Good morning, ladies and gentlemen. I'd like to welcome everybody here in the room, the people on the webcast, and also those people who have joined us by telephone. I'd like to wish you all a very big , warm welcome here on behalf of myself and all my colleagues in AIB Group to Number 10 Molesworth Street, our new corporate headquarters.
This marks the 101 day that I have been fortunate enough to be CEO of AIB Group, and you'll be glad to hear we've had a busy 20 weeks. We've launched a series of initiatives that I'll go through in a few moments, but before I do, first of all, we need to do the necessary and show you the forward-looking statement. We'll give you about one and a half seconds to fully digest that before we move on.
The initiatives that we've launched are very much designed to augment the strength of our existing franchise, and we have a very robust franchise within this country. In response to changes in terms of customer demand, we cut our fixed rates in the mortgage market all the way out to 10 years, and we now have a very compelling proposition, which serves to complement the already market-leading standard variable rate that we present. We announced our proposed acquisition of 75% of Payzone, and that very much is a signal of our ongoing determination to be Ireland's leading fintech, or to remain Ireland's leading fintech. We underlined our commitment to cost discipline by introducing a hiring freeze across the group in March.
We completed the sale of a EUR 1 billion portfolio of non-performing exposures, and we announced our intention to rebrand our business in Northern Ireland from FTB, and we will have one unified brand all the way across the group, later on this year. It's been a solid performance in the first half. Now we are content with where we stand. We're very much focused on delivering for the full year, and we look forward to sharing with you our plans for the next phase of the bank's development. We'll do that when we present our full-year results for 2019 in March of next year.
The economic backdrop remains very positive in Ireland, although the level of outperformance against expectations is going to be lower, we believe, in 2019 than it was in 2018, where growth came in more than double the level expected when we came to the market in June of 2017. The growth rate is still robust and healthy, although it will feel significantly less buoyant than we've experienced in recent years across the country.
It still remains at the very upper end of the European league table. That very strong dynamism in the economy is translating into an ever-tightening labor market. With unemployment rate now down to 4.5%, a level last seen in 2006, well before the financial crisis, while employment levels continue to expand and hit new all-time highs. In the housing market, we're looking at an ongoing recovery from a very depressed position.
At the bottom of the last cycle, we saw housing output no higher than 4,000 units, and this year we expect to see a housing output of about 22,000 new units. There still is a considerable gap between what we think is the normalized level of demand of around 35,000. In the absence of the macroprudential rules, I do think we would see very significant house price inflation.
The rules, while they are impacting affordability, particularly in the capital city, they are having a desirable impact on the economy in that it's putting a very firm lid on house price inflation. In terms of the business sector, the service sector continues to expand and looks very healthy in terms of forward-looking purchasing managers' indices. The manufacturing sector is showing signs of moderation of pace and has dipped lower in recent months.
We believe that is very much a reflection of the uncertainty created by the decision of our nearest neighbor to leave the European Union. In terms of the balance sheet, we saw new lending in the first half of EUR 6 billion as compared with EUR 5.5 billion in the first half of last year, an increase of 8%. Mortgage lending up 8%. We now have a market share of 31.3%, by some margin, the strongest market share in Ireland.
These numbers, of course, don't reflect the impact of the fixed rate decisions we took earlier this year. We are noticing a marked improvement in approvals and applications, and we expect that to translate into an improving market share position as we move towards the back end of 2019. Personal lending scored a very impressive rate of growth, up to EUR half a billion in the half.
On the property side, this relates to our large real estate lending division. We saw a fall in new lending. This is in no way reflective of any diminished appetite on our part to participate in this very important part of the market. It is merely a reflection of the fact that loans in this space tend to be lumpy, can be very large, and we expect to be on plan for the full year. Within the corporate side, we had a very strong performance in corporate banking here in Ireland and in Britain. That was offset to some extent, to a large extent actually, by more muted activity in our syndicated international finance area. That is the result of deliberate decisions that we are making.
We turn down over 90% of the proposals we review in that space, and we're very happy with the performance of that side of the house in terms of the corporate side of the house. All that translates into very strong market shares, leading market shares, in the key segments of the markets that we target, and they're highlighted here at the end of the chart.
When we made the case for investment in our company in March of 2019, we set out our four pillars. We set out four medium-term targets. CET1, NIM, cost-to-income ratio, and the return on tangible equity. We also set out what was a really, really ambitious target in terms of the reduction of our NPEs. It's worth recalling that at the end of 2016, as recently as the end of 2016, we had 22% of our gross loans were non-performing.
We set out a very ambitious target. We said we're going to reduce that to circa 5% by the end of 2019. Then we had the IPO. Over the period since, we've made great progress against our targets. We've seen a sustainable profit. We've seen a growing balance sheet, and we've seen, critically, a strengthening balance sheet because of the ongoing significant reduction in our non-performing exposures.
They currently stand at 7.5%, and we remain very committed to getting them down to circa 5% by the end of this year. When we meet again in this forum, in the spring, we'll not only be presenting our results for 2019, but we will be outlining our strategic plans for the bank's next phase of growth and development out to the end of 2022. We'll be setting out a new set of medium-term targets.
We'll be setting out our plan for capital. We'll also be setting out and making clear our ambitions for NPEs. At this juncture, I can tell you, we intend to reduce that amount decisively lower in the next number of years. I'm not going to go through, you'll be relieved, every single point on this chart here. I'm just going to draw your attention to a few of them. On Customer First, we were delighted to launch a EUR 5 billion fund, which is earmarked to support the transition of the economies in which we operate to low-carbon . Not only are we looking at funding renewable energy generation, we're also looking at promoting ever more energy-efficient transportation and housing.
On Simple and Efficient, we were delighted to welcome our 1 millionth customer to our mobile app, and we're very proud of the fact that we have the most popular mobile banking app of any Irish bank. On Risk and Capital, Donal and the team in Treasury had a very successful period in terms of MREL issuance. We have EUR 3.3 billion now issued, and we're very comfortable where we stand and well-positioned to meet the expected requirement.
On Talent and Culture, we're putting culture and accountability at the center of everything that we do, and we were very pleased at the first time of asking to be one of 40 of Gallup's customers globally to be awarded a Great Workplace Award. That's a very neat reflection of the significant improvement in engagement we've seen across the group in the past five or six years.
These two wheels here very neatly, I hope, summarize all the ways that we engage with our customers. We engage in person, in branch, by phone, by internet, using kiosks, over the ATM. The most popular way that our customers choose to interact with us is using our mobile app. We've had incredible growth in its use in the past five years, and the total number today, on an average day, we get 1.26 million mobile transactions. That's eight and a half times the level that we would have seen in 2013. In the half that we're just reporting on, we saw an 18% increase in digital transactions across the group, a 7% decline in non-digital transactions. Biggest single shift happening in terms of contactless, which is up 49% on a year-on-year basis.
This is improving the efficiency of the organization, but it's doing it without any detrimental impact on our customer experience. In fact, if you look at our NPS, they highlight the fact that our customers value the availability of digital that allows them to interact with us in the way that they choose. We have a very strong set of NPS scores. Our Mortgage Express journey is sitting at NPS now of 65, positive NPS of 65. Over one in two of the customers who are new mortgage borrowers are choosing to go that particular route, and our mobile app that I referred to earlier has an NPS score of +66. We've had a very heavy lift in terms of investment over the 2016-2018 period.
We will continue to invest well in the period ahead, but at a level below where we were between 2016 and 2018, in and around about EUR 225 million per annum. That investment is very much focused on delivering on our strategy and underpinning our resilience, promoting sustainment, and making sure that we comply with the requirements imposed on us by the regulator. Before I hand over to Donal, my last slide. The Irish economy is doing very well, but the clouds are gathering on the horizon. Geopolitical environment is very difficult and getting increasingly difficult. Global trade tensions are at levels we haven't seen in decades. Purchasing managers' indices the world over are turning downward. Monetary policy authorities are pointing to a loosening rather than an expected tightening on the policy side.
Of course, we have that conundrum of Brexit, which we still don't know what form it'll take three years after Britain's decision to leave the European Union. All of these point to risks to the level of growth in the economy, and it is incumbent upon us within AIB Group to ensure that we put our balance sheet into the strongest possible position to allow us to weather the storms that may lie ahead, and we will do that in the interests of our customers and our shareholders. We are focused now on controlling what we can control. That means ongoing reductions in our NPEs. It means ensuring that the quality of loans we put onto our balance sheet is high.
In the first half of this year, we would have graded 98% of our new loans as strong or satisfactory, that has seen our total stock of loans, the grading there of strong or satisfactory has moved from 83% at the end of 2018 to 86% at the end of the first half. We have a very clear and unremitting focus on managing our cost base well. Taken together, these are going to be the appropriate guides for us at this juncture, combined, they will underpin the sustainability and strength of our business through 2019 and over the years ahead. Donal.
Good morning, everyone. Thank you very much, Colin. Okay, before I get into the financial highlights, I really just want to run through a couple of points that I want to leave you with. Overall underlying business performance for AIB Group in the first half is very strong. We have a growing balance sheet on a gross and a net basis. Our NPEs are reducing, and we're very well capitalized. They're the big four headline messages for me. We'll get into some of the details now. PBT, EUR 567 million pre-exceptionals. Net interest margin, 2.46%. Obviously, a very important metric. We'll come onto that one in a bit more detail later, but we are seeing strong discipline on pricing on the asset side.
Cost was EUR 744 million for the first half of the year, which is up 6% year-on-year, which really underlines the requirement, like Colin said, for us to focus on costs. I will come into that a little bit later. Non-Performing Exposures of EUR 4.7 billion as at June. That is a very strong reduction from our FSG unit of EUR 1.4 billion. It puts us very much on target for the circa 5% at the end of the year, which we have always maintained is a very, very important data point for us.
CET1 ratio is 17.3%. Solid underlying profit generation of approximately 80 basis points. We have got indicative guidance on our AIB mortgage TRIM. I will try and go into that a little bit later, it looks like it is going to be a 90 basis points impact to CET1.
As Colin mentioned, our MREL issuance program is proceeding very well. Okay, on the income statement. Like I said, operating income is pretty strong. We're very comfortable with that. Very much in line with the environment that we've been in and the market shares that we have. Expenses, I'll come onto a little bit later in a bit more detail. Bank levies and regulatory fees, it looks like a large increase year-on-year, probably distorted by the fact that in 2018 there was in fact a reduction.
Actually, probably more in line year-on-year. Impairments. For the half year, there's a charge of EUR 9 million. That's probably the first time since 2013 that we've had an impairment charge. Even last year, we had a significant write-back of EUR 142 million. I think this is down to a number of things.
As we work through our non-performing exposures and that quantum reduces, the amount or the ability for numbers to get written up or written down reduces. I'd say more importantly, what we're seeing in some of the key indices that revalue collateral, such as HPI or even commercial real estate indices. Throughout 2019, these indices have probably leveled off quite a bit.
Overall, business-wise, we probably feel like that's a positive. Affordability in the mortgage market in the housing market is very important. It just does have obviously an impact when you're looking at your provision levels. I think EUR 9 million charge for the year as we look from now to the end of the year, difficult to predict entirely, given the sensitivity around provisioning models. It's going to be driven really by the macro environment, where we go from here.
It certainly does seem that we're coming into an environment of more normalized cost-of-risk-type discussions. Overall, the key metrics here, you can see. I'll come to those a little bit later. Net interest margin, quite a bit going on overall. What I've tried to do on the top slide is itemize exactly what is impacting our net interest margin, and down below, really try to give you a sense of what's happening quarter-on-quarter. On the positive side, last year we would have spoken about impact on, let's say, price and competition, et cetera. We're very pleased to see that overall asset yields and asset pricing and loan pricing is holding up very strongly. That's actually an improvement of four basis points for the first half of the year.
On the deposit side, we've managed to make some efficiencies there of approximately a basis point as well. On the headwinds, we would've talked previously about MREL issuance, the requirement to hit all of our MREL targets. As we do that and as we issue quantums of MREL, that's obviously coming onto the liability side and creating a drag. IFRS 16, putting leases on our balance sheet, no income impact, but obviously grosses up our balance sheet and has an impact.
Obviously, on the investment securities, there's old legacy investment securities that are of high yielding coupons mature. It has that downward pressure on our overall net interest margin. We would have cautioned at Q1 not to think too far above 2.5, and in fact, recognized that there was going to be more downward pressure. That's obviously what we're seeing now.
Like I said, it really is created by issuing the MREL, and also the impact excess liquidity can have of just actually holding that on the liability side. I think as I look towards the end of the year, this is a similar position where we were last year, where we had a lot of liabilities to consume in the first half of the year, and then it's just down to management to get actions effectively to recycle that and reduce what the impact is going to be for the outturn.
Other income, we're pretty pleased with the outturn here. Year-on-year, you can see business income slightly down, but fees and commissions up 6% year-on-year, which is a pleasing result. The other business income is related to customer-related derivative type exposures, so CVAs, XVAs, or whatever you want to describe those as.
Year-on-year, you can see the change there. I'd say they're structural in nature and linked to the interest rate environment. Business income, we would say, is fairly flat. In terms of other items, I think you're seeing more of the available-for-sale investment security gains than there was last year, and equally a little bit less on realizations on restructured loans. Overall, that's pretty flat, so other income year-on-year is certainly in line with what we would have hoped. Costs. Colin would have talked about this earlier, with our renewed focus on cost discipline. If we look at our exceptional items first, EUR 131 million. This is made up of a number of different items. We have a gain in our portfolio sale of approximately EUR 34 million. We have restitution costs of EUR 102 million.
That's made up of two things. Number one, there is the unit that we had put in place to complete all of the work related to the tracker program, dealing with customers. Now that the program that's coming to an end and we've dealt with all customers, we're in a different phase of the tracker journey, which is an enforcement phase. We're working with the Central Bank. We believe that this will go into 2020, and obviously, there's going to be units and people attached to that. We think that the cost related to that is around EUR 40 million. In addition, we have a self-identified restitution cost of EUR 61 million. This is a loan documentation issue which we self-identified relating to some SME and some personal customers. We've sized this problem up.
We think that the EUR 61 million is adequate for what we have identified. We're comfortable with that. The second item is a provision for fines of EUR 43 million. The largest part of that is a provision that management has made for the tracker mortgage examination. We've made a provision of EUR 35 million, and this is effectively management's best estimate for what we think could be an enforcement fine.
Again, we don't think that we're going to have line of sight on that in 2019. It's more likely to move into 2020. Management felt it was prudent to try to take a provision at this stage. If I look at the operating expenses. You can see between half one 2018 and half one 2019, they're up 6%, approximately EUR 40 million. I'm going to try and break those out a little bit.
Wage inflation running at 3%, I think, is what we would always have talked about as being the normalized level. That's approximately EUR 10 million. Increased depreciation from investment programs. Again, this is one of the headwinds we said related to all of the prior year's investment in technology. That's approximately another EUR 10 million. The cost of heightened regulatory requirements and oversights, I'm not going to put a specific number on that.
That's just across all areas of business. I'm not really just referring to items related to inspections, et cetera. It's just items such as open banking or if we look to the future things as the IBOR project. There's just always a lot of very large regulatory projects coming through that we have to deal with. Lastly, I would look at the elevated cost of our workout unit.
You can see in the FTE and the employees number here, year-on-year, the amount of staff that we have dedicated to our workout unit has actually remained the same. This is a conscious decision of management to ensure that we were fully invested in our workout unit. Two reasons for this.
Number one, we have a very clear target for the end of 2019, a circa 5%. Beyond 2019, recognizing the significant headwinds that may face us with respect to calendar provisioning, et cetera, we also would have said at the year-end results that we saw the circa 5% as a milestone and not a destination. I'd say as we're fully invested in this area and all the associated support that goes with working through these very complex, difficult environments. They're all of the items that are feeding into the operational expenses.
Like Colin said, we're very focused overall on the cost agenda. We've implemented a hiring freeze from March of this year, we're really going to get focused and ensure that we work hard in that area. Balance sheet. I'm going to start off actually on the liability side here, work my way into the asset side. Main moving parts here, I would say, are on customer accounts. The strong macro environment in Ireland overall is just leading to stronger growth in retail deposits. This is a theme that we've seen over the last number of years, it really just is driven by that environment. That's a positive. Debt security is an issue. You can see that that's increased on the year, that's really due down to the MREL issuance that we obviously would have done.
You can see the excess liabilities then actually moves on to the asset side of the balance sheet. When you look at loans to banks, really what you're seeing in the increase there is the additional or the excess liabilities appearing on the asset side of the balance sheet, kind of manifesting itself as EUR 2 billion-EUR 3 billion of excess liquidity that we hold with central banks.
When I talk about the NIM drag from excess liquidity, really that's what I'm referring to. Excess cash, particularly held with the ECB, given the fact that there's negative interest rates there. On the asset side, overall, performing loans, you can see strong year-on-year, net loans to customers, net asset growth year-on-year, very much in line with results last year and in line with our projections as well. Gross performing loans.
Colin would've broken down the specifics for the year for the first half of the year. I'm really just trying to give an overall look at the balance sheet totals. Mortgage growth, up year-on-year by 8%, but the mortgage portfolio flattish for the year, which obviously the difference there being some redemptions. If we look at the business mix, I would say that this is very much in line with what we would've seen in 2018 as well.
More activity in the wholesale type of business area. Colin would've mentioned strong performance in corporate Ireland, corporate U.K., and property as well. In the SME business and the SME market, we still see muted credit demand. I mean that was something that we had seen in 2018, and that we thought we would continue to see this year.
That overall I think is down to, that's a Brexit effect. Okay? The larger corporates are putting in place plans to ready themselves for all kinds of Brexit outcomes. Property and construction is driven by more and more firms moving here, commercial real estate, et cetera, supporting that.
The SME growth, I would say is still a little bit muted. What it really means business mix-wise, is we've got a little bit more wholesale than we do of retail. Which in and of itself is absolutely fine, but it probably talks a little bit to a mortgage market which is to date, slightly underwhelming. Momentum in NPEs. Again, we think this is a good news story. We've moved from EUR 6.1 billion of NPEs to EUR 4.7 billion as at June. Coverage ratios remain the same.
The levers we use within the FSG unit, there's a large team there, really trying to engage with customers on a case-by-case basis. You can see that really coming through the BAU-type activity. There's cash redemptions there's restructurings, there's new to impaired, and there's outflow. There's a lot going on in that box there for EUR 400 million. There was obviously a portfolio sale executed earlier this year what had a material impact on the NPEs. Finishing the year at EUR 4.7 billion and very much on target for the year-end, circa 5%, which has been one of the key targets that we've outlined since the IPO to date in 2017. What I'm trying to do here is just really unpack the underlying non-performing exposures by asset class.
I think what you can see between December and June, notwithstanding the top-line reduction, is a large reduction in what we would consider to be the stickier or more difficult part of the portfolio, which is the Primary Dwelling Home area. That's reduced in the six months from EUR 3.3 billion to EUR 2.8 billion. That's really on the back of a lot of case-by-case restructuring on behalf of the FSG area, and that's very tough granular work because you're talking, there's a lot of numbers in there. What I really tried to do with the mortgage breakout is try in the middle slides to show what the gross and the net exposures are, pre and post-provisions . Also, really try to separate out within that mortgage area what's buy-to-let and what's PDH.
Over on the right-hand side, again, this is to give an idea of the type of non-performing exposures we have in this mortgage area. I think the easiest way to think of it is 50% is deep arrears and 50% is either restructured in a probationary period, which is the 36% not past due, or recently moved into arrears, which is an additional 11%. It's really, I would say, split. The portfolio is split in two. The part of the book that's recently in arrears obviously has lower coverage rates. The part of the portfolio that's in deep arrears obviously has higher coverage rates. That's an important distinction to try and look into these asset classes. That'll give you an idea of the areas of difficulty in managing the non-performing exposures.
It is more granular exposures, so it does require a lot of heavy oversight from the FSG team to get to the 5% ratio. Funding structure. I think the easiest way to summarize the funding picture is actually just to look at the loan to deposit ratio, 90% to 88% as at the end of June. Our balance sheet is now 75% funded by customer accounts. A very strong position to be in.
Obviously, from a wholesale perspective, the additional liabilities are really all driven by MREL. Our MREL ratio is 28.22%, so that's fairly linear calculation for you to do. What's changed in the last quarter, I would say, is given the update that we've got on TRIM of 90 basis points, it has an associated RWA impact. That RWA impact is going to end up increasing our MREL requirements.
Historically, we would have talked about an MREL quantum requirement of approximately EUR 4 billion. I think what we're saying now is that's approximately EUR 5 billion. That's really just on the back of that TRIM update. Overall, we had positioned ourselves well insofar as we had transacted a number of large deals earlier in the year. We think we're in a fairly strong position now over the next year and a half to just tactically ensure we can get optimized pricing, et cetera.
Okay, here are the capital ratios. I think the capital walk down below is probably the most important one to look at. Day 1, IFRS 16 hit 20 basis points. Really, our starting point was 17.3%. Strong underlying profitability, giving 80 basis points to the bottom line. RWA growth of 20 basis points.
That's really driven, I'd say, by the larger wholesale corporate business mix, vis-a-vis a mortgage type of mix, but that's to be expected. There's a number of items around 30 basis points that are impacting CET1. There's a number of them, so I'm actually not going to itemize them. That's a pre-dividend CET1 ratio of 17.6%, which overall is clearly very strong.
The headwinds are now coming to fruition. We've always talked about TRIM potential impact. We now have the answer to our AIB mortgage TRIM. Okay, that's going to be 90 basis points, EUR 2 billion of RWA. If we look through the details of the findings, and they are still draft, okay, so I'm giving you estimations for what these are. Effectively, what's happened is that our mortgage density will move from approximately 29% up to 41%. That's a reasonably large readjustment.
As you know, we're in discussions with the Regulator as well on our corporate model. We have no update on that. I would say that we expect to have some line of sight on that though, before the end of the year. Lastly, calendar provisioning. Clearly, a very large theme in the market. There's a lot of complexity in this calculation. We're not giving forward guidance on our future NPE ratio, given that that's something that we are still working through.
What I would say is that there's a reasonably diverse range of estimates in the market for the calendar provisioning impact in 2020, between 50 basis points and 150 basis points. I'd be comfortable enough to say that we would see it at the very bottom end of that range, so around 50 basis points.
Okay, to conclude, net interest mar v gin 2.46%, strong, very comfortable with the year-end target of 2.40%. Cost-to-income ratio outturn 54%. As Colin said, we have a very strong focus on cost discipline, we're going to work towards that 50% cost-to-income ratio. Not only is there the hiring freeze that we had in place since March. I think in Q1 of next year, you can expect to see a very comprehensive overview on how we look at costs, what structural changes we may want to make as we continue to address that. Fully loaded CET1 ratio, 17.3%. Obviously, very strong. Well in excess of all regulatory targets. A return on tangible equity of 7.9%. Obviously down versus our target, driven really by that movement around exceptionals.
I'd say to conclude that it's a solid operational performance with normalizing NPEs, and now we really need to move our focus to returning excess capital.
Thanks. Donal. Donal's going to join me up here now, and we're going to open the floor to questions. Pat Clarke will devour me because I forgot to tell you earlier to turn off your mobile phones. If you do, that would be greatly appreciated, and you'll get me out of trouble. We're going to take questions from the floor first of all, and then we're going to go to the telephone line, and then come back to the floor if there are any other final questions. We'll take questions now from the floor. You raise your hand, wait for a mic, and then speak. We'll go to Eamonn first.
Eamonn Hughes from Goodbody. Thanks for the presentation, guys. Maybe if I can just touch on costs a little bit on NPEs and then capital, if that's okay. Just in terms of the cost side, it looks like the depreciation number was up about EUR 50 million or so year-on-year in the half-year. You'd flagged Donal about the kind of pickup, or maybe it was you, Colin, just in terms of the investment spend over the last couple of years.
Can we take it that probably 2019 should be the peak in terms of the depreciation number? Or how that should profile into possibly next year? Secondly, just in relation to the NPE side. You were kind of in line where we were looking at 47. The organic run rate is slowing down a little bit.
You've got that target of circa 5% by the end of the year. To get to there, presumably, you're a little bit more open around transaction activity, possibly, or kind of metrics like that. Then finally, in relation to capital, maybe a little bit of an unfair question in one sense, but the P2R, very elevated at 315, particularly against the peer group, and given specifically what you've done in that balance sheet. Should we be hopeful that the regulatory engagement is hopefully a little bit more on the positive track, just given that we've suffered a little bit on trend? Thank you.
Thanks, Eamonn. Then I'll refer the cost and capital questions to Donal. On the NPE side, we have any number of options available to us. We continue to work on new options. We've restructured over 100,000 loans, including over 40,000 PDHs. We have a clear preference to retain these banking relationships. We have a clear preference to work with our customers to put in place sustainable restructured arrangements.
However, we have a number of options available to us, including portfolio sales. We have executed a number of portfolio sales successfully. We will use every lever at our disposal. Clear preference, as I said, for going down the restructuring route. We will have portfolio sales if we need to because that circa 5% target is an overriding priority for us. We need to do it, not only because of capital impacts.
We need to do it because we need to get our balance sheet into the strongest possible position given the economic uncertainty that lies ahead.
Eamonn, sorry. Question from you was with respect to CET1.
No. It was costs, depreciation-
Yeah,
growth and P2R.
Okay. P2R. 315, I think we would conclude that that is at a very elevated level. We are due to receive our SREP letter later this year. We have no forward look at what that could be. We've made a huge amount of effort in restructuring large parts of our balance sheet. We will remain to see if we get a reward for that. With respect to depreciation, I think the comment that I said for the year-on-year growth was approximately EUR 10 million, was the impact. You need to strip out some IFRS 16 impacts as well from that, really EUR 10 million I think year-on-year is the number to look at.
Okay, thank you. Stephen.
Thanks. Good morning. Stephen Lyons from Davy. Just a couple of questions from me. Firstly, just on NPLs. Obviously, you had a gain on the sale in the period recorded on a capital benefit. Just trying to get a sense of the continued strength, in the NPL buyer market in Ireland. To the extent that NPL sales are pursued over the coming period, particularly into year-end, to achieve that 5%, what should we be thinking in terms of CET1 impact?
The same type of positive gain again, or has there been a softening, and what factors have maybe caused that softening? Separately, just around the syndicated finance market that you mentioned you pulled back a little bit. Just there's been greater scrutiny on that, particularly from the coverage from the Irish Central Bank comments, particularly.
Could you maybe just elaborate on the particular markets that you do participate in within that, and how confident you are on the resilience of the asset quality within that, please? Thank you.
On the syndicated international finance team, this is a market we've been active in for 20 years. We have a very disciplined approach to it. We've got a tremendous team working on supporting the European market out of Dublin and the U.S. market out of the United States. They have a superb record in terms of the credit decisions that they have made.
During the crisis, we were forced to significantly reduce our presence in that marketplace, and we did that very successfully and very efficiently. We are very comfortable with the assets that we currently have on the balance sheet. I think it's important to highlight that this is a part of our activities that we can really choose to take to the sidelines in whenever it is in the overall interests of the institution. There are no customer elements here. We're not managing relationships here.
This is a portfolio management tool. It allows us to diversify geographically. It allows us to diversify in terms of sector exposures, but it is a credit management tool, and it's a tool that we use to great effect. I'm really comfortable with the decisions the team have made, not only in the last six months, but over the course of the past 20 years.
With respect to the NPE market, what we've seen over the last number of years, with respect to portfolios transacted by AIB Group, is that there has been a gain on sales. We would always guide that we aim to reduce NPEs on a capital-neutral basis, and that will remain to be the situation. As it's always difficult to try to predict liquidity in different markets at different times. We'd be confident in hitting our NPE ratio on a capital-neutral basis. Overall, within the market environment, I think there's been quite a bit of activity this year, and it doesn't look like there's a market slowdown and appetite for Irish assets.
Thank you. Owen Callan from Investec. Just two quick questions, if I may. On the credit impairment, I think it is Donal noted the first net negative credit impairment in a number of years. Going forward, assuming, as I said, maybe the NPE work out has no significant impact on P&L going forward, what do you assume or what do you look for as the normalized credit impairment cost that we should expect from AIB Group going forward, given the current market, as Colin maybe hinted at the start as well, given the fact that some of the growth metrics may be turning down slightly, albeit still at relatively healthy levels. What should we build in for that normalized credit environment?
On excess liquidity, as you've noted, and you're not alone in this, banks across Europe are struggling with the excess liquidity costs and further MREL issuance will only make that more of a challenge. Is there any strategies you've looked at as regards limiting that excess liquidity, as regards maybe looking at either how to be less, having current account balances, maybe either more beneficial for you in terms of being able to charge for them somehow? I don't know if that's difficult from a regulatory perspective, or seeking to dissuade people from putting retail deposits into AIB Group, to limit the cost of that.
I'll take your second question, then I'll hand over to Donal for your first. We are very actively managing our liquidity. In the second half of last year, towards the back end of the year, we, for our very largest corporate customers, we introduced negative interest rates on current accounts and on deposits. That has had a desired effect in relation to discouraging the larger corporates from placing funds with us. We'll continue to look at all options in this space. It is a priority for us. With respect to the cost of risk question, for years, this has been a little bit of a non-event type of debate with AIB Group because we've always had such significant write-backs.
Definitely seems to be an inflection point this year. That is being driven by the normalization of the key collateral indices, okay, such as HPI and in the CRE type space. Between now and the end of the year, the outturn is going to be driven by some macro factors. Brexit obviously is one. If you're to probably look to the future and try to get an underlying cost of risk number, I think between 20 and 30 basis points is what you should be thinking of. Okay. We're going to take one more question in the room before we go to the line.
Good morning. Pierce Byrne, Cantor Fitzgerald. Two quick questions. Firstly on the NPEs. We've seen the quarterly resolution rate down to about EUR 200 million from about EUR 400 million in the previous year. Is that something we can expect to continue into year-end? Secondly, on the additional MREL issuance. I think you called out in your announcement this morning about a EUR 2 billion increase in RWAs. How are you getting to a EUR 1 billion increase in MREL on the back of that? If you could give us some more color on that. One final one, on new lending. We saw new lending growth rates of about 11% in Q1. We're down to 8% for H1. How do you see that into year-end? Thank you.
On the new lending rates, we're very happy that we are expanding the balance sheet at a sustainable rate of growth. We are looking for steady, sustainable growth rates. We're not in the business of chasing spectacular growth in balance sheet. Our focus is very much on the long-term health and viability of this organization, because that is a necessary precursor to allowing us to deliver on our purpose.
We cannot deliver for our customers or our shareholders in the absence of having a strong balance sheet. I'm not going to make any apology for not having triple-digit growth rates in balance sheet. I'm very content with where we are at this point in time. The second question I'm going to give to Donal, and then I'm going to try and remember what your first one was.
I think you were referencing the slowdown in quarter-on-quarter NPE reductions and whether that's a new guide for the future. Yeah. What we've seen from the last number of years, as you know, is that we've been dealing with larger types of asset classes and underlyings, which does mean quarter-on-quarter that you're able to reduce on a larger quantum. Where we are today, like I would have mentioned earlier, is we are dealing with asset classes now that are of the most granular nature. These are individuals, PDH type owners, okay. Engagement in this area it's very tough. It's very time-consuming. It takes a lot of resources, and it takes quite a while to get these restructures in place.
You will see a slowdown quarter on quarter from that BAU restructuring because of the fact that what we're dealing with is so granular in nature. With respect to the MREL, again, I think what I said was we'd always said circa EUR 4 billion, and now I'm saying circa EUR 5 billion. If you multiply out the 90 basis points, that's probably around EUR 2.2 billion of RWAs, multiply it out by the ratio, and that gives you 650. We're just moving from circa EUR 4 billion to circa EUR 5 billion.
Notwithstanding the fact that we have had a moderation of pace in Q2 in relation to NPEs, we are very much focused. Number one priority for the entirety of the group is getting that NPE total down to circa 5% by the end of this year, by whatever means necessary. We'll go to the line now. You might open up by identifying yourself by name and institution, please.
Thank you very much. Our first question is from Raul Sinha from JP Morgan.
Hi, good morning. If I can have a couple, please. Just firstly on NPEs, going back to what you said, Donal, on the calendar provisioning impact. How should we think about this from the outside? As you said, it's quite complicated and probably quite difficult to work out. When we look at your NPE coverage, obviously, it's quite low relative to the new calendar provisioning guidance that's coming in. Obviously, the coverage ratio also ticked down slightly. Could you elaborate a little bit on how you get to this 50 basis points or at the bottom end of the range, in terms of calendar provisioning? That would be helpful. The second one is on Basel IV.
We don't really talk much about that, but have you sort of thought about how this TRIM impact is going to overlap, if at all, with what impact you might be calculating from the input floor?
Okay. I'll certainly take those ones. On calendar provisioning is obviously difficult to calculate because it's asset by asset, and it depends on the time in arrears, and we're projecting out to 2024. We don't want to give, and we're not going to give any guidance today on what the future NPE ratio is going to be, because that's going to be packaged up in a much larger overview that we want to come back and describe in the first quarter of next year.
Just to help you model out the impact, what I've tried to do is look at our existing plan, run rate, et cetera, without giving you our end state, which I'm not going to. I'm really just trying to tell you and give you guidance, to give you an idea that 50 basis points for 2020 is certainly around where we see it.
With respect to Basel IV, that's an interesting one. I try to find some good in the recent TRIM letter and its associated impact. The only one I could find is that impacts in Basel IV surely must be a lot less now. We're going to have to play that out. There's lots of things going on in the Euro system. I don't think we ever felt that we were going to be hugely impacted by Basel IV, and I'm probably more convinced of that now than ever.
Okay. Thanks very much.
Next question from the line.
Our next question is from Alicia Chung from Exane. Please go ahead.
Morning, everyone. Just a couple of questions from me. Firstly, just to go back on the mortgage TRIM impact. You said that the RWA density moved up from 29% to 41%. Could you just give a bit more color as to what exactly the ECB wasn't happy with? Was the key issue with the performing mortgages or the non-performing mortgages as well? Secondly, just to go back on cost. Can you explain in a bit more detail what was driving the 8% year-on-year increase in staff costs, and especially when average staff numbers increased only 2%? How should we think about staff growth and wage growth over the next two or three years from today? Thank you.
I'll take the TRIM question first. Again, the findings are still draft, and we're working through this with the regulator. Folks, I wanted to give you an early line of sight. Going from 29% to 41%, that landing point is certainly well above the European averages. I would look at the performing impact, whereby pre-TRIM we were at 25% for AIB mortgages, and post-TRIM we're at 37%.
I think it's more on the performing area that's been impacted. I wouldn't say it's an issue, per se, with AIB Group in a particular part of its model. The reality is, this is the result of the treatment of mortgages, mortgage holders, deep arrears through the crisis in Ireland. This is it just coming to fruition at the end of a quantitative process. That's what I'd say there.
With respect to costs, wage inflation at 3% I think, is what we've always flagged. In terms of average FTEs, there was a few things year-on-year that would have impacted that. Okay? Number 1, we re-insourced some activities that in prior years had been overseas. There was 100 bodies that we moved back onshore.
Now, that didn't really have a cost impact. It will kind of obviously increase staff costs and decrease depreciation, that kind of goes into the number. In terms of overall average head count, there's a number of different items that are at play here. The decision we took to maintain our FSG unit at its fully invested level has an associated impact on the organization for support areas, et cetera, as we work through all of these cases on a case-by-case basis.
All I would say is that the 1,300 people that you can see in the FSG unit, that is not a normalized situation for a bank with a normalized NPE ratio. I think that we'll be able to provide more color on that later. I'd say that's the main area of the FTE movements.
Thank you very much. That's very clear. Just to be clear, on the number of staff in FSG, is it fair to assume that that is now likely the peak level of staff, or will you be expecting to recruit more? In terms of those staff numbers falling again, can we assume that they'll start to be run off after 2019 once you've met your target, or will you expect to keep them on for a while later? I guess my bigger question is, what can we expect in terms of 2020, 2021 staff cost run rates?
The FSG unit is doing a great job. It is probably the most difficult part of the bank in which to work, and we've got tremendous professionals doing an extraordinarily good job there. When I was doing my old job, I was notorious for going into FSG to raid it for high-quality bankers, because the training they get there is absolutely exceptional. Some of the people who moved into leadership positions within my old division would have come from Jim O'Keeffe's world in FSG.
I have no intention of seeing these people forced out of AIB Group when they complete their work. We will be redeploying that across the rest of the group, and in so doing, we'll be replacing people who may be consultants or are on our staff as a result of being daily rate contractors.
I'd also like to draw your attention to the fact that we still have a very high level of activity in terms of tracker enforcement. We've got 500 people working in the tracker program. We're going to close that particular chapter of our history, and those people will also be redeployed elsewhere in the group, replacing non-FTE employees.
Got it. That makes sense. It's probably fair to assume this is a sort of rebasing of staff levels, and we can just assume general wage inflation from here going forward.
We take another call from the line. Any more questions from the line?
Yes. Our next question is from Chris Cant from Autonomous. Please go ahead.
Good morning. Thank you for taking my question. I just wanted to come back on calendar provisioning, if I may. If I think about what we're seeing with the gains you book on portfolio sales, obviously, you still expect to sell any further NPE portfolios in a capital- neutral way, but you're actually booking some gains. Your coverage ratio might be low, but it's obviously adequate in terms of the market-clearing price for these assets.
I think about how calendar provisioning plays through in the 50 basis points that you've guided to as a potential impact for next year. How does that actually materialize? Are you actually going to have to change your IFRS 9 expected loss models to say, "Actually, we were wrong last year, and we now expect higher losses"? Will it come through as a regulatory deduction, potentially because you don't change your provisioning?
How does that actually materialize in practice? Your provisioning is obviously adequate as far as the market's concerned for these assets. Related to that, if you then go on to sell these assets, will you then recover that 50 basis points in the sense that you go back to the clearing price, which is where you're currently marked? Thank you.
Thank you, Chris, for that high-level question. What I'm not going to do is give you the forward-looking NPE reduction plan, okay?
Despite any amount of provocation.
That is obviously what you need to be able to calculate all of the moving parts associated with this. Really just to ensure that the measurements don't get misused or miscalculated. That was the rationale for me, really just trying to put a floor on the 2020 number of around 50 basis points. How things work out from there, calendar provisioning will be an impact through capital. It's going to impact all banks throughout Europe. We've been on a long journey on reducing NPEs. I think what I would say is just that , well, we will hit our target at the end of this year, circa 5%, then we will look to move beyond that. Okay. We have run out of time, ladies and gentlemen. The clock is against us today.
Thank you all very much indeed for being with us, and we look forward to seeing you. We have lots more to say in the spring. Thank you.