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, very warm welcome here on behalf of myself and all my colleagues in AIB Group to number 10 Mosewood Street, our new corporate headquarters. Day. This marks the 101st 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 1.5 seconds to fully digest that before we move on. So the initiatives that we've launched are very much designed to augment the strength of our existing franchise.
And we have a very, very, 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 year. And we now have a very, very compelling proposition, which serves to complement bit the already market leading standard variable rates 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 €1,000,000,000 portfolio of nonperforming exposures, and we announced our intention to rebrand our business in Northern Ireland from FGB, 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. And we'll do that when we present our full year results for 2019 in March of next year.
Bit. 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 day in June of 'seventeen. The growth rate is still robust and healthy, although it will feel significantly less buoyant than we've experience in recent years across the country, but it still remains at the very upper end of the European League table. And that very strong dynamism in the economy is translating into an ever tightening labor market, with our unemployment rate now down to 4.5%, level last seen in 2006, well before the financial crisis, while employment levels continue to expand and hit new all time highs. The housing market, we're looking at an ongoing recovery from a very, 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 20,000 22,000 new units. There still is a considerable gap between what we think is the normalized level of demand of around 35,000. And in the absence of the macro prudential rules. I do think we would see very, very significant house price inflation.
So the rules, while they are impacting on affordability, particularly in the capital city, they are having a desirable impact on the economy and that it's pushing a very, 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. Day. 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 €6,000,000,000 as big CHF 5,500,000,000 in the first half of last year, increase of 8%. Mortgage lending, up 8%. We now have a market share of 31.3 percent, 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.
But we are noticing a marked improvement in approvals and applications, and we expect that translate into an improving market share position as we move towards the back end of 2019. Personal lending scored a very, very impressive rate of growth, up to €500,000,000 in the half. And 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, very important part off 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, 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. And that is the result of deliberate decisions that we are making. We turned 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, 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. So when we made the case for investment in our company in March of 2019. We set out our 4 pillars. We set out 4 medium term targets: big CET1 NIM cost to income ratio and the return on tangible equity.
We also stated set out what was a really, really ambitious target in terms of the reduction of our NPEs. And it's worth recalling bit that at the end of 'sixteen, as recently as the end of 'sixteen, we had a 22% of our gross loans were nonperforming. We set out a very ambitious target. We said we're going to reduce that to circa 5% by the end of 'nineteen. And then we had the IPO.
Big. And 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 nonperforming exposures. Bit.
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're not going to be presenting our results for 2019, bit, but we will be outlining our strategic plans for the bank's next phase of growth and development out to the end of 2022. Big. We'll be setting out a new set of medium term targets.
We'll be setting out our plan for capital. And we'll also be setting out and making clear our ambitions for NPEs. And at this juncture, I can tell you we intend to reduce that amount decisively lower in the next number of years. So I'm not going to go through, you'll be relieved, every single point big on this chart here. I just want to draw your attention to a few of them.
On customer first, we were delighted to launch a €5,000,000,000 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, but we're also looking bit 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 with any Irish bank. On risk and capital.
Donal and the team in Treasury had a very, very successful period in terms of EMBL issuance. We have GBP 3,300,000,000 now issued, and we're very, very comfortable with where we stand and well positioned to meet the expected requirement. And on talent and culture, we're putting culture and accountability at 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. And that's a very, very neat reflection of the significant improvement in engagement we've seen across the group in the past 5 or 6 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. Bit. But the most popular way that our customers choose to interact with us is using our mobile app. Big.
We've had incredible growth in its use in the past 5 years. And the total number today, on an average day, we get 1,260,000 mobile transaction. So that's 8.5x the level that we would have seen in 2013. And 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. So this is improving the efficiency of the organization, but it's doing it without any detrimental impact on our customer experience.
And in fact, if you look at our NPS, they highlight the fact that our customers value the way bit that the availability of digital that allows them to interact with us in the way that they choose. We've a very, very strong set of NPS scores. Big our mortgage express journey is hitting an NPS now of 65 positive NPS of 65. Over 1 in 2 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 plus 66.
We've had a very heavy lift in terms of investment over the 2016 to 2018 period. We will continue to invest well in the period ahead, but at a level below where we were between 20162018 in and around in about €225,000,000 per annum. And that investment is very, very much focused on delivering on our strategy and underpinning our resilience, promotion sustainment and making sure that we comply with the requirements imposed on us by the regulator. Day. So before I hand over to Donald, my last slide.
The Irish economy is doing very well, but big 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 in the world over are turning downward. Monetary policy authorities are pointing to a loosening rather than expected tightening of on the policy side.
And of course, we have that conundrum of Brexit, which we still don't know what form it'll take 3 years after Britain's decision to leave the European Union. So all of these point to risks to the level of growth in the economy. And it is incumbent upon us day within AIB 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. So 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 on to 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. And that has seen our total stock day of loans. The grading there of Strong and Satisfactory has moved from 83% at the end big of 18% to 86% at the end of the first half. And we have a very clear and unremitting focus on managing our cost base well.
Taken together, these are going to be the guides bit the appropriate guides for us at this juncture. And combined, they will underpin the sustainability and strength of our business good 2019 and over the years ahead.
Good morning, everyone. Thank you very much, Colin. Big. 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 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. Big.
We'll get into some of the detail now. PBT, euros 567,000,000 pre exceptionals. Net interest margin, 2.46%, obviously, a very important metric. We'll come on to that one in a bit more detail later, but we are seeing strong discipline on pricing on the asset side. Costs were €744,000,000 for the first half of the year, Which is up 6% year on year, which really underlines the requirement.
And like Colin said, for us, to focus on costs. Again. I'll come into that a little bit later. Nonperforming exposures of €4,700,000,000 at the as at June. So that's a very strong reduction from our FSG unit of €1,400,000,000 It puts us very much on target for the circle 5% at the end of the year, which is we've always maintained as a very, very important data point for us.
Big CET1 ratio, 17.3%. Solid underlying profit generation of approximately 80 basis points. We have got indicative guidance on our AIB mortgage TRIM. I'll try and go into that a little bit later, but that looks like it's going to be a 90 basis points impact to CET1. And as Colin mentioned, our MRAD issuance program is proceeding very well.
Okay. So on the income statement, like I said, operating income, pretty strong. We're very comfortable with that, very much in line bit the environment that we've been in and the market shares that we have. Expenses, I'll come on to 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 big reduction.
So actually, probably more in line year on year. Impairments. Big for the half year, there's a charge of €9,000,000 That's probably the first time since 2013 that we've had an impairment charge. Even last year, we had a significant writeback of €142,000,000 And I think this is down to a number of things. Big.
Obviously, as we work through our nonperforming exposures and that quantum reduces, the amount or the ability for numbers to get written written down reduces. But I'd say more importantly, what we're seeing in some of the key indices that revalues 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. So I think €9,000,000 charge for the year big I mean, it's going to be driven really by the macro environment where we go from here. But 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, and we'll 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 big is itemize exactly what is impacting our net interest margin. And down below, really try to give you a sense of what's happening big quarter on quarter. So on the positive side, I mean, last year, we would have spoken about impact on, let's say, pricing competition, etcetera. Big we're very pleased to see that overall asset yields and asset pricing and loan pricing is holding up very strongly. So that's actually an improvement of 4 basis points for the first half year first half of the year.
On the deposit side, we've managed to make some efficiencies there of approximately a basis point as well. Then on the headwinds, we would have talked previously about MREL issuance, the requirements big hit all of our MREL targets. So 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. And then obviously on the investment securities, as old legacy investment securities that were at high yielding coupons mature, big.
It has that downward pressure on our overall net interest margin. So I mean, we would have cautioned the Q1 not to think too far above 2.5 and in fact recognize that there was going to be more downward pressure. And that's obviously what we're seeing now. And like I said, it really is created by the by issuing the MREL and also the impact excess liquidity can have Of just actually holding that on the liability side. But 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. Big. 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 bit.
Related derivative type exposures, so CVAs, XVAs or whatever you want to describe those as. So year on year, you can see the change there. I'd say that's structural in nature and linked to the interest rate environment. Big. So 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. But overall, that's pretty flat. So other income year on year is certainly in line with what we would have hoped. So costs. Colin would have talked about this earlier with our renewed focus on cost discipline.
If we look at our exceptional items first, €131,000,000 This is made up of a number of different items. We have a gain in our portfolio sale of approximately €34,000,000 We have restitution costs of €102,000,000 That's made up of 2 things. Number 1, 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, that program has effectively that's coming to an end and we've dealt with all customers, big. 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. So we think that the cost related to that is around €40,000,000 In addition, we have a self identified restitution cost of €61,000,000 This is a loan documentation issue, which we self identified relating to some SME and some personal customers. We don't think we've sized this problem up.
We think that the €61,000,000 is adequate for what we have identified, and we're comfortable with that. The second item is a provision for fines of €43,000,000 The largest part of that is a provision that management has made day for the TRACKER mortgage examination. So we've made a provision of €35,000,000 and this is effectively management's best estimate big. 2019 is more likely to move into 2020, but management felt it was prudent to try to take a provision at this stage. Big.
Now if I look at the operating expenses, you can see between half one twenty eighteen and half one twenty nineteen, they're up 6%, approximately €40,000,000 So 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 €10,000,000 big. 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 €10,000,000 The cost of heightened regulatory requirements and oversights, I mean, I'm not going to put a specific number on that. I mean, that's just across all areas of business. It's and I'm not really just referring to items related to inspections, etcetera. It's just items such as open banking or if we look to the future, big The IBOR project, there's just always a lot of very large regulatory projects coming through that we have to deal with. Big.
And lastly, I would look at the elevated cost of our workout unit. So 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 have our we are fully invested in our workout unit. And two reasons for this. Number 1, we have a very clear target for the end of 2019 to circle 5%.
But beyond 2019, recognizing the significant headwinds that may face us with respect to calendar provisioning, etcetera. We also would have said at the year end results that we saw the circa 5% as a milestone and not a destination. So 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. And so they're all of the items that we that are feeding into the operational expenses. Day.
But like Conor said, we're very focused overall on the cost agenda. We've implemented a hiring freeze from March of this year. Big. So we're really going to get focused and ensure that we work hard in that area. Balance sheet.
I'm going to start actually on the liability side here and work my way into the asset side. Big. Main moving parts here, I would say, are on customer accounts. The strong macro environment in Ireland overall big. It's just leading to stronger growth in retail deposits.
This is a theme that we've seen over the last number of years, and it really just is driven by that environment. Big so that's a positive. Debt security is an issue. You can see that, that's increased on the year, and that's really big down to the MRAD issuance that we obviously would have done. So 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 addition or the excess liabilities appearing on the asset side of the balance sheet, kind of manifesting itself big as €2,000,000,000 to €3,000,000,000 of excess liquidity that we hold with central banks. So when I talk about the NIM drag from excess liquidity. Really, that's what I'm referring to. Excess cash, particularly held at the ECB, given the fact that there's negative interest rates there. Day.
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. Big. Gross performing loans. Colin would have 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.
So mortgage growth, up year on year by 8%, But the mortgage portfolio flattish for the year, which obviously was 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 have seen in 2018 as well. More activity in the wholesale type of business area. So Colin would have mentioned strong performance in Corporate Ireland, Corporate U. Big property as well.
And in the SME business, in the SME market, we still see muted credit demand. I mean that was something that we had seen in 2018 and that we had we thought we would continue to see this year. And that overall, I think, is down to that's a Brexit effect, Okay. So 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, etcetera, supporting that.
Big. But the SME growth, I would say, is still a little bit muted. So what it really means business mix wise is we've got a little bit more wholesale than we do big 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. Eur we've moved from €6,100,000,000 of NPEs to €4,700,000,000 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.
So there's cash redemptions there, big There's new to impaired and there's outflow. So there's a lot going on in that box there for €400,000,000 And then it was obviously a portfolio sale executed earlier this year, what had a material impact on the NPEs. So Finishing the year at €4,700,000,000 and very much on target for the year end circa 5%, which has big been one of the key targets that we've outlined since the IPO date in 2017. What I'm trying to do here is just really unpack the underlying nonperforming exposures by asset class. Big.
I think what you can see between December June, notwithstanding the top line reduction, big as 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. So that's reduced in the 6 months from €3,300,000,000 to €2,800,000,000 And 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 and there's a lot of numbers in there. Big. 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, and also really try to separate out within that mortgage area what's buy to let and what's big PDH.
Over on the right hand side, again, this is to give an idea of the type of nonperforming 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%. So it's really, I would say, split the portfolio is split in 2. Big. 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. Big. But that's an important distinction to try and look into these asset classes. And that will give you an idea of the areas of difficulty in managing the nonperforming exposures. It is more granular exposures, so it does require big a lot of heavy oversight from that 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, 19% to 88% as at the end of June. So our balance sheet is now 75% funded by customer accounts, very strong position to be in. And 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 couple. 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 and MREL Quantum requirement of approximately €4,000,000,000 I think what we're saying now is that's approximately €5,000,000,000 big.
And that's really just on the back of that TRIM update. But overall, we had position ourselves well insofar as we had transacted a number of large deals earlier in the year. So we think we're in a fairly strong position big year to just tactically ensure we can get optimized pricing, etcetera. Okay. Here's the capital ratios.
I think the capital walk down below is probably the most important one to look at. Day. Day 1 IFRS 16 hit 20 basis points. So really, our starting point was 17.3%. Big.
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. And then there's a number of items around 30 basis points that are impacting CET1. And there's a number of them, so I'm actually not going to itemize them. That's a pre dividend big CET1 ratio of 17.6%, which overall is clearly very, very strong.
Big. The headwinds are now coming to fruition. We've always talked about TRIM potential impact. We now have the answer big To our AIB mortgage trim, okay? That's going to be 90 basis points, €2,000,000,000 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. Effect. Effectively, what's happened is that our mortgage density will move from approximately 29% up to 41%. So that's a reasonably large readjustment.
As you know, we have we're in discussions with the regulator as well on our corporate model, but 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. And lastly, calendar provisioning, clearly a very large theme in the market. There's a huge there's a lot of complexity in this calculation. We're not giving forward guidance on our future NPE ratio, bit given that that's something that we are still working through.
But what I would say is that there's a reasonably diverse range of estimates in the market for the bit. For the calendar provisioning impact in 2020, between 50 basis points or 150 basis points. And 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. So to conclude, net interest margin, 2.46%, strong, very, very comfortable with the year end target of 2.40%.
Cost to income ratio outturn, 54%. Like Colin said, we have a very, very strong focus on cost discipline, and we're going to work towards that 50% costincome ratio. Not only is there the hiring freeze that we had in place since March, but I think in Q1 of next year, you can expect to see very comprehensive overview on how we look at costs, what structural changes we may want to make as we continue to address that. Day. Fully loaded CET1 ratio, 17.3%, obviously very strong, well in excess of all regulatory targets.
Big. And a return on tangible equity of 7.9%, obviously down versus our target, driven really big that movement around exceptionals. So 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.
Big ones that are joining me up here now. We're going to open the floor to questions. Pat Clark will give out to me because I forgot to tell you earlier to turn off your mobile phones. So if you do, that would be greatly appreciated
and
getting me out of trouble. Big. We're going to take questions from the floor, 1st 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. Day. So we'll take questions now from the floor.
You raise your hand, wait for a mic and then speak. We'll go to Eamon first. Big.
Eamon Hughes, Goodbody. Thanks for the presentation, guys. Maybe if I can just touch on costs, little bit in NPEs and then capital, if that's okay. Just in terms of the cost side, it looks like the depreciation number was up about €50,000,000 or so year on year and a half year. So big.
You'd flagged, Donald, 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? Big. Secondly, just in relation to the NPE side, you were kind of in line where we were looking at 4.7%, but the organic run rate is slowing down a little bit. You've got that target circa 5% by the end of the year.
So to get to there, presumably, you're a little bit more open around transaction activity possibly or kind of metrics like that. Big. And 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 big. 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 fact just given that we've suffered a little bit on TRAM.
Thanks, Eamonn. I'll address the NPE question, and then I'll refer the cost and capital questions to Donald. On the NPE side, we have any number of options available to us. We continue to work on new options. Big.
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.
And we will use every lever at our disposal. Clear preference, as I said, for going down the restructuring route, but we will have portfolio sales if we need to because that 5 that circa 5% target is an overriding priority for us. Bit. 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.
Big Emman, sorry, a question from you was with respect to CET1. No, it
was costs, depreciation levels
and P2R. Okay. P2R, 315, I think we would conclude that, that is at a fairly elevated level. We are due to receive our SREP letter later this year. Big.
We have no forward look at what that could be, but we've made a huge amount of effort in restructuring large parts of our balance sheet. So big 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 €10,000,000 was the impact. You need to strip out some IFRS 16 impacts as well from that. €10,000,000 I think year on year is the number to look at.
Okay. Thank you. Stephen?
Big. Stephen Lyons from Davy. Just a good couple of questions for me. Firstly, just on NPLs. Obviously, you had a gain on 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. I mean, 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, same type of positive gain again or has there been a softening? And what factors have maybe caused that softening? And then separately, just around big 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 win, please?
Thank you. On the syndicated international finance team, this is a market we've been active in for 20 years. Bit. We have a very, very disciplined approach to it. We've got a tremendous team working on supporting the European market out of Dublin and big.
The U. S. Marketer in the United States, they have a superb record in terms of the credit decisions that they have made. Bit. During the crisis, we were forced to significantly reduce our presence in that marketplace, and we did that very, very successfully and very, very efficiently.
We are very comfortable with the assets that we currently have on the balance sheet. Bit. And 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 interest 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 day that we used to great effect. I'm really comfortable with the decisions the team have made, not only in the last 6 months, bit over the course of the past 20 years.
With respect to the NPE market, big. What we've seen over the last number of years with respect to portfolios transacted by AIB 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 big as it's always difficult to try to predict liquidity in different markets at different times. But we'd be confident in hitting our NPE ratio
big. Owen Callan from Investec. Just two quick questions, If I may. On the credit impairment, I think as Donal noted, the first net negative credit impairment in a number of years. Bit.
Going forward, assuming, as I said, maybe the NPE work out has no significant impact on P and L going forward. What do you assume or what do you look for as the normalized credit impairment cost that we should expect bit from AIB going forward given the current market, as Colin maybe hinted at at the start as well, given the fact that some of the growth metrics may be turning down slightly, Albeit still relatively healthy level. So what should we build in for that normalized credit environment? And then on excess liquidity, as you've noted, you're not alone in this. Banks across Europe are struggling with the excess liquidity costs and further MRL 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 know that's big or seeking to dissuade people from putting retail deposits into AOB to limit the cost of that.
Answer for second question, then I'll hand over to Donald for your first. But on 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. And that has had desired effect in relation to discouraging the larger corporates from placing funds with us. But we'll continue to look at all options in this space.
It is a priority for us.
With respect to big cost of risk question. I mean, for years, this has been a little bit of a non event type of debate with AIB because we've always had such significant write backs. Big Definitely seems to be an inflection point this year, and that is being driven by the normalization of the key collateral indices, big, such as HPI and in the CRE type space. I think between now and the end of the year, the big. The outturn is going to be driven by some macro factors.
Brexit, obviously, is 1. But if you're to probably look to the future and try to get an underlying cost big I think between 20 30 basis points is what you should be thinking of. Okay.
We're going
to see one more question in the room before we go to the line.
Big. Pierce Bernd, Cantor Fitzgerald. Two quick questions. Just firstly on the NPEs. So we've seen the quarterly resolution rate down to or resolution rate down to about €200,000,000 from about €400,000,000 In the previous year, is that something we can expect to continue into year end?
And then secondly, just day. On the additional Emerald issuance, so I think you called out in your announcement this morning about a €2,000,000,000 increase in RWAs. How are you getting to a CHF 1,000,000,000 increase in Enron on the back of that? If you could give us some more color on that. And then actually one final one then just on new lending.
We saw new lending growth rates of about 11% in Q1, down to 8 percent for H1. How do you see that for the into year end?
On the new lending rates. We're very, 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. And I'm not going to make any apology for not having trebledigit growth rates in balance sheet. I'm very, very content with where we are at this point in time. The second question I'm going to give to Donald, 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 weather this is that's a new guide for the future. Yes. I mean, what I've Seeing 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, and like Odo mentioned earlier, is we are dealing with asset classes now that are of the most granular nature. So these are individuals, PDH type owners, okay?
So 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 big So you will see a slowdown quarter on quarter from that BAU restructuring because of the fact big that what we're dealing with is so granular in nature. And with respect to the MREL, again, I think what I said was We'd always said circa €4,000,000,000 and now I'm saying circa €5,000,000,000 If you multiply out the 90 basis points. That's probably around €2,200,000,000 of RWAs.
Multiply it out by the ratio, and that gives you €650,000,000 so we're just moving from circa 4,000,000,000 to circa 5,000,000,000.
And notwithstanding the fact that we have had a moderation of pace in Q2 2 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're going to go to the line now.
Big. Our first question is from Wal Sinner from JPMorgan.
If I can have a couple, please. Just bit. Firstly, on NPEs and going back to what you said, John, on the calendar provisioning impact. Big. How should we think about this from the outside?
As you said, it's quite complicated and probably quite difficult to work out. But when we look at your NPE coverage, obviously, it's quite big relative to the new calendar provisioning guidance that's coming in. And obviously, the coverage ratio also ticked down slightly. So 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 will be helpful.
And then 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 flow?
Big. Okay. I'll certainly take those ones. I mean calendar provisioning is obviously difficult to calculate because it's big 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 Q1 of next year.
But just to help you model out The impact, what I've tried to do is look at our existing plan, run rate, etcetera, without giving you our end stage, which I'm not going to. I'm really just trying to tell you and give you guidance. I'd like to give you an idea that 50 basis points for 'twenty is certainly around where we see it. Big. With respect to Basel IV, that's an interesting one.
I tried to find some good in the recent TRIM letter of and its associated impact. And the only one I could find is that impacts in Basel IV, surely must be a lot less now. But I mean, we're going to have to day. 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.
Our next question is from Alicia Chung from Exane.
Big You 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 it key issue with the performing mortgages or the nonperforming mortgages as well. Then secondly, just to go back on costs, 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%. And how should we think about staff growth and wage growth over the next 2 or 3 years from today? Big.
Okay. I'll take the TRIM question first. So I Again, the findings are still draft, and we're working through this with the regulator. But Faltz, I wanted to give you early line of sight. Bit.
Going from 29% to 41%, I mean, that landing point is certainly well above the we're well above the European averages. Big. I would look at the performing impact, whereby pretrim, we were at 25% for AIB mortgages post TRIMR at 37%. So I think it's more on the performing area that's been impacted. And it's not I wouldn't say it's an issue per se with AIB in a particular part of its model.
I mean the reality is this is the result of the treatment of mortgages, mortgage holders, deep arrears through the crisis in Ireland. Big. And this is just coming to fruition at the end of a quantitative process. So that's what I'd say there. With respect to costs, wage inflation of 3%, I think, is what we've always flagged.
In terms of average FTEs, There's a few things year on year that would have impacted that, okay? Number 1, we had we in sourced we re in sourced big some activities that prior years had been overseas. So there was 100 bodies that we moved back onshore. That didn't really have a cost impact. It will kind of obviously increase staff costs and decrease depreciation.
So that kind of goes into the number. And then in terms of overall average headcount, there's a number of different items that are at play here. Big The decision we took to maintain our FSG unit at its fully invested level has an associated impact on the organization for support areas, etcetera, as we work through all of these cases on a case by case basis. Big. I mean, all I would say is that the 1300 people that you can see in the FSG unit, I mean, that is not a normalized situation for a bank With a normalized NPE ratio.
But I think that we'll be able to provide more color on that later. So I'd say that's the main area of the FTE movements.
Big. That's very clear. And 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? And in terms of big.
The staff numbers falling again. Can we assume that they'll start to be run off bit. 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 20 very, very, very, very, very, very, very, very, very, very, very, very, very,
very, very, very, very, very, very, very, very, very, very, very, very, very, very, very, very,
very, very, very, very, very, very, very,
very, very, very, very, very, very, very, very, very, very, bit. 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. Bit. When I was doing my own job, I was notorious for going into FSG to rate it for high quality bankers because the training they get there is very exceptional. And some of the people who moved into leadership positions within my old division would have come from Jim O'Keefe's world in FSG.
I have no intention of seeing these people forced out of AIB when they complete their work. But we will be bit redeploying that across the rest of the group. And in so doing, if we'll be replacing people who may be consultants big for our honor staff as a result of being Gateway contractors. I'd also like to draw your attention to the fact that we still have a very, very high level of activity in terms of tracker enforcement. Big.
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 as for in the group replacing non FTE employees.
Bit. Got it. That makes sense. So it's probably fair to assume this is sort of rebasing of staff levels and we can just assume general wage inflation from here going forward. Big.
Yes. Our next question is from Chris Can't from Autonomous.
I just want Come back on calendar provisioning, if I may. If I think about what we're seeing with the gains you book on portfolio sales, big So you still expect to sell any further NP portfolios in a capital neutral way, but you're actually booking some gains. So Your coverage ratio might be low, but it's obviously adequate in terms of the market clearing price for these assets. If I then think about how calendar provisioning plays through in the 50 bps big 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, how does that actually materialize in practice? Because your provisioning is obviously adequate as far as the market's concerned for these assets. And related to that, if you then go on to sell these assets, will you then recover that 50 bps in the sense that You go back to the clearing price, which is where you're currently marked?
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?
Quite any amount of propagation.
That is obviously what you need to be able to calculate all of the moving parts associated with this. I mean 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. I mean how things work out from there. Canada provisioning will be an impact through capital.
It's going to impact all banks day throughout Europe. We've been on a long journey on reducing NPEs. I think what I would say is that we're going big Aim to hit our well, we will hit our target at the end of this year circa 5%, and then we will look to move beyond that.
Okay. We have run out of time, ladies and gentlemen. The clock is against us today. But thank you all very much indeed for being with us. And we look forward to seeing you, and we have lots more to say in the spring.
Thank you.