 separate pieces. On the left hand side, we can see where the net interest margin drove net interest income erosion.
So that's really the most important piece. In terms of customer deposits, we had an improving profile here. Deposits reduced from 0.41% to 0.28%. So that's very strong. On the loan side, our asset pricing has remained very consistent and disciplined.
And in fact, we saw an increase in loan yields, And core loan yields up 6 basis points. Then we look at some of the headwinds that we're facing from a net interest margin perspective. Structural hedge that we have in place to hedge some of our equity and reduce the impact of lower interest rates, That is reducing and that had a 3 basis points NII and NIM reduction. Cost of MREL issuance, 5 basis points. Obviously, throughout the year, we would have done over €2,000,000,000 of MRAD issuance, very successfully completed transactions, But that would have had an erosion on net interest margin and net interest income of 5 basis points.
Investment security yields reduction of 4 basis points. This is simply just fixed income investment securities that we've had from prior years at higher yields that are just maturing and running off the balance sheet, and the impact 2019 was 4 basis points. And then the introduction of IFRS 16 is a one off item, and that was 2 basis points. You can see here now on the right hand side where the main areas of net interest margin reduction have come from, and that's 7 basis points. It's for investment security volumes and excess liquidity.
The point I'm really trying to make here is that although there is a net interest margin reduction, there is not net interest Income reduction. If I take, for example, the excess liquidity position, if it uses a proxy that €1,000,000,000 of excess Euro surplus liquidity reduces net interest margin by 3 basis points. You can see the reduction over time on the net interest margin from that impact. But for example, we had over €6,000,000,000 of excess cash sitting with the ECB at the end of 2019. 2 thirds of that would have had a zero rate applied due to tiering.
And the other third, we would have applied negative deposit rates to a cohort of customers. So again, the €6,000,000,000 is really just grossing up the balance sheet and not having a net interest income eroding effect. So going forward in the guidance in the forward guidance piece, I'll run through this a little bit more. But obviously, there is a distorting impact, and I'm going to keep separating that going forward. Other income, very strong year on year.
Fees and commission, up 3%. As we look forward, we think we will get more synergies from the Pay Zone acquisition that we completed in Q4. There's going to be a lot of synergies with respect to the products they have and that we can bring them to our customers. The outturn for the year at €119,000,000 is obviously including some other items, €62,000,000 for B and C notes, etcetera, etcetera. Gains on investment securities of €45,000,000 We wouldn't expect that to be as strong going forward, but the Core underlying business income will be greater than €500,000,000 And for other items, we think even on a look forward basis, it should be at least €550,000,000 Costs deserve a little bit of time to break down and describe.
So €1,500,000,000 cost of increase on the year by over 5%. A couple of different moving parts in there. Depreciation from investments has increased by €33,000,000 On the staff side, we can see that there's increase here from wage inflation, Also from the elevated cost of our NPE Workout Unit, where we consciously decided to keep a larger team managing NPEs so that we could get to a lower outturn And the heightened cost of regulation is an evergreen item. Since we would have spoken at the half year, we've made some heavy inroads into our cost base. We've taken over 500 people out of the business in the second half of the year to leave the year at the FTE number of approximately 9,500 employees.
I'll break that out a little bit further on what our plans are for the future. Exceptional cost items for the year of €592,000,000 are made up of restitution costs of €416,000,000 The largest part of that is obviously the recently announced provision for €300,000,000 A provision for regulatory fines of €78,000,000 that incorporates €35,000,000 provision for the tracker enforcement process, plus an additional potential provision of another €35,000,000 making up €78,000,000 overall. We had termination costs of €48,000,000 in 2019. Like I just mentioned, we would have, on a voluntary basis, 500 people left the organization in the second half of the year and the rough costs associated with that was €48,000,000 We had loss and disposal of loan portfolios, €40,000,000 2 large portfolio sales were executed throughout 2019. The net outturn for those on an exceptional basis was €40,000,000 But obviously, on a capital basis, on an RWA basis, these were capital accretive.
On the balance sheet, I think the best way to describe it is really Is if I start on the liability side, customer accounts increasing by €4,100,000,000 Debt security is an issue, obviously increasing by €1,100,000,000 So the increase on the liability side It's now impacting the asset side as well, where you can see loans to central banks and banks has increased by €5,500,000,000 That's on our balance sheet where you're seeing the impact of surplus liquidity coming through, through all of our core business lines and then being placed with the ECB And other central banks such as the Bank of England. So they're really the main moving parts on the balance sheet. But on the performing loan side, Performing loans would have increased by €2,000,000,000 which is up 3%. And new lending was €12,300,000,000 on the year, which is quite similar to what we would have seen in 2018 as well. Gross performing loans, like I mentioned, up 3.4%.
You can see here the breakout of the different asset classes, which are Performing personal up, property up, mortgages up, corporate and SME up. So all performing loan areas in all of our markets are performing strongly. If you look at the new lending statistics, again, we've broken out this by our main business pillars, retail, corporate and U. K. You can see despite Brexit headwinds in the U.
K, there has been a strong performance there. Colm will actually break out some of the activities that we're doing in the U. K. In CIB, slight reduction year on year. We have seen increases in our energy business and our energy portfolio, But some reductions in appetite in our international syndicated business.
Personal lending, very strong, up 13% year on year, and that's an area of real focus for us going forward. So NPE is a very positive story for AIB. 2013, 37 percent NPE ratio, €31,000,000,000 of nonperforming exposures. At the end of December 2018, we're still at €6,100,000,000 of nonperforming And through a huge amount of work, efforts and a multitude of different ways to manage Through this, we've ended the year at €3,300,000,000 of nonperforming exposures, which is an NPE ratio of 5.4%. So as I would have described before, we have different strategy treatments for all of the different asset classes and customer cohorts.
But really the way in which the reductions were achieved this year was through redemptions, which is just individual deals made with borrowers. Write offs, restructures, there's a whole host of activities in there when we restructure transactions and then they sit in waiting rooms. Flow in and out of NPEs, that's obviously going to become more of a feature as we enter a more normalized world. That's items going in from Stage 2 into Stage 3 And then reemerging from Stage 3 back up to Stage 2. And obviously, the largest part of the NPE reductions come from comes from portfolio disposals of €1,800,000,000 leaving us at €3,300,000,000 at year end.
So we're really very, very pleased with that outturn. NPE provision coverage. Overall, you can see, although the reduction has been from €6,100,000,000 down to €3,300,000,000 The coverage levels have remained the same year on year. The asset classes underlying the NPEs is obviously changing quite a bit. The remaining underlying non performing exposures are predominantly mortgage in nature.
So that's primary dwelling homes and buy to less type of exposures. And for that reason, I've really tried to break it out here in the middle segment to give you an idea of how those different asset classes are segregated between primary dwelling homes and buy to lets and the coverage levels that we have applied. The collateral value here of €2,300,000,000 is a capped real estate value, just to give you a sense for the type of collateral which is securing our lending, which really helps describe and get comfort around the coverage level. Obviously, with our mortgage portfolio or any arrears, the Time in arrears is a key indicator for the credit quality of the assets. Typically, when I look on the right hand side here, I break Into 2 parts.
On the right hand side, not past due, less than 90 days past due, coverage levels on these mortgages will be far less because they are there are still customers that we are working with to try to reengage and restructure transactions. On the left hand side, it says greater than 180 days past due. There's large elements of that portfolio that could be multiple years with little or no engagement. So that is really the deeper part of the portfolio that we're really focused on because that's the part of the portfolio that attracts very negative calendar provisioning impacts. Bottom right hand side here, again, just to show you the impact over time of the loan to value, the Collateral values associated with these different portfolios.
So from 2016 to 2019, the LTVs have improved markedly from, say, 100%. There was obviously a lot of negative equity associated with this, down to much more normalized levels At the end of 2019, in and around 60%. So overall, provision cover, strong NPEs have significantly reduced. Funding structure. Again, I would have talked about this a little bit on the balance sheet slides.
On the wholesale side, you can see the increase here from the MREL issuance that we completed in 2019. Four deals, €2,600,000,000 All very much oversubscribed. Throughout the year, 2 of the rating agencies, Fitch and Moody's, would have upgraded us to investment grade, now leaves us investment grade with all of the main rating agencies for all of our MREL Holdco issuance debt, which should help and improve yields going forward as we do more issuance. I'd say the more interesting part on the funding side is just to look at the breakout on the core deposit side. So I've broken it out here really between nonbank financial institutions, corporate and SME and retail.
Lending growth, you've seen running at around 2% or 3% on the asset side. The strong macro environment is Probably more we really see it on the liability side of the balance sheet, where 7% 8% growth year on year From retail customers and SMEs as evidenced on the deposit side. So it's not negative overall from a risk perspective, but that Does explain how and why you get from a loan to deposit ratio from 90% to 85%. And that is a trend that has we have been seeing since 2018, and I would expect to see for this year as well. Capital ratios and RWAs.
Obviously, throughout the year, we would have issued some more hybrid securities, Trying to fill our buckets for AT1 and Tier 2. €51,400,000,000 RWAs at the start of the year, Finishing the year at €54,200,000,000 and that is incorporating the impact for €2,200,000,000 of the mortgage TRIM to size. Outside of that, there's some headwinds and there's some tailwinds. New business is obviously going to increase RWAs, Particularly with the business mix we have towards corporate and SME and those reductions in RWAs coming through from the MPE reduction strategy. In addition, throughout the year, we would have had a number of RWA efficiency programs, looking at simple things like derivative netting, etcetera.
And those items would have improved our RWA out term by €600,000,000 to €800,000,000 again, helping the year end position. So the walk for the year in terms of CET1 effectively started at 17.5%, introduction of IFRS 16 of 20 basis points, add profits, take off intangibles and others, exclude a dividend and ultimately leaves us with a year end position of 16.4 Which is slightly above our previously guided CET1 target of 16% or CET1 outturn of 16%. And that's obviously incorporating the effect and the impact of the €300,000,000 provision. So it's 16.4%. And obviously, there's Small benefit that was due to accrue in the Q1 of 2020 from the previously disclosed NPE sale called Alder last year, which will have another benefit of around 20 basis points.
So overall, very strong capital position, 16.4%. Okay. I shall now hand it back to Colin to give you an overview of the 2020 to 2022 strategic refresh.
Thank you very much indeed, Donald. In setting out our strategy for where we want to bring the bank over the course of the next 3 years, I suppose, it's good to take account of where the bank stands today. And this is, I think, a neat encapsulation of all the salient features of AIB at the start of 2020. We are the leading banking franchise in this country with leading market shares across all the key product areas, not least in the mortgage market where we enjoyed a 31.4% market share in 2019. We are by a wide margin the digital leader in this country with the number 1 Irish banking app, with 1,300,000 of our customers choosing to engage with us using our mobile technology and 1,500,000 of our customers choosing to engage with us using all our digital interfaces.
We have a modern, resilient and flexible IT estate today, And we have been a very early and committed supporter of the sustainability agenda. And it is on the strength of that bedrock that we are confident that the strategy we're outlining today will deliver on the new financial targets, the new ambitions that we have set for ourselves, a cost base of no more than $1,500,000,000 in 2022, a CET1 ratio ahead of 14% and an ROTE of 8% more than 8%. So our strategy to simplify, to streamline and to strengthen is built on 5 pillars: putting our customers first simple and efficient, risk and capital, talent and culture and sustainable communities, highlighting the importance that we ascribe to the environmental agenda and also our commitment to be embedded in the communities that we serve, the length and breadth of this country. In support of that strategy, we have rebuilt our structure. It's been simplified, and it's now focused on 3 key customer interfacing areas: our retail bank, our corporate institutional business bank and our operations in Britain and Northern Ireland.
And those customer facing areas are supported by our business and customer services teams, finance, risk, legal corporate governance, HR and Corporate Affairs, Strategy and Sustainability. All of this has been underpinned by an independent group internal audit function, which reports directly to the Board Audit Committee. The Retail Bank is the heart of AIB. It is the largest single part of our balance sheet with $36,600,000,000 of a loan book, more than 2,500,000 customers. That loan book accounts for 59% of our gross loans, making an operating contribution of 54%.
The largest and most important part of the retail bank, of course, is our Homes business, where we are the number one mortgage Provider in this country, as I said already, we had a 31.4% market share in 2019. And the good news is that we're off to a very, very solid start in January, with our mortgage market share in the 1st month of this year standing at 33.5%. That share is underpinned by a broad array of propositions delivered through our 3 channels, AIB, EBS and Haven. And it's a very, very clear reflection of the competitiveness of the product offering that we bring to our customers. We're increasingly digitizing our offering in this space, and 60% of our customers are now using our Express Mortgage journey and also our new My Mortgage app.
We're the number one business bank in the country with a 43% share of current accounts. With a focus on sector specialism delivered through the largest distribution network, the length and breadth of the island. And we've also seen the benefits of significant digital investment in this space, but there's more to come. We have now end to end online loans and overdrafts for sole traders, And we've seen a 35% growth in direct channel new lending. In terms of day to day banking, we are the number one bank for personal current and loans.
And we are by a country mile the leading digital bank in this country with 1,500,000 interactions every single day on our mobile technology. We've enhanced our existing capabilities in this space with the acquisition of PayZone, and we look forward to that making a full contribution to the bank as it is integrated. And we've also launched a Voice ID biometric system in 2019, underpinning our commitment to ongoing innovation in the interests of our customers. Within the Corporate Institutional Business Bank, we provide a unique offering in this country in terms of the completeness and the comprehensiveness of our service offering in terms of delivering senior lending, mezz lending, advice and indeed, in very selected cases, equity. This part of the bank accounts for $16,200,000,000 of our loan book with more than 7,000 customers, 26% of gross loans and makes an operating contribution of 34%.
Our business here is organized into 6 teams: Corporate Banking, which caters for our customers with senior debt requirements in excess of £10,000,000 Business Banking, which looks after our customers with senior debt requirements between $1,000,000 $10,000,000 a specialist team, multidisciplinary team within real estate finance looking after both new development and existing CRE, an energy climate action infrastructure team, which has seen loans in that area double in 2018, double in 2019, and it will remain the fastest single part fastest single growing part of our balance sheet over the course of the next 3 years. Within specialized finance, we have teams serving our private banking customers, sponsor finance, corporate finance and mezzanine. And within syndicated international finance, We have a strong track record going back 20 years of delivering geographic and sectoral diversification to the bank, which would otherwise not be available. Within the UK, we've got 7,800,000,000 pounds sterling of a loan book with 300,000 customers. It accounts for about 12% of the group's operating profits.
In Britain, we have a niche bank, very selective, focused on commercial and SME lending, with a particular lean towards lending into the healthcare, renewable energy and infrastructure, hotels and leisure and property industries. That service is delivered through 14 business centers across the island of Britain. And we currently have a market share in the British market of about 1%. In Northern Ireland, our bank is a challenger bank with a strong again, on the business community. In 2019, we rebranded our operations in Northern Ireland from First Trust Bank.
We now have one single brand right the way across our businesses in Britain, Ireland and indeed in New York. Our operations in Northern Ireland are delivered through 15 branches. And that's a marked reduction in the past 2 years. We've seen the number of branches in Northern Ireland halving. And we remain very, very focused on cost efficiency in that very, very competitive marketplace.
In terms of the economic outlook, well, obviously, the Irish economy is performing very, very strongly in recent times. And the Outturn has since in recent years comfortably exceeded expectations. We expect growth to remain positive, but it will be less buoyant than it has been in recent years. And I suppose that's not necessarily unsurprising given how long the cycle has been and given the fact that we are, as evidenced by a very strong labor market performance, running out of spare capacity. Employment levels have reached have passed through their previous peak and are now at a more time high, and the unemployment rate remains below 5%.
In the housing market, we're looking at an ongoing recovery in terms of supply, and that GAAP that exists and has existed really since the crisis in terms of normalized demand and supply is narrowing. But we are some the time away from equilibrium being restored to the housing market. That does so underpin our expectations in relation to what we're going to see happening in the mortgage market in the next 3 years. Business sentiment has been negatively impacted by Brexit, And I suspect that once we see the next set of readings in terms of both manufacturing and services, we will see a further dip, thanks to the recent arrival of the coronavirus phenomenon. But it is comforting to remember that the buoyancy we've seen at the economy in recent years has not been credit fueled.
And in fact, we've seen an ongoing climb in deposits in both the household and corporate sectors, at the same time that leverage within both sectors has fallen and fallen quite dramatically. So we think we are at or close to the point of inflection in terms of overall leverage within the economy, And that will support our expectations for the future development of our balance sheet out to the end of 2022. So that economic backdrop translates into our expectations for a total mortgage market size growing from just less than $10,000,000,000 as it was at the end of 2019 to some $13,000,000,000 in 2022. We expect the SME business to grow from for the country as a whole to grow from as a whole, to grow from £3,500,000,000 to about £4,000,000,000 and consumer lending to increase marginally from £5,600,000,000 to £6,000,000,000 When we apply our own expectations in terms of market share, that looks like an AIB retail loan book increasing from 36 €600,000,000 to of the order of €38,000,000,000 in 3 years. I know that growth rate looks rather modest, but it's worth bearing in mind the fact that our FSG units and our NPEs are sitting within the retail book now.
And the growth that we're expecting to see will be offset to some extent, by planned further reductions in our non performing exposures. The strongest growing part of the bank in the 3 years in terms of the balance sheet will be the corporate institution of Business Bank, largely underpinned by ongoing progress in meeting our commitments to be a driver of Ireland's transition to a lower carbon economy. And in Britain, we're expecting the loan book to increase from just shy of £8,000,000,000 to some £9,000,000,000
So
Our strategy, as I said already, for the next 3 years involves us simplifying, streamlining and strengthening the bank. But in setting out our strategy, I think it's really important that we also set out the challenges that the bank faces. We have ongoing challenges because of the overhang of legacy issues, in particular, NPEs and tracker mortgages. We have a product suite that is too complex and too numerous. We have an organization whose complexity is what you would expect from a bank of 25,000 people, which we were 10 years ago, rather than a bank of less than $8,000 which we will become in the next 3 years.
And of course, we continue to deal with an evolving regulatory environment. But we will meet those challenges head on by through our pillars. We will enhance our continue to enhance our customer propositions, and we will continue to drive the move to digital, not just for personal customers, but indeed for as well. We will reduce the complexity of our business through automation and rationalization of our product suite. We will continue to address the legacy issues, build resilience and improve our data models, not simply for regulatory reasons, but because it leads to better credit risk decisions and better credit risk management.
And we will invest in talent and implement cultural change across the organization with a particular focus on the accountability agenda. And finally, we will maintain our leadership in the on the sustainability agenda by embedding it within our business, and we will build on existing credentials. Those pillars will combine to deliver on our ambitions for 2022, the financial targets that I've already outlined, cost base, CET1 and ROTE. So we have a very, very strong track record in relation to technological investment. We've invested wisely and well in a way which has transformed our business.
And we haven't only invested in our systems. We haven't only invested in improved processes. We've invested in our products. And that is clearly manifest and seen in the way that our customers have chosen to change the way that they engage with us. So if you go back to 2013, on an average day, we had just shy of 150,000 interactions over our mobile devices.
In 2019, 6 years later, $150,000 had become $1,500,000 So because of the quality, the functionality, the reliability of our mobile product. We've seen our customers fundamentally change the way they engage with us. They like us. It works. And it is a really, really important part of our franchise.
We now have the number 1 Irish banking app. We've got 1,500,000 customers who are active on a daily basis on our digital offerings. 75% of our personal loans are now applied for digitally. 63% of our key products are sold digitally. We've seen a 200% growth in our digital wallet transaction volumes and a 41% growth in all contactless transaction volumes.
The investment we've made to the end of 2019 has transformed the bank. Has consolidated our position as Ireland's leading digital bank. It has allowed us to make major platform replacements in Business Banking and Payments and also within our Treasury division. And this has all led to an enhanced customer experience. It hasn't in any way diminished customer experience, quite the contrary, with our new end to end digital mortgage journey attracting an NPS score from its users of +64.
The lessons that we've learned In transforming the personal customer experience in the past 4 years gives us a template for what we're going to do for business customers in the next 3 years. And we will simplify and automate our business credit processes. We will replace our corporate and business lending platforms as we put in place a new end to end credit system for our business customers. And in so doing, we will drive the further relentless simplification of our bank in the interest of improving our customer experience, reducing risk and reducing cost. Customers are at the very, very are the center of our concerns.
And we do have an ambition to provide for the full range of their financial service needs. We do have an ambition to offer an improved product in the wealth and insurance space, and that's something that we will aim to do on a very planned gradual basis over the course of the next 3 years. We expect, because of the quality of our technology to see an ongoing migration onto the mobile platform. We've seen a very, very big increase in the past 3 years, And we expect in the medium to long term more than 2,000,000 of our customers to engage primarily on a day to day basis with us through our mobile devices. And again, as I said, this is not going to lead to reduced customer experience.
And it actually, we expect, will lead to an improved customer experience on a transaction basis with relationship NPSs for both personal and SME customers targeted to increase dramatically over the long term. This should not in any way be seen as a subtle way of suggesting we're going to reduce our branch footprint. Our branches are a very important part of our franchise. We significantly reduced our footprint, our geographic our number of locations in 20122013. We significantly reduced the average headcount in each branch over the course of the past 5 or 6 years.
If you go back 6 years, the average branch had 13 employees in it. Today, that number is of the order of 9. But the role of the branch in the communities that they serve will evolve over time away from supporting day to day transactions and more towards sales and advice. By making the bank simpler and efficient, we reduce risk and we reduce cost at no cost in relation to the customer experience. We will continue to invest wisely in technology enablement.
And we will increase the availability in digital format of our sales and services. Within the SME space, we expect to see a sea change in terms of how our customers engage with us. We are going to provide functionality that will allow origination, decisioning and fulfillment to be driven digitally over the course of the next 3 years. Across the entire state, we're going to double the amount of our products and services, which will be available over the mobile device. And we're also committed to significantly reducing the number of independent retail products with our own sets of terms and conditions.
We're committed to reducing that by about onethree in the next 3 years with further reductions planned beyond that point. This isn't going to in any way reduce customer choice. It's going to reduce customer complexity and operational risk for the business as a whole. And taking that drive towards increased efficiency and increased simplicity, that reliance on an ever greater role for the digital agenda. We expect to see our headcount falling from the 9,500 level it was at the end of 2019 to less than 8,000 at the end of 2022, with half of that reduction being driven by the resolution of legacy issues and half are coming from increased efficiency in how we run our business.
A strong balance sheet is the essence of the bank, and we will do everything within our power to maintain the strength of the AIB Group balance sheet. We've been very focused on reducing our NPEs. As Donal has already said, they stood at 37% of our gross loans in 2013, and this stood at 5.4 percent of our gross loans at the end of 2019. And we will continue to address this issue with a view to reducing our NPEs as a percentage of gross loans below 3% by the end of the planning period. So in a reasonably short period of time, we will have transformed our balance sheet from 1 of the weakest in the European Union to one of the very, very strongest.
And we will continue to focus on the quality of our credit management and the quality of our credit risk decisions. I'm delighted that in 2019, 98% of the new loans we put onto the balance sheet were rated strong or satisfactory. And the strength of the lending we have made and the quality of the reductions in NPEs have combined to see the proportion of the group's overall balance sheet, which characterized the group's overall loan book, which is characterized as strong or satisfactory, moving from 83% to 89%. We are determined to continue to drive that category north over the years that lie ahead of us. Notwithstanding the significant investment we've made in technology, our core asset is still our people.
And that will remain the case because we want to push an ever more open and transparent culture and enhanced accountability at the core of our mission. And they are objectives that can only be delivered by our people. We want to be an employer of choice. We want to be a progressive institution characterized by a diverse and inclusive and streamlined organization. And already, we've made good progress in those fronts, reducing the number of layers within the organization from 10 to 7, with 94 separate job codes no longer relevant within the organization.
At the same time, we've delivered gender balance at both non executive level and at senior management level. And we look forward to making further progress in terms of our employee engagement over the course of the next number of years. And finally, on the sustainability agenda. This is the greatest challenge that our generation faces. And we will not be in a position to arrest and reverse the terrifying phenomenon that is global warming, unless there's a concerted effort by government, businesses and individuals working together to address this major, major challenge.
At AIB, we have a major role to play, not only as a significant employer in our own right, significant business in our own right, but also as a provider of capital to customers, business and personal, who are eager to assist Ireland's transition to a lower carbon economy. We have a major role to play, and we are willing, ready and able to play that role. And we have demonstrated that willingness through the products we've launched In 2019, our new green mortgage, our green bond framework, a $5,000,000,000 Climate Action Fund. And these are not merely aspirations. We're putting our money where our mouth is, €1,200,000,000 in green lending in 2019, The fastest growing part of the balance sheet, renewable energy, and that is something we expect to remain a feature of the business landscape and the AIB landscape over the course of the next 3 years.
So AIB in 2022. How will the successful implementation of this strategy manifest itself? A strong, robust and resilient balance sheet amongst the best in the European Union delivering sustainable profits, generating and returning capital to our shareholders delivering an excellent customer experience to both personal and business customers with competitive products and highly efficient processes a streamlined appropriate cost base for a leaner, simpler and more agile business, a derisked bank with NPEs resolved and legacy issues resolved. And that will position us to deal with whatever challenges and whatever opportunities lie ahead. So in 2022, AIB Group will be a bank transformed, simplified, streamlined and strengthened in the interests of all our customers, our shareholders and the communities that we're proud to serve.
Thank you.
Okay. Thank you very much, Colin. I'm now going to bring you on to the last piece of the overview, which is the financial targets for 2020 to 2022. The medium term targets that we have set ourselves for the coming 3 years are threefold. Firstly, a hard cost target of €1,500,000,000 Secondly, a CET1 ratio of greater than 14% and thirdly is an RoTE of greater than 8%.
To guide you along the way and ensure that both the bank management and investors are all on the same page, On an annual basis, I will define a set of metrics whereby I will guide you quite clearly. The 5 items that I've chosen here, obviously, through debate and discussions with analyst community and investors, are the ones that we feel are the most relevant. So firstly, a net interest income guidance of €2,000,000,000 for 2020. I feel that's a much more appropriate and clearer measure than trying to give you a net interest margin number, which has a lot of that distortionary effect from excess liquidity. Cost inflation targets circa 2% to 3%.
We're obviously going to work very hard to manage the cost base as tightly as we can. It looks like for 2020, we will rise marginally and then reduce more significantly as the plan evolves. Normalized cost of risk of 20 to 30 basis points. I would have alluded to this earlier with respect to the charge that we had in 2019, whereby we would expect to see charges coming through on an annual basis, So 20 to 30 basis points and probably at the upper end of that range. Performing loans to grow by low single digit percentage points.
Colm would have given a very detailed overview of our core markets, what we see happening with them and our market share assumptions. So you can see quite clearly that these are growth expectations, which are aligned with how we see the overall economy, but very manageable and in line with what we would have seen over the last number of years. Again, Colin would have mentioned, By 2022, we want to reduce our NPEs to less than 3%. So for 2020, we will be looking to reduce them under 4% as a starting point. So operating expenses.
This is one of the this is probably the key medium term target. So we want to use a hard cost number of €1,500,000,000 And the way that this is going to break out over time will be With respect to staff costs, firstly, over the 3 year period, we believe that we will be Managing down the cost base by around $1500,000,000 That will be on a fairly linear fashion from 2020, 2021 and '22, very much in line with the changes that we would have made in half two twenty nineteen. And if I was to break out the areas, Colin would have alluded to at a high level some of its legacy and some of its efficiency. To be more precise, 750 of the reductions we will believe will come from legacy units, such as the NPE Workout Unit, such as the mortgage tracker examination unit. 500 FT
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Against this, we obviously have salary inflation, which we always approximate to be around 3%. And just to be clear, There will be costs associated with these staff reductions. If we use 2019 as a reasonable proxy, Whereby 500 people would have left the firm on a voluntary basis. That costs around €48,000,000 €50,000,000 So we believe on a worst case basis over the next 3 years that could cost us €150,000,000 But I'm saying here it's going to be between €100,000,000 and €50,000,000 There is attrition. There are ways in which we can manage headcount without always having to offer Voluntary severance.
But they're the boundaries that I would guide you for between 2020 2022. Those costs will be viewed as exceptional, so they're not Going to come through the cost line. Overall G and A, a reduction of €15,000,000 over the life of the plan. That's an area where I think we can make some more efficiencies in the future. But the focus really was on the headcount and the investment for now.
And we will be able Come back and update you overall with any further initiatives in this space. So the way we look at these is our cash costs. Okay. These are staff costs. These are G and A.
Combined together over the next 3 years, we'll see a reduction of €105,000,000 between these items. Separately, and on the left hand side, you can see how I look at the depreciation and the investment spend of the organization. I take out The IFRS 16 impact of €58,000,000 So 2019, the depreciation cost is €171,000,000 That's going to increase over the period of the plan from €171,000,000 up to approximately €270,000,000 So an increase of €100,000,000 which is from prior year's investment spend, but also the amount of investment that we feel we need to make in the business to ensure that we can maintain our market leading position in the digital area and ensure that we're able to take make process improvements to facilitate the cost reduction targets. I'm going to break this one out a little bit more on the investment side. So, Colin would have given lots of very strong statistics over AIB's market leading position in digital banking, etcetera, etcetera.
And that's certainly very good news. The bad news is that we have to pay for it. I would say particularly on the platform side, the app side, The key message I would give is that a lot of the change has happened. It has been done. It's been implemented.
There is no execution risk. This is me showing you on a look forward basis how we're going to represent the costs. So I'm going to, On a go forward basis, break this out into 5 separate areas. Strategic, we would classify as items that help Generate more revenue or take out more costs. Going forward, this is going to be a key area of investment to ensure that we Can maintain our market leading positions.
Resilience. What we mean by this is the underlying platforms in the organization. We would have replaced our payments platform over the last number of years. We would have replaced our treasury system over the last number of years. These are very big investments on which no bank can really look to expand.
And we feel like we have done the largest part of the work in that area. Colin mentioned that a lot of the work that was done on the retail personal space, we're now going to look to improve our processes on the business area. And so that's going to be the next area of focus for the organization. Sustainment is a consistent cost of Our overall spend, it's wonderful having new technology and new IT and new kit. But a lot of these IT companies are wonderful, Given us upgrades and all of those wonderful things that we need to continue to pay for.
But obviously, it's very important to ensure that we have resilience in our systems. We obviously always have an ongoing investment in cyber type of activities. Regulatory, I put one line in there. I had a whole slide on it. Some of the work that we have done over the last number of years in the regulatory space has been really significant.
I think Colin would have mentioned some of the stats, statistics around Where AIB sits in the payments system or ecosystem in Ireland. I mean, we have processed approximately 50% of payments. Along with that, on our customer profile, implementation of things like PSD2, Open Banking have been really, really significant Project investments for the organization. In addition, we will have things coming down the track such as IBOR. So we don't believe That the regulatory spend is something as we look forward that is likely to reduce significantly because there's always new items.
On top of that, when we have business model assessment reviews with the regulator, there's a lot of adjustments, amendments, things that we need to improve to keep to manage our relationship with the regulator, but ultimately to try to drive down our P2R. Property, again, this is probably the new item into this overall picture. Throughout 2018 2019, as you know, we Would have materially changed our physical footprint, particularly in the Dublin region. We would have been all located in one area in Bank Centre and Balls Bridge. Now we have a number of large properties throughout Dublin in different parts of the county, Which does facilitate flexible working hours, which does facilitate more collaboration amongst employees.
Obviously, you would have seen in prior years some of those expenses being exceptionalized. They were with respect to onerous leases and such items. But as we moved into some of the new properties, 2 or 3 of the main ones, there's obviously fixed or fittings associated that go along with that, which are I'm including here in the depreciation picture, so you get a complete overview. Lastly, another item which is incorporated in here and that Needs to be taken into account is when we purchase PayZone. Part of the way we've accounted for it is we're depreciating an intangible asset of €50,000,000 So that's an additional €10,000,000 onto the depreciation number, which is included in that €270,000,000 number that I gave you for the end of 2022.
So that's the picture on the investment spend. Our capital target of 14%. The way that we've looked at this is we have Looked at the environment at the moment on all of the buffers that we currently know about. So obviously Pillar 1, P2R, Capital conservation buffer, OSI, countercyclical buffer, and phased them in over time on the time lines with what we know and So by 2021, with all non buffers, that gives you 12.6%. We don't disclose our P2G, but effectively P2G plus management buffer would lead us to a CET1 target of greater than 14%, and we're very comfortable with that.
Outside of that, there are headwinds as ever, and there are tailwinds. TRIM. So we've concluded the mortgage TRIM. We have yet to conclude and incorporate impacts on corporate and SME. And that's going to happen over 2020 2021.
Buffers, we believe we have captured all known current buffers. However, it does seem likely that the Central Bank of Ireland will utilize and implement a systemic risk buffer. Or certainly, they have asked the Minister For Finance in Ireland for permission to introduce a buffer such as this. We do not know its Timing, we do not know how it interacts with other buffers. We do not even know if it will be implemented.
But it is certainly an item that I think we'll get clarity on throughout 2020. Basel IV, beyond throughout 2020. Basel IV, typically, we would have talked about this and we would have updated you that from a credit perspective, We don't believe there could be any material downside, just given where our RWA density is at the moment. That is what gives us the comfort. The only question we may have is around any potential multiplier that could be applied to operational risk.
That isn't going to come into effect until 2022 in any case, but we would hope throughout 2020 to get a little bit more visibility on that. Calendar provisioning, again, a hot topic throughout 2018 2019. Last guidance that I would have given on this is it was an early Estimates to say that the 2020 impact of calendar provisioning would be less than 50 basis points. Given the update that Colin just gave you there on the trajectory for our nonperforming exposures, on our targeting of deeper rare exposures And the endpoints that we want to reach are less than 3%. I'll be happy enough to say the calendar provisioning impact will be less than 50 basis points over the period of the plan.
In terms of tailwinds, P2R reduction year on year of 15 basis points. We continue to focus in all areas of engagement with the regulator. NPEs is obviously a huge area of focus over the last number of years. As I look to the future, it seems that IRB modeling is going to be a large theme for them. It's obviously a huge focus area for us.
And associated with that is data, data management, etcetera, that all lives in the same family. We're putting a lot of efforts, time and investments into areas of improvement so that we can drive down this P2R. Other tailwinds, Article 104, how to fill P2R with AT1 and Tier 2. Again, it's a thematic euro item at the moment. We'll wait and see exactly how this concludes with respect to the regulators.
And then RWA efficiencies. We're always internally working on ways that we can improve efficiencies around RWAs. So an example I gave earlier was a simple one around derivatives netting, which had a positive benefit of €600,000,000 or €800,000,000 There are other areas on our balance sheet where we think we can find ongoing efficiencies. And as we move to a more normalized capital structure and capital base, We do want to become more efficient with our capital, and we will look to introduce more securitization type of products, More likely to be in 2021 or 2022, and I mean SRT type trades to optimize our capital number. So overall, that is the capital picture and the capital target.
With respect to capital returns, this is clearly a very important slide. So important, I have cut and paste The wording from our RNS and repeated it here. The way I think about this is twofold. And certainly, the way you need to about this as going to be similar. We have an ordinary dividend payout ratio of attributable profit of 40% to 60%, Okay.
So with respect to balance sheet growth, guidance, etcetera, etcetera, what I'm trying to do here is from our normal business as usual activity and provide very clear guidance on where we will set our annual dividends. Separate to that is the question of surplus capital or excess capital, etcetera, etcetera. We have a CET1 outturn of 16.4%, arguably 16.6% if I include the benefit from the NPE sale. So the question is clearly how does one look at a 16.6% CET1 ratio and a target of 14%. With respect to additional distribution, what I would say is that we intend to apply for regulatory approval To make an additional capital distribution as soon as possible, ideally this year.
This will be the first step of a multiyear program where we will look to converge on our capital targets. This will be subject to regulatory approvals, and we'll maintain Flexibility on the form of any additional distributions. So I think this is as clear as we can make it. And certainly, I think our intentions are the key item here, converge and capital targets and the fact that we believe this will be the first step of a multiyear program. Okay.
Going to wrap it up there. Simplify, streamline, strengthen, that was certainly the theme of Colin's presentation. From my perspective, the key items of focus are going to be costs €1,500,000,000 CET greater than 14%, driving returns greater than 8%. That's what we're going to look to do. Thank you very much.
Thank you very much indeed, Donald. Now we're going to have the Q and A session. I think we have Up to 55 minutes available to us. So plenty of time for questions and answers. And the First man with his hand in the ear is Eamonn.
Sorry, thanks very much, Eamonn Hughes and good buddy. 2 or 3, if you don't mind. Just in relation to the targets, maybe Donald, in relation to you kind of gave guidance there for 2020. How should we maybe think around the impairment number And some of the other targets as we move into 2021 2022. And so specifically also thinking about you've kind of talked about NII of €2,000,000,000 How should we think about that progressing over the next year or 2?
And maybe any context around I know you kind of were saying, I'll pull away from there, must kind of cover the liquidity point, But is there anything else you want to say on that? And then maybe just delving into the NII point as well. Looking at asset yields that were up, I think you said 6 bps. Just is that mostly a mix issue? Or what are you seeing in terms of pricing on some products?
And maybe on the liability side, given all the discussion and as was the tightness in swap rates we've seen over As well, what more potentially are you doing in relation to customers on the deposit side in terms of negative rates?
Okay. Thank you very much, Eamon. The 20 to 30 basis points cost of risk. If I look at our balance sheet growth in 2019, The underlying cost of risk was approximately 20 basis points on new lending, new assets. So that really is the core underlying.
Against that, we've obviously got a number of write backs, which has been a feature of our balance sheet over the last number of years. Notoriously hard to predict, quite frankly. But just due to the fact that the quantum of NPEs has now reduced so materially, we have a very we don't have a very high expectation that write backs could be as high as in the past. So that gets us to a similar level of 20 basis points on balance sheet. And the reason I'm guiding for 20 to 30 basis Points are at the higher end of that range.
It's just it's there's no particular single asset or event that is driving that. It's just it's management's view that give where we are in the cycle, where we are in the environment. That is our best estimate of what UCL is going to be. So that was question 1. Question 2, I think despite the fact that I gave you an NII target, You really want to drag me back and talk about NIM, but I'm not going to do it.
So the net interest income number for 2020 €2,000,000,000 If you look at what happened and the moving parts in 2019, That will and I'll talk to it in terms of that because that will help you understand what 'twenty is going to look like. We had benefits on the customer yield side in 2019, largely driven by business mix. You would have seen increases in our Personal lending, which is higher rate business, corporate SME was quite strong as well. So overall yields in our core it would have held up very well. But as I look to 2020 overall on asset yields, I don't believe that we're going to be able to increase pricing across the board.
I think asset pricing will hold in core markets. But obviously, on the mortgage side, recently, we would have announced and number of costs. So that will have a small impact. On the deposit side, you're right to say that The amount is now quite low. It's gone from 0.41 percent to 0.28 percent.
But An enduring negative rate environment means that we will need to continue pushing that number down. And we will continue to reduce deposit pricing on all products. And in fact, if we I think I might have mentioned when I was describing the surplus liquidity, the way in which we look at applying negative deposit pricing to customers, Over the last number of years, we've segmented client groups from top to bottom, starting with non bank financial institutions. And obviously, at the bottom of the waterfall, you might say it's more retail customers. As the negative rate environment has prolonged and it looks like it will endure, We have enabled ourselves and our platforms to be able to apply more negative rates to different cohorts of customers.
So to date, it's really just been non bank financial institution customers and large corporates, but we will obviously look to apply negative rates to other large businesses and high net worth individuals over the coming years. Other items, I would say, on net interest income. A 2019 impact, 5 basis points of MREL. I don't think you're going to see that again in 2020 because the issuance is done. IFRS 16 won't really be an issue.
So I'd say for 'twenty and beyond, the 2 Pieces of the jigsaw that you need to understand is probably the structural hedge. And what I'd say on that is that approximately 6 Percent of NII in 2019 came from the structural hedge, and I would expect that to reduce to 3% over the life of the plan to 2022. I should fill that in for you nicely. And secondly, on the investment The reduction in 2019 was approximately 4 basis points. What I'd say on available for Sales, that was approximately 9% of NII in 2019, and I would expect that to fall to approximately 6% in 2022.
So you can clearly see what the headwinds are going to be there from a structural hedge available for sale. And the ways in which we're going to be able to Counteract that is definitely on the deposit pricing side and maintaining discipline on the asset side.
Okay. Thank you. Steve?
Thanks. Good morning. Stephen Lyons from Davy. Just a Few questions for me. Firstly, just in terms of the NII outlook, just to confirm what your interest rate expectations, market interest rate expectation that is are built into that given And furthermore, just on NPL reduction, appreciate the guidance there.
Would it still be your expectation that you can reduce NPLs Within current capital, I. E, neutral to possibly capital accretive as you work through that effort? And then just finally, I appreciate the The added clarity you gave on capital return, but prudently, how should we look about it over the next few years of that multiyear program? Should Total payout based on attributable profit at €100,000,000 be maybe an upper limit of what should we consider? Or is there opportunities to go in excess of that?
So I'll ask Donald to take question 1 and 3 if you're set, and I'll do 2. But Donald will kick off first.
Okay. Well, on the rates, Always a bit of a moving feast in these times. Over for 2020, we would have assumed Negative 50, negative 50, and associated U. S. Euros.
On the euro side, Alun Board have assumed A small cut in the U. K, for example. That's for planning purposes there. On the capital side, What I would say to you is not to create your own methodology for defining what I would have outlined, okay? Split it in 2.
Ordinary, okay? Work off consensus, work off guidance. That will drive you to a dividend payout percentage. On the capital distribution side, we'll apply for approval as soon as possible. Ideally, this year, it will be the first step of a multiyear program where we look to converge on our capital target.
And that's how we're going to approach it.
Okay. In relation to the NPEs, we have a good effort. Well done. In relation to the NPEs, You know our track record. We are now within shouting distance of where we want to bring R and Ps to.
And we've got and ambition to reduce them from 5.4% to 4% less than 4% this year and then down towards less than 3% at the end of 2022. The vast bulk of the reductions to date have been driven by agreed restructurings with our customers. That's our preferred means reducing our NPEs. But we don't rule out any option out. And in the event that we have further portfolio loan sales.
It is worth recalling that the loan sales we've had to date have all been, at worst, neutral from a capital perspective. And we would envisage no change in that scenario in the event that we have further loan sales.
Ryan McGrath, Cantor Fitzgerald. Just one on the impairments. And looking This year, maybe in the short term, is there a risk of an impairment spike just on a decrease in domestic economic growth linked to the coronavirus? Also you mentioned syndicated international lending and that was at lower levels last year. Any reason behind that?
And should we expect a rebound? And finally, if I could, your rating agency upgrades in 2019, which are always welcome, S and P upgraded the Sovereign in late last year. And any thoughts of further rating actions as we go into 2020?
I'll do 12, and you can do 3. So on the impairments, we are monitoring the coronavirus situation very, very closely. We're in touch with our customers. In touch with our suppliers. Our number one priority is to ensure the safety and health of our staff and our customers.
In the event that it does unfold as it has in other countries, it is likely to have a near term negative impact on a number of sectors across the economy, most obviously, hospitality sector. It is too early to quantify what that impact will be in the near term. But I would I suppose our position on this is that we've been working really hard in the past 3 years to prepare for a hard Brexit situation. So we're continuously planning along of all scenarios on hard Brexit really since the middle of 2017. And some of the products we developed, some of the protocols we developed there are now being applied in contingency planning for how coronavirus might impact on the economy.
The bottom line on this is that the bank is very, very well capitalized. We have a really, really strong balance sheet, which is in marked contrast to the position we were in the last time the country went into an economic dip. So we stand ready to support our customers through the cycle.
I would just add in addition to that, I mean, the way in which we approach IFRS 9 from a macro We've applied pre any of this a 40% downside in our probability weightings, which was already reflective of a global macroeconomic environment, with trade tensions, etcetera, etcetera. So we're probably comfortable with that position and wouldn't see any particular reason to change. But I think we are in unusual territory at the moment. So it's always under review. With respect to rating agencies, we've put a huge amount of time and effort in to get to the IG level with the Three main rating agencies.
Rationale there, number 1, I think, is validation for the organization around normalized Bank normalized balance sheet. More selfishly, we're able to issue tighter levels with the 3 IG ratings. We don't. We haven't planned for any upgrades in the coming years. We will obviously continue to engage.
Some of it will be related to Irish macro events. But we're not planning and we don't nor do we expect any upgrades in the near future. Obviously, given a lot of the focus of the bank For the growth areas on sustainability, etcetera, going forward, we are looking to improve our ratings with I think Colin would have mentioned that we've put a green bond framework in place. So this is going to be pretty thematic for AIB going forward on the asset side and the liability side as well.
And sorry, I just in relation to your question on syndicated international finance, As I said earlier, this is a business we've been active in for 20 years. We've really strong track record of delivering value to the cycle there. The lower activity we saw in 2019 was the result of very, very deliberate choices based on asset quality and pricing. And given that the floor seems to be silent, I think we'll go to the phone lines. You might identify yourself, please.
Our first is from Raul Chinha. Please go ahead.
Hi, good morning, gents. It's Raul here from JPMorgan. I've got a couple, please. Just the first one is trying to get a more medium term sense of your cost and cost efficiency targets. If I look at where you end up on the revenue and on your absolute cost Guidance, that obviously implies the cost income ratio towards the sort of high 50s, almost up to the 60% level.
I was just trying to get a bit more thought from you about whether this is sort of the new normal for AIB? Or do you think that there is hope for you to bring it back from that kind of level in the future? Obviously, I do realize that your cost base is going to be declining on an absolute basis from 'twenty one to 'twenty two as well. So just Some color on what you think about the right efficiency ratio for AIB in the long term would be helpful. And then the second one, maybe a bit more detail on the RWA moving parts.
If I try and estimate the RWA base for the bank in 2020 To get a wide range of moving parts in there and obviously that feeds into your RoTE sort of target as well. So I was wondering if you could help us a little bit in terms of what are the moving parts, the main moving parts we need to keep in mind. It looks to me like the RWA number could be higher than where we are for 2022. But if you confirm that, that would be helpful. Thank you.
Okay. Thanks, Ronald. Joel? Okay. With respect to costs, again, Similar to NIM, I've really wanted to move away from a cost income ratio.
And the reason for that is the income in the current environment Being so heavily impacted by rates, obviously, plays into that. So the rationale of really breaking out the costs On a single stand alone hard number was to ensure that there was absolute clarity, a, with respect to ourselves internally, but more importantly, for the external commentators such as yourself to understand that. The speed and timing of the reductions, it is, I think look at it twofold, and it's very similar to how I would have broken it out. The reduction in headcount will be fairly linear over from 'nineteen, 'twenty, 'twenty one and 'twenty two. So I think you can you should be able to model that Fairly clearly.
Overall, from, call it, Q1 of 2019 to the end of 'twenty That's 15% to 20% of the headcount in the organization. We don't see any changes beyond that level. Colin would have said that the footprint across the country with respect to the branch network is strong, Stable and very front and center in our plans. So that is not an area where we would look to flex. So I think you need to be looking at the €500,000,000 certainly for 2020 to 2022 as a very realistic number.
And where we go beyond that, It will be driven, I would expect, by lots of events such as digitization, society Take up of mobile applications, which quite frankly, I wouldn't want to hazard a guess to see how they're going to play out in the future. But I think what will help you is with respect to the depreciation charge that I've guided for 2022 at €270,000,000 It effectively plateaus at 2022. And it isn't until further years that it begins to decline, but I'm There'll be continual reinvestments, but the point there is that, that depreciation number does not doesn't rise beyond 2022. So that is the cost side. In terms of RWAs, I think Colin gave a very good Overview of the main markets where we operate, the market share expectations.
So you can see from that the different mix of assets, whereby we intend to grow. So although we will see growth in the mortgage market, We'll also see reductions on a net basis from NPEs, etcetera, etcetera. So you can expect to see going forward RWA growth from the business mix and the type of assets that we're lending into, but in line with annual growth targets, which is low single digits, which will happen over time.
Okay. Thank you. We'll go back to the lines again for another question there.
Our next question is from Aman Raka from Barclays. Please go ahead.
Morning, gents. Thanks for the detail on the impact From structural hedge and the liquidity portfolio, can I ask you just for a little bit more disclosure on the hedge, please, In terms of the absolute size of that hedge and what the average yield on it is and the duration, please? Because I guess the reason I'm asking is we've seen a pretty precipitous fall In kind of 5 7 year swap rates. So it'd be really interesting just to kind of benchmark kind of what your expectation for those swap rates were When you gave that impact and we can kind of compare it to where the swap rate is now. And the second question was just regarding kind of capital return.
I don't know if I'm kind of overanalyzing this actually, but do I sense is there a somewhat sort of a delay in your Expectations regarding getting approval from the ECB, regarding commencing special distributions. I think The conversation or the narrative before is that this might have been something that we could potentially expect to get sign off On during H1, and we may even be in a position to commence special distributions in H1 2020. I guess another way to ask that Do you think you could pay a special dividend with half year results later this year? Thank you.
Okay. Thank you for that. You won't be surprised that Dorel's going to take the structural hedge, and I'm going to have a go at the
Sorry about that. Okay. Yes, on the structural hedge, so you have the income effect, okay, 6% to 3 Which really is €120,000,000 down to €60,000,000 What I would Say on the nominal of the hedge, it's approximately €8,000,000,000 Average life is approximately 5 years. The Key point there is I've given you the outcome, okay? So I've probably done a lot of the heavy lifting for you.
Over the last 12 to 18 months, as midterm rates have reduced, We have not continued to roll a structural hedge, okay? And the reason for that is just Because I don't want to lock the balance sheet in on a 5, 10 year basis to prolong with negative rates. So it isn't within the guidance that I gave you there, that is effectively the existing swaps running down over the next 3 years. So you should get comfort from, I would say, the percentage of NII.
Okay. And on capital return, how will I put this? We intend to apply for regulatory approval to make an additional capital distribution as soon as possible, ideally this year, as a first step in what we envisage will be a multiyear program to converge on the group's capping target. We
And 3 small ones, please. So dividend so your dividend last year was outside of your 40% to 60% range. Clearly, there's a lot of one offs last year, but I don't quite understand that one. 2nd, the 80% capitalization of your investment spend, that's awful high. It's got quite a shift.
I'd say that That was featured 2019. Presumably that puts an upward drag on your costs post 2022, just to check whether that's the case. And thirdly, could you just walk us through your mortgage pricing a little? Your NII guidance for this year is somewhat below consensus. Mortgage prices are clearly a key component of that.
Being a price leader isn't the obvious Same from the outside for you to be doing at this point. So just to understand your pricing strategy versus total revenues. Thank you.
Okay. I think on the ordinary dividend payout ratio, this is for 2020 going forward. We've tried to be absolutely crystal Clear 40% to 60% of attributable earnings. Obviously, if we look at 2019, Depending on the methodology that you want to use, it's slightly different to that, but it's very much in line with 40% to 60% of profit after tax. So that was always the range of discussions that we would have discussed with the board.
But really what I'm trying to do for the future is to make and create absolute clarity And consistency between our dividend payout assumptions, RoTE calcs, etcetera. So that's the dividend question. On the capital investment question, really what I've tried to ensure is that by breaking out all of the different components of capital Expenditure, including non IT platform related items, such as property investment, such as Depreciation of Paesone acquisition. I'm trying to create as complete a picture as possible for the outgrowth years, 2020 to 2022. And I don't believe with the trajectory that we have with the existing Intangibles we have, which are going to be paid for over the next number of years.
And actually, the future years' investment spend of €300,000,000 The €270,000,000 but 2022 should be the maximum amount we believe on an annual basis We'll be paying out from a depreciation perspective. Last question was on non interest income. But I think you were really asking about mortgage pricing. So,
yes, I'll pass
that one back to you.
We this is a competitive market. This is a very, very important part of our balance sheet. We keep our pricing under constant review. We've made some adjustments in the past number of weeks. And we are now very, very happy with where our pricing levels are in the marketplace.
We think it's a very, very strong proposition, not only on price, but in terms of speed of delivery. And we're very, very happy with where we currently stand.
Thank you.
Another question from the phones Or are we done?
We have another question, sir. It's from the line of Chris Krant from Autonomous. Please go ahead.
Good morning. Thank you for taking my questions. If I could ask about your investment spending, please, the €300,000,000 per annum, Of which you're going to capitalize 80%. How much intangible asset growth do you expect off the back of that given where you're Starting from in terms of amortization in 2019, it looks like you've probably got about €300,000,000 to €350,000,000 of CET1 drag over the plan In absolute terms from net growth in intangibles. And as a point of detail related to that, why are you not deducting all of your intangible asset balance From your capital position at the year end, you've got €917,000,000 on balance sheet and 798 €1,000,000 in the capital schedule as a deduction.
I think in previous years, those two numbers have been the same. And then a separate point, please, on DTA utilization. Obviously, you've changed the Definition of the return for your target. But in the past, you've talked to us about DTA utilization as being a key part of your Capital generation also has returned to shareholders longer term. What's your expectation now on the pace of DTA utilization going forwards, please?
Okay. With respect to the investment spend, overall, the outlook that I've given you for 22 would incorporate all of the existing spend which has been made to date across all types of areas that have That create our intangible assets. And the number of from 20 to 22 and the associated depreciation incorporates all of those amounts, different assets and different platforms obviously have different profiles. What I tried to give you by giving 80% capitalization and 20% revenue impact is Really an average number for to try to help you model that out over the life of the plan. And that was the question on the investment side.
The intangibles do get amortized through the Capital on an annual basis for an amount. I think that's a fairly detailed question. And I'll get I'll give you a call on that one later. With respect to tax, again, I would say in 2018, AIB's effective tax rate was around 12.5 percent. For 2019, it was much higher at 27% or 28%.
Going forward, I would I think you should use an effective tax rate of around 15%. The performance and the tax rate in 2019 was impacted by a few moving parts. The exceptional items obviously would have impacted the profitability of AIB Plc. So the utilization of a deferred tax asset would be far less In the year of 2019, profits in the UK were a little bit stronger, so we have a little bit more bias to the UK. And the tax line was in fact impacted by a write down of the UK deferred tax asset of approximately €25,000,000 Going forward in terms of DTA utilization, I think for 2018, The utilization of the DTA was approximately 70%.
I think going forward, you should use a DTA utilization rate of approximately 50% over the medium term and out for the rest of the plan. I think with respect to your commentary on intangibles, the difference that you saw Pre and post was probably related to the Pason acquisition, but definitely won't get into that in too much detail now. Happy to call you on it later.
Okay. Thank you. We have a question now from Exane, I understand, on the line.
Good morning, everyone. So just a couple of quick questions from me. Firstly, just going back on the capital return, My sense is that over recent years, the ECB has been quite cautious about allowing excess capital return across the sector. Now that may or may not change going forward. And I think without a doubt, they will consider each case individually.
But within that context and from your The discussions that you've had with them today, what do you think are some of the regulators' key concerns or things that they would want To think about around capital distribution before they allow it. So whether that is Brexit negotiations being finalized, the regulatory landscape still being in transition, economic uncertainty. What are the key things that you think the regulator is concerned about when they think about AIB's Excess capital return for this year or going forward. Secondly, just going back on the impact of BELFOR. As you rightly pointed out, you previously indicated that there would be relatively immaterial impact from Basel IV.
I think it sounds like the difference now was around the operational RWAs. What's driving your expectation that there will now be more of an impact from operational risk RWAs? Is that related to The various tracker mortgage review fines and can you give us a sense of what you think the range of impact would be based on the current reform package? Also, when I look back over the last couple of years, operational risk weighted rates have already been growing at about 9% a year. Is it fair to expect this to grow at a similar rate Going forward?
And how does that impact the way you think about Basel IV and how that fully loads? Thank you.
I'm going to hand over to Donald just to take those questions in a second. But just on the capital return, I'll just make it We will do everything that is within our power to ensure that that application that we intend to make as soon as possible ideally this year is as robust and as strong and as cogent as is possible.
Yes. And obviously, from a capital perspective, what are the items that would be on the regulator's mind? I think there's no difference to the items that are frankly on most people's minds sitting around the table here. I mean, again, I would draw you back just to the simple the headwinds that I would Talked about the tailwinds that I would have talked about. I purposely separated them from the conversation over how we've defined our capital target Because I have no way of knowing exactly how they're going to conclude.
Your guess is as good as mine, arguably better. So I will leave that to you to work through all of those Parts to try and figure out what's positive and what's negative. And we can all make our own assumptions. Basel IV, it's not New news that I'm trying to put into the conversation here. And it's not AIB specific news per se.
There's a conversation that has to conclude within the eurozone and it's going to be around an op risk multiplier that's going to be applied And it could be between 1 and it could be between 1.5. And obviously, us along with every other bank will be impacted if it's at the upper end of that range. So we are keenly awaiting an update on that. But I think the reality is, as you mentioned, when you have historic legacy Your op risk charges are going to be higher, as you will have witnessed from our disclosures anyway over the last number of years. But it isn't it is not the recent €300,000,000 provision that is concerning me or the question on my mind with respect to Basel IV, it's simply the key question of what the multiplier is going to be.
Okay. Thanks, Joel. We're going back line is understanding that Owen from Berenberg is on.
Thanks for the presentation. Just coming back on your new ROT target, you've gone From 10% to 8%, but you have changed the sort of calculation to exclude the DTAs on a like for like basis. It looks like it's in The RoTE target is in the 6%, 6.5% range. I mean, what's the reason for the change in methodology? And then maybe secondly, just Coming back to excess capital again, sorry for this.
You say you ideally wanted to apply this year. And I mean, one of the previous questions sort of asked by The regulators, I mean, what are the conditions necessary from your perspective to do it this year versus, say, next year?
Okay. With respect to the RoTE methodology, fairly straightforward. I haven't traveled the world and met hundreds of investors over the last 3 or 4 years. I've never met one who has fallen over with joy saying how much they loved our old methodology on ROTE and how intuitive it was. So that was the starting point for us thinking if we needed to have a much more standardized RoTE, which reflected How we as a management and a board look at managing the business.
So it's the methodology is more like a return on And on target of equity, which would reflect the amount of CET1 and capital we believe we require To manage the business on an ongoing basis. And that really was the basis for the discussion and taking out any distortionary effects. Frankly, that can come into play from the DTA and bring it more in line with what management's intention is, Which is to manage the business going forward with a CET1 ratio of 14%.
And excess capital?
Excess capital. We intend to apply for regulatory approval to make an additional capital contribution as soon as possible, ideally this year.
Thank you.
Aman, you're going to have another go for Barclays.
Good morning, guys. Sorry. Thanks for taking one additional follow-up question. It's just regarding The European wide relief that banks are getting on Pillar 2A and presumably AOB going to benefit From that, so I was just wondering if you guys are planning to issue AT1 and Tier 2 instruments. Have you kind of have you included that in your budget?
And if so, kind of what Quantum of issuance are you expecting? Can you give us an indication of costs that you've planned for?
Did the DCM guys run down to your office and ask you to put in that question? No. Again, what's in the plan for 2020, you'd already seen 'nineteen, we would have issued some Tier 2, we would have issued some T1 and rationale for that was really to derisk some of the restructuring and re Financing that we need to do already in 2020. So pre IPO, pre HOCHOA, actually, we had obviously issued the Tier 2 and AT1. And that's going to have to be refinanced by the end of 2020, December 2020.
So I suppose what we will look to do is if we can get any clarity over how exactly this is going to operate, we'll be able to adjust at that time towards, let's say, optimum levels. But again, by filling P2R with Hybrid debt, I mean, it's great from a capital perspective and it's very positive from that perspective. But we have to look at the entirety of the capital Structure and make sure that we feel confident and comfortable that we're able to move up and move down all parts of that capital stack. So in effect, nothing really to update you on specifically in that area other than We will definitely be refying some Tier 2 and AT1 later in this year. And we will adjust it to the most optimum levels in advance of that.
Very good. We're back to the floor now for any remaining questions here. German is going to ask a question there.
Don't worry, I won't ask about capital. Colin, you mentioned wealth and insurance is an area that you're looking to build out. Perhaps you can give us a little bit more detail about what you're planning there. Is it To digitize your offering with your partners? Or is there something more expansive that you're looking to?
And then secondly, maybe around risk weighted assets. I mean, in the past, we had looked at EBS as being maybe an area where you could move from standardized into IRB. Is that something that will be on the agenda once TRIM and IRB reviews generally are gone through this year and early into next year? Thank you.
Thanks so much, Dieter. Notwithstanding the fact that we've got some strong market shares in so many of the key products, I'm very, very We're all very, very conscious of the demographic shape of our customer base and the fact that we do have market share weakness in relation to Wealth and Insurance. And given the fact that we have this ambition to sit at the very, very heart of our customers' financial lives, it will be remiss of us not to have an improved offering in that space. Now there is no near term Big story that I'm holding back from you. But we are going to deploy our own organic growth and an ongoing digitization of our products and services in collaboration with existing customer existing people we work with in order to improve our service offering.
But we're calling it out very, very openly, very honestly as a gap and a gap that we're intent on closing, not next week, not the week after, but over the course of the next 3 years. RWAs.
RWAs, overall, we will have a hierarchy of models that we are looking to Get approval for IRB status with. I think we have updated you on the mortgage side, the IRB mortgage side. EBS will, at a point in time, be brought forward for approval. But in the meantime, it isn't really a priority. We're looking at AIB mortgages are the largest part.
Next was our corporate model. After that is going to be our SME model and not until after that we'll look at the EBS models.
Okay. Is there any other questions here in Dublin? Because we're going to go back to London for 1 they're multiplying in London at the moment. Back to the lines.
We have a question from Martin Leibig from Goldman Sachs. Please go ahead.
Yes. Good morning. Just two questions from my side. And the first one is on Just how you're thinking about mortgage pricing in Ireland going forward? And I'm just noting there's a couple of headwinds.
There's a couple of headwinds coming, obviously, in terms of P and L. So low interest rates, the inability of passing on certain Low interest rates to retail deposit. So I'm just thinking, what your thinking is regarding mortgage pricing here going forward? Is there pressure for pricing to go up To absorb some of those pressures. So is competition such that you would expect it to stay flattish where it is now?
And the second question, just on the impact of the virus and potential disruption. I was just wondering How are you thinking about supporting impacted SMEs, impacted sectors, whether there's For Barron's payment holidays, so what kind of tools you're thinking if this was to get worse to support some of your borrowers? Thank you.
Okay. On the mortgage pricing, as I said already, we're very happy with where our mortgage pricing is. This is the largest single part of our balance sheet. We want to remain a very, very relevant player in the space. We keep our pricing under ongoing review, but I want to really emphasize that we are very, very, very comfortable with where our products are currently priced, right away from variable all the way out to the 10 year area.
And in relation to the products we're going to make available to our customers. They're the pre existing products. Every customer is going to be different. Every customer will be impacted in a different to a different level of severity depending on the nature of the overall coronavirus impact. But the key thing for us is that This is a bank that is underpinned by strong relationships.
We're in very regular contact with the customers who may well be affected if coronavirus becomes very, very problematic for the economy here. And we will stand ready to support them because Relationships if we're serious about being a relationship bank, we'll be there for them in good times and in bad. One more question in London, and this is the last question from Chris.
Hi there. Thank you for letting me take another one. It's Chris Kent from Autonomous. I just wanted to come back to something that you said earlier in the call When discussing your income and specifically the other income line, just trying to understand, I think from memory you said you expect this to be More than €550,000,000 on a go forwards basis once you include the non business income items. But I just wanted to unpack At a little bit, if I could.
When I think about your 2019 actual, the €491,000,000 within that, You've got €26,000,000 of dividend income, which I think is largely on your NAMA sub bond, and obviously, that's going to drop away. So It feels like your starting business income post pay zone is a 485 type number. How do you get to the €550,000,000 on an ongoing basis? What is it that you expect to continue to recur perpetually that's not business income? I would have thought that those items would subside over time.
Thanks, Chris. Very good question. If we look at the fees and commissions year on year, very strong, very comfortable with that. I think the NamUs sub that you're referring to will be a 2021, 2022 type item. But obviously, you're wondering about the go forward and where I get comfort with the 550 type level.
What you can expect to see is overall fees and commission, we believe that that will be able to accrue and climb quite steadily over the coming years from areas such as pay zone, from areas such as Wealth Management and Insurance. And if I look at the other items for €128,000,000 in 2019, they will reduce over time. We would expect obviously gains from restructured loans to decrease over time, but it will take a number of years. So that 128,000,000 doesn't go to 0 in 2020. It will over the coming years reduce year on year, I would imagine between €30,000,000 €40,000,000 So that's how I really get to the €550,000,000 So there is going to be moving parts.
I do expect fees into commission to rise And I do expect the other items to reduce.
Okay. Well, that's it. One last thing I want to do before we finish this morning. Some of you may be aware that this is our Chairman's final AIB results presentation. And Richard has been our Chair Since late 2014, he's led the organization with great distinction.
He's been a wonderful steward of the organization at a time of great change and great turbulence. Richard, we're going to miss you an awful lot because you've been a great leader, a great friend and a great colleague. And thanks for all you've done for us.