Welcome to the AIB Trading Update Call. We have Mark Burke on the line who will give a short intro and then turn the call over to G and A.
Good morning. To introduce the IMS This morning, I'm going to make a couple of initial comments, run you through very briefly and then as we introduce and say, I'll hand over to Q and A. So at a high level, the message is here essentially that the bank's performance remains very much on target. If we look at it in terms of our medium term targets, our NIM in the 2.40 plus range comfortably Our tracking to a cost income ratio by end 2019 run rate of 50%, very much on targets. We have also sustained net loan growth over the period and Our underlying performing book has grown well in the year to date.
The last Leg of that of the story is essentially the NPE reduction and that continues to be unplanned and therefore That being the key to ultimately our excess capital release and that we expect to reach The European order, the certified percent by end 2019 as well. So we are essentially reaffirming All of those. To take I'm going to digress from the statements. I'll go to the back of it essentially just to take One issue upfront, which is the more surprising one is the morning, which is that Bernard has informed The Board of his intention to resign. The principal points I want to make about that are that First of all, Bernard will remain with the bank as CEO into the New Year that we have immediately started a process To choose Bernard's successor, the Board have started that process and that will get him underway in earnest as we start into next week.
It is also clear in the statement that we are we have considerable bench strength and that is Evidenced by our appointment to Deputy CEO of Thomas Meirch, who is our COO and To Deputy CFO of Donald Galvin, who is the Group Treasurer. So the message here is essentially this is BAU and we have immediately embarked on the sort of process you would expect. That I'll leave to one side and then I'll talk to you briefly through the actual statement itself. So The highlights being fully loaded NIM 18 or 17.9 percent, our NIM year to date 2.51 Discipline cost management performing loan increased by $3,000,000,000 and our NPEs reduced by 29 In the year from 10% to 7.2%. And I have already touched on those.
Just then as we move into the meat of the statements itself, The principal points we're making on backdrop, our Irish economy continues to grow strongly and you can see that through the kind of Constant upward revision. Employment is growing and we are reaching a point of sort of full employment, which has obvious implications On cost as well as for the buoyancy of our trading business, activity in the Irish housing market continues to improve and although there are significant and remain significant supply constraints. On the sort of negative or more concerning side is obviously the global uncertainty and The uncertainty in relation to Brexit. And we talked a little bit more about this because like everybody else, The probability waiting for a disorderly or longer period of uncertainty is one That everybody is probably waiting a little bit more towards the downside. For us, We still have base case obviously of a non disorderly, but we are looking at all potential scenarios and we look at that across In terms of our business, our credit stance and also impact for our customers and work with our advisors, our Advisors are working with our customers in doing so.
Financial performance though, turning back to remains very strong. NII On an underlying basis, stable and NIM at 2.51% compares very well with Both our targets and prior year. In terms of the factors that impact our NIM, Obviously, STAAR underlying NII means that the plus side is in good shape, but we do have the impact of excess liquidity Approximately 4 basis points to $1,000,000,000 is what we are experiencing. Now that said, we believe That we will have our exit NIM will be somewhere in the 2.46%, 2.47%, mid-240% s range by year end. And they as I say that we are taking measures to displace and certainly To apply negative rates to non retail deposits.
On Customer fees and commissions stable as you would always expect. And on the cost side, the factors are As always, continued wage inflation, which is the product of the buoyant economy and Continued investments in our business and our loan restructuring activity and against that, Obviously, the continued drive towards efficiency being the way we keep on track For that cost income ratio. One point I would make in relation to exceptional cost is in general, we probably have Slightly higher exceptional costs than consensus, but we also have slightly higher write back than consensus. So we are comfortable With consensus given those two canceling factors. And the drivers of The costs are still the same and they will we will clearly be coming out the other side of Our tracker mortgage, our IFRS 9 programs and ultimately that investments in dealing with restructured loans.
Turning to the balance sheet then, net loans increased by $500,000,000 and that's $500,000,000 and That basically means that our performing loan book has increased by 3. And on the other side of the equation, NPEs continue to reduce, having reduced, as I said, but From our R27,200,000,000 at September from R10,200,000 at the start of the year and therefore Getting us to that target and normalized level by end 2019. The principal points on the balance sheet and what that growth reflects is 2 or 3 different things. We obviously have A strong performance from our corporate business. We have a strong performance from our mortgage business maintaining our market share in around 32%.
Although that Mortgage market is slightly smaller in consensus terms than originally expected. And our UK and SME businesses Are operating well, both operating well in economies where investment decisions are essentially probably Delayed and that's probably in our view a actively a Brexit consequence. And turning to funding and capital, just a couple of very small points. Obviously, we keep we continue to accrete capital and we have 17.9% fully loaded CET ratio by end September, that reflects our reflects a dividend Based on prior year, which is the matter which is normally computers and we have as yet Had no real update on no update on the TRIM exercise to inform the market on. We have also had a successful MREL issuance just in the last month $750,000,000 and this is the start of our U.
S. Dollar program. So we are well on the way to fulfilling our $4,000,000,000 MREL issuance Requirements having done 3 so far this year and completed $1,650,000,000 I have Already covered the management changes section. And I think just to round out, This is a I think an IMS which shows that the bank is performing to expectations And expecting to reach all of the targets that we have set ourselves as we went Through IPO and through last year. So good quarter, expect to meet expectations and well positioned as we move into 2019.
On that, I will hand it over for questions.
Q and A. We will pause for another 5 seconds. Our first question comes from Bank of America, Alastair Ryan, your line is open. Please go ahead.
Thank you. Good morning. I'm just trying to work through this First order problem of too much deposits. The inflows have been very strong year to date. It looks like that's So you get them in for nothing and they cost you money on day 1.
Al, how do you work that through? I mean, as you mentioned, that's something you want because it's a delicate balance, not winding the customers up, but also It is a real cost to you. And then down the road, if these are stable deposits, they'll turn out to have been very valuable to have got in For nothing. So in a way, there's a sort of delayed benefit if we do believe interest rates ever normalized, which BCB is trying to tell us the will. So just pushing the pull and then if I can push a little bit to the NIM Has that an impact?
What about net interest income? So obviously, we're using NIM as a proxy for net interest income, but There can be dynamics in the quarter that mean that's not necessarily a one for one? Thank you.
Yes. Brian, Alsir, thanks. So I'll take the net interest income one too. We did actually front up with that, Which is really to sort of back up or demonstrate the points, but mainly it's a denominator effect From liquidity that you're looking at impacting NIM, so our NII very stable. There's a slight decrease in what we call our Dispense interest, which is related to NPE reductions, but broadly you can see from our net interest income that it is Pretty much flat year on year.
Then turning to NIM and impact of the liquidity, you're absolutely right. And the way we look at it As business is that the operating and straightforward retail, it is a very big step If you move from 0 to negative. However, in relation to any significance SME and corporate deposits of any size, they are essentially ones where It should be perfectly acceptable to move to negative rates. And even moving to negative rates, obviously, that doesn't give you doesn't give you a compensate impact, but and we have a sort of ratcheted structure as we do so. So we very much split Are based into the 2 and it is the large SME and corporate That we have applied negative rates to and I think we've had some success thus far in displacing.
So the Comments you make, which is there is clearly an upside as we move towards The curve moves up towards 0. And the other side of that coin is that if One believes that forever we were in a negative interest rate territory then the whole industry would probably revisit retail. But as at Today and as for the foreseeable future, we do not envisage negative rate retail customers. I think that's everything that you
Got you. Yes. Thank you.
Thanks, Manavas.
Next question comes from David, Cleveland. Your line is open. Please go ahead.
Good morning. Can you have your questions first?
Can you hear me okay? I can now.
Sorry, good morning. Just a couple of questions for me. Firstly, just on the CET1 development in Q3, if you could just walk through that in a bit more granular detail with us because certainly I would have been expecting At least that's sort of an outturn on the Project Redwood deleveraging alone. And separately, is that and maybe on a related point, Down to the corporate lending, could you just talk us through the moving parts there? Clearly, that's a stronger performance.
Maybe that's what's causing the slightly weaker CEU-two zero nine churn given Higher RWA density, but how much of that corporate is domestic focused corporate versus international leverage lending? Thanks so much.
Okay. Yes, I am a little bit surprised that you were expecting a higher On the quarter, but basically our accretion profit thus far for the year less a dividend Which is computed on the basis of prior year. And then we did get an RWA with a couple of about 20 basis points of impact From Redwood in that. And there are a couple of other bits and pieces I wouldn't describe. Corporate as the principal driver Of RWAs in the quarter.
So the second question was Corporate and the split. Actually, if you look across, I'm just thinking, as I look across all of our corporate books, syndicated, CRE and sort of mainstream corporate, all of them have performed well Across the quarter, it isn't biased into any particular one. Everything has sort of outperformed.
Okay. Thanks very much.
Thanks, Keith.
Thanks so much.
Next question comes from good morning, Emanuele. Your line is open. Please go ahead.
Hi there guys. Hi, Mark. How are you? Maybe just one or two small ones. Just to pick up maybe a little bit on the lending You kind of mentioned a couple of times about SME and I think in the first half it was down and you've obviously flagged the concerns around Brexit and stuff.
So Would it be possible that maybe it kind of slowed a little bit more that it was maybe heading into sort of year on year declines that
could be double digit?
First point. Secondly, in relation to NPEs, to get to that sort of normalized level by end 2019, Presumably, it requires some disposals maybe next year and maybe just sort of any thoughts around that in terms of timing and how think about it, and maybe finally, just you mentioned numerous times around the cost line and full employment and wage inflation and all that. So Just your comfort with where sort of consensus expectations are in relation to the cost line as we move into 2019?
Yes. Okay. So costs, I mean, I'm making the point, but I made that There is there continues to be cost upward pressures in relation to waste inflation. There continues to be the ongoing impact as of our investment cycle In terms of increased depreciation, but I'm also saying as we have previous years, the 2 countervailing Things are that one, we continue to drive efficiency and continue Take out headcount on our core business at a consistent rate. And then ultimately, the normalization Of our distressed credit operations gives us the answer that adds up to run rate cost income ratio In low 50 and that remains the case.
I think it's just all the factors are still absolutely Presence that we have mentioned over the last number of results. So the cost question, the I'm just trying to remember what the next one.
Yes, just the SME point and then just disposals possibly next year.
SME and disposals, right. So as you know, We do not ever comment on individual potential portfolio disposals. However, if you Kind of takes 2 things. One of them is that our reaffirmation of our expectation to reach They circa 5%. They sort of normalized levels, European normalized levels.
And you look at our run rate sort of BAU, which is slowly, which is about the I suppose about The $100 a month, $90 to $100 a month when you look at the June to September, then It is almost an arithmetic certainty that the disposals are probably part of the equation. So Without saying yes, I'll leave it at that. And on SME, it is absolutely true that And you can see it on both sides of our balance sheet that the SME area is one where we see Strong business performance, continued profitability, growth in liquidity, but a definite circumspection on investment plans. A. And that also, I suppose, is in we see it in the UK lending context.
Well, in the UK, part of this is our credit stance or our stance on Chemours Capital we place into that market. So overall, it's a pretty subdued market, but I don't I'm not talking about the decline level that you intimated in the question.
Okay. Thank you.
Thanks very much.
Next question comes from the Tony Merits Research, Craig Kent. Your line is open. Please go ahead.
Good morning. Thanks for taking my questions. You referenced an exit NIM in sort of mid high to forward range. Obviously, the excess liquidity is having an effect there. If I think back to what you were saying, I think it's back in 2017 about the rundown of your AFS Portfolio, you're expecting that to shrink by about $3,000,000,000 over a multiyear period, dollars 3,000,000,000, dollars 4,000,000,000 Give us a feel on where you expect that AFS book As we head into next year, based on your current views around how this equity situation is developing, I guess that's the area where You may need to end up deploying some of that.
So, into a $15,800,000,000 at the first half, how should we expect that to trend as we head into 20
Yes. I mean, I think that you're absolutely right. Clearly, the liquidity issue It's not part of original plan. And yes, from a yield point of view, we have the headwind that we have talked about. But the more likely kind of AFS pattern is that it would be ultimately maintained as The kind of entry points in 2016 rather than run down, which was our original expectation.
So that would be part of liquidity absorption, even though rates on reinvestments are not particularly attractive. It is a place where the excess does better than placing Pleased with ECB and paying the price.
And if I could ask just one other NIM related question. There's been quite a lot of press coverage In recent months around potential entrants into the mortgage market, given your history of cutting SVR to That's competitive relative to front book pricing. How nervous are you around potential new entrants to drive down pricing? Do you believe the Headlines about AMPO, for instance, potentially undercutting pricing by a percentage point are realistic in terms of how you would see those
I mean, I think it's a really good question because A potential entrance, first of all, without we'll just take the specific, Without a designated partner touting a 1% Difference with an as yet uncertain rate is a very long way From being a real and present threat. To go to the then they kind of meet with the underlying question was there are a number of other players. In general, they have been Small at the periphery and their pricing has not been of the type that you would say It gives you sort of a concern about a price war. Our history in terms of moving front and back book It is very much part of a strategy of serving our customers, maintaining our customers and maintaining a sort of covenant with the customer, which is that With us, whether you are on our back or front book, you get the same rate and it's a competitive rate. And that has in our view, that is one which is set out in order not to stimulate Any significant level of activity in the remortgage market and therefore shorten the life.
As a last point, I mean, our cuts in SDRs took place over a period of time when we We're doing significantly well in liability repricing. We do not expect To lead in that area, but we do believe that we have the ability to respond If the market became difficult. As an overall point, we have always said that what we should have is a well completed market with a number of Consistent players and it is not a good idea to have a very, very attractive market that somebody can decide to enter into For opportunistic reasons.
Okay. Thank you.
Thanks, Chris.
Next question comes from Credit Suisse, David Wong. Your line is open. Please go ahead.
Good morning all. Thanks for taking my question. I just had one question. It's really just thinking about accessed equity from the perhaps the asset point of view, obviously, given that you've got quite a low LDR ratio, Is there anything that sort of stops you from being a bit more vigorous in on the lending front in order to redeploy that excess Liquidity? Many thanks.
Well, I mean, I think that the principal point on that is There is a sort of natural market size. There is a level of demand and then there are essentially our credit and Underwriting standards. And I do not say I think that what you would essentially have to do is take a very different We will not do so. So our excess liquidity in broad terms is something that we have to deal with from the other side, which is an attempt, First of all, to displace and to displace through a series of essentially imposition Of negative rates, obviously, we have the benefit of or we will lose the level liquidity as Telstra ends and I do not see it as a Essentially a major capital deployment or liquidity deployment opportunity.
Many thanks.
Okay, one more.
Next question comes from JPMorgan, Raul Sinha. Your line is open. Please go ahead.
Hi, good morning, Mark. I'm surprised nobody already asked this, but is there a reason that official reason or any kind of reason that's been communicated for Bernard to have that down. I guess in your case, there was an understanding that you were moving to a new To a sort of new job, is that the same case here or is there something else? Obviously, the performance is pretty solid, so it's not performance related, I would have thought.
I think the message is that it's absolutely not performance related. I mean, although I do not have the detail, Yes, absolutely. Bernard has had another opportunity, which he has elected to take up, Which provides an attractive opportunity. But that's about all I can say on the subject because I don't have any more details on that.
Okay. That's good enough for me for now. Just the second one, following up on the mortgage market share. You've called it out as being steady at 32% in August. There's been obviously quite a few price cuts in the market more recently.
So I was wondering if you might give us some kind of sense of how we should expect the share to evolve. Are you taking any sort of active pricing decisions and Sort of what the general outlook for the mortgage originations is going to be in Q4?
I mean, I think that there have been a number of pricing cuts. Our overall view on this is that a sort of stable set of competitors who are consistently in the marketplace It's probably the best answer. Some who sort of enter and leave make a reasonably big And it's very it's a fairly straightforward thing to do with a fixed marker, Which doesn't have an impact on back book. But we would we expect sort of things to be reasonably Stable as we go through the 2nd quarter or the last quarter. And Our hope is that we will continue to have that level of share on average for the year.
Thanks very much, Mark.
Okay. I think we're done.
Alicia? Sorry, Alicia disconnects herself. You may begin.
Okay. We will cover that. Thank you very much.