Good morning, and you're very welcome to our 2020 interim results presentation. We meet today during what continues to be an exceptional period. The impact of COVID-19 is reflected in our results. Our priority throughout the pandemic has been to support our customers, colleagues, and communities, and while managing the crisis, stay focused on our longer term strategic initiatives. These include the transformation of our IT systems, the consistent reduction of our cost base, and improvement of returns in our U.K. business. In the first half of 2020, we delivered stable net interest income and a net interest margin of 2.02%, net lending growth of EUR 0.2 billion, continued cost discipline with a further 3% reduction, increased market share in key products such as Irish mortgages, and pre-impairment operating profit of EUR 271 million. However, the challenging backdrop is also very clear.
We have taken a EUR 937 million credit impairment charge. EUR 432 million of this relates to updated IFRS 9 models that reflect our macroeconomic outlook. EUR 184 million relates to our prudent assessment of the credit risks associated with payment breaks. EUR 321 million relates to actual loan loss experience, mainly from a small number of retail related legacy property exposures. The group's non-performing exposure or NPE ratio has also increased by 140 basis points to 5.8%. Myles will provide more information on these items shortly. We've taken a prudent and comprehensive approach in arriving at our impairment charge for the first half. We expect this H1 charge to represent between 70% and 85% of our total full-year impairment charge, subject to no further deterioration in the economic environment or outlook.
We have more than a decade of proven expertise of working with customers in financial difficulties to find sustainable solutions. Before COVID-19, we had the industry leading NPE ratio of any Irish bank, with arrears at a fraction of the market average. Combined, this puts us in a position of relative strength for the effective management of impairments. Despite the challenges, our capital position remains strong. Our fully loaded CET1 ratio was 13.6% at the end of June. This is down just 20 basis points since the start of the year, despite the elevated impairment charge. Our regulatory CET1 ratio was 14.9% at the end of H1. Our purpose is to enable our customers, colleagues, and communities to thrive. In recent months, we've seen countless examples of this purpose in action in both weathering immediate challenges and planning for economic reboot and recovery.
We have agreed 105,000 payment breaks for personal and business customers across Ireland and the U.K. The first of these breaks was granted in March. We have been contacting customers with options at the end of their initial three-month payment break. Of these customers, 54% of Irish mortgage customers and 62% of Irish SME accounts have availed of an extension, with the remainder resuming capital and interest payments. In the U.K., 33% of mortgage accounts and less than 10% of customer accounts have availed of an extension, with the remainder resuming capital and interest repayments. We are strongly supporting the reboot of the economies where we live and work. Since launch, we have issued more than half of all funds drawn down under Ireland's COVID-19 Working Capital Loan Scheme.
We have approved around GBP 250 million in loans to businesses through the U.K. government schemes, mainly through our Northern Ireland business. As the leading lender to the Irish economy, we stand ready to do more. We have expanded our home building funds to EUR 2 billion and our green lending facilities by a further EUR 1 billion. We will play a strong role in supporting our customers in Ireland through the new COVID-19 Credit Guarantee Scheme being launched in the coming weeks. The steps we've taken to support our customers are mirrored in the 10 point improvement in our relationship net promoter scores since the start of the year. We are very proud of how our colleagues have risen to the challenges presented by COVID-19.
We have always said that culture is commercial, and the transformation of our culture, which we have prioritized since 2018, has helped us respond swiftly to a very complex operating environment. Colleague engagement is up eight points so far this year to a new high of 70%. This surpasses the global financial services benchmark for engagement for the first time. Throughout the crisis, we have also engaged with governments and industry groups, and we have supported communities in need through our programs such as Begin Together. The progress we are making in our responsible and sustainable business approach can be seen in our improved ESG rating. This hard work is reflected in Bank of Ireland having recently been recognized as the best bank in Ireland by Euromoney. Turning now to the macroeconomic outlook. 2020 will be a year that sees a significant contraction across our core markets.
There are many uncertainties, including the potential for a second wave and the outcomes of Brexit. However, there have been a number of positive developments since our first quarter trading update. Here in Ireland, the reopening of the economy was accelerated. A majority government has also been formed since our last update. Governments on both sides of the Irish Sea have increased their fiscal stimulus packages. The Irish government has introduced additional measures to support the economy. Direct spend per capita in Ireland is now amongst the largest in Europe. High frequency indicators suggest that the worst effects of the economic shock have passed. We have seen a sharp fall in the number of people receiving the Pandemic Unemployment Payment in Ireland. Recipients are now 52% below the peak. Card data shows a strong recovery in consumer spending.
This is now broadly in line with pre-COVID-19 levels, although some of this may reflect pent-up demand from lockdown. Housing indicators have firmed as the economy has reopened, and our own Economic Pulse shows an improvement in trading conditions. COVID-19 has also accelerated some existing trends, in particular, increased digital engagement by our customers. This further underlines the importance of our own systems transformation. Unsurprisingly, branch transactions and cash usage continue to decline. In parallel, we've seen good momentum across our digital channels. We successfully launched our new mobile app to customers in May. This is supporting accelerated growth in mobile banking, which now accounts for over 60% of all our digital traffic. We've also invested in simplifying customer journeys. Today, over 65% of high volume product applications are fulfilled digitally. In that context, our systems transformation is delivering both customer and cost benefits.
During H1, we rolled out market leading digital platforms in our wealth and insurance business. These strengthened our offerings across pensions, advisory, and the broker channel. There's more to come. Our roadmap includes further digitization of customer journeys. Building on previous investments, we have a number of additional milestones we will roll out in the coming months. This will deliver increasingly competitive and cost efficient services to our customers. Costs have been successfully reduced in the last five reporting periods. We've achieved over a quarter of a billion euros in gross cost savings since 2017. We now expect 2021 costs to be below our previous guidance of EUR 1.65 billion. We won't stop there. We will look at all tactical and strategic opportunities to reduce costs further beyond 2021.
We'll do this by continuing to invest in digital, simplifying and automating more customer journeys, restructuring our business model, and optimizing our property footprint for more efficiency, which will be supported by innovation in our workplace of the future. This morning, we've also announced to our colleagues a bank-wide voluntary redundancy scheme. This is a well-considered step in our continued cost reduction. We will provide further guidance on costs when we release our full-year results. In the U.K., we've made good progress against our strategy of invest, improve, and reposition. We have grown lending in niche mortgages, higher margin personal loans, and in our Northridge business, while maintaining commercial discipline on risk and pricing. We have reduced costs and simplified our business. However, the U.K. market remains challenging. Competition, particularly in mortgages, is intense.
Interest rates have reduced, with the outlook pointing to lower for longer. COVID-19 has negatively impacted this outlook further. We have therefore identified further opportunities to restructure in order to improve our U.K. returns. In Britain, we will reshape our mortgage business by running down lower margin and less profitable segments. This will result in a reduction in the mortgage book size over time. We will also reduce our operating expenses and funding costs to reflect this change in scale. We will leverage our expertise in areas such as car finance and travel money and continue to grow our bespoke mortgage business. In Northern Ireland, we have initiated a strategic review. This review will assess all options for our retail business in Northern Ireland, and we will provide an update on this at our full-year results.
I will now pass you over to Myles to take you through our financial performance in a bit more detail.
Thank you, Francesca, and good morning, everyone. Today, we are reporting a strong capital position with a 13.6% fully loaded CET1 capital ratio and 14.9% on a regulatory basis. An underlying loss of EUR 669 million due to COVID-19, a 13% reduction in total income, a 3% reduction in costs, a credit impairment charge of EUR 937 million, and net lending growth of EUR 0.2 billion. Net interest income was stable in the period.
Business income declined by 14%. Falling equity markets and widening credit spreads were the key drivers for negative income of EUR 123 million relating to valuations and other items. This was an improvement from the quarter one position, reflecting some recovery in equity and bond markets. Our impairment charge is a comprehensive assessment. It reflects the expected credit losses under IFRS 9, and this is the first time this accounting standard has been tested in a downturn economic environment.
We also want to highlight EUR 136 million within non-core for the impairment of intangible assets, which has no impact on our capital ratios. On net interest income, while average earning assets were up EUR 3.4 billion, primarily from liquid assets, the impact of structural hedges and competitive pressures in the U.K. reduced interest income on assets. Lower cost of deposits and liabilities was a positive factor, reducing interest expense. Taking account of these items, our NIM is 12 basis points lower than the outturn for 2019. In terms of the outlook for NIM, we reaffirm the guidance provided at quarter one for a full-year outturn of circa 195 basis points. On net interest income, due to lower lending volumes and the low rate environment, we see our full-year outturn contracting by about 5% compared to 2019. The group delivered net lending growth of EUR 0.2 billion in H1.
This was heavily supported by EUR 1.3 billion of revolving credit facilities. Excluding these RCFs, our new lending declined 19% year-on-year. In quarter two, new lending declined by 48%. This reflects the impact of COVID-19 and the forced shutdown of the Irish and U.K. economies on all portfolios. As the economy begins to reopen, we are seeing a general pickup in business activity in June and July. To give one example, our Irish mortgage applications in July were over 30% higher than June, driven partly by pent-up demand post the lockdown period. For the full-year, we expect new lending to come in at about 70% of 2019 levels, an improvement on the guidance provided earlier this year. COVID-19 has had a material impact on business income, with lower activity driving a 14% contraction in H1, and 32% for quarter two. Wealth and insurance income declined by 16%.
Back book revenues mitigated some of the impact of softer new sales. Looking ahead, as Francesca outlined, technology investments in our wealth and insurance business will underpin future growth and recovery post-COVID-19. Retail Ireland income reflects lower levels of economic activity. For the full-year, we now see business income reducing by 20%-30% compared to the 2019 performance, reflecting the accelerated reopening of the Irish economy. We have maintained our strong multi-year delivery of cost reduction, with a 3% year-on-year headline fall in operating expenses in H1. Excluding COVID-19 related costs, the reduction was 5%. We expect the 2021 costs to come in below the EUR 1.65 billion previously guided. To achieve this cost base will require increased cost of voluntary severance. This incremental cost is materially within the business model budget of EUR 300 million, a component of the overall EUR 1.4 billion transformation budget.
To reduce costs beyond 2021 will require further investment. Guidance on revised cost targets and required investment will be provided at the full-year 2020 results presentation. I'd like to cover off non-core items which totaled EUR 153 million in H1. EUR 136 million of this relates to an impairment of software intangibles. We continue to make good progress with our transformation program. During the period, we also have assessed the value of our software assets. In February, we highlighted that transformation would go beyond 2021 and would include the continued modernization of core systems. As we progress with this multi-year program, we are learning more about deploying a broader range of technology solutions than originally anticipated, and doing so in a more modular, step-by-step approach. Due to this, earlier infrastructure investment has less value today.
The rapid pace of technology advancement for the banking sector is such that elements of our prior year investment now requires a write-down. Ensuring we deliver the right solutions for our customers is fundamentally important. To this end, we remain committed to our transformation investment strategy across back, middle, and front-end technologies. We are announcing a EUR 937 million credit impairment charge for H1 today. At the highest level, this charge can be broken down into three elements. EUR 432 million capturing the expected credit loss arising from the macroeconomic outlook. This is a model output and is at the heart of IFRS 9, which attempts to capture lifetime expected credit losses on stage two performing loans. Assuming there is no significant shift in the economic outlook, we should not expect a material change in this number for the full-year.
The second element is the management overlay of EUR 184 million for payment breaks provided to mortgages, consumer, and sectors more exposed to COVID-19. This charge is designed to capture the risk of required forbearance as customers come off payment breaks in H2. The last element is the actual loan loss experience of EUR 321 million relating to business and corporate exposures. Included within this are a number of legacy pre-2008 investment property exposures amounting to EUR 166 million. While uncertainties remain, subject to no further deterioration in the economic environment or outlook, the 2020 impairment charge is expected to be in a range of circa EUR 1.1 billion-EUR 1.3 billion. Staying with impairments, I provided a range of slides providing more granularity on the staging profile of our loan portfolio.
Much of this content you can take away to review, and I'll clip through the most important components of our H1 impairment assessment. On coverage, we increased loss allowances to EUR 2.1 billion, representing 2.7% of gross loans, while our coverage of stage three loan losses is at 29%. COVID-19 has increased the risk profile of our loan book. 80% of our loan book remains within stage one. We have doubled stage two loans to EUR 11.3 billion. stage three loans increased by EUR 1.3 billion. This includes a EUR 0.9 billion increase for the new regulatory definition of default, with the balance from credit migration in corporate and property portfolios. Mortgages account for 57% of our loan book. As you can see from this slide, average LTVs are 60% and 62% for Irish and U.K. mortgages respectively.
Referring back to earlier slides, around half of Irish and a third of U.K. mortgage customers have extended their initial three-month payment break. The EUR 149 million ILA we are taking in H1 for this portfolio is largely on performing loans and includes a prudent assessment in respect of customers on payment breaks. Our non-property SME and corporate book is well diversified by geography and sector and predominantly secured. Within these portfolios are sectors potentially more impacted by COVID-19. These include wholesale and retail, hospitality, and acquisition finance. Across this portfolio, we have materially increased impairments to 4%, increasing stage two loans by EUR 3.7 billion, with loan loss allowances of EUR 880 million now on balance sheet. Property and construction accounts for a tenth of our exposures.
This is a very different place to where we were at the time of the global financial crisis, when around a quarter of our lending was to this sector. Similar to our mortgage book, most of our customers have significant equity, with three-quarters of the investment property book on sub 70% loan-to-values. Within this book, legacy investment property exposures have driven a EUR 166 million increase in stage three ILAs. Largely as a consequence of that, we have effectively doubled our impairment coverage ratio to 5.6% since the start of the year. Consumer lending accounts for 7% of our loan book. The EUR 109 impairment loss allowance increase on our consumer book is largely on performing loans and reflects management adjustments relating to payment breaks. Our NPE ratio increased from 4.4%- 5.8% during H1.
Half of this increase is down to the new definition of default, with the balance reflecting credit migration. Substantially all of our stage three loans are now classified as NPEs. There are two important points that I'd like to call out here. Firstly, Bank of Ireland has a proven track record of working with customers to implement sustainable solutions. Secondly, we have previously highlighted the potential for NPE transactions in 2020, with a focus on Irish mortgages. Due to COVID-19, it is more likely that a transaction will occur in 2021. Despite COVID-19 headwinds, the group retains a strong capital position. Our capital ratios improved in quarter two. The fully loaded CET1 ratio is up 10 basis points to 13.6%, while the regulatory ratio improved by 50 basis points to 14.9%, 560 basis points above the new minimum regulatory capital requirement.
The previously guided 80 basis points impact of regulatory capital demand by end of 2021 is now materially complete in the H1 results. In terms of how we see our capital evolving, our expectation is for the 2020 fully loaded CET1 ratio to be well above minimum requirements. On the 2020 regulatory CET1 ratio, we expect this to remain above 13.5%. While it is clear COVID-19 will have a very material impact on 2020 performance, our outlook for the year has improved somewhat compared to Q1 IMS. Gross new lending volumes are expected to be at 70% of 2019 volumes. The rate of property supply, mortgage demand, Brexit challenges, and the impact of fiscal packages are key factors in the eventual outcome. Net interest income is likely to be in the region of 5% lower than last year, with lower lending and structural hedge income driving this.
Business income has been significantly impacted by COVID-19, and we expect Q3 and Q4 to be subdued, with recovery towards the end of the year and into 2021. We expect to outperform previous guidance on cost, taking 2021 costs below EUR 1.65 billion. On asset quality, I'm forecasting a full-year impairment charge of the order of circa EUR 1.1 billion-EUR 1.3 billion, absent any further economic shocks. As previously covered, capital ratios are expected to remain strong and resilient, and no dividend deduction is assumed for 2020. The longer-term impacts of COVID-19 remain uncertain. Therefore, pre-COVID-19 medium-term targets should no longer be considered current in these circumstances. I will now pass over to Francesca for concluding remarks.
Thank you, Myles. I'd like to recap on the key points we've shared. We now see an improved outlook for 2020 relative to what we set out at our Q1 IMS. We're focused on supporting businesses and households. Our capital and funding position is strong. We believe that the charge taken in H1 covers the majority of our 2020 impairments. Transformation remains a strategic priority, with culture and systems change delivering benefits. We will continue to reduce our costs. We will restructure our U.K. business to further improve returns. Thank you.
Thank you. We'll now move to Q&A. Ladies and gentlemen, if you wish to ask a question, please press star and one on your telephone keypad and wait for your name to be announced. Once again, star and one if you wish to ask a question. We will now take our first question, and this comes from the line of Diarmaid Sheridan from Davy. Your line is now open. Please go ahead.
Good morning. Thank you for the detail in the presentation. A couple of questions, if I may. Firstly, just around guidance. I wonder if you might provide an update on trends that you're seeing that are driving the upgrade in outlook relative to what you provided in Q1, and also how that may play into 2021, please. Secondly, in relation to payment breaks, perhaps you could provide some trends on what you're seeing at present around what is happening there. Finally, around the restructuring in the U.K. and the further cost initiatives that you're announcing this morning, I wonder if you could maybe provide some details, and specifically around whether the cost initiatives are dependent on the restructuring in the U.K., or should we look at them as being independent of one another? Thank you.
Thank you, Diarmaid. I'll start off. I'll pass over to Myles maybe to expand a little bit on outlook in general. In terms of our outlook, obviously COVID-19 is still going to result in lower levels of economic activity, credit formation, and business income. Our outlook for the rest of the year is cautiously more optimistic than where we were in May when we were reporting on our first quarter results. That really reflects, I would say, three things. One is that the Irish economy has opened up sooner than originally planned in most sectors, not all. We are beginning to see some positive early trends in some of the high-frequency data. For example, house prices are showing much more resilience than expected.
Also in Ireland, for example, the claimants of the Pandemic Unemployment Payment are now 52% below the peak, which we see as a positive. There's a couple of examples there. The second is, since our last update, a majority government in Ireland has formed, they have launched a material fiscal stimulus package. If you look at the package per capita of the population, it does place Ireland in the upper end, quite favorably compared to European peers at 11% of GNI, we think that will help the economy reboot. The third thing is just the observed behavior and insights that we're getting from our personal and business customers every day. We've seen a pickup in sales. If I just take a couple of examples, Irish mortgage applications were 30% up in July versus June, actually 25% up year-on-year.
We'll see how that translates to actual drawdown. A lot of that is dependent on housing supply. When we look at our housing market, all construction sites have reopened, and even though the new housing supply will be less than we anticipated pre-COVID, we are seeing commentators increasing upward revisions of the supply of housing in 2020. That is what informs our cautiously more optimistic outlook. In terms of an update on payment breaks. Across the U.K. and the Irish business, we granted 105,000 payment breaks. 65,000 of those have now come to an end of their initial three months, and obviously we're being very proactive in contacting customers in anticipation of that. Two-thirds of those customers have returned to capital and interest, so they've resumed normal payments, which I think is a good sign. One-third have requested a second payment break.
You can see on page six of the pack, some of the percentage of customers in Ireland wanting to avail of a second break is slightly higher than in the U.K. I would say that they're not like for like comparisons. They're two quite distinct markets. The reason why you're seeing, for example, 54% of mortgage customers rollover in Ireland versus 33% in the U.K. is that payment break started sooner in Ireland across a range of products. I think clarification on some of the U.K. second payment break regulatory steps were confirmed relatively recently. Another factor is that the U.K. furlough scheme payment is quite significantly more than the wage subsidy equivalent in Ireland. Also, particularly for SMEs, this is relevant that the stimulus package for SMEs in the U.K. came out very early, in the shape of CBILS and Bounce Back Loans.
In Ireland, that has now been legislated and announced, but we are expecting the COVID-19 Credit Guarantee Scheme to be finalized in the coming weeks. Just to give us some assurance about relativity, when we look at payment break take up in Ireland or the second payment break rollover in the U.K., we are broadly in line with the market. Just to answer your third question around cost, we've had really, I think, positive momentum in our cost reduction over the last few years. The U.K. has been part of that. U.K. costs have reduced by 23% since we started this journey in 2017. The overall group is minus 10%, and we've taken over a quarter of a billion euros of costs out on a gross basis. I would expect the U.K. to continue to improve its efficiency.
In terms of the strategic review, for example, of the Northern Ireland business that we've announced today, we're not pre-judging the outcome of that. There's no assumption sort of hard baked into the sub EUR 1.65 billion revised guidance on costs. Hopefully that addresses most of your questions. I might just go to Myles to talk more about outlook in general.
Thanks, Francesca, and good morning, Diarmaid. I think firstly, the updated guidance we provided today represents the material impact of COVID-19 on our 2020 performance, important not to forget that. At Q1 IMS, I would say we essentially called the floor on income given the level of uncertainty and the scale of impact. That guidance, it was premised on a full lockdown to August and two very difficult quarters in Q2 and Q3, with recovery in Q4. While Q2 has seen a steep decline in activity, examples include lending down 48%, business income down 22%, it was not as severe as originally anticipated. We now have the Irish and U.K. economies opening sooner, we can see that in some of the emerging activity data for July, which Francesca has called out.
Our updated guidance assumes that the level of activity in quarter two will be broadly similar in quarter three, with the beginning of improved trading in quarter four and then into 2021. This assumes no new lockdown or a significant second wave of COVID-19. Just to echo Francesca's point, we remain cautious given the external uncertainties. Just to comment briefly on 2021. If the current macro environment I've set out plays out, we do see recovery towards the back end of the year and into next year. When I think about our diversified business lines, I see no material structural revenue issues post-COVID. Possibly the U.K. consumer travel effects may take longer to recover.
Finally, while we're not providing specific guidance on 2021 lending or income, and when I think about 2021 consensus, I'm broadly comfortable with the pre-provision operating profit for 2021.
Great. Thank you.
Thanks, Diarmaid.
Thank you. We will now take our next question. This comes from the line of Eamonn Hughes. Your line is now open. Please go ahead.
Hi, Francesca, Myles. It's Eamonn Hughes, Goodbody here. Maybe just picking up, Myles, a little bit just on those final comments. I know you kind of talked about the pre-provision, but you've taken quite an extensive proactive action around the impairment number, and I just was wondering the context of some of the commentary there about improvement maybe in Q4 and into 2021 on the macro. Is there any sort of signpost you'd kind of guide us towards in relation to maybe impairment figures? I think pre-COVID we were looking at sort of normalized impairment rates of 20- 30. I presume there'll be still parts of the economy that'll be difficult next year, but any sort of guidance in relation to how you think about that figure next year, if you wouldn't mind. Secondly, just in relation to capital. Sorry, Myles, again.
You talked about regulatory capital guidance greater than 13.5, and then greater than minimum on fully loaded. Just maybe to square off in relation to how we think about fully loaded, because the gap at the half year was 130 basis points. Is there sort of factors that might reduce that gap in H2 that consensus, I'm conscious, on fully loaded is around about 13. I'm close enough to that myself at the end of the year, 12.8. Maybe just how we think about that. Finally, just in relation to data on payment breaks, like you gave the breakdown in terms of people moving on. Just in terms of new business, are there differentials in how customers both in Ireland and the U.K. are treated in relation to those on wage subsidies and those not?
There's been a lot of anecdotal and media commentary about it. I'm just wondering what's the official sort of Bank of Ireland view in relation to that?
Okay. Thank you for the question, Eamonn. Before I hand over to Myles on impairment and the capital in more detail, just to step back and just share with you our impairment philosophy. We talked about being prudent and comprehensive in our approach. We are mindful that the EUR 937 million number is the single biggest judgment that we're making in the first half. As you would expect, it's had a significant amount of management focus from myself, Myles, and all the senior leadership team, and also oversight and deep diving by the board. We've really challenged ourselves on all our key assumptions and judgments, and where appropriate, we've sought external perspectives and some expert advice to ensure that we are capturing the full risk of the pandemic in the impairment charge that we're taking. Also just bearing in mind our track record.
We have over 12 years' experience since the 2008 financial crisis of working out solutions predominantly organically, inorganically where it makes sense and the market supports a transaction. Pre-COVID-19, and I would have said this in my opening comments, we'd reduced our NPEs to the lowest amongst any Irish bank. Our risk track record is a fraction of the market, and we do see this as a relative competitive advantage within our market. We've got a team of people that average 27 years risk experience, so exactly the sort of scars of the past and the gray hair that we like. That's why we feel comfortable that we have an appropriate level of confidence in our approach and our impairment charge. I will just cover the third question very quickly.
There's been media coverage in Ireland around whether people on payment breaks or people on wage continuation support would be not provided new lending. We have provided new lending. If someone's income has severely reduced, we'd obviously look at that on a case-by-case basis, but we're very much open for business and taking appropriate assessment of someone's affordability.
Thanks, Francesca. Good morning, Eamonn. On impairment guidance, just to comment on the H1 numbers, first of all, briefly, consistent with IFRS 9 and its intent, our ambition for the H1 number is to be as comprehensive as we possibly can and to capture as much of the forward-looking risk on balances in P&L for the results. It's in that context we should think about the guidance of 1.1-1.3 relative to the EUR 937 for H1. It's probably just worth highlighting that that guidance is essentially underpinned by the macroeconomic forecast that we're currently experiencing. Just to give you some sense of, this is set out in the detailed accounts, Eamonn, if we think about the kind of probability weighting, I think this is important to highlight.
We have, in arriving at our H1 number, and indeed our forecast, our guidance, we have 30% weighting to the downside, 50% to the central, and 20% to the upside. We're biased towards central to downside, and that reflects that level of uncertainty. If all of the downsides played out, we could expect the charge to be in the region of EUR 330 million higher. If all of the upside applied, we could be better to the region of about EUR 250 million. My final point to make is, we're not giving precise guidance for 2021, and we all look forward to having COVID in the rearview mirror.
I do think, so back to pick up on what you said, to the pre-COVID impairment guidance, where we said a medium-term target was between 20 and 30 basis points, and we were probably ticking up towards the upper end of that guidance. That, for me, in a post-COVID environment feels like a good place to be. On capital, on the fully loaded, yeah, we've reported 13.6% for H1, a strong capital position. When I think about some of the moving parts for H2, I'm thinking about, first of all, that impairment guidance that I've just spoken about. I have an eye on calendar provisioning as well for the end of the year. Some of the benefits from the software regulatory relief.
Also just depending where our lending book ends up for the full-year, I would see full-year, fully loaded CET1 being around the 13%. Consistent with your own forecasts, Eamonn.
Thanks, Myles. Thanks, Francesca.
Thank you. We will now take our next question, and this comes from the line of Jason Napier from UBS London. Your line is now open. Please go ahead.
Good morning. Thank you for the presentation and the helpful disclosures and guidance. Can I just probe further on two features, please? The first on net interest margin, sort of rough second half indications of about 190 basis points. I guess, given that sort of step change is sort of in your guidance, although volumes are turning out better than expected. I wonder whether you could talk a little bit about the drivers that are inherent in that change in the second half and how those play out into next year. Then secondly, the pivot to a higher margin mix in the U.K., I think clearly makes sense. I wonder whether you wouldn't mind giving some more details on how large the low margin book is and sort of what the associated revenues and the potential restructuring charges involved might be.
I'm assuming that there isn't much in the way of cost saves to come from that run-off process. If that's wrong, perhaps you could also correct me in that area. Thanks very much.
Okay. Let me take the net interest margin question first of all, Jason. Yeah. In the context of a full-year guidance of 195, I'd concur, we see the H2 at around 190 basis points. Thinking about that versus where we're at at half year, first of all, I'm expecting average interest rate on assets in H2 to decline, and that's consistent with the guidance in relation to where we see new lending being at in the region of 70% of where 2019 was at. The mix is also important because we're seeing strong liquidity maintained. Actually, I think deposits are likely to be higher in H2 on average. They may decline towards the end of the year. I'm thinking about tax payments from SME customers. Overall, deposits will most likely be strong.
That's relevant because that gets us into holding higher levels of liquid assets, which of course are good to hold, particularly if credit formation is a little bit subdued because of COVID-19. Putting those deposits into liquid assets does generate interest income, but it also pulls down the NIM. I think when you think about the NIM guidance, you've also got to think about where net interest income is at as well, and take into account of lending volumes and also the ongoing impact of structural hedges. So hedging at lower income streams than previously. We see interest income down about 5%. In relation to the U.K. question on NIM, essentially we've disclosed the full mortgage book in the U.K., just under EUR 20 billion. Essentially that book, in the main, is mainstream mortgages.
It has been maturing over the last number of years in a very competitive market in the U.K. Even though I would say the team are doing quite well to hold margin discipline, nonetheless, it is reflective of a lower rate environment. It's for that reason that we see ourselves over time coming out of those lower profitability, lower margin mortgages. Francesca may want to comment on the cost piece, but I would say that the U.K. is a valid component of the overall cost program for the entire group, and we've made good progress reducing costs in the U.K., and we will continue to do so.
If I just add to that, Jason, two points. One on cost, also just the pivot, and how that will support going forward better margins in the U.K. business. Our bespoke mortgage business, it was 5% of origination. We've written about GBP 320 million in new lending since we launched that. In the first half of this year, with lower swap rates and just more realistic pricing appearing particularly in second quarter, I think a temporary result of COVID, we have continued to write good quality business where we can generate the right return. We're shifting our focus away from volume targets and thinking about size to really focus on margin. Our margin on new mortgage business in the first half was 30 basis points better than it was this time last year.
Within that bespoke mortgage margin was 20 basis points better again. That just gives you a feel of the sort of margin protection, but also the upside that bespoke mortgages represent. In terms of cost, as the back book of lower LTV, less profitable mortgages runs down, you can imagine that our cost base, both in terms of operational expenses and funding costs, will reduce to right size and reflect that smaller balance sheet. That is incorporated into our sort of confidence and optimism about continued momentum in reducing our costs.
Thank you. If I could just follow up on that point. The, I guess, relative market share suggests that you could write substantial amounts of business in the bespoke space, but I wonder whether in aggregate, you're sort of conditioning investors to expect a period of sort of revenue declines driven by that rebalancing, or you can replace one with the other as the lower margin material matures. Thank you.
When I think about the revenue profile of the U.K. business, the first things I think about, Jason, is ensuring that the returns are strong. I suppose first priority is to maintain strong margin. Second priority is the actual quantum of income that we generate. Over time, I do see that whilst a smaller book should generally be replaced by higher margins, and therefore I'm comfortable with the overall direction of maintaining revenue streams in the U.K. The other point to make, of course, is that in doing that, in taking those actions to reduce mainstream mortgages, that also allows us to rely less on deposit gathering within the U.K., which frankly is expensive. Overall, I'm comfortable that we're going to maintain in the main income levels, which generate a higher quality of income.
That's very clear. Thanks very much.
Thank you, Jason.
Thanks.
Thank you. We will now take our next question, and this comes from the line of Alastair Ryan from Bank of America. Your line's now open. Please go ahead.
Mortgage pricing again, at this time in Ireland, please. There's been some headline grabbing moves by competitors, which seem, not well-grounded in sort of economic reality. Are you seeing mortgage pricing? Would you feel a need to respond to it if your market share dipped down or as in H1, where you had a pretty good market share outcome, the range of options you've got allow you to keep pricing pretty stable and your market share, in the low to mid-20s. Thank you.
Hi, Alastair. Yeah, there's been a few moves by competitors. We've not made any pricing changes in our mortgage business in Ireland in the first half of the year. We saw one of our competitors cut their SVR rates. That was more, I believe, to equalize their front book, back book variable pricing. It is notable, but it's less relevant to our business. 90% of our new lending is fixed rate, not variable, and our SVR is already equal in terms of front book and back book. We see news about potential new entrants. Let's see. I think the market share of new entrants, smaller entrants in recent years is sort of sub 3%. I actually think the competition comes much more from the established players as opposed to new entrants. We've seen An Post here defer their launch into their entry into the mortgage market.
When I step back and think about our business, we've always said 25%-30% market share is a comfortable range. We don't chase market share. It's risk, price, and volume in terms of our sort of order of priorities. I'm pleased with the increase of market share 25%. Like I said, we've done that without price cutting. That has been from embedding good relationships across all our channels, both our own frontline and our broker partnerships. Yeah, we feel good about our performance in the first half.
Thank you.
Thank you. We will now take our next question, and this comes from the line of Chris Cant from Autonomous. Your line is now open. Please go ahead.
Morning. Thank you for taking my questions. Two, please. On regulatory headwinds, you've obviously taken most of the 80 basis points that you've been guiding for a while in the first half. You mentioned calendar provisioning. Is there any risk beyond the 20 basis points residual implied from calendar provisioning or other regulatory change, or are you still comfortable with the 80 basis points as the cumulative figure? On winding down the lower margin books in the U.K., obviously spreads have widened quite meaningfully year to date in the U.K. mortgage market. I'm just curious on the timing of it. Are you basically taking a view that over the medium term it's not really viable to compete for bread and butter, i.e. non-specialist mortgage business given your scale? Thank you.
Maybe I just give a quick answer to the second one, Chris, and thanks for both questions, and I'll pass over to Myles on regulatory headwinds. Yeah, we've seen, I think there's a sort of temporary reprieve in terms of margins in the lower LTV remo business in the U.K. We have continued to write the business where we can achieve the right returns in the first half of this year. Our base case is a gradual rundown in parts of our U.K. standard mortgage book that would be lower margin, and that's over time as redemptions reduce the size of the book. That's the premise. We're not doing a hard handbrake turn if we are able to still generate business that is in line with the margin that we aspire to improve returns in the U.K.
Okay. Thanks. Hi, Chris. Yeah. On the reg headwinds question, again, absolutely guidance unchanged. We talked about 80 basis points of regulatory headwind, we've taken about 60 of that in H1. The balance is there to support calendar provisioning. There's a little bit of EL in the capital account that's helpful for that as well. When we think about the overall guidance that we've given, the higher guidance on the reg ratio, and I guess I gave some soft guidance on this fully loaded on from Eamonn's question. That guidance captures the remaining usage of the 20 basis points and assuming that calendar provisioning is adopted by the end of the year.
Okay. Thank you.
Thank you, Chris.
Thank you. We have three more questions, and we will now take the next question. This comes from the line of Aman Rakkar from Barclays, London. Your line is now open. Please go ahead and ask your question.
Morning, team. Thanks very much for the update. I had a couple of questions. Could I probe you a little bit more on, probably one for Myles, on your comment on being broadly comfortable with consensus next year pre-prov? Could you actually maybe just lay out what your view of that number is? I guess the number that I have in front of me are something like EUR 750 million of pre-provision profits next year, predicated on about EUR 2.5 billion of income. The reason I'm asking is I think you've basically guided up your most important revenue line by the best part of EUR 80 million for this year. Presumably, that bodes well for revenue trajectory into next year. Are you looking for some pretty spectacular drop off in net interest income next year? Is there some kind of offset, maybe in business income?
I think the Street's got about EUR 600 million in for next year, which I don't think is unreasonable if you're looking for some kind of normalization in business income. It just seems like there's some offset there that I'm not able to see. I guess that would be the first question. Just on capital, it's just a small one. I know that you've basically benefited from the expected loss deduction in CET1 that's protected your capital position in the quarter from the heavy impairment build. It does look like you've still got a little bit left. Can you just talk us through whether that should protect you from any incremental charges in H2, or do you need to build it to a certain level, or does it basically need to stay where it is, and everything else that's coming basically is going to feed through to capital? Thank you.
Thanks, Aman. Let me just, I guess, comment on the 2021. Look, it is important to start off with saying we're not giving guidance on 2021 at this point in time. It is good to see that trading for 2020 looks like it is improving relative to where we thought it would be in quarter one, and that's a positive. Back to Francesca's cautiously optimistic point. It is premised on a recovery towards the end of the year. No further events with lockdown or second waves. I do think there's still a little bit of uncertainty out there, and so I would just urge a little bit of caution on that. Therefore, I guess what I'm saying is that, in the general sense, yes, you're right, the consensus is at about EUR 750 million pre-provision operating profit.
One thing I would say to call out to you is that this year we have had the benefit of the revolver credit facility sitting on our balance sheet. EUR 1.5 billion in quarter one and EUR 1.3 billion for the H1. They are helpful to have for this year, they're supportive of net interest income. They are, in many ways, a feature of COVID, with our corporate customers just taking contingent action to maintain liquidity. Therefore, I don't expect to see that in any material way on our balance sheet next year. In some ways I don't want to see it because it's a function of COVID. If that goes off our balance sheet, that's, in a kind of fundamental way, a good thing.
Also, just to remember, we've signaled that the impact of hedging, the structural hedges coming off historic hedges that were quite beneficial from income perspective, mindful of the continuation of the low rate environment, that's also going to be a feature of 2021. That's the best guidance, Aman, I can give you at this point in time in relation to 2021. On capital, there is a little bit of the ELS, and I think about it as, yes, it could potentially be helpful to incremental impairments, but I also have my eye on it in the context of the adoption of calendar provisioning by the end of the year. Therefore, I would take you back to the guidance we've given on capital on both a regulatory and fully loaded basis.
Cool. Just as a quick follow-up on that. Thank you very much for that. Just to ensure I understood the income commentary then. I think you're basically saying an element of caution on the business income. It doesn't sound like you're too uncomfortable with kind of EUR 1.9, EUR 20, that kind of ballpark as an NII figure next year for the structural reasons that you laid out. Also things like the unwind of the RCF. I'm actually just surprised that can offset the much better volume dynamic that you guys are basically laying out. Maybe I can pick it up offline.
Yeah, sure. Why don't we catch up with either myself or Matt with the IR team to tease this out? I think the points that I've set out on this call are where we see it at this point in time. Okay?
Thanks.
Thank you. We'll now take our next question. This comes from the line of Andrew Coombs from Citi. Your line's now open. Please go ahead.
Morning. Thank you. Perhaps I can stay on the same theme and then add one on capital as well. On the net interest income and your rebased guidance, your margin guidance is broadly unchanged. Obviously, your slightly better average interest earning assets. If we look at the mix in the first half, your loans and advances to customers' average interest earning assets are broadly flat. The big increase has been in the other interest earning assets, which I think has jumped from EUR 23- EUR 27 billion. I assume part of this is due to the deposit inflow that you've had, which has subsequently been reinvested into the liquid asset portfolio. Can you just elaborate as to the driver of that other interest earning asset line and also how sustainable that is? That would be my first question.
Second question, sorry if I missed this, I can see that the SME support factor has come through in capital. I think the software amortization step change is for the second half. Have you given quantitative guidance on that? Thank you.
Hi, Andrew. I think your assessment of the average interest earning assets is accurate. There has been a build up on the liquid asset line, that has been a function of the fact that our deposits have grown. I think about H2 2019 last year, average deposits were at EUR 81 billion. For H1 this year, they've been at EUR 84 billion. It's a unique phenomenon of this particular crisis that whilst we're in an economic shock, we still see very strong liquidity. Now, that at the same time with subdued levels of credit demand, means that we find ourselves putting those deposits into liquid assets.
That will be the feature for H2 as well, where we do think that lending will be subdued, little bit better than where we're at at Q1 IMS, but still up to that guidance of being about 70% of last year. Therefore, in that context, with strong liquidity, we can expect liquid assets to continue to grow, and that is supportive of interest income, but doesn't reflect well on NIM. In relation to the software assets, pre-COVID, I was pretty sanguine about how beneficial it would be. It looks like the EBA have come out with some more guidance on that, and they seem to be a bit firmer on it themselves. It's for a two-year period only, so it has a limited impact. I'd say it's been beneficial to about 20 basis points to capital, which we hope will feature in H2.
Thank you.
Thank you. The last question comes from the line of Guy Stebbings. Your line is now open. Please go ahead and ask your question.
Morning, y'all. Thanks for taking my questions. I wanted to firstly just come back to capital and risk-weighted assets. Some quite helpful moves in the period for credit RWAs, obviously supported by the SME support factor. There are no obvious negative credit migration pulled out, some favorable asset quality moves in the period. I'm just trying to gauge how much of this timing is just too soon for that coming through, and given what we're seeing on the ECL provision side, should we expect some negative credit migration in the second half based off your sort of central assumptions, as it were? Albeit, I appreciate some of your models are less pro-cyclical than some peers. Also on RWAs, I just wanted to check the treatment of payment holidays. I think one of your peers referenced quite a big pickup in RWAs, specifically payment holidays, yesterday.
I wasn't sure what your treatment would've been here. Secondly, I just wanted to ask on customer deposits, which fell healthily over the period. I just wonder whether the exit rate was much lower than the 21 basis points average for the first half. Conscious the U.K. drives quite a lot of this, given we're close to 100 basis points still in terms of cost there. Taking some of the comments you've made today, should this be quite a big delta as we look forward? Thanks.
Hi, Guy. Just let me take the RWA question and link it to the mortgage one in at the same time. Our credit RWA declined by EUR 2.2 billion in absolute terms, and the density also reduced by 2%. Back to your point about the models, it is important to call out that if 72% of our credit RWA is IRB, which as you know, is designed to capture through the cycle losses. That's one of the reasons why we should expect less volatility on RWA. Factors driving that reduction are, as you say, the implementation of the SME support factor and also the change in mix and quality. Now, in relation to the mortgage customer break. The nature of these payment breaks, of course, is to try and ensure as much as possible that these customers don't go into forbearance.
Of course, we know some will. That's why on the impairment side, we've set aside EUR 184 million for the totality of impairment breaks. From an RWA perspective, if they do migrate clearly into forbearance and therefore into stage three, that will have the impact of increasing RWAs for mortgages. To put that into context, for Bank of Ireland, our ROI mortgage density has been ticking down over the last two years. From 34% in 2018 to 30% in 2019, and to 27% for H1. While the U.K. mortgage density fell from 22% two years ago to 19% in H1. The overall quality of the mortgage book relative to the last financial crisis is generally pulling down risk weights.
In that context, taking all of that into account, I'm not expecting a material increase in RWA as a consequence of COVID-19, certainly for 2020. In relation to deposits, overall, the cost of deposits, I think about H2 last year, the average cost was 27 basis points. It's down to 21 basis points for H1. We are seeing reductions, which is a good slide, actually, if you've got time, 38 gives some detail on the average balance sheet, but you can see it broken down there. Ireland deposits down three basis points. Credit balances, including the application of negative rates, is generating plus four basis points as a positive income. U.K. has come from 109 basis points in H2 last year down to 97 basis points. In our corporate and treasury, it's more than half, from 34 down to 16.
This feels like, Guy, it's a bit like operating cost. Deposit is an area that's within our control where we can create value, and we've seen some good experience of that in H1.
Great. Thank you.
Thank you, Guy. Do you have any more questions on the line?
No further questions that came through, ma'am.
Okay. Thank you. Well, before I just bring the call to a close, I just want to say thank you everyone for joining us this morning and for your questions. Your time is, I know it's precious, and it's always appreciated.
Yes. Thank you. Also, can I just say we wish Alastair good luck in his new role.