Welcome to the AIB Trading Update call. We have Mark Bourke on the line who will give a short intro and then turn the call over to Q&A.
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 the introducer said, hand over to Q&A. 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 240 plus range comfortably are tracking to a cost income ratio by end 2019 run rate of 50%, very much on target. 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 the story is essentially the NPE reduction, that continues to be on plan, therefore that being the key to ultimately our excess capital release.
That we expect to reach the European norm, the 35% by end of 2019 as well. We are essentially reaffirming all of those. I'm going to digress from the statement. I'll go to the back of it essentially just to take one issue up front, which is the more surprising one of 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, that will get underway in earnest as we start into next week.
It is also clear in the statement that we have considerable bench strength, that is evidenced by our appointments to Deputy CEO of Thomas O'Muircheartaigh, who is our COO and to Deputy CFO of Donal Galvin, who is the Group Treasurer. 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, then I'll talk you briefly through the actual statement itself. The highlights being fully loaded NIM 18 or 17.9%. Our NIM year to date 251. Discipline cost management. Performing loan increased by EUR 3 billion and our NPEs reduced by 29% in the year from EUR 10 to EUR 7.2. I have already touched on those.
Just then as we move into the meat of the statement itself, the principal points we're making on backdrop are 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, although there are significant and remain significant supply constraints. On the sort of negative or more concerning side is obviously the global uncertainty and particularly the uncertainty in relation to Brexit. We talk a little bit more about this because like everybody else, the probability weighting for a disorderly or longer period of uncertainty is one that everybody is probably weighting a little bit more towards the downside.
For us, we still have base case obviously of a non-disorderly, 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 advisers. Our advisers 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 251 compares very well with both our target and prior year. In terms of the factors that impact our NIM, obviously strong underlying NII means that the plus side is in good shape, we do have the impact of excess liquidity. Approximately 4 basis points per billion is what we are experiencing.
That said, we believe that we will have our exit NIM will be somewhere in the 246, 247, mid 240s range by year end. 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. On the cost side, the factors are as always continued wage inflation, which is the product of a buoyant economy, continued investment in our business and our loan restructuring activity. 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 costs is, in general, we probably have slightly higher exceptional costs than consensus, we also have slightly higher write back than consensus.
We are comfortable with consensus given those two canceling factors. The drivers of the costs are still the same. We will clearly be coming out the other side of our tracker mortgage, our IFRS 9 programs, and ultimately that investment in dealing with restructured loans. Turning to the balance sheet, net loans increased by EUR 0.5 billion, that basically means that our performing loan book has increased by EUR 3 billion. On the other side of the equation, NPEs continue to reduce, having reduced, as I said, from our EUR 27.2 billion at September from EUR 10.2 billion 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, 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 the 32%, although that mortgage market is slightly smaller in consensus terms than originally expected. Our U.K. and SME businesses are operating well, but operating well in economies where investment decisions are essentially probably delayed. That's probably, in our view, effectively a Brexit consequence. Turning to funding and capital, just a couple of very small points. Obviously, we continue to accrete capital. We have a 17.9% fully loaded CET1 ratio by end September. That reflects a dividend based on prior year, which is the manner in which it is normally computed. We have, as yet, had no real update on the TRIM exercise to inform the market on.
We have also had a successful MREL issuance just in the last month, EUR 750 million. It is the start of our USD program. We are well on the way to fulfilling our EUR 4 billion MREL issuance requirement, having done three so far this year and completed EUR 1.65 billion. I have already covered the management changes section. I think just to round out, this is, 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. Good final quarter, expect to meet expectations, and well positioned as we move into 2019. On that, I will hand it over for questions.
Thank you. Please press star one to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow the signal to reach our equipment. Again, please press star one to ask a question. We will pause for another five seconds.
Good word.
Our first question comes from Bank of America. Alastair Ryan, your line's open. Please go ahead.
Thank you. Good morning. I'm just trying to work through this first order problem of too much deposits. The inflow's been very strong year to date. It looks like so you get them in for nothing, and then they cost you money on day one. How do you work that through? As you mentioned, that's something you're on because it's a delicate balance not winding the customers up, but also it is a real cost to you. Then
Down the road, if these are stable deposits, they'll turn out to have been very valuable to have got in for nothing. In a way, there's a sort of delayed benefit if we do believe interest rates ever normalize, which the ECB's trying to tell us they will. Just the push and the pull, then see if I can push a little bit to the NIM has had an impact. What about net interest income? Obviously we're using NIM as a proxy for net interest income, but there can be dynamics in the quarter that mean it's not necessarily a one for one. Thank you.
Right, Alastair. Thanks. 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 that mainly it's a denominator effect from liquidity that you're looking at impacting NIM. Our NII very stable. There's a slight decrease in what we call our suspense interest, which is related to NPE reductions. Broadly, you can see from our net interest income that it is pretty much flat year-on-year. Turning to NIM and impact of the liquidity, you're absolutely right. The way we look at it as a business is that the operating and straightforward retail it is a very big step if you move from 0 to negative.
In relation to any significant SME and corporate deposits of any size, they are essentially ones where it should be perfectly acceptable to move to negative rates. Even moving to negative rates, obviously, that doesn't give you a compensate impact. We have a sort of ratcheted structure as we do so. We very much split our base into the two, 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. The comment you make, which is there is clearly an upside as the curve moves up towards zero. 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.
As at today and as for the foreseeable future, we do not envisage negative rates retail customers. I think that's everything.
Got you. Yep. Thank you.
Thanks very much, Alastair.
Next, the question comes from Stephen Lawrence. Your line's open. Please go ahead.
Morning.
Good.
Just a couple of questions. You hear me okay?
I can now.
Sorry, morning. Just a couple of questions from 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 de-leveraging alone. 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 CET1 outturn given its higher RWA density. How much of that corporate is domestic focused corporate versus international leverage lending? Thanks very much.
Okay. Yeah, 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. We did get an RWA with a couple, about 20 basis points of impact from Redwood in that. There are a couple of other bits and pieces. I wouldn't describe corporate as the principal driver of RWAs in the quarter. 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 TRE 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, Steve.
All right, thanks so much.
The question comes from Goodbody, Eamonn Hughes . Your line's open. Please go ahead.
Hi there, guys. Mark, how are you?
Hello, Eamonn.
Maybe just one or two small ones. Just to pick up maybe a little bit on the lending trends. You kind of mentioned a couple of times about SME, and I think in the first half it was down and you obviously flagged the concerns around Brexit and stuff. Would it be possible that maybe it kind of slowed a little bit more, that it's maybe heading into sort of year-over-year declines that could be double-digit? First point. Secondly, in relation to NPEs, to get to that sort of normalized level by end of 2019, presumably it requires some disposals maybe next year and maybe just sort of any thoughts around that in terms of timing and how we should think about it. Maybe finally, just you mentioned numerous times around the cost line and full employment and wage inflation and all that.
Just your comfort with where sort of consensus expectations are in relation to the cost line as we move into 2019.
Yeah. Okay. Costs. I'm making the point that there continues to be cost upward pressures in relation to wage inflation. There continues to be the ongoing impact of our investment cycle in terms of increased depreciation. I'm also saying as with previous years, the two countervailing things are that one, we continue to drive efficiency and continued take out headcount on our core business at a consistent rate. Ultimately the normalization of our distressed credit operations gives us the answer that adds up to a run rate cost income ratio in low 50. That remains the case. I think it's just all the factors are still absolutely present that we have mentioned over the last number of results. That was the cost question. Sorry, I'm just trying to remember what the next one.
Yeah, just the SME point, just disposals possibly next year.
SME and disposals. Right. As you know, we do not ever comment on individual potential portfolio disposals. However, if you take two things, one of them is that our reaffirmation of our expectation to reach the circa 5% at the sort of normalized levels, European normalized levels. You look at our run rate sort of BAU, 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 disposals are probably part of the equation. Without saying yes, I'll leave it at that. 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.
That also, I suppose we see it in the U.K. lending context. In the U.K. part of it is our credit stance or our stance on how much capital we place into that market. Overall it's a pretty subdued market. 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 Autonomous Research, Grace Dargan. Your line's open. Please go ahead.
Good morning. Thanks for taking my question. You referenced an exit NIM in the sort of mid high 240s range. Obviously the excess liquidity is having an effect there. If I think back to what you were saying, I think it was back in 2017 about the rundown of your AFS portfolio, you were expecting that to shrink by about EUR 3 billion over a multi-year period, EUR 3 billion-EUR 4 billion. Give us a steer on where you expect that AFS book to be as we head into next year based on your current views around how this excess liquidity situation is developing. I guess that's the area where you may need to end up deploying some of that. I think you were EUR 15.8 billion at the first half. How should we expect that to trend as we head into 2019, please?
Yeah. I think that you're absolutely right. Clearly the liquidity issue is not part of original plan. Yes, from a yield point of view we have the headwind that we've talked about. The more likely kind of AFS pattern is that it would be ultimately maintained at the kind of entry point N16 rather than run down, which was our original expectation. That would be part of liquidity absorption, even though rates on reinvestment are not particularly attractive it is a place where the excess does better than placing with European Central Bank and paying the price.
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 keep that competitive relative to front book SVR pricing, how nervous are you around potential new entrants to drive down pricing? Do you believe the headlines about An Post, for instance, potentially undercutting pricing by a percentage point are realistic in terms of how you would see those front book SVR pricing?
I think it's a really good question because a potential entrant first of all just to take the specific without a designated partner housing a 1% difference with an as yet uncertain rate is a very long way from being a real and present threat. They kind of meet with the underlying question, which 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 gives you a concern about a price war.
Our history in terms of moving front and back book 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. That has, in our view, that is one which is set out in order not to stimulate a significant level of activity in the remortgage market and therefore shorten the life. As a last point, our cuts in SVRs took place over a period of time when we were 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-competed market with a number of consistent players, and it is not a good idea to have a very attractive market that somebody can decide to enter into for opportunistic reasons.
Okay. Thank you.
Thanks.
Next question comes from Credit Suisse, David Wong. Your line's open. Please go ahead.
Good morning, all. Thanks for taking my question. I just had one question. It's really just thinking about your excess liquidity from 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 on the lending front in order to redeploy that excess liquidity? Many thanks.
Well, I think that the principal point on that is there is a sort of natural market size. There is a level of demand, then there are essentially our credit and underwriting standards. I think that what you would essentially have to do is take a very different credit stance, and we will not do 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 a level of liquidity as TLTRO ends. I do not see it as potentially a major capital deployment or liquidity deployment opportunity.
Many thanks.
Very much. Okay. One more.
Next question comes from JP Morgan, Raul Sinha. Your line's open. Please go ahead.
Hi. Morning, Mark. I'm surprised nobody's already asked this, is there a reason, an official reason or any kind of reason that's been communicated for Bernard to have stepped down? I guess in your case, there was an understanding that you were moving to a sort of new job. Is that the same case here, is there something else? Obviously, the performance is pretty solid, so it's not performance related, I would've thought.
I think the message is that it's absolutely not performance related. Although I do not have the details, yeah, absolutely, Bernard has had another opportunity which he has elected to take up, which he finds an attractive opportunity. That's about all I can say, Raul, on the subject because I don't have any more detail than that.
Okay. That's good enough for me for now. Just a 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. 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 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 is probably the best answer. Some who sort of enter and leave make a reasonably big splash, and it's a fairly straightforward thing to do with a fixed marker which doesn't have an impact on back book. We expect things to be reasonably stable as we go through the second quarter or the last quarter, and our hope is that we will continue to have that level of share on average for the year.
Okay. Thanks very much, Mark.
Okay. I think we're done.
Next question comes from-
We'll have one more.
Davy, line.
Alicia.
Sorry. Alicia disconnected herself. You may begin.
Okay. We will cut it at that. Thank you very much.