Good morning, ladies and gentlemen. We will now listen to the Bank of Ireland's annual results announcement for 2021, presented by CEO Francesca McDonagh and CFO Myles O'Grady, followed by a Q&A.
Good morning, everyone. Today, we are announcing a strong rebound in our financial performance for 2021, continued momentum in the execution of our strategy, and confidence in our growth outlook for 2022 and beyond. As summarized in Slide 5, in 2021, we delivered our best performance since the financial crisis. We're reporting underlying profit before tax of EUR 1.4 billion. Operating profit pre-impairment shows strong growth, up 53% year on year and up 25% versus 2019 pre the pandemic. Our 2021 ROTE is 12.7%. While this is helped by an impairment gain, it also reflects strong business performance and the successful execution of our strategy over the past number of years. This shows that we're on track to deliver a sustainable ROTE of in excess of 10%.
A further key development in 2021 was the commencement of the sell-down of the state's holding in the group. This holding is now below 6%, and we expect to return to full private ownership during 2022. This is a positive step for Irish taxpayers, for the Irish economy, and for Bank of Ireland. We will always be grateful for the support we received over a decade ago. We repaid this back in full by 2013. By the end of 2021, we had returned EUR 6.2 billion to the state from its original support of EUR 4.8 billion. The ongoing sales process adds to these returns and will mark a milestone moment in normalizing the relationship between the Irish state and Bank of Ireland. The economic outlook across our markets has markedly improved.
This is mirrored in our improved asset quality with a EUR 194 million net impairment gain and a reduction in our non-performing exposures ratio. We've maintained our momentum in delivering our strategy, including the transformation of our business model and our technology. We continue our disciplined focus on costs, and we delivered on our 2021 cost target. We're also reporting a 32% improvement in operating contribution from our U.K. business. This is enabled by our strategic reset with a clear focus on the value of our lending in the U.K. over volume. Capital is a particular highlight of today's results. We finished 2021 with a fully loaded CET1 ratio of 16%, an increase of 280 basis points year on year, excluding distributions.
Last year, we said that distributions would recommence on a prudent and progressive basis based on performance and capital position. Since then, we've agreed two significant acquisitions, which, subject to the completion of the customary clearances, will materially enhance our returns and are a highly effective use of our capital. We're also supporting economic growth across our markets and are continuing to invest in our business. Consistent with our distribution policy and investor feedback, we are returning capital to our shareholders. We are recommencing distributions with EUR 104 million proposed in a mixture of dividends and buybacks, and we expect our distributions to grow from this position. Turning to Slide 6. Our purpose is to enable our customers, colleagues, and communities to thrive. For customers in 2021, we provided over EUR 5 billion in new Irish mortgage and SME lending.
Our customers recognize Bank of Ireland as the market leader in supporting their financial well-being. For colleagues, for a second successive year, our cultural embedding score is above the global financial services benchmark. This reflects the investment we are making in transforming our culture to make Bank of Ireland a great place to work for our colleagues. However, as with many employers, we face an increasingly competitive environment to attract and retain talent. At the same time, Bank of Ireland still remains subject to significant remuneration restrictions, including a ban on performance-related pay and benefits for colleagues at all levels in the group. These restrictions are unique to Ireland, and they place us at a competitive disadvantage when recruiting and retaining staff at every level of the organization.
Our view is that Ireland should now align with European norms, and that the historical crisis-era restrictions should be replaced with the guidelines set out by the European Banking Authority. Returning to Slide 6. We continue to support the communities where we live, work, and do business. We have increased our sustainable finance fund from EUR 2 billion to EUR 5 billion, and our green bond issuance of EUR 1.3 billion supports our green lending, including development funding for social housing. In 2021, we launched our Responsible and Sustainable Business Strategy. We have made good progress under all three pillars as set out on Slide 7. This includes in green lending. We have provided EUR 1.8 billion in green mortgages since the product was launched in 2019, making us the leading lender of green mortgages in Ireland.
Other highlights include the wide range of actions we are taking to meet our financial well-being targets and the significant progress we've made towards 50/50 gender equality in our senior management appointments. Our progress in 2021 is recognized in improving ESG ratings. In 2022, we are increasing our investment in responsible and sustainable business, including the appointment of our new chief sustainability officer and the establishment of a new dedicated board committee. The strength of our balance sheet and franchises ideally position us to manage the risks in the climate-related transition and support our customers with significant climate-related investment opportunities. Slide 8 shows the improving external environment. In Ireland, we expect to see another year of growth and improving labor market conditions as the country recovers from the pandemic.
Inflation and the impact it is having on disposable incomes is a key focus in the Eurozone, and Ireland is no exception. However, it is important to note that Irish household balance sheets are in good shape with a 23% increase in deposits since 2019. The other impact inflation is having is on interest rate expectations. These are a potential tailwind for our net interest income. In addition, housing completions are expected to increase to 27,000 in 2022, the highest annual outturn in Ireland since 2008. This is supportive of our mortgage lending in the year ahead. In terms of our wider outlook, we are vigilant to the impacts from the fast evolving geopolitical situation in Eastern Europe. The next slide details how our systems investment is supporting customers' accelerated shift to digital.
Digital adoption and delivery have stepped up a gear with 94% of our everyday product applications now digitized. Mobile app logins increased 63% year-over-year, and the improvements we've made to simplify customer journeys have delivered a material uplift in customer satisfaction and cost savings of around EUR 70 million. Slide 10 sets out the tangible benefits of our transformation program on our customers, costs, and competitiveness. Key highlights of what we have delivered include Wealth and Insurance enhancements to drive revenue growth and diversification, personalized customer engagement to drive tailored offers and advice. The rollout of single view of customer to enhance how we use data, and the introduction of card controls to significantly reduce customer friction and toil. There's more to come in 2022.
Further enhancements to our digital propositions are planned, and we will have dedicated resources in place to manage the expected onboarding of a significant number of new customers as a result of structural change within Ireland's banking sector. Slide 11 sets out the group's progress on cost improvement. We continue to meet our targets. 2021 operating expenses were below EUR 1.65 billion, with costs reducing for an eighth successive reporting period. Overall, we've reduced costs by 13% net since 2017. We expect costs to continue to reduce year on year in both 2022 and 2023, excluding the impact of our announced acquisitions as planned. However, in 2022, the rate of cost reduction is likely to moderate.
This is due to 2 factors: increased inflationary expectations and structural change in Ireland's banking sector, which warrants some focused investment to capture targeted growth opportunities. We then expect to return to our prior cost reduction trajectory in 2023. I look forward to providing more detail on how we see the outlook for costs as part of our strategy refresh during this year. Turning now to Slide 12. Our strategic actions in the U.K. and a supportive market backdrop delivered a step change in performance during 2021. The U.K.'s operating contribution pre-impairment was up 32% last year and is 53% above the 2019 pre-pandemic outturn. In line with our strategic plan to prioritize lending value over volume, we reduced the size of our loan book and plan further deleveraging in 2022.
In addition, we reduced our deposit book as we move towards our U.K. end state of a smaller but more profitable balance sheet. A good example of this pivot is the success of our bespoke offering. This made up 25% of our U.K. new mortgage lending in 2021, 4 times its share in 2019. Wealth and Insurance delivered a robust performance in 2021, with operating profit increasing 32% to EUR 121 million. Assets under management of EUR 22.5 billion were up 14% year-on-year. We saw around EUR 800 million of net life inflows into the suite of funds offered by Wealth and Insurance during 2021, up 107% versus 2020. This performance has been supported by our digital investments in our Wealth and Insurance business.
For example, 3 quarters of pension applications through our broker channel are now made via our digital platforms. As Ireland's only universal bank insurer, we are ambitious for further growth in this area, supported by our planned acquisition of Davy in 2022. Staying with acquisitions, our plans in relation to Davy and the KBC portfolios are transformational. Davy is Ireland's market leading provider of wealth advisory and capital market services. It's an excellent fit for our existing wealth capabilities. The acquisition is progressing through the approval process and has now been approved by the Competition and Consumer Protection Commission. The planned acquisition of KBC's loan and deposit portfolios is another significant development for our business, consistent with our growth strategy. This acquisition is currently in phase two of the competition approval process. We are preparing a detailed response to the assessment we recently received from the Competition and Consumer Protection Commission.
We will allocate circa 200 basis points of capital to execute these 2 acquisitions. This investment will significantly strengthen our franchise and future growth potential. Combined, the acquisitions are expected to deliver improvements in our group ROTE of in excess of 1% on a full year basis. I will now pass over to Myles to take you through our financial performance in more detail.
Thank you, Francesca, and good morning. I hope everyone is well. We are pleased to report a strong set of results, demonstrating recovery from COVID-19 and progress with our strategic objectives. Highlights include underlying profit of EUR 1.4 billion and net credit impairment gain of EUR 194 million, net lending of EUR 0.6 billion, which excludes planned U.K. deleveraging, a 5.5% NPE ratio, very strong capital ratios, an adjusted ROTE of 12.7%, and the important recommencement of distributions. Slide 18 sets out our P&L and performance metrics. A more supportive backdrop, augmented by the strategic initiatives which Francesca spoke to, has produced a strong outcome. Total income rose 12% last year, with all businesses contributing. Operating expenses fell 4% after absorbing the effects of inflation and investment.
That's a net reduction of 13% or EUR 254 million since 2017. The credit impairment gain captures an improved macro outlook and generally a more benign credit environment. Slide 19 covers net interest income. We've delivered a 5% increase, and that's down to a number of factors. We continue to maintain commercial discipline with the 12 basis point improvement in the loan asset spread. Our participation in the ECB TLTRO scheme contributed EUR 62 million to income, successfully hitting the required lending benchmark. The application of negative interest rates provided a EUR 72 million benefit, and our U.K. strategy helped to improve U.K. interest income by 8%. We are mindful of the evolving interest rate environment and the positive impact this can have on future performance.
We have factored in the market view that euro rates could rise to 0% by early 2023, which will support interest income. I'll come back to this when I provide guidance on the 2022 outlook. Our balance sheet is positively geared to the dynamics at play in the rate environment. I've set out on the Slide a 25 basis points interest income sensitivity, which on a 2022 annualized basis could improve income by circa EUR 60 million. Turning now to slide 20 on lending. Retail Ireland and corporate new lending grew by 16% in 2021. U.K. new lending fell 24%, reflecting our strategic pivot to higher margin segments with the U.K. NIM improving by 24 basis points to 1.97%.
We also saw higher redemptions in 2021, impacted in part by the buildup of liquidity during COVID, resulting overall in net lending of EUR 0.6 billion when we exclude planned U.K. deleveraging. Slide 21 summarizes business income growth of 15%. While an insurance business income grew by nearly a quarter, supported by higher new business and improved performance on the existing book. This result is a strong endorsement of our bancassurance model. Corporate and markets grew 13%, driven by higher fee income linked to lending transactions and increased customer activity. On this slide, I would also like to mention the EUR 72 million contribution from valuation items, reflecting equity and bond market performance in 2021. Turning now to Slide 22. As Francesca said, these results are the 8th consecutive period in which we have reported lower costs.
We met our cost reduction target of reducing costs to below EUR 1.65 billion, despite headwinds from inflation. Staff costs fell 8%, supported by the voluntary redundancy program announced in 2020. Pension costs were higher in 2021, mainly as a consequence of the nonrecurrence of a gain recognized in the 2020 results. Depreciation and transformation costs combined were 19% lower as a result of legacy technology assets, which are at the end of their useful lives, and we continue to invest in new technology. The following slide sets out our non-core charges for the year, which fell as we progress important elements of our business restructuring.
The customer redress charges you see here relate to the ongoing tracker mortgage examination and the EUR 25 million Central Bank of Ireland fine related to historical IT service continuity issues. Slide 24 sets out the building blocks for the net impairment gain of EUR 194 million. EUR 152 million of this gain is a combination of ILA model releases from the improved economic outlook, partially offset by the retention of management adjustments as we protect our balance sheet from latent COVID-19 risk and NPE resolution and related items. We're also reporting a gain of EUR 42 million from stage 3 actual loan loss outcomes and portfolio activity. Subject to no material change in economic conditions, we expect the full year charge for 2022 to be lower than 20 basis points.
Slide 25 updates on the NPE position, which reduced by 20 basis points to 5.5%. This was mainly driven by our Irish residential mortgage NPE disposal, with minimal net inflows seen during the year. We are mindful of the risk of NPE inflows in 2022 from COVID-19 as fiscal supports are withdrawn. To counter this, we will continue to leverage our proven track record of working with customers to implement sustainable solutions. We also continue to explore potential NPE transaction opportunities. On this slide, I'd also call out the strong ILA coverage in our books, 2.5% at the end of 2021, which compares to 1.6% at the end of 2019 pre-COVID. Slide 26 provides a useful snapshot of our loan book, which is well diversified by sector and geography and predominantly secured.
You will see on this slide that reflecting the economic recovery, there's been a big move from Stage 2 to Stage 1 in 2021, and we've maintained similar levels of coverage on Stage 2 and Stage 3 loans. 2021 saw very strong capital accretion from operating performance and a benign credit environment. This was augmented by the NPE disposal and balance sheet optimization through the CRT transactions. Our fully loaded CET1 ratio is 16% and 17% on a regulatory basis. Notwithstanding allocating around 200 basis points to the agreed acquisitions, we are very pleased to announce the recommencement of distributions totaling EUR 104 million. The last item I'd call out in this slide is that as economic conditions improve, this will, over time, lead to the normalization of regulatory capital requirements.
We see this in the reintroduction of the U.K. countercyclical buffer, increasing Bank of Ireland requirements by 30 basis points in 2022. Our strong capital position leaves us well placed to meet future regulatory capital requirements while we continue to execute our strategy, grow our balance sheet, and continue with our distribution policy. Now to 2022 outlook. On profitability, overall, we see 2022 total income in line with 2021. This reflects broadly stable net interest income underpinned by rates rising to zero by 2023. Clearly, rates will be a swing factor here, mindful of the emerging Ukraine crisis. We expect higher business income, and we assume a zero contribution from valuation items, which is subject to equity and bond market movements. Our costs will continue to reduce.
On a net basis, 2022 costs will be lower than 2021 after absorbing inflation and excluding the announced acquisitions for which the customary clearances are currently being progressed. The impairment outlook is expected to remain benign in 2022, with the charge expected to be below normalized levels. Subject to no material change in the economic conditions or outlook, we expect the 2022 impairment charge to be lower than 20 basis points, and we should see further improvements in our NPEs. On capital, we reaffirm guidance for the expected acquisitions to consume circa 200 basis points of CET1 once completed. We expect strong capital generation in 2022, with this outlook supporting continued balance sheet growth and business investments. Distributions are expected to increase on a prudent and progressive basis.
Finally, before handing back to Francesca, as many of you will know, I depart the group in March. I would like to take a small moment to thank you as important market stakeholders for your support during the three years I've been with Bank of Ireland. Our 2021 results show that the group is executing the right strategy, and I wish Francesca and the team, including my hardworking colleagues in Finance and Investor Relations, the very best for the future. Francesca, back to you.
Thank you, Myles. It's been an absolute pleasure working with you these past few years, and I know everyone at Bank of Ireland, myself included, wishes you every success. To recap, today, we are announcing a strong rebound in our financial performance for 2021, continued momentum in the execution of our strategy, and confidence in our growth outlook for 2022 and beyond. 2021 was a year of strong performance and strategic progress. We're reporting underlying profit before tax of EUR 1.4 billion, an adjusted ROTE of 12.7%, and are on track to deliver a sustainable ROTE above 10%. The completion of the acquisitions of Davy and the KBC portfolios is expected to contribute incremental ROTE in excess of 1% on a full year basis. We see unique growth opportunities in our home market.
We have turned around our U.K. performance. A return to full private ownership is expected during 2022. We have recommenced distributions, and we will provide a strategy refresh, including new medium-term targets during this year. Thank you, and we'll now go to questions.
Thank you. We will now move to Q&A. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound # key . Once again, if you would like to ask a question, please press star and 1 on your telephone keypad. Your first question today comes from Robert Noble from Deutsche Bank. Please go ahead. Your line is open.
Morning, all. Thank you for taking the questions. Just a couple of questions from me. Is the outcome of the competition review a black-and-white pass or fail situation, or are there any other suggestions that they could come back with that will potentially allow you to purchase KBC but with restrictions? Secondly, what's the impact on capital of rising rates on your bond portfolio? Is there any material capital risk from that perspective? Thank you.
Okay. Thank you, Robert. Thanks for the question. I'll answer the first one then pass to Myles on the capital question. So
For KBC, first of all, we feel, you know, very positive about both transactions. It's difficult to comment on the KBC process with the Irish Competition Authority, the CCPC. You'd have seen the development that's gone to phase two. That's not entirely surprising. We're engaging very constructively with the Competition Authority to make progress as part of that process. It's difficult for me to sort of comment more broadly than that at this stage in the process, but we look forward to giving you an update in due course. I can turn to Myles on capital.
Yeah, thanks, Rob. In the context of accounting convention, there's no material impact in the context of movements in bond valuations and capital. However, when we think about the rate environment and as our structural hedging matures and as our liquid asset matures, that does represent upside in income, which of course is positive to capital. Thanks, Rob.
Thank you.
Thanks, Rob.
Thank you. Your next question comes from the line of Diarmaid Sheridan from Davy. Please go ahead. Your line is open.
Good morning, Francesca. Good morning, Myles. Thank you for the presentation and taking my questions. I have a couple, if I may. Firstly, on the cost outlook, perhaps you could talk to the dynamics at play, and to continue to achieve the cost reductions that you're flagging in both 2022 and 2023. Should we expect further non-core charges to achieve those? Maybe 2 questions which are somewhat interrelated. Just on the distributions, perhaps you could talk to the calibration of the payout, you know, in the context of both the very strong capital number, but also the significant profitability in, excuse me, 2021.
Finally, just around capital, how should we think about management capital levels? I guess in the context of the normalization of, you know, some of those regulatory buffers that you've flagged, Myles, and also the Central Bank of Ireland review of the overall macroprudential landscape. Thank you.
Thanks, Diarmaid. I'll answer the broader cost outlook question and also how we think about distribution and calibration. Then I'll pass to Myles on both non-core for costs and on management capital levels, if that's okay. Just in terms of cost, we've been clear that costs will continue to reduce year-on-year in both 2022 and 2023. We've made incredible progress, we believe over the last four years. We've taken EUR 250 million net out of our cost base since 2017, closer to EUR 400 million on a growth basis, and that won't stop. The initiatives that we've had in place to get us to sub EUR 1.65 billion today will continue to make us increasingly efficient. Those programs continue to drive cost reduction.
What we have said is that the rate of cost reduction is likely to moderate in 2022 for two reasons. One is the increased inflation expectations that we're all seeing, and second is just the degree of structural change that we're observing and expecting in Ireland's banking sector. We see that as warranting some very focused investments to capture targeted growth opportunities. We do want to invest in that profitable growth. We're literally using some of the capacity from our ongoing cost reductions to invest in targeted strategic growth and would then expect to return to, you know, more aligned to our prior cost reduction trajectory in 2023.
You know, overall, that means we're still confident that we're going to land near the EUR 1.5 billion target that we would have communicated before. We'll provide a bit more granularity on our cost outlook when we do our strategy refresh this year. I know Myles will talk about non-core in a moment, but just broadly on distribution and how we think about buybacks and our policy. We know how important distributions are for our shareholders. I mean, there's the two key points that I would want you to sort of take away from this. One is we previously said that distributions would recommence on a prudent and progressive basis based on performance and capital position, and that's exactly what we're doing today.
We're emerging from the pandemic. We've got strong performance, and we consider the recommencement of distributions as a really important, progressive step for our shareholders. We decided the quantum with our board based on financial performance and capital outlook, and we decided the split based on a number of factors. And that includes investor feedback, and some investors value cash, some investors value buyback, and we wanted to reflect both components, in what we're communicating today. I think it's also important to. Whenever we're talking about distribution, and the 20 basis points of capital or EUR 104 million, we need to take that in the context of the 200 basis points and circa EUR 1 billion of capital being invested in the two transformational acquisitions of Davy and KBC's portfolio in Ireland.
Those combined are gonna strengthen our business model. They're gonna generate higher sustainable returns. I would have commented comments in my opening words about an incremental ROTE in excess of 1% on a full year basis. Importantly, that helps enhance our future distribution capacity. We're in a very fortunate position to be able to do both distribution and two significant acquisitions. We've been clear that our future distributions are expected to increase.
Thanks for Francesca , and good morning, Diarmaid. Hope you're well. Let me take the non-core question first, and then I'll discuss capital requirements. Non-core, in the context of our transformation program, our non-core costs have been elevated as we essentially invest today for both immediate and future benefits. A good example is the cost of the voluntary redundancy scheme announced in 2020, which we took as a cost of non-core, but of course, that results in our staff costs falling by 8% in 2021 as we saw 1,500 FTEs take up that voluntary redundancy scheme. Now, as our formal transformation program comes to an end, we can expect our non-core costs to reduce as well.
We've seen this in the 2021 results with non-core transformation costs falling by in the region of 50%. Now, two important points to make. When we set our 2023 cost target, we assume non-core costs will not be a material feature, unless, of course, there are specific new opportunities that require further investment, and which improve returns. And secondly, in that cost target, we include ongoing technology and digital investments. In relation to capital guidance, I referenced earlier that as economic conditions improve, that we can expect the reintroduction of regulatory capital buffers over time, and we've seen this already with the U.K. countercyclical buffer, increasing Bank of Ireland requirements by 30 basis points this year. Now, in previously setting our capital targets at greater than 13%, we factored in the reintroduction of these buffers.
You're mindful, of course, that our 2021 requirements was 9.77%, rising to 10.07% this year, which excludes P2G. We also know the Irish Central Bank of Ireland, the Irish CBI, is evaluating capital requirements, and hopefully we'll get more clarity on that later this year. Two items to note. If we do see a need to increase our capital target beyond 13%, I would expect increases to be relatively moderate. Our strong capital position as we enter 2022, combined with organic growth opportunities, leaves us in a very comfortable position to manage those requirements.
you know, the team look forward to provide an update on medium-term targets and requirements as part of our investor update for 2022. Thanks, Diarmaid. Thank you both. Myles, I'd just like to wish you the best in your new challenge and adventure. Thank you very much, Diarmaid.
Thank you. Your next question comes from the line of John Cronin from Goodbody. Please go ahead. Your line is open.
Good morning, Francesca, and good morning, Myles. Thanks for the presentation. I've a few questions. The first one is, could you just talk through the constituents of income guidance for FY 2022 in a bit more depth of the drivers underpinning those? Secondly, can I just press you further on the distributions point? You finished the year now with a CET1 ratio of 16% relative to your capital ratio target of 13%. Appreciate your comments to the effect that distributions will grow from here. Why didn't you go a little bit further for 2021, you know, given the very strong capital position? Then thirdly, thanks for the improved rate sensitivity disclosures.
Could you talk us through some of your assumptions in terms of how deposit costs are expected to evolve within those sensitivities, and whether deposit betas are expected to materially differ once you get through 50 basis points of ECB base rate increases? Thank you.
Thank you, John. I'll go to Myles first on income guidance and rate sensitivity, and I'll come back on distributions. Thanks.
Hi, John. So on income guidance, just to recap, we expect 2022 income to be in line with 2021. Interest income expected to be broadly stable. Just to give you some of the most material moving parts, we expect with the loss of the TLTRO income of EUR 62 million, which we had the benefit in 2021, we won't have that in 2022. That is predominantly offset by a rise in interest rates from negative to zero. I said earlier, you know, movement in interest rates is a key factor here.
Clearly, while emerging geopolitical concerns could result in rate uncertainty, overall, the direction of a rising rate is a net positive for interest income. Slide 19 sets out the sensitivity for a +25 basis points move in rates, which on an annualized basis would support income by EUR 60 million in 2022. Slide 38 in the appendices provides a further, what I would describe as a simplified sensitivity to a 1% movement in rates, which would, you know, in a given year, could improve income by EUR 275 million.
Following the 15% increase in business income in 2021, we expect that to grow further in 2022, particularly from renewed activity supporting credit card and related fee income in Retail Ireland. We also expect, as we have signaled previously, strong increases from our Wealth and Insurance business, particularly from our life business. Just to remind everyone, that guidance on income excludes the benefit of the acquisitions. In particular for 2022, the benefit of the Davy acquisition on business income. I should also comment on valuation items, which we assume makes a 0 contribution in 2022. The actual outturn for this will ultimately be driven by equity and bond markets impacting Wealth and Insurance and group liquid assets.
If I think about what we've experienced so far in quarter one this year, we've seen some market volatility generate a level of negative valuations. Now, on the other hand, we see the increasing rate environment has offered an opportunity to crystallize some gains on liquid assets. Just to give you more detail on the interest rate sensitivity. You know, in essence, we hedge all of our fixed rate asset exposures back to short-term interest rates, and we're protected from longer-term rates through our structural hedge program. Now we are exposed to ECB and Bank of England base rates, and particularly for euro, we have significantly more exposure to short-term floating interest rates, such as EURIBOR.
For example, that's the reason why, you know, we've deployed negative interest rates to large deposits over the last couple of years, which you could view as an additional natural hedge to short-term interest rates. Clearly in a rising rate environment, our exposure to those short-term rates offers income upside, and we see that in the sensitivity set out. In particular, in relation to your question on deposit beta, that 1% interest rate sensitivity would assume a basic up between 30%-50% in that region. I would probably see that as being a relatively prudent assumption in the context of the analysis. Thanks, John.
John, just to answer your question on distribution. Let me give you a little bit sort of color on how we think about the prudence and progressiveness wording in our policy, but also how we think about the future. We are prudent, and I think in the context of investing 200 basis points in two acquisitions and proposing a 20 basis point distribution, that is a reflection of prudence. I mean, that 200 basis point are two very significant transactions that will be materially beneficial to our business model and financial results. The progressiveness, you know, points to the fact that the EUR 104 million is a starting point, and we would expect distributions to grow.
You know, when we think about the future, you know, we've given that sort of guidance about expecting to grow because it reflects confidence in our business performance, our improving ROTCE trajectory and organic capital generation. When we sit down with the board to talk about future quantum, we wanna get the right balance between future distributions and funding balance sheet growth and investing in our business. Future distributions will reflect one, improving ROTCE trajectory and financial performance, and we've talked about our confidence in being on the track to being in excess of 10%, plus the combined 1% accretion on a full year basis from the 2 deals. 2, it reflects any evolving regulatory requirements, and Myles has spoken to that just now.
Third, it reflects our capital position. You know, even with our current business model, we generated 185 basis points of organic capital in 2021. So we feel positive about that and all of which points to future distributions increasing.
Thanks very much. Best of luck, Myles, in the new position.
Thanks a lot, John.
Thank you. Your next question comes from the line of Grace Dargan from Barclays. Please go ahead. Your line is open.
Good morning. Thank you for taking my questions. Best of luck as well, Myles. A couple from me. Firstly on Wealth and Insurance, note the comments you've made so far, but maybe if you could add a little bit more color on how you expect that division to evolve in 2022, including maybe any comments on AUM growth in particular, and also whether you'd be prepared to make any comments around IFRS 17 at this point. Then secondly, just coming back on rate sensitivity, particularly on the euro piece and thinking as rates rise to zero, how do you think about the dynamics there, including how do you think customers will react?
Do you think they'll be comfortable still being charged at negative rates even as rates are rising up to zero, for example? How do you think about that interaction? Thank you.
Thank you, Grace. Thank you very much for the question. I'll answer sort of our ambitions for wealth and insurance, then Myles will cover IFRS 17 and then the rate sensitivity. Obviously, wealth and insurance, we've made this part of our business a strategic priority for growth, since we set our strategy in 2018. We've executed against that strategy. We see AUM up more than 25% since 2018. It was 14% up year on year. We've seen very strong rebounds in sales volume in 2021, up 32% year on year. Still, 15% above pre-pandemic levels. Year to date, we've got off to a good start. In terms of our outlook, I mean, we would expect our wealth and insurance business to grow organically.
Plus, obviously, the Davy acquisition will significantly strengthen and represent a step change in our wealth and insurance proposition and our ability to, subject to sort of, you know, the final regulatory approval, our ability to offer Davy's high net worth proposition to banking customers, but also their platform around Davy Select to mass affluent customers. We see real revenue synergies from the acquisition that will support further growth. I mean, I would point you to the uniqueness of our position. So we are Ireland's only bank insurer. Our penetration of our eligible customer base is strong. It's 35%, and I see potential for that to increase. Our penetration of affluent and high net worth individual households is strong as well, and that's reflected in the sort of growth that we're showing today.
Our outlook for 2022. Myles will talk about sort of income guidance more broadly, but it reflects a very positive Irish demographic of a young population that is very well employed. There are pensions and savings gaps, and people are becoming increasingly aware of the need to focus on financial well-being. While we continue to be in a low interest rate environment, the opportunity to move deposits into some of our wealth solutions is very positive. We saw over EUR 800 million of AUM increase specifically from that source. We're also seeing some increased risk appetite post-COVID as some of our customers are searching for higher yields and returns. All of that is supported by the digital investment in Banking, Wealth and Insurance.
We're not giving a firm prediction on AUM growth. Obviously, that reflects flows and market valuation. We would see our Wealth and Insurance business as becoming a more significant part of our other business income in 2022 and beyond.
Yeah. Thanks, Francesca , and great, thank you also for those kind comments. Yeah, I mean, on the wealth insurance, we've been consistently clear that wealth insurance is one of the three pillars, in addition to cost reduction and asset growth, as being one of the pillars to get to that 10% sustainable return on equity. You know, we see that 24% growth in wealth insurance in 2021 versus 2020. In fact, 2021 numbers are now, you know, broadly back to 2019 pre-COVID levels. So that's very encouraging. Absolutely, it's an area for growth into 2022. That's before we have the benefit of the Davy acquisition. You're right to call out IFRS 17.
I mean, I see it as an accounting standard which impacts the phasing of profit recognition, and doesn't change the economic value of our insurance business. Or indeed, the benefit of being the only bank insurer in Ireland. Just as a reminder, I mean, the embedded value of our wealth insurance business was EUR 1.1 billion at the end of 2021. Now, IFRS 17, as we know, will be introduced in 2023, so I'm not going to give you specific guidance on it today, but the group will provide an update as part of the planned strategy refresh. Your question on the euro rate environment and the interplay with deposit pricing and the application of negative rates.
where, you know, the base case now is that ECB rates rise to zero over the course of 2022, or at least the market would consider would require two moves by the ECB. Now of course, recent events in the Ukraine, you know, may slow that down a little bit. Let's see how that plays out. I would take you back to the sensitivity we provided on Slide 19, where that 25 basis point move this year on an annualized basis on the euro component would support income by about EUR 40 million. To your substantive question on deposit rates.
So we have applied negative rates to deposits of more than €1 million, which captures like €15 billion of deposits supporting income by just over €70 million and about €100 million on a run rate basis. Now, we're not announcing any changes to the rate environment just today. I would expect that to prevail for much of 2022. Clearly, as the European rate environment evolves, we would then therefore consider the application of negative rates accordingly. Thanks, Grace.
Perfect. Thank you very much.
Thank you. Your next question comes from the line of Chris Cant from Autonomous. Please go ahead. Your line is open.
Good morning, both. Thanks for taking my questions. Myles, if I could just echo the sentiments of others, good luck in your future endeavors. If I could ask please on Davy. I appreciate there's not very much you can say about the competition review on the KBC deal, but with Davy, you said it's been approved. Could you give us a bit more of a view on what impact you expect from that in 2022? A sense of the sort of revenue and cost impacts and any kind of visibility you can give us on how that business performed in 2021 as a benchmark for that would be helpful.
Then second, Myles, you mentioned a 30%-50% deposit beta assumption within your rate sensitivity disclosures, which you think is prudent. Obviously, you've got this kind of EUR 15 billion at negative rates. If I think about your non-U.K. deposits, you've then got EUR 60 billion at zero or above that are non-U.K. deposits. Are you expecting to pass through 30%+ of the first 100 basis points to those depositors as well, given the liquidity position on the balance sheet and indeed within the Irish banking system as a whole? Obviously, they've been floored at zero, EURIBOR being minus 50 basis points. It feels like quite a substantial pass-through of the rate rise, if we're talking about the first 100 basis points, if you could speak to that, please.
That sort of comment surprised me a little bit, and I'm wondering whether that is part of the reason your rate sensitivity looks a bit light versus some European banks who've talked more optimistically about the first 100 basis points. Thank you.
Okay. Thank you very much, Chris. I'll answer, say as much as I can about Davy and then pass to Myles on deposits. The Davy acquisition. First of all, we are very excited and look forward to welcoming Davy colleagues and customers to the Bank of Ireland Group. Would expect to do that hopefully in 2022. That is subject to the regulators, Central Bank of Ireland's approval, the CCPC, the Irish Competition Authority, have approved the transaction. In terms of the future of that, I mean. We will give more granularity in terms of our vision for how we integrate Davy into the group as part of our strategy refresh during the year. Obviously it adds a significant amount of AUM.
I mean, you see that in the pack, and it's grown to EUR 20 billion versus our EUR 22.5 billion, and a market leading proposition around wealth advisory, and it's also very complementary on the capital market side to our corporate banking and markets business. We see this very much as revenue accretive, and a real value add to diversify income away from NII, and to be market leading in this space. We'll give more information on that when we do our strategy refresh, over to Myles.
Thanks, Francesca . Hi, Chris, and thank you again for those comments. Just one comment briefly on you referenced negative rates, and I've given some information on that. To recap, the logic of applying those negative rates essentially is to offset our exposure to short-term rates as it's presented in the outcome on income from structural hedging and liquid assets. As the slide 27 gives you some detail on that. That application of negative rates has been largely successful to achieve that offset. Now, I take your point on the interest rate sensitivity. It's important to say that today, you know, I don't really want to be specific on customer pricing. That wouldn't be appropriate.
We have assumed for the purposes of setting out what we would describe as an instantaneous and sustained 1% parallel movement in rates, that impact of if it's 100 basis points higher, a positive to NII of EUR 275 million. I have said that the deposit beta is between, you know, 30%-50%. Now, in reality, we would need to think about that in the moment, you know, when that rate environment changes. I think it's, you know, that guidance we've given is off a static balance sheet, and it's really before management action to think about the precise impacts on the various customer cohorts. I know that that's a broad answer to your question.
I know I haven't given you the precise component, but you'll appreciate not wanting to offer pricing guidance today.
If I could possibly follow up on that and maybe come at it from a slightly different angle, then. I mean, if I think about the structure of your balance sheet, you're at a loan-to-deposit ratio well below 100%. Where do you aim to get the group to from a loan-to-deposit ratio perspective over the next couple of years? 'Cause I think you could probably still be quite comfortable from a liquidity perspective if the entire negative rates balance of EUR 15 billion decided to go elsewhere because other European banks were offering slightly less negative rates, for instance. Where do you aim to get that loan-to-deposit ratio to from a group perspective by, say, 2023, 2024?
Yeah. Thanks, Chris. With the dynamics of the Bank of Ireland balance sheets has been the build of liquidity, and we saw that in, you know, the average volume of liquid assets in the second half of last year, which was EUR 46 billion. Now, heavily supported by the TLTRO. But even taking that aside, liquid assets are a large component of balance sheet. Now, actually, while that does represent a reduced demand for credit in a rising rate environment, it's beneficial. That's the first point to make. To your more precise question.
Firstly, in the Irish franchise, we are expecting to see on the back of a stable balance sheet in 2021, we are expecting the Irish franchise to grow in 2022. That's driven by a couple of factors. One, on the mortgage side, a growing mortgage market to say EUR 12 billion in 2022, possibly rising to EUR 14 billion, EUR 15 billion out over the further years. Also, on business banking, and to be fair, we've kind of called this a couple of times where we think sentiment from business customers will result in credit growth. We know Brexit had an impact. We know that the pandemic had an impact. Again, we have reason to be positive about that.
Of course, the last point, the execution of the KBC deal, which will bring to bear both EUR 9 billion of assets and EUR 5 billion of deposits, will also grow our balance sheet, improve LDR, and also suck up excess liquidity. I think on balance, you know, we expect the loans deposit ratio to improve from our lending profile and the liquid assets, by virtue of the rate environment, the returns should enhance given the rate outlook. Okay, thank you.
Thanks, Myles.
Thank you. As a reminder, if you'd like to ask a question today, please press star and one on your telephone keypad. Your next question comes from the line of Guy Stebbings, BNP. Please go ahead. Your line is open.
Hi. Morning, Francesca. Morning, Myles. Thanks for taking questions. The first one was back on net interest income and then the flat guidance. You talked about the TLTRO benefit falling out, then the benefit from rates hopefully coming through this year. What are you assuming from a volume perspective? I mean, the answer to Chris's question, it sounds like you looking quite positively in terms of the mortgage market, business banking, you know, structural changes in the market more broadly might help volumes. Any color you can give on what volume expectations are predicated on that income guidance would be helpful. Also associated with that, can I just double-check the comment you made around the benefit from rates assumed this year? Because obviously the timing of which we go to around zero is important.
I think you said EUR 40 million from the rate benefits of FY 2022. Is that just Euro short rates or is that rate tailwinds more broadly? The second question was on costs and just understanding the commentary around the slightly slower cost takeout in 2022 and then the step up in 2023 on a clean basis at least. Interest around the comments on capturing opportunities from the structural changes in the market. I guess we'll have to wait for the strategy update for what that might mean for top line benefits, et cetera. I would have thought that might be a multi-year process in terms of investment that would come alongside that.
Any color you can give around that would be useful just to help us feel comfortable that is a sort of a 1-year impact. Thank you.
Sure. Thank you, Guy. I'll go to Myles on NII and rate benefit and sensitivity, and I'll come back on cost again.
Yeah, happy to. Good morning, Guy. The assumption in the interest income guidance is that the rate environment, based on what we know today, is expected to support income, I would say, in the region of between EUR 50 million and EUR 60 million. That's a combination of movements in euro rates, but also, thinking about the U.K. rates as well and indeed, U.S. The majority of that being in the Euro space. On volume, so if I just unpick some of the moving parts. In the Retail Ireland franchise, it is the mortgage market growth plus sentiment from our business banking customers that will result in what I would describe as green shoots of balance sheet growth.
I call it green shoots because we do know that the level of liquidity in the system is still a factor that is hindering growth, i.e., if a business wants to invest, there are cash reserves they can deploy in the first instance. Nonetheless, we do expect green shoots in 2022. On the corporate side, I mean, that was a very good contributor to balance sheet in 2021, and we expect that to feature again in 2022. The other part of our business in the U.K., in line with strategy, we expect that balance sheet to continue to deleverage.
What's really important here, and it's not an exact science in a given year, but over a number of years, that the dynamics are that as the balance sheet falls, we write business at a higher margin, have a lower funding cost and a more operating model. Just to bring that to life, you know, we know that the U.K. margin in 2021 of 1.97%, up 24 basis points, about 16 of that was from better margins, particularly from our bespoke business, but also lower funding costs by about 10 basis points. That interplay of higher margin, lower funding cost and a smaller balance sheet will play out. Guy, I haven't given you know, the precise volume number, but hopefully I've given you the moving parts to get a good sense.
Yeah, Guy, on cost, if we just take a step back, I mean, we set a EUR 1.5 billion target. It was in the context of longer term cost journey from the EUR 1.9 billion cost base that we would have had back in 2017. That's about a EUR 400 million net reduction, probably closer to EUR 600 million gross terms. As of now, we are over 60% of the way there. We're confident that by the end of 2023, we would have achieved the vast majority of that cost. We'll be in and around the EUR 1.5 billion number on an underlying like-for-like basis.
I think the reality is that we have 2 banks who've announced their departure from Ireland, and we will see circa 1 million personal and business current account customers looking for a new home. We're already seeing that, particularly in the case of Ulster Bank, and we want to capture that business. We don't want to lose sight of growth opportunities. That very strong track record in managing our costs gives us some capacity to invest in profitable growth. If we don't land precisely on the EUR 1.5 billion number, that's because of deliberate decisions that we're taking to invest some of those growth savings back into growth opportunities.
We would expect most of that to be happening during the course of 2022 and be back on to a more regular cost reduction trajectory in 2023.
Okay, thank you. That's helpful.
Thanks, Guy.
Thank you. Your next question comes from the line of Diarmaid Sheridan from Davy. Please go ahead. Your line is open.
Hi again. Just a question on the U.K., if I may. Just looking to, you know, clearly you're flagging further deleveraging in 2022, but looking beyond that, I suppose, how should we think about the growth of that business, you know, once that's happened? Clearly, the division has seen quite a substantial turnaround in recent years. You know, I suppose just how should we think about that in a maybe a more longer term picture? Thank you.
Thanks, Diarmaid. 2021 has been an outstanding year for our retail U.K. business, which reflects strong performance by the teams, which I'm very pleased about, and also the actions that we've taken over the last few years to improve returns. It's also helped by a supportive market backdrop as well. In terms of our net lending balance, so that reduced GBP 2.6 billion year-on-year to GBP 2.2 billion, very much in line with the guidance that we provided previously. We would expect further reduction of around a similar amount, around 11%, in 2022. That's as a result of just the focus on lending value over volume.
We're less focused on the hyper-competitive remortgage market, more focused on more niche lending, particularly our bespoke offering, which has been very successful and has now increased to a 25% of our new mortgage origination and also focused and disciplined lending in car financing and personal lending. You know, when we step back, the U.K., we always wanted the U.K. to be a more positive contributor. We use ROTE contribution as our North Star. What we have now is a very different business to four years ago. It's multi-niche. It's got its bespoke offering. It's got industry recognition. We've reduced our funding, including with the Post Office by about a third since 2019. We've got a new mortgage platform, recommitted to Northern Ireland, taken a lot of cost out.
We now see the U.K. as very much a positive overall contributor to group ROTE, which we're satisfied with. We'll talk more about how we see our future strategy and medium-term targets when we meet for our strategy refresh in the year.
Great. Thank you.
Thank you.
Thank you. As a reminder, if you'd like to ask a question, please press Star and One on your telephone keypad. Your next question comes from John Cronin from Goodbody. Please go ahead. Your line is open.
Hi again, and thanks for taking a further question. Well, two, actually. This should be pretty quick. One is on stage two residential markets in the U.K. Can you just talk through why there was a EUR 400 million uplift in stage two loans there? And then secondly, is there any update or is it, I guess, is there an appointment of a CFO imminent given Myles here leaving in March? Thank you.
Okay, I'll have to answer the second one. Myles is with us until the end of March. We would hope to be able to make an announcement soon. We are in a regulatory approval process, but I feel pretty positive about that.
In the meantime.
In the meantime, back to you on stage two, resi in U.K.
Overall for John, I just said the increase in mortgage stage two is the application of LGD floors. That's the main point. It doesn't really reflect any deterioration in the underlying quality of the book, but we have taken the opportunity to provide floors on LGDs, not just for U.K. mortgage, but also for Irish. Thanks, John.
Okay. Thank you.
Thank you. I will now hand the call back for any closing remarks.
Okay. Well, I just wanna say thank you to everyone for your questions and your time. We look forward to meeting some of you face-to-face when we're out and about. I reiterate the very good comments, positive comments about Myles, still here until the thirty-first of March. Thanks for your support and time. Thank you very much, everyone.
Thanks a lot. Take care. Bye.
Thank you. That does conclude today's conference call. Thank you for participating. You may all disconnect.