Earnings Call: H1 2021

Aug 3, 2021

Morning and you're very welcome to our results presentation. In the first half of twenty twenty one, we've seen a strong recovery in our performance. We've continued to deliver our strategy. We've maintained a laser light focus on costs. Our economic outlook is increasingly positive with sentiment back to pre pandemic levels and we've announced 2 significant acquisitions. This progress is reflected in our Results group operating profit of €465,000,000 is up 72% compared with the same period last year. If we leave aside the turbulent year of 2020 and compare our results to the same period in 2019, our underlying operating profit pre Impairment is up 7%. Our asset quality remains strong, supported by the improving economic backdrop. And our net impairment charge of just €1,000,000 reflects this with the group's NP ratio improving by 20 basis points to 5.5%. Miles will give further detail on these points shortly. We've also maintained a crystal clear focus on delivering a multiyear strategy and that includes in the following 5 key areas. Our discipline regarding cost improvement is well established. Today, we are announcing a further reduction in costs for the 7th consecutive reporting period. We have continued to invest in our digital capabilities and product journeys, which is driving improved customer satisfaction. In the UK, our transformation of our business model has delivered a turnaround in financial performance reporting a 52% increase in operating profit. Our planned acquisitions of Davy and KBC Bank Ireland further strengthen our growth outlook and support our national champion ambition. And we've strengthened our capital position with our fully loaded CET1 ratio increasing by 70 basis points to 14.1%. Our purpose is to enable our customers, colleagues and communities to thrive. Slide 6 shows some examples of how we've been living that purpose this year. To mention just a few, new customer lending is up 12%, 99% of all payment breaks have now concluded. Very positively, we've seen minimal impact on asset quality. And our financial well-being program continues to grow with a circa 140% increase in customer financial health checks. In recognition of the group's progress, Euromoney recently named Bank of Ireland the best bank in Ireland for a second successive year. Slide 7 sets out an increasingly positive macro economic outlook. The Bank of Ireland's economic pulse stood at 89.3% in July, above its pre pandemic level. We've seen a marked improvement in labor market conditions. Consumer spending is rebounding as the economy reopens. Latest data shows that in volume terms, retail sales in Ireland in June 2021 were up over 13% when compared with June 2019 and the multinational exporting sector also continues to be very resilient. All this contributes to a strong outlook for the Irish economy. We expect a strengthening in GDP growth in Ireland to 9% this year. This will be supported by increased household spending as some of the 17% growth in household deposits since the start of the pandemic is tapped into. These factors are expected to reduce unemployment further. Our positive economic outlook is also supported by Ireland's vaccine rollout, now amongst the highest in the world. In the UK, we expect strong GDP growth of 6.8% this year with another solid increase in 2022. And in terms of Brexit, while there are ongoing challenges following last December's deal, We see indications that businesses are increasingly adjusting to the new trading arrangements. Slide 9 shows how customer engagement continues to shift to digital. We recorded almost 22,000,000 visits per month to our digital channels. That's up 8% in the same period last year continuing a long established trend. Today, 75% of all our product applications are fulfilled digitally, up from 69% last year. Our investments in digital also supports our strategic priority to drive improved customer satisfaction. Complaints have fallen 54% from H1 twenty nineteen and our mobile app customer effort score has more than doubled improving from 24 points a year ago to 49 today. As set out on slide 10, our transformation is clearly delivering customer benefits and improved business outcomes. For example, this year we launched a seamless digital journey for our Irish mortgage customers. We've also overhauled the digital process for small business and agricultural loan applications. Nearly 3 in 4 applications are now digital compared to just 1 in 4 before the journey was enhanced. And there's more to come. In the second half of this year, we'll introduce new customer engagement tools and enhance our mobile app with spending insights, nudges and card management capabilities. As part of our strategy, cost reduction has remained firmly in our sights. On Slide 11, you'll see that we have reduced costs consistently in the last seven reporting periods. Since 2017, we've decreased gross costs by over €300,000,000 or 17%. This reduction in costs has given us the capacity to invest in our people and in our technology. Overall, net Costs are down by 13% during this period. We are on track to deliver a cost base of below €1,650,000,000 this year and the building blocks are in place to reduce this to €1,500,000,000 by 2023 based on our current business model. These building blocks include completing the voluntary redundancy scheme that we launched in 2020, delivering more digital journeys for our customers, completing the restructuring of our UK business and reducing our property footprint. Transformation of our UK business model continues as highlighted in the next slide. Today, we're reporting that our UK performance is significantly improved. In the first half, we delivered a 52% increase in operating profit. Net interest income grew 12%, Costs reduced 11% and we're growing in bespoke mortgages, which now account for more than 1 5th of our new UK mortgage lending. We are delivering these improved returns in the UK through higher new lending margins with clearly defined discipline and commercial risk appetite, reduced funding costs, lower operating costs and a smaller more profitable balance sheet. Growing our Wealth and Insurance business has been a core element of the strategy that we set out in 2018. Slide 13 details the organic growth that we have delivered over the first half, including an increase in operating profits of 27%, New premium sales up 34% and assets under management growth of 17%. The digital platforms that we launched in our Wealth Insurance business last year are also giving us the ability to scale. Today, over 2 thirds of new individual pension business arrives digitally following the launch of our broker portal. Our wealth advice platform has seen 60% of applications on a straight through process with sign up time cut by 2 thirds and nearly 40% of all general insurance policies are now generated via our digital wallet. We have recently announced 2 significant inorganic opportunities which are highly complementary to our strategy. Whenever it comes to potential acquisitions, we always ask ourselves 2 key questions. Does it offer value to our shareholders? And is it a good fit for our business. The acquisitions of Davy and KBC Bank Island tick both boxes. Davy is the number one provider of wealth management and capital market services in Ireland. It is several times larger than its nearest Irish competitor and will bring about €16,000,000,000 of assets under management to the Bank of Ireland Group. While we've grown our own Wealth Insurance business organically by Around a quarter since 2018, the Davy acquisition strongly supports our ambitions for further business growth. And it comes at a time when the demand for wealth products and services is increasing in Ireland. We've agreed to acquire Davy, which had an adjusted PPT of circa €33,000,000 in 2020 for an enterprise value of €440,000,000 The next significant inorganic opportunity is the KBC Bank Ireland transaction for which we entered into a memorandum of understanding in April. This is on a portfolio basis and our interest is focused on circa €9,000,000,000 of performing mortgage loans. KBC Bank Island has around 300,000 customers who we look forward to welcoming to the group. These transactions which will be financed from internal resources are important contributors to our mission to achieve sustainable returns above our cost of capital. Both are subject to standard regulatory and competition authority approvals. Turning now to slide 15, we've made good progress since the launch of our responsible and sustainable business strategy. There are 3 pillars to this strategy and we are delivering under each. Highlights include our progress on gender diversity. We also launched a national campaign, the F Word, the F stands for finance and challenge the taboo about talking about money. This campaign has contributed to Bank of Ireland being ranked 1st place amongst all brands in the LASIS Ipsos brand shout. And in the first half of twenty twenty one, we committed to expanding our sustainable finance funds by 2 50 percent from €2,000,000,000 to €5,000,000,000 We also raised €1,250,000,000 and the launch of 2 green bonds. Before I conclude, I want to look ahead. We will refresh our medium term targets at a strategy update, which expected in 2022. We see clear growth opportunities for the group as economies recover from COVID-nineteen from changes to market dynamics in Ireland and from the turnaround of our U. K. Business. Given our strategic delivery in recent years, including on cost, Wealth and insurance, digital transformation and culture, these are all opportunities that we are very well placed to take advantage of. The KBC and Davy acquisitions will further our ambition to be the national champion bank in Ireland. In addition, The Irish government's decision to sell down its 14% ownership in Bank of Ireland is a milestone moment. This further normalizes the state's relationship with the group. Having been the 1st and only Irish bank to fully repay the taxpayer, Bank of Ireland will now be the 1st Irish bank to return to full private ownership. This is an important validation of our team and of our strategic direction. I'll now pass you over to Miles to take you through our financial performance in more detail before we move to Q and A. Thank you, Francesca, and good morning. I hope everyone is well. Today, we are pleased to report an underlying profit of €465,000,000 Representing a strong recovery in performance and improved outlook. A £1,000,000 net impairment charge with macro conditions benign, net lending growth And an NPE ratio of 5.5 percent, down 20 basis points since the start of the year. Our capital position also threatened in the period, Reporting a regulatory CET1 of 15.3%. That's 14.1% on a fully loaded basis. We've seen increasingly positive economic conditions supporting increased trading activity and minimal credit impairments. As set out on Slide 20, total income increased by 14% in H1, with all businesses contributing to the strong performance. Net interest income was 2% higher, and I'll return to this in a few moments. Business income increased by 8%. Valuation items made a positive contribution, while operating expenses reduced by 4%. And non core items of £39,000,000 were driven by planned restructuring costs. Slide 21 covers net interest income in detail. Our 2% increase in NII reflects tailwinds, including reduced funding costs and the application of negative interest rates to corporate deposits. Both of these factors were more than sufficient to offset headwinds, and these were from negative yields from liquid assets and reducing structural hedge income. The group has maintained its pricing discipline with the loan asset spread 16 basis points above the same period last year. And we also participated in the TLTRO in March, which benefits interest income with further potential income upside to come in H2. Turning now to Slide 22. Overall, the net lending book was higher at £77,200,000,000 On a constant currency basis and adjusting for planned U. K. Deleveraging and the successful NPE transaction, The book grew by £0,300,000,000 in H1. All divisions are demonstrating solid recovery with new lending up 12%. That includes new lending growth of 38% in corporate and 15% in Retail Ireland. And as suggest you referenced, In the U. K, we saw strong growth in bespoke mortgages. These grew by 170% while retaining a disciplined approach to pricing and risk, which is a good demonstration of our strategy execution. The group's business income increased by 8%. The 5% increase in Wealth and Insurance reflects higher new sales activity and existing book income. Retail Ireland posted a modest decline as a result lower card fee income, while growth in corporate and markets reflects higher underwriting fee income on the back of strong new lending in H1 And stable FX income. The contribution from valuation items is as a result of improved equity and financial markets. And the outlook for business income is positive and expected to grow in H2, supported by continued reopening of the economy. As mentioned earlier, this is the 7th consecutive period in which we have reported lower costs. And the €35,000,000 reduction we are announcing today is after absorbing wage inflation And higher pension costs of £11,000,000 Our non core charge is chiefly driven by ongoing business model restructuring. And for this year, we reaffirm our target for operating expenses to be below GBP1.65 billion and we have the billion box in place to reach that target. For H1, we are reporting a £1,000,000 net impairment charge from improved economic conditions and minimal loss experience, While maintaining coverage to address credit risk from the removal of COVID-nineteen government supports. I'd like to spend a few moments on the individual components of this There are 4 key points to highlight. Firstly, improved macroeconomic forecasts resulted in a requirement to hold lower allowances And therefore, an impairment write back of £163,000,000 Secondly, this was broadly offset by model changes resulting in a charge of £72,000,000 predominantly a prudent decision to change mortgage LGD assumptions and maintaining adequate coverage levels, including the application of LGD floors. Thirdly, there was minimal loan loss experience in H1. And finally, To capture the potential credit risk arising from customers who may experience credit difficulty after the removal of COVID-nineteen government supports, Our release of £8,000,000 to P and L while maintaining £229,000,000 stock and management adjustments held on balance sheet for this latent risk. In terms of outlook, we expect the H2 impairment charge to be broadly similar to H1. Slide 26 updates on our NPE position. Overall, NPEs fell marginally in the period. We have a long track record of market leadership in the management of NPEs in Ireland. In the first half, NPEs reduced by 20 basis points to 5.5%, driven by an Irish residential mortgage transaction. In terms of our approach to NPEs, we will continue our successful dual track approach, Combining working with customers to find sustainable solutions and transactions. Turning to Slide 27. We have a diversified balance sheet With strong credit quality. On stage migration, stage 2 loans increased by a net £2,000,000,000 in H1, Primarily reflecting reclassification of loans underpinning the post model adjustment for Business Banking and Mortgage Portfolios. This is minimal P and L impact in H1 as a charge was taken in 2020. Our capital performance was very strong in H1. Our fully loaded CET1 ratio increased by 70 basis points, helped by 90 basis points of organic capital accretion, A minimal impairment charge on the MP transaction. Our regulatory CET1 ratio of 15.3% provides circa 5.50 basis points of headroom to our minimum regulatory capital requirements, excluding P2G. And moving now to outlook. We are guiding for H2 twenty twenty one total income to be circa 5% higher versus H1. This guidance reflects 3 key points: higher net interest income, including the TLTRO upside if the 2nd benchmark is achieved in December Higher business income and broadly unchanged valuation items versus H1. And as Francesca set out, We read our guidance on costs. That is 2021 costs to be less than €1,650,000,000 and 2023 costs of €1,500,000,000 based on current business model. On asset quality, subject to no material change in economic conditions or outlook, We expect the H2 impairment charge to be broadly similar to H1. On capital, our end 2021 CET1 ratios are expected to increase by circa 30 to 50 basis points above June levels, which captures a range of assumptions, including loan growth, Transformation and distributions. Additional balance sheet optimization initiatives are being progressed during H2, Which will be incremental to this capital guidance. In relation to the important inorganic opportunities we have discussed this morning, The group has sufficient capital resources to support their execution. And distributions are to recommence on a prudent and progressive basis Based on performance and capital outlook. Thank you very much for your attention this morning. We will now go to questions. Thank you. We will now begin the Q and A. Thank you. Your first question comes from the line of Dheme Sheridan from Davy. Good morning, Francesca and Miles. I hope you're both well, and thank you for your presentation. Three questions, if I may. Firstly, on your guidance and specifically on the income side, if you could provide a sense of the key moving parts on both net interest income and fee and commission, please. Secondly, and mindful of your comments, Myles, I just wonder if we could understand the variables and probabilities associated with the dividend and capital distributions. And finally, just looking into 2022 and beyond, I wonder if we could get a comment on how inorganic opportunities might impact on earnings and return on tangible equity. Thank you. Thank you, Jim, and good to have you on the call. So three questions there. I'll go to the 2nd third of capital distribution and the sort of Outlook for the 2022 and beyond given M and A and then I'll Miles will get back on guidance, particularly on revenue. So in terms of Capital distribution. So we obviously absolutely understand and support the importance of distributions to our shareholders and the strong capital position that we're reporting today and Given the guidance about future capital accretion, obviously support recommencement of distributions. As we've said, it is our intention to do so on a prudent progressive It's based on performance and outlook. And it's also noteworthy that the strong capital position that we have today coincides with 2 fantastic And significant acquisition opportunities. And our belief is that allocating surplus capital to these transactions is the right decision That in turn will materially enhance future returns. So as these two acquisitions play out over the second half, Miles, myself, the Board will Distributions at the full year and we'll make the appropriate decision at that time, okay? And in terms of just M and A and sort of the future, obviously, we've got 2 opportunities here, both of which create value for shareholders. They're both Let me just briefly talk about each in turn and what that means in terms of returns outlook over time. So obviously Davy, market leader in Wealth Management and Capital Markets. The business is 75 percent Wealth Management, 25 percent Capital Markets that we're acquiring. It is a multiple of the nearest Irish competitor. It brings with it 16,000,000,000 Euros of AUM and that just compares to our own organically grown wealth insurance AUM of about €21,000,000,000 So this is Good increase, very nice strategic fit. It gives us an opportunity to diversify revenue, to include more business income And also to capture growth in the Irish demographic and some macro backdrop. KBC, the focus there is on the acquisition of the portfolio. It's Back book acquisition, and we're focused on the €9,000,000,000 performing mortgage book and about €5,000,000,000 of savings. We've entered into an MoU and we're looking to complete both transactions subject to approval and final agreement in the case of KBC in 2022. In terms of what that means for return, so our North Star focus in terms of our return on tangible equity Has continues to be in excess of 10% in the longer term and that's unchanged. That hasn't been Diluted by COVID and actually that North Star and that target is independent of M and A. Obviously, these two acquisitions will get us Beyond the 10% ROCE and we'll get there sooner, we're not being explicit in terms of timing. We've I did that we'll do a strategy refresh in 2022. And even though we'd have loved to have done that this year, we want to get the conclusion of those 2 acquisitions to be more List it in terms of timing and medium term guidance. Hopefully, that answers 2 of your questions. I'll go to Myles on the first. Thanks, Jessica, and good morning, Dermot. Hope you're well. So on guidance, we are guiding that the second half of the year income will be 5 That's higher than H1, which essentially equates to for the full year income being about 9% above 2020. And that's a better than expected outcome to where we thought it would have been, say, 6 months ago. That's driven by strong performance From our corporate business, but also stability in Retail Ireland despite the lockdown and better margin overall margin in the U. K. And that lending performance has also supported our participation in TLTRO, Which is enhancing income. So they're the broad moving parts. So we delve into within that 5% overall. If we go to net interest income, Expect the second half of the year to be higher by about 5%. It was up 2% in the first half of the year. And the major moving parts For interest income in the second half of the year are that dynamic of the application of negative rates and lower funding costs Offsetting generally offsetting the impact of negative yields on liquid assets and lower structural hedging income. But also importantly, the guidance on interest income is supported by meeting the lending benchmark for TLTRO at December 2021. In relation to business income and fee and commission income, up 8% In the first half of the year and underpinning that overall 5% growth in income is an assumption that business income We'll be up by about 20% in the second half of the year. And much of that is coming from our Wealth and Insurance business. We have I've talked before about the opportunity for Wealth and Insurance. Aside from the opportunity from Daybeat, the organic growth in that business and much of that 20% uplift is going to come from the Wealth and Insurance business. And overall, we're we assume no major movement on valuing They're the major moving items, Geraldine, guidance. That's great. Thank you very much. Thanks, Dimit. Thank you. Your next question comes from the line of Eamon Hughes from Goodbody. Hi, Francesca. Hi, Miles. Good morning. Actually, I might sneak 1 or 2 more questions than just Usual 1 or 2. Maybe just in the U. K, clearly massive reversal there in terms of ForEx and a lot of it's got to be doing with the work you've been doing yourselves in relation to the business. But Just kind of getting trying to get a sense around margin progression into H2. Do you expect the market there to become a little bit more competitive? Certainly NIM Was better in H1 than prior guidance. So maybe that's just the first question. Secondly, maybe just staying on the Irish mortgage market Share at 23 was probably a little bit lower than expected. Maybe thoughts around H2, what you're seeing in terms of applications. Miles, specifically maybe on NPE flows to into NPE, any particular parts of the book That kind of we started to see a deterioration. And then maybe Francesca, if I can maybe come back to the ROCE point. I mean, you talked about greater than 10% long term. I mean, look, and I know you haven't kind of said anything specifically in relation to the acquisitions in terms of contribution, but Pretty material upgrades today, acquisitions flow through. Could we conceptually see that number in 2023? Okay. Thank you, Eamon. I'll answer the first couple and I'll give you a short answer on the ROCE and then go to Marl, do you want to add something more or I then talk about MDFO. So in terms of the U. K, I mean, this has been the progress that we're seeing with the 51% increase in our grossing profit pre impairment is a reflection of the last 3 years of transformation of that business model. It is a turnaround for us. We see revenue improving, cost down and the shift in lending and supporting that. And we're delighted With the results that we're seeing in the U. K, we are driving value as opposed to volume as a result reducing funding costs and operating costs. Specifically, your question on NIM. So NIM is up 29 basis points year on year to 1.95% overall. And there's a few moving parts in there. Some of that is improved product margin and mix. So a step away from the sort of very Low LTV, very price competitive remortgage market and obviously an increase in our new origination of bespoke. We've also lowered our deposit pricing because we need less of it. And we see obviously base rates flat at 10 basis points. And margin is up across all of our product lines. And in terms of the outlook and going into Second half of the year, obviously, we would expect more increased competition in the mortgage market. I think we're seeing that with other U. K. Banks Well, and our NIM improvement is expected to continue in the second half, but not necessarily at the same rate. So we're guiding for an NIMA circa 2% for the UK overall. That's the first question. The second one on ROI mortgages. Yes, so Our market share for the first half in drawdown was 23%, and that compares to just over 25% for 2020. There is a reduction. 2 let me just explain two reasons for that. One is there is a different approach towards how The macro residential walls are used by competitors. So we all have a level of exemption. We spread that over the course of the year. We will see some other competitors use more of their full year exemption in the Q1. And that's one of the factors. We would think that accounts for sort of plus or minus 1% of the market share reduction that we've seen. We expect that to be better in the second half. And our second half traditionally always is stronger than the first half in mortgage business. And the second element is just the growth in the broker market, especially in the switcher base the switcher segment. So Broker market really important has become increasingly relevant in the Irish market. They're up from 30% participation last year to 40%. And we just see with price competition in that space, we've applied a very disciplined approach. An element of that is the switcher market, which we is relatively small for us, but it's more active for the broker market. The second half, I'm obviously not going to give guidance on market share per se, but We are investing in our digital platform for mortgages. That's really great month price differentiation. Continue to do product innovation and we typically always have a stronger So we would feel good about the pipeline of business. And just on the third point very briefly on ROCE, I mean, it is I'm not giving explicit guidance on when we would be in excess of 10%. Obviously, the 2 acquisitions are both materially accretive to Roti and we look forward to those completing and giving Great. Thanks, Jessica. Good morning, Eilin. On the NPE question, so the Overall, NPE movement fell from €4,500,000,000 at December 20, that's 4.1% with the FX point, 5.7% to 5.5%, 2 major moving parts, the announcement fee reduction As a consequence of successfully executing that Irish residential mortgage transaction, I saw net income growth of €0,200,000,000 predominantly in the corporate space, but nothing really material to call out in And I think overall, we are generally encouraged by The relatively low level of actual loss experience, we saw that throughout the second half of last year and we've seen it again in the Half of this year. In terms of where NPEs gravitate to, obviously, we continue to apply Our successful approach of executing transactions combined with working with our customers for sustainable solutions. And as I'm sitting here today, thinking about the second half of the year, the area of our focus clearly is for those customers Right now, we'll continue to avail of government support and really a careful eye on them, whether they're mortgage customers or whether they are SME customers receiving support from the government. That's our area of focus from an NPE perspective. And of course, mindful that We are holding from a stock of provisions expected €229,000,000 at the half year to cover That latent risk. That will be our NPV focus as we progress through H2. And Myles, actually, if you don't mind, just a quick follow-up. Just when you mentioned that, I suppose the 229 sitting there presumably gives a good bit of comfort. I know you've kind of Talked about reasonably negligible charge for H2. But also as we think about kind of 2022 as well, I mean The traditional normalized impairment number is in and around 30 basis points. So it sounds like you're feeling reasonably good about that print as well possibly? Yes. So I mean, we've I think we've been clear and correct the COVID crisis To get our arms around the credit risk horizon from COVID, I think we did that successfully last year. And we are in a relatively benign economic environment. And we are hoping that provision, as I say, to We'll assess it at the end of the year. There is some sense that possibly as customers come off of the We might see the impact on the quarter 1 or possibly quarter 2 of next year, but we'll certainly make that assessment as part of the year around Process and into 2022, Em. Okay, Miles. Thanks a million. Thanks so much, Jessica. Thank you, Eamonn. Thank you. Your next question comes from the line of Chris Kamp from Autonomous. Good morning, both. Thanks for taking my questions. 2, please, if I could. The first on costs. So obviously, you've reiterated the 1.5, so 1 point But just thinking about your 1H print and the 1 165 for this year, I think that implies 800 ish, maybe a touch above that in the second half, which I guess looking into 2022 just annualizing And allowing for that momentum that you've been building up on cost, I guess your operating cost number ex levies for 2022 is Sub 1.6, is that fair, accepting that M and A will then have an impact As and when those transactions close, but pre that, is that how we should be thinking about 2022? I think consensus is at more like 1.65 for next year ex levies. And then the second on provisions, please. So just thinking about your opening remarks About the strength of the macro recovery, it looks to me like the macro inputs to your IFRS 9 models are lagging quite a bit where Consensus macro expectations would be for 2021, in particular, thinking about GDP It's better than you have in. Unemployment would be better than you have in on a weighted basis. I think house price inflation is already running ahead of what you've got in for this year on a weighted If you were to mark to market now, what would that do to your provision position, please? Because I'm guessing your 2nd half guidance when you said broadly stable, that's predicated on no change To your macro inputs, I presume. But if you were to change your macro inputs to align with consensus, how should we think about the scale of the release there, please? Thank you. Thank you, Chris. I'll answer the cost question. So, yes, made very good progress. We're happy with where We're going our guidance is unchanged, as you know, for 2021 to be sub €1,650,000,000 In terms of your extrapolation into 2022, I just sort of encourage you to assume sort of linear run rate in terms of that continued cost reduction. And our guidance to be at a cost base of €1,500,000,000 by 2023, we reiterate. Obviously, that Target and those numbers are based on the existing business model. So we set them before we would have been in the process of The acquisitions of Daley and KBC, what is good about that is the KBC portfolio is a backward portfolio with marginal additional cost But has a relatively smaller cost base, very much people driven and very much a people business. That's what we're acquiring. So that's just sort of an extra element there. I know you're asking more for guidance on Just wanted to give that context also. I'll pass to Myles on IFRS 9. Sure. Good morning, Chris. And you are right. There's a range of new forecasts on the macroeconomic Assumptions have come out. And you'll appreciate as part of our H1 process, we go to print at a certain point in time to deploy those Assumptions into our credit models. As I think about it, a couple of thoughts. One is, When we use macroeconomic forecast to drive the EO charge, we do so over a multiyear basis. So Even though the in year forecast may be more optimistic, it may not be as pronounced you would think in terms of the EO charge because we forecast over 3 years. But having said that, It is fair to say that the outlook is improving. And particularly for Bank of Ireland's balance sheet, I mean GDP is a good headline indicator, but the 2 that really So the influence our EO charge is unemployment and property prices. And certainly, I take the point property prices are looking more favorable than say they would have been 4 to 6 weeks ago. In terms of the impact, We do make some helpful disclosure I think on as part of an appendix slide 4445. And they set out some decent parameters to work out how the EO charge could move as a consequence of different economic scenarios. Maybe just to give you some examples of that. For example, if we were to gravitate a charge to our upside scenario, Which accounts for 20% of our overall weighting, that would improve the loan loss allowance by 222,000,000 And To take your point on residential property prices, if the property price is increased, let's say, 10% above our forecast, That would improve the loss experienced by £33,000,000 about an 8% impact. Hopefully, that gives you a sense Of the ranges, but I'd say those disclosures do give helpful parameters to plot the EO charge across a range of different scenarios. Thanks. That's really helpful. If I could just clarify on the cost question. I think you were in agreement there in terms of the momentum. Did you say Francesca that you'd expect to be kind of straight lining the cost Progress, we're nearly running that cost progress down to 1.5 in 2023 as we look through 2022, Which I think would get you to the same conclusion, sub-1.6x M and A ex levies next year? Yes, sorry, Chris. Yes, year on year, yes. Okay, that's great. Thank you. Your next question comes from the line of Sengana Bhattwala from UBS. Good morning. Thank you for taking my question. I wanted to ask about the additional balance sheet optimization initiatives that we've mentioned for the second half. Could you please provide more detail on those? Thank you. Sure. Thank you, Nganana. I'll go to Myles on additional balance sheet optimization for the second half. Yes, happy to. So there's a range of Optimization initiatives that we have good track record in executing and underpin that activity in the second half of the year. The first is in relation to a credit risk transfer. We've done a few of those. I won't Sure. You'll appreciate I won't share the commercial element of that today, but they do offer our ability to share some of the risk On our balance sheet, which offers relief on capital. And also just generally with the benefit of having New Ireland Assurance as a subsidiary, there's an ability for us to optimize our capital position between the subsidiary and between the group. And They will be the 2 main interventions that I expect will have a material impact on capital in the second half of the year and in particular Are supportive related to the execution of the 2 inorganic opportunities, which we have at the moment. Sure. And just a clarification, these measures are in built in the 30 to 50 basis points Incremental ratio number? No, they are not. They are incremental to the 30 to 50 basis points. Understood. Thank you. Thank you. Thank you, Tidjane. Thank you. And we have a further question from the line of Eamonn Hough from Goodbody. Sorry to jump in again, Francesco, Miles. Maybe just two things. Miles, can I pick up on just back to the slide around the IFRS nine adjustments, the The 172 from the model parameters, can you just go again through the reasoning behind that for me? And then secondly, just in terms of new business flow, I mean, I know I kind of asked a question around mortgage activity, but just what are you seeing on the ground On the SME side in particular, I mean, we know like the drawdowns from the COVID guarantee scheme are pretty weak still. But as was what are you seeing yourselves over the summer in terms of applications and And interest and activity, and I suppose is that giving you a little bit more hope in relation to and supportive of your more optimistic stance around H2? Thanks, Eamon. I'll talk about on the ground business banking and then Miles will respond on the impairment question. So new term lending in the first half was €1,200,000,000 to the Irish Business Banking sector. So that's 8% up year on year, but it is 5% below where we were in the first half of twenty nineteen. And with a strong finish in the 4th Quarter of last year, but we've just seen some slight slowdown in appetite to draw down at the beginning of the first half, particularly just because restrictions came back in. I would say 3 key sort of broad themes here. One is we're seeing a lot of SMEs notice obviously rising costs. That's the reality for 3 out of the 5 firms that we would survey. Some of that pent up demand, some of it supply chain disruption, But it's a reality that is impacting on some sectors' appetite for new borrowing. And second is Brexit disruption It still exists, but most firms are increasingly adapting to that change, which is positive. And the third is that Sentiment and appetite to borrow really varies by sector. So it's worth my well, you know that 58% of SMEs came into COVID debt free. And in terms of sectors that we are seeing with appetite, so obviously tech, media, telco, appetite remains high. We see good volumes and good Pipeline for the second half, in contrast, hospitality has been lower than first half and we see limited opportunities in the second half just because of the sector's risk Profile, but also uncertainty. And one sector that we you know has been under leveraged, but we're just seeing improvement is on agriculture. So we've seen that just very, very recently, a notable increase. So the last month is 5% up year on year, Drawdown is up 23% of previously approved, and we'd expect growth in that part of the SME market in the second half. So I hope that's given you a bit of a flavor of what we're Hearing, staying on the ground. And Damon, on the follow-up question relating to the IFRS nine charge. So just to frame The response and overall charge of £1,000,000 at the highest level, a model charge of £9,000,000 And €8,000,000 write back on the group management adjustment and overall net 0 on actual loan loss experience. And within that €9,000,000 model charge, there are 2 major components. The first is Recognizing the improved economic outlook, there's a write back of £163,000,000 And Then offsetting that, we have applied what I would describe as a model driven P and L charge of 172,000,000 In H1, primarily through increasing our coverage on non performing Irish and UK mortgages. And that has the impact of increasing the NPE coverage on mortgages from 22% to 27%. And I would describe that intervention It's really not been reflective of any actual experience on the brand, but it is a prudent intervention, which includes The application of LGD floors and a more cautious assumption along stated arrears. And all of that, of course, in the context, if you look at our mortgage portfolio, we have €2,000,000,000 sitting in the NPE portfolio. And back to that point around the dual track approach of progressing with transactions, but also working on sustainable solutions. So it's a cautious intervention to protect against any future downside that may arise in the portfolio no more than That's great. That's very helpful. Thank you both. Thank you, Eamonn. Thank you. The next question comes from the line of Dermot Shailesh from Davy. Thank you and apologies for following up. And maybe I just missed this, so apologies. Just in terms of the cost piece and your guidance, just wonder around the cost to achieve that. I think consensus is just maybe Slightly short of €160,000,000 of exceptional items for this year. Is that kind of appropriate? And should we see that then decrease Beyond that in the coming years. And then just secondly, just around risk weighted assets and mindful Miles of the comments that you made about credit Transfers. But just around the organic side, how should we look at kind of migration of risk weighted assets? Obviously, the mortgage portfolio has decreased in Ireland Somewhat. But if we look at the general credit risk weighted asset, how should we think about that going forward? Yes. Very happy to, Derek. So in relation to The risk weighted asset profile, overall, the density has unchanged with A reduction in the mortgage portfolio down 1%, and that's predominantly as a consequence Of the MP transaction, but also you've probably said it before, every year we do From book lending and mortgages, the overall risk weight profile improves as a consequence of writing new business at lower risk weights. And linked to the my comments earlier from having a strong performance in the corporate book, By their nature, they come with higher risk weights. So that's been a factor overall to result in a stable risk weighted asset Profile. And when I gave the guidance in relation to capital being between 30 50 basis points higher In the second half of the year compared to H1, I captured what I see as being the loan Investment, if I can call it that, the increase in risk weights or increase in lending to accommodate that profile. In relation to cost, I think the point really is that we remain within our $1,400,000,000 transformation budget To deliver on taking the cost base to below €1,650,000,000 And of course, that's incremental to the other benefits from the transformation program that Francesca has spoken about and to take the cost base to 1,500,000 does require further investment and that will be an element of that This year and indeed some more as we work our way towards 2023 to get to that Lower run rate cost of €1,500,000,000 We're not giving precise guidance on that today, Dermot, but we will update the market on that in due course, in particular, in Part of our strategy update expected in 2022. That's great. Thank you. Thanks, Dimit. Thank you. Your next question comes from the line of Marta Romero from Bank of America. Thank you very much. Good morning. Most of my questions have been answered. So I just want to understand your views On whether you have any hope about the Central Bank recalibrating the LTI limits and whether that is a bit constrained On your lending capability and if you can share how much demand you're not being able to meet on the basis of LTA restrictions? Thank you. Thank you, Martha, for the question. So I'm not we're not baking into our guidance or our outlook any change in the macro prudential rules that In Ireland, we operate obviously within them. We spread out the exemption limit that we would have, the exceptions limit Through the course of the year, which obviously does impact some of our relative trading in the first half versus the second half, Could we do more mortgage business if those rules were lifted? I think the entire market could. The extent to which that would be necessarily sustainable will be challenging Some of the price inflation that we see is quite high in Ireland, I think, is where the debate is. I'm not working on the debate if that's going to change anytime soon. Our focus is on increasing the supply of homebuilding as well as buying. And that whole supply and demand issue Continues to put pressure on prices, but also gives opportunity over time for increased mortgage lending and that's where our focus is. But I wouldn't break that into your Yes, I'll just add to that. The single biggest driver for the mortgage balance sheet for Bank of Ireland We'll be the growing mortgage market driven by increased housing outputs. And Yes. We're clearly conscious of house price increases and the impact that may have on affordability. It is good to see that much of the new homes that have been built are biased towards affordability. But that growth in the market will Thank you. The next question comes from the line of Arman Rakhour from Barclays. Good morning, Francesca. Good morning, Myles. Hi, Linda. Good morning. Good morning. I yes, I guess most of the questions seem not been asked. Sorry, Coming to this call a touch late, so forgive me if I'm asking something that's already been addressed. Could I just get the sense around Capital distribution potential at full year and the mix between buyback and ordinary, I guess, when you're trading below book, the buyback kind of is perhaps A bit more attractive at these levels. So I know the quantum of capital return is dependent on a few bits and pieces. But Is there a higher propensity to do a buyback now versus an ordinary? And kind of how do you manage that balance between the 2? And second question was around the regulators, the authorities more broadly. To the extent that you're able to comment, have you noted any kind of change in the rhetoric or tone In regards to the kind of conversations that you're having with various authorities, I guess I'm thinking particularly in light of the various exits in the system. Hopefully, is there a sense of pragmatism perhaps that we're sensing now that perhaps wasn't there before? Okay. So just in terms of capital distribution, obviously, I don't know if you heard the response at the beginning, Just reiterating our understanding and support of the importance of distributions to shareholders. We've obviously got a strong Capital position today and we've given guidance on positive future accretion that will support recommencement of distribution. We'll do that on a pretty progressive basis Based on performance and outlook, in terms of the mix between, in the future share buybacks or dividends, I mean, we're not being This is in terms of timing or amount or constructs of distribution. Obviously, our strong capital position coincides With 2 exceptional and rare acquisition opportunities, we'll provide more clarity as part of the year end process In terms of distribution and how they could look. In terms of the second question, just on regulatory authorities, we continue to have a Constructive professional level of engagement, has there been a total change or even a material change given news Of NatWest and KBC, no. To be fair, I think When we think about the regulatory agenda more medium term, obviously, it continues to evolve. It's very much focused on business model sustainability. I think that's not Specific to Ireland, it is a European regulatory focus. And obviously, you've got emerging risks that around with that climate and cyber becoming key more relevant parts or more important parts of the regulatory agenda. But in terms of immediate reaction, no. Okay. Thank you very much. Thanks, Simon. Thanks, Simon. Thank you. Next question comes from the line of Guy Stebbins A bit like I'm going to join the conference late, so hopefully I'm not being too repetitive with my questions. But firstly, just one sort of briefly back on capital distributions and then one on margin. So On capital, obviously, strategically, there's a lot of actions going on which are going to absorb capital. I'm just wondering if you could talk about the trade off there between those actions and restock distributions. I I guess the capital elements have given a lot more headroom than we might have expected. But just in terms of sizing any sort of capacity thereafter, The distributions, should we be thinking kind of pro form a for those acquisitions, you might want to run with a bit of extra headroom because of execution of risk around them? Or Is that not really a concern? And actually, by form of those actions, you're going to be more capital generative. So if anything, you'd be more happy to operate with lower capital headwind. And then on margin, some quite favorable dynamics in the period helping to offset some of the headwinds. Could you remind us where we are on the application of negative Rates and sort of how much further support that could provide going forward? Thank you. Sure. Thank you, Guy. And those questions haven't been asked before, so it's not at all repetitive. And just on capital distribution, let me just say a few words and Martin may want to add before we get on to margin and negative interest rate. So In ordinary times, any capital in excess of our requirements would be prioritized for distribution back to shareholders, like I said to Amyn's Question in the form of a dividend or in a share buyback. Obviously, our strong capital position today coincides with 2 exceptional and rare acquisition opportunities where we feel that we will create more value for our shareholders and in turn the ability to increase distribution over time because they are accretive to ROCE. It's not binary. It's not as if we do distribute we distribute or we do M and A. It's not a binary choice of 1 or the other. But we do obviously Prioritize where we will see the maximum optimization of shareholder returns, which sitting here today, those 2 M and A opportunities we see as very accretive. Marc, do you want to add? No. Just to that point really is that, I mean, we've said it before, we really understand the importance of distributions To our shareholders, we're very comfortable with the statement that we want to recommence distributions. And right now, sitting here today, Our focus clearly is on these 2 very important inorganic opportunities that represent, To my mind, a step change in performance and return and therefore, by definition, value to shareholders. But we do look forward to having that discussion with the Board in relation to the recommence and the distribution at the right time. In relation to margins and negative rates, so I suppose The factors that determine our margins are really unchanged, maintaining strong pricing discipline In Ireland, improving margins in the U. K. Through examples of the bespoke mortgage, but also importantly lower funding costs, But also the management actions and to your point on negative rates that we're taking, so the interventions on lower funding costs and applying negative rates To corporate customers is essentially offsetting the impact of negative yielding liquid assets And lower income from structural hedging. And I see that dynamic continuing. But if I think about your precise question on negative rates, We applied negative rates to €8,500,000,000 of deposits at the half year, which generated income of €30,000,000 I expect that application to increase to about €15,000,000,000 on deposits. And when you annualize the €30,000,000 plus that Additional expansion, we're looking at income in the region of £70,000,000 to £80,000,000 for the full year. So very positive and material intervention. And that's driven by essentially reducing the threshold from the region of £2,500,000 down to £1,000,000 That will play out over the course of the second half of the year. Okay. Thank you very much. Very helpful. Thanks, Guy. Thanks, Guy. The next question comes from the line of Chris Kampf from Autonomous. Hello, again. I thought I'd ask One more, if that's okay. I understand you don't want to talk about the sort of expected financial impact of the M and A transactions, but just in terms of Helping us think about a couple of points. I guess, firstly, on the KBC transaction, when I look at KBC's Risk weighted asset disclosure for KBC Island, they appear to have quite a large add on In terms of the mortgage risk weights, it looks to be a very risk heavy book on KBC's balance sheet. Can I just check? I don't think you're assuming that that's going to come across, but should we be thinking about something of the order of €4,000,000,000 to €4,500,000,000 of RWAs for that book on your balance sheet? And secondly on Davy, I guess one of the concerns people might have with this transaction given the events which sort of preceded Davy being Up for sale, how are you thinking about any legal risk that you're taking on with that business? Are you indemnified against that? Is that part of the contingent consideration? Have you reached agreement? Or will you seek to reach agreement with regulators In relation to historical conduct matters, just because the multiple does look quite high to me. I understand why you view it as Strategically attractive, but it does look like quite a high multiple that you're paying. And I guess if you're paying that and taking on legal risk, that would be a further negative in my mind. Thanks. Thanks, Chris. I'll answer David and then go to Mark Marls on KBCLWA. So obviously, By virtue of the fact that we have reached a decision to acquire AV kind of reflects the level of comfort we've got around both the risk and opportunities. And obviously, there was a very specific incident that resulted in the regulatory finding. As you'd imagine, we've undertaken robust due diligence Part of the process, we're satisfied with our assessment of the business and we have a good understanding of the risk and opportunities and it's a business that we know well. I'm not going to go through sort of the details of the constructs of the consideration other than what we put in the R and S, but we feel it strikes the right balance Between creating value and also protecting and having conditions going forward that We'll make it a successful acquisition in addition to the Bank of Ireland Group. So that has been well considered within our I'll go to Myles on RWA. Yes. Chris, I think your math is about right in relation to the risk weights for KBC, so we don't assume but we assume that they come across essentially at standardized Risk weights, plus of course, I'm going to answer off risks. I think where you've got to is about right. And I should say as well, taking them in at Standardized does offer the opportunity over time to migrate those mortgages to IRB, Which would represent further upside down the line. Okay. I think we've answered all the questions. I know the Investor Relations team will be in touch if there are any other queries and we have a call later in the week. Thank you very much for your time and attention this morning and appreciate the engagement. Thank you. Thank you very much. Have a good morning. Thank you. Thank you.