Good morning, everyone, and welcome. Over the year, we have continued to make progress against our three strategic priorities to transform the bank, serve customers brilliantly, and grow sustainable profits. This morning, Myles and I will set out the progress that we've made, update you on the action we're taking to control the controllables, and provide new guidance on a number of our financial targets. The group had a successful 2019. We generated underlying profit before tax of EUR 758 million. Operating profits pre-impairment grew by 10%. We delivered strong net lending growth of EUR 2 billion. Wealth and insurance income increased by 11%. Costs reduced by a further 4%, achieving a second year of positive j aws.
We're benefiting from investment in our transformation, and we generated organic capital of 170 basis points with a proposed 9% increase in our dividend. The Irish economy continues to perform with strong GDP growth, and unemployment at a 13-year low. Brexit has, of course, made itself felt. Uncertainty impacted consumer and business confidence during 2019. As a result, the pace of credit formation in Irish SME lending and mortgages was slower than expected. The recent Irish general election has been inconclusive. It may take some time for the next government to take shape. However, the overall outlook remains positive, and we expect Irish GDP to expand by a further 4.8% in 2020. In the U.K., the economy has been resilient, with moderate GDP growth and a strong labor market. We expect these trends to continue in 2020.
The most notable change in our external environment since we published our strategy in 2018 has been the material reduction in the interest rate environment. Euro and sterling rates are now expected to be at or below their current historically low levels for a number of years, with muted inflation in the Eurozone and the U.K. These factors represent challenges to all retail banks, including Bank of Ireland, in our core markets. Our three strategic priorities guide us in how we think about our business and in every action that we take. 2019 was another year of delivery.
Transformation of our culture, systems, and business model remained a critical focus for us. This has helped us deliver our new mobile app and migrate 2 million customers to a new payments platform. This was the largest customer migration in the history of the Group. We have also exited a number of unprofitable business activities in the U.K. We've changed our ways of working to reduce our property footprint and to be more efficient.
Our priority is to serve our customers brilliantly in a way that delivers attractive, sustainable returns to our shareholders. We've renewed our brand and improved customer experience. This has delivered a 13-point improvement in our Customer Effort Score, and customer complaints are down 29% to their lowest level on record. The group has made good progress over hard ground, despite external headwinds, by delivering strong growth in net lending, growing our wealth and insurance business, and generating 170 basis points of organic capital. We also further reduced our non-performing exposures. We have the lowest NPEs of any Irish bank. Transforming technology in banks takes time. Integrating back end and front end systems is a complex process. It must be carefully managed.
The launch of our new mobile app took longer than anticipated, reflecting our commitment to getting this right for our customers. Since we started our transformation journey, the technology, business, and regulatory landscapes have evolved. We have responded appropriately and dynamically to these developments while staying committed to the upgrade and replacement of our core banking systems. This investment is bearing fruit. New products and improved customer experience is leading to a growth in sales and customer interactions. Over 60% of our personal loan applications are, for example, now made through a mobile device.
The group's business model transformation has delivered significant results. We have simplified our business and our structure. We have brought colleagues closer to the customer, with management layers reduced by 20%. The group is committed to remaining within the guided transformation spend of EUR 1.4 billion, equating to an average of 50 to 60 basis points of capital per annum until 2021. Investment in modernizing our banking systems will continue beyond 2021, but at a lower level of capital investment.
Our transformation is delivering tangible customer benefits. Our new mobile app has launched to all of our colleagues and is being rolled out to our customers starting in Q1 . It represents a step change in customer experience. With a 50% increase in functionality versus its predecessor, this is an important step forward in becoming a more digital bank. We also launched new platforms for our wealth and insurance customers in 2019. Our digital insurance wallet provides customers with greater access and management of their policies all in one screen, and our digital investment platform provides customers with a one-stop shop to research and open a personal investment plan. These new channels and services will support growth in our wealth and insurance business in 2020.
An enabler of this will be further penetration of the bank's customer base, which we increased from 26% in 2018 to 32% last year. The group has also mobilized an end-to-end simplification program to streamline our business model. Two highlights are improvements in our personal current account opening process and first-time buyer mortgages. We've reduced account opening time from one day to less than 10 minutes by incorporating biometric facial recognition or selfies and eliminating unnecessary questions. Improvements to our mortgage process for first-time buyers enables customers to complete the end-to-end journey digitally. We now accept over 70% of documents online, up from 40% previously. These initiatives are enhancing customer experience and satisfaction, reducing costs, and helping us compete more effectively. In the U.K., 2019 saw continued implementation of our plans to enhance our return on tangible equity, or ROTE.
We've seen good growth by pivoting our mortgage offering to higher margin business, and we grew our consumer lending. We reduced U.K. costs by 18% last year. We've taken steps to improve the funding of our U.K. operations, and we extended our partnership with the Post Office to at least 2026 with better alignment of shared value. We continue to reposition our U.K. footprint, exiting unprofitable areas such as ATMs, current accounts, and credit cards. At our 2018 Investor Day, we set a target of high single-digit returns in the U.K. by 2021. We retain that target. However, lower for longer interest rates and continued competition in the mortgage market means that it will take longer to achieve that target.
In terms of our outlook for the U.K., we will continue to invest in profitable lending whilst retaining a disciplined commercial and risk focus. We will also take steps to further optimize costs. Let me be absolutely clear, increasing returns in our U.K. business remains the strategic imperative. One of the levers that we talked about at the interim results was the relentless focus on costs across the group. This is the fourth successive reporting period in which we've reduced our operating expenses. At the same time, we've continued to invest in our systems and our people.
Our cost reduction is strategic. It has strong momentum and has become embedded in our mindset. I feel particularly pleased with the progress that we've made so far, but we see opportunities to go further. To reflect this, we are today committing to lowering our cost target by a further EUR 50 million to EUR 1.65 billion in 2021.
Bank of Ireland's purpose is to enable our customers, colleagues, and communities to thrive, and central to this purpose is conducting our business in a responsible and sustainable way. In 2019, we signed the UN Principles for Responsible Banking. Sustainability is clearly a growing area of focus nationally and globally. To play our part, we've taken a number of steps. We launched a national financial wellbeing strategy. We've reduced the group's carbon footprint by 40% since 2011. We established a EUR 1 billion sustainable finance fund to support personal and business customers, and we were the first bank in Ireland to offer a green mortgage. 2019 was a year of further growth in our lending and business income, progress on reducing cost and capital growth. We further transformed our culture, systems, and business model.
We improved our U.K. business whilst acknowledging we do have more to do, and we generated capital and improved the asset quality of our loan portfolios. We are maintaining our commercial discipline on risk and pricing with stable net interest income. This includes prudent application of negative interest rates. The group has been effective at controlling the controllables. However, there is no getting away from the fact that since we set our targets in June 2018, our operating environment has changed materially. Put simply, it has become more challenging. External headwinds have impacted the timeframe for delivery of some of our Investor Day commitments. Today, we are refreshing three of the group's targets. We are setting a new ROTE target of circa 8% by 2021, which Myles will provide more detail on shortly.
In the longer term, we still target a ROTE of 10%. As I've already mentioned, we are lowering our target cost base to EUR 1.65 billion in 2021. On capital, primarily reflecting a recent increase in the U.K. regulatory requirements, we are increasing the group's target CET1 ratio to in excess of 13.5% in 2021 from 13% previously. Our dividend policy is unchanged. This is for our dividend to increase prudently and progressively, and over time, build towards a payout ratio of around 50% of sustainable earnings. The group is proposing a dividend of EUR 0.175 in respect of 2019, a year-on-year increase of 9%. I will now hand you over to Myles, our new CFO and executive director, to take you through the financial statements in more detail and to provide more guidance on our outlook.
Thank you, Francesca, and good morning, everyone. Against a challenging backdrop, I'm pleased to present a strong financial performance. We have delivered net lending growth, increased wealth and insurance income, lower costs, reduced NPEs, net capital generation, and a dividend increase of 9%. We are reporting an underlying profit of EUR 758 million, with operating profit up 10%, stable net interest income, other income up 4%, and operating expenses down 4%. The group's impairment charge was EUR 215 million, reflecting a more normalized level of impairment and losses on a small number of large exposures. Our non-core items for 2019 include EUR 67 million relating to the tracker mortgage examination, covering, one, compensation, two, program costs, and three, provision for a potential fine. The balance of non-core costs relate to business model transformation.
Loan book growth and pricing discipline have ensured stable net interest income. In terms of NIM, while growth in lending is supportive, NIM declined to 2.14% in 2019 from the U.K. Card disposal, competitive pressures in the U.K. mortgage market, and growth in the liability base and liquid assets. On outlook, importantly, loan book growth will continue to support net interest income and NIM. Pricing discipline will remain key both for lending and for the application of negative interest rates to corporates and larger business balances. Nonetheless, lower interest rates represent a material headwind for NIM.
For full year 2020, we expect NIM to be around 205 basis points, primarily from reduced income on structural hedges and higher liquid assets. Taking account of these factors and loan book growth, we expect net interest income to be broadly in line with current levels. We've set out new disclosures on the group's structural hedge policy. This policy protected income in recent years from low market rates. The maturity of higher yielding historic hedges, combined with falling longer-term swap rates, will result in lower income from structural hedges over the coming years. Loan growth momentum continued in 2019 with net lending of EUR 2 billion. That's been driven by new lending of EUR 16.5 billion spread across our markets.
In Ireland, we had a 24% share of a mortgage market that grew 9% in 2019. Brexit impacted Irish business sentiment with more caution on investment decisions. Even with this impact, we continued to grow our SME market share, last year we increased new lending by 3%. In the U.K., lending increased by 15% from growth in mortgages, car financing, and personal lending. Our corporate new lending was 10% lower, reflecting careful capital allocation and conservative asset selection.
Our outlook for 2020 is net lending growth of circa EUR 2 billion, and we expect Retail Ireland to account for a greater proportion of overall lending compared to 2019. Underlying business income was 6% higher, with wealth and insurance a standout performer. Income rose by 11%, delivered by growing new business sales and life market share. A big part of this was the deeper penetration into our own customer base. In Retail Ireland, income was EUR 13 million lower from reduced cash handling fees and lower overdraft fees. On valuations, the improvement is driven by movement in market rates during the year in both fixed income and equity markets. As you heard from Francesca earlier, we have an absolute focus on cost.
Last year, we generated gross cost savings of 6% through, one, process efficiencies and org design resulting in lower staff costs, two, lower third-party costs, and three, U.K. portfolio exits, including cards. Importantly, within these savings, we absorbed wage inflation of 2.6% and higher depreciation associated with transformation investments. This has resulted in an overall reduction of 4% in 2019 and a 2% improvement in the cost-income ratio. On transformation, we invested EUR 263 million in 2019, of which 38% was capitalized. We remain committed to operating within our EUR 1.4 billion transformation investment to 2021.
Looking ahead, 2020 operating expenses are set to be lower than 2019. For 2021, we are reducing our cost target by a further EUR 50 million to EUR 1.65 billion, with a clear line of sight on the required initiatives. We reduced non-performing exposures by a further EUR 1.5 billion last year and our ratio to 4.4%. An important feature of this reduction is the contribution from both organic workout and portfolio transactions. Organic workout was supported by our dedicated in-house teams and positive macroeconomic conditions. The two portfolio transactions generated 30 basis points of CET1 capital, and we expect further improvements on NPEs.
On asset quality, the impairment charge was 26 basis points. This reflects a more normalized level of impairments compared to net write-backs recorded in 2018. We've increased our coverage ratio on Irish mortgages to 25%, and the charge on U.K. personal loans has grown in line with lending volumes. In H2, the charge was elevated at an annualized 32 basis points. This was primarily as a consequence of losses on a small number of SME and corporate loans.
Taking account of all of these factors, including NPE coverage and calendar provisioning, we expect the net impairment charge to be at the upper end of the 20-30 basis points range to 2021. We have strong funding and liquidity levels. Customer deposits and current accounts grew by 6%, reflecting economic growth with the resultant impact of higher levels of liquid assets. For MREL, guidance is unchanged, and we expect to issue EUR 1 billion-EUR 2 billion of senior debt per annum to 2021. As a key takeaway, we have the funding and capital capacity to support growth. The group CET1 capital ratio increased by 60 basis points in 2019. We delivered organic capital generation of 170 basis points, providing capacity for investment in loan growth, transformation, and dividend. Capital initiatives unlocked a further 40 basis points.
The group finished 2019 with a fully loaded CET1 ratio of 13.8% and a regulatory capital ratio of 15%. On slide 26 of our results presentation, we set out the components of capital generation and usage, including regulatory demand, which is expected to consume up to 80 basis points of CET1 capital by the end of 2021, with the majority now expected in H1 2020. We expect capital generation to benefit from both organic and further capital initiatives. We are increasing the group's target CET1 ratio from in excess of 13% to in excess of 13.5%. This reflects the announcement by the Bank of England of an increase in the U.K. countercyclical buffer. This adds 30 basis points to requirements effective from December 2020. There are two potentially offsetting capital requirements that may emerge.
These are, firstly, the introduction of a systemic risk buffer in Ireland, the timing, sizing, and application of which remains unknown. Secondly, new EU capital proposals allowing regulators to permit issuers to partly meet their P2R requirement with AT1 and Tier 2 capital. Taking account of capital generation and usage, we expect to remain above 13.5%. On outlook, looking to 2020, we expect the year ahead to be characterized by further growth and efficiency. We see net lending growth of circa EUR 2 billion, with NIM of around 205 basis points. Net interest income to be broadly in line with 2019, and continued growth in the group's wealth and insurance business. We expect 2020 to be the third successive full year in which we reduce our operating costs with continued progress in reducing NPEs.
We anticipate impairments to be at the upper end of the 20-30 basis points range, and we will continue to generate capital supporting our dividend policy while progressing towards our 2021 ROTE target. In terms of that target, I'd like to set out the major building blocks to improving returns from 6.8% to circa 8% by 2021. Further cost reductions, growth in our loan books, and increased fee income will be the tangible actions to improve returns. Lower interest rates, MREL issuance, and increased capital requirements are the main drags. We expect ROTE to continue growing beyond 2021 on a progressive basis, with the potential to get to 10% over the longer term. An improvement in the interest rate environment will help achieve a 10% return sooner.
I'd like to close by reaffirming the group's refreshed financial targets that Francesca referred to earlier. On ROTE, as discussed, we see this progressing from last year 6.8% to circa 8% by 2021, and to 10% over a longer timeframe. On costs, we will build on the progress made in each of the past two years with further reductions in 2020. We are setting a new target cost base of EUR 1.65 billion in 2021. This will bring the net reduction in operating costs to EUR 250 million since 2017. We expect to maintain a robust capital position with a target CET1 ratio in excess of 13.5%. On dividends, we reaffirm our policy as unchanged. Thank you.
Thank you. Okay, Myles and I will now take questions. I'll start in the room here in Dublin, then I'll come to questions on the phone. If you could just raise your hand and let us know your name and your institution, please. I'll start with Diarmaid just here.
Thank you. Good morning. It's Diarmaid Sheridan from Davy. Three questions, if I may. If I could maybe start off with, Myles, you referred to return on tangible equity and the 10% longer term target. If we think about the cost and transformation aspects of those, how should we think about those supporting, bridging, I guess, from 8% towards that 10% beyond 2021? Should we continue to think of those as being drivers of that? In terms of the U.K., it clearly continues to be a very challenging competitive environment at the moment. Beyond the initiatives that have been carried out in 2019, what further types of actions do you think you could take that would look to support the increase in returns there?
Maybe finally, on capital, and Myles, again, you alluded to the kind of offsetting measures. I just wonder to what extent are those incorporated into 13.5%? I appreciate some of those are unknown at this point, to what extent would they be incorporated in should a systemic risk buffer, for instance, be introduced at some point in the next year or so? Thank you.
Thank you. I'll take them in a slightly different order. I'll answer on the U.K. and just give you how I think about the ROTE in excess of 10%, and Myles will talk more about the component parts of our ROTE, WACC, and then capital. The U.K., we remain committed to our U.K. business, but as I said in my opening comments, improving returns is an absolute imperative. We're committed to the U.K. because we've been there for 40 years through a series of cycles, but there's no misplaced nostalgia or romanticism about the fact we've been there for 40 years as the reason why we'd want to stay there. It's because we still see attractive returns being possible in the U.K. market.
It is a large scale market. There's adjacency, and we believe that we have an opportunity to continue to improve our profitability. We are making good progress. We set out our invest, improve, reposition strategy. We've invested in growth in niche segments. We wrote a quarter of a billion sterling of new bespoke mortgage business in 2019, which I'm pleased about. We also grew lending in the consumer space with our strategic partners and through Northridge, which was our intention, and we've done that well. We've improved the Post Office relationship with an extension of the partnership, and we've also improved our costs in the U.K. They're down by about 20% in the last two years. We've repositioned. We've exited unprofitable businesses such as UK Card.
Our strategy is working. However, we acknowledge that the external environment is tougher. The low for longer interest rate and also just the level of competition in the overcrowded mainstream mortgage market has made the high single-digit guidance that we provided around ROTE not necessarily something that's going to be delivered by 2021, but we're certainly pursuing it as we grow and improve our ROTE. We constantly challenge ourselves on returns in all of our geographies, in all of our products and segments, and the U.K. is no different. Your question was, is there anything more we can do? Continue on the improve, invest, and reposition strategy.
We challenge ourselves on different scenarios. It's always about shareholder return, and we don't want to take any action, for example, exiting any parts of any part of the group that would be dilutive to ROTE, and we believe exiting any part of the U.K. would be dilutive. Obviously, if the environment were to change, we would always challenge ourselves in finding ways to improve shareholder returns. That's how we think about the U.K. just in terms of the ROTE. We're reporting a ROTE today of 6.8%. Myles can elaborate on how we are confident we'll get to the 8% by 2021.
The in excess of 10% is still our intention, because when we look at our business model, the Bank of Ireland business model can generate ROTE in excess of 10%, and that's without assuming a big change in our interest rate environment. Obviously, if interest rates were to go up sooner, we would achieve in excess of 10% quicker. We see a path to getting to in excess of 10 through continued loan book growth, which we're demonstrating today, improved expansion, and diversification of our revenue, for example, for wealth insurance, and the further improvement in costs, which I think we're demonstrating really strong momentum and a proven track record on. I'll pass to Myles to talk about sort of the ROTE and the component parts and also capital.
Sure. Diarmaid, the increase in ROTE from 6.8% to our revised target of circa 8, a fundamental part of that is the cost reduction to EUR 1.65 billion by 2021. Of course, we don't stop our cost reductions at that point. It continues. We talked about the progressive improvement in ROTE beyond 2021, and part of that most definitely is further efficiencies. Yes, transformation is part of that in two ways. Firstly, we've talked about that we will continue to invest in transformation, but at a lower level of capital investment. That will be helpful to our operating expense. Secondly, just the efficiencies that we would expect to get from a longer term transformation program.
On capital, in setting the greater than 13.5% target, it reflects everything we know today as best as we can know. We have incorporated the U.K. 0.3%, that's included. Now, I talked about those two major events, which is the introduction of a systemic risk buffer, of which details are unknown. We have assessed its introduction in other jurisdictions, and in particular, its offsetting relationship with O-SII buffers. Secondly, the ongoing dialogue in relation to meeting P2R requirements from non-CET1 capital, such as Tier 2 and AT1. That is a helpful development, and we see that development as having real potential and being a viable opportunity. So, setting our target at 13.5% takes account of all of those moving parts.
Thank you. Eamonn.
Eamonn Hughes in Goodbody. Just two points, one on capital, one on NIM. Just in relation to the NIM, you'd given guidance previously, which kind of rounded to 2021 as well. Maybe just try and get our heads around your thought process on that, given that you've given a number for 2020 at 2.5. It's just in relation to that, we've seen obviously a big pickup in terms of liquid assets. Has there been any actions kind of even year to date? I'm conscious it's quite early still. To give you a little bit of comfort around that it's not an issue that's kind of material into the rest of this year and clearly a factor that could be in place for 2021 as well. Maybe just in relation to the AIB moves and mortgage rates today.
I'm conscious it's only happened this morning in the papers, how should we think about that in relation to maybe NIM sensitivity? Just on capital. Myles actually just alluded to it there in relation to your answer to Diarmaid. The step down in relation to transformation post 2021. It's 50 to 60 basis points a year. Is it materiality? Is it half that? Ballpark? How should we think about that just kind of as an ongoing capital guide for us? Thank you.
Thanks, Eamonn. I'll answer briefly on how we think about our mortgage pricing and then pass to Myles more broadly on NIM and capital. In 2019, there were 19 price changes in the Irish mortgage market. We did two of them. One was to price up, one was to price down. We have demonstrated prudence and discipline around pricing. We obviously must stay competitive, and we believe we are. We have a competitive offering, even compared to latest competitor developments, and that's been demonstrated by the fact that our market share in the second half of 2019 increased. Our market share overall was 24%. That reflected the fact that we were entering the broker markets early in 2019 as the broker market in Ireland grew.
We didn't participate in all the growth in the first half, but I'm certainly happy with the results that we had in the second half of 2019. We had a good six months. Our Q4 market share was getting closer to 25%. In December, we had a market share of 28%. That was a particularly strong month. I feel the pricing changes that happen in any competitive market, we're in a competitive position right now. We've increased our channels, we have a strong proposition, and our pricing is working. Over to you, Myles.
Eamonn, in relation to the 2021 NIM, look, as new CFO, I want to give guidance on those items that I feel comfortable and confident of achieving. I'm not providing specific guidance on 2021, and that's because my focus is on generating net interest income, which drives profitability and returns. Now, having been asked the question, if we see no further deterioration in the rate environment, I'd anticipate NIM remaining above 2%. It is really important to call out the buildup of liquidity and therefore higher liquid assets could impact NIM, but being very mindful that this doesn't impact net interest income.
In relation to the transformation spend and beyond 2021, just to reaffirm, first of all, that we remain very comfortably within the EUR 1.4 billion envelope. Given the nature of activity, it is elevated right now by design. It's investing heavily in where we want to be at. Beyond 2021, it will be lower, not providing precise guidance on what that would be.
Okay. Thank you. Any more questions in the room? You can come back to the room. I don't know if we have any questions on the line. A couple of callers on the line. Let's go to the first one.
Yes, ma'am. We have questions over the phone line. As a reminder, if you wish to ask a question over the phone, just press the *1 on your telephone keypad. Your first question over the phone lines is from Alastair Ryan of Bank of America. Please go ahead. Your line is now open.
Thank you. Good morning. Just on the IT upgrade. I'll admit to struggling from the outside on just where you are with that. You sound very confident on the numbers today. You were a little slow rolling out the app for retail. Could you just expand a little for us, please, on what we should see to measure the progress that you're making? I think your financial goals are quite clear on that. Clearly, just what markers should we be looking for to see that externally that your sort of delivery is on track? Clearly it's such a large project and you're sort of over the hump in a way, certainly with the core platform. How do I think about measuring that? I think that'd be quite material for you over the next 12 months. Thank you.
Okay. Thanks, Alastair. I will respond to that. We are making progress. We're hitting key milestones. We're within the budget and the guidance that we've given, and we're very clear on what we want to achieve. I think we're demonstrating tangible benefits. Our costs are improving. Our customers are beginning to feel the benefit now of the changes that we're making in our technology, and we do have increased stability in our overall system. As Myles said, we won't be done on December 31st 2021. That was never the intention. Investing in technology and staying current and relevant, as you'd expect, is an ongoing activity. We're not going to be investing at the rate that we are currently. That 50-60 basis points per annum of capital allocation will reduce in 2022 and beyond.
In terms of how to track our progress, as we stand up new technology, we are migrating customers and then decommissioning the old technology. For example, the 2 million migration of customers to a new core platform will enable us to decommission that platform. As we migrate our customers onto the new mobile app, which is a Temenos technology, we will decommission the old app. That ability to stand up new technology, migrate, and then stand down and decommission old technology is a sign of progress. More broadly, our cost improvements.
The cost improvement we're making by having just more efficient processes, whether that's through Temenos and the investment that we continue to make, or whether it's just improving some of our end-to-end processes, like the example on accounts opening or our mortgage journey, is enabling us to grow while our costs are coming down. You're seeing second year successive positive jaws. We're seeing a total cost in the last two years of gross cost improvement of EUR 215 million, or 11%, whilst growing our business. That's another evidence point. In terms of our positioning with customers, complaints are down. Our participation and market share where we choose to compete is compelling without necessarily competing exclusively on price. Those are the sort of key measurements and aspects that we would articulate around our transformation journey.
Thank you.
Thank you, Alastair.
Thank you. Your next question comes from the line of Aman Rakkar of Barclays. Your line is now open. Please go ahead.
Morning, Francesca. Morning, Myles. I had one quick question on your hedge disclosure. Thank you very much for this new disclosure. It's very interesting. Just regarding your strategy on the hedge. It does look like you actually quite materially increased your balances in 2019. If I look at the volume of the hedge, it's gone to EUR 33.3 billion from EUR 26.4 billion. It looks like you've loaded on the hedge pretty significantly at a time when interest rates are particularly low. I was kind of hoping to interrogate the kind of strategy and the thinking behind that. The second bit is, I think you also really helpfully call out the yield difference between kind of the average yield and the front foot yield on that.
It does look like you're probably on course to lose basically all of the income from that hedge over the next couple of years. First of all, is that a correct interpretation? As part of that, can the yield actually turn negative on that hedge? I guess, is there anything you can do as far as your toolkit in terms of potentially investing in certain assets or kind of diversifying what's gone into that hedge to kind of offset that drag? Is that basically unavoidable? Is that something we should just basically model as a drag over the next couple of years? Thank you.
Thanks, Aman. Go straight to Myles on structural hedge.
Sure. Let me just firstly respond with a broader comment just on net interest income. You've heard me say that I expect interest income to remain broadly in line with 2019. Just to examine that briefly, 2020 interest income will benefit from EUR 2 billion of new lending, which equates to about EUR 50 million of income next year. I expect that increased income will be largely offset by lower income from structural hedges of about EUR 40 million, and I'll come back onto that number in a second, and also the cost of additional MREL issuance to be around EUR 10 million. They are the big moving parts on why net interest income will be flat or thereabout in 2020. In relation to the precise question, a couple of things to call out.
One is we have a policy that we apply. We've set that out, and that's about hedging 100% of equity and about 80% of free funds. It's important to say that for sure that rate has come down significantly, and it's lower than where it was compared to our historic hedges. Equally, it's higher than the overnight rate, right? We are earning more on our structural hedges than we would if those funds were simply placed overnight. It's a lower level of income, but it's still a higher level of income relative to overnight rates.
The precise impact, so I've called out that EUR 40 million impact and the moving parts on that are, if you look at our available, the average balance, we hedge about 15% of that each year based on a three and a half year average. That's about EUR 4 billion of hedges that will roll over this year. Comparing that to the historically higher rates of hedges, it's about 100 basis point decline. EUR 4 billion, 100 basis points, EUR 40 million impact 2020.
Okay, thank you. We'll stay on the line. Sorry, Aman, did you have another question, or?
Sorry. Just regarding the step up in balances in 2019, it just does indicate some shift in the policy, either that you've increased basically your assessment of what are non-interest bearing free funds or something. You basically increased the size of that hedge by a third in one year. I just wondered where that was coming from.
I think if you look at the buildup on the liability side of the balance sheet, you'll see that. Deposits and current accounts grew by 5% year-on-year, and that's the primary driver for the increase in the average hedge balance.
Okay, thank you.
Thank you. We'll stay on the line.
Thank you. Your next question, ma'am, comes from the line of Alicia Chung of Exane. Your line's now open.
Morning, everyone. Two questions from me. Firstly, on your NPEs. Obviously, you're continuing to make good progress on reducing those. That's now down to 4.4% in terms of your NPE ratio. Just wanted to get a sense of what you might be targeting going forward. Obviously, you're already at a good level, but there's certainly a case to be made to keep reducing those NPEs to reduce the calendar provisioning impact that you've been guiding to. First of all, what would you be targeting over the next couple of years? Also, what will be the impact of the definition of default on your NPE ratio? How much of a step up could you see going forward?
Secondly, just looking at the strong increase in your business income. Obviously, that was one of the highlights, I suppose, of today. You're seeing very good progress in wealth and insurance. What momentum can we expect to see over the next couple of years in terms of market share and customer base penetration? Could you also give a sense of what dynamics you're seeing in terms of fee margin pressure in the business, and how that might roll forward? Thank you.
Okay. Thanks, Alicia. Let me go. I'll answer on the other business income and wealth and insurance and how we see that growing. I'll touch on NPE reduction, but then ask Myles to provide more on guidance and how the definition of default will impact that going forward. As you mentioned, it is an area of growth. We've committed to investing in our wealth and insurance business. Our overall business income grew by 6% to the EUR 666 million you have in the pack. Within that, wealth and insurance grew by 11%, and that was through increased market share. In the life markets, we went from 20%-22%, increased penetration of our customer base in life and pensions to over 30%, 32%. We feel positive about that improvement.
There's three reasons why we feel confident and positive about the outlook and the continued growth in our wealth insurance business. One is the demographic backdrop. Ireland as a market is attractive for wealth insurance. You've got a growing population, full employment, increasing disposable income. Because of the age demographics, people are beginning to think more about providing for their pension, they're generally unprovided for, and protecting life and asset. We're certainly keen to serve them in addressing those needs. The second reason to be confident is our distribution model is unique in Ireland. Bank of Ireland is the only bank assurer in Ireland. We see attractive opportunities to continue serving our customer base as well. We've seen our bank channels perform particularly strongly in 2019. New business generation was close to 30% up in our own banking channels.
The third is investment we're making in digitization of the offering. We invested in having a life advice platform which enables customers to explore and pick an investment or a savings plan. We also launched digital wallet, which really reduces the journey and just the ease of picking more general insurance, and we'll be adding more products. We're looking forward to rolling out an improvement to our pension offering, which is an area of significant growth in Ireland that will be very attractive, particularly for corporates who offer pension products to their employees. Plus, we'll be digitizing our own back office. We have reduced our costs. You've got a cost-income ratio in our wealth insurance business sub 50% and some very positive jaws. They're the sort of dynamics.
Looking forward, we would certainly see that as an area of growth in our business as we diversify our revenue streams. Just on sort of an overall note on NPEs before I pass to Myles. We improved, as you said, Alicia, our NPE ratio by 190 basis points to 4.4%. We did do that again through a combination of organic and inorganic action. 60% of that improvement, about EUR 0.9 billion, was through organic action. That's just working with our customers to find solutions. 40% was from inorganic. Those were the transactions we did that involved NPE securitization and sale. We would certainly see a combination of both as opportunities to continue to manage our NPEs effectively going forward. I'll ask Myles to give more color.
Yeah. Having got to EUR 3.5 billion, we don't stop. The work continues, and again, it will be from both organic work out, which is supported by a benign macroeconomic environment, but also further transactions. We've talked about, or we signaled in our results deck, the potential for an Irish mortgage transaction this year, and that will also feature. In relation to the definition of default, its impact really is that it will slow down the pace of reduction. That's its major impact, and that is captured. You recall earlier I talked about regulatory capital headwinds as previously guided in the region of 80 basis points. That captures the impact of definition of default. There's other things in there as well, IRB models, et cetera, but DoD is caught in that.
The trend, we will continue to make improvements on NPEs, but the pace of reduction will slow down from DoD.
Alicia, I think it's the third question about margin. I just wanted to clarify what the query was.
Sorry. Is that me?
Yes.
The question on margins?
Yes.
No, I didn't ask a question on margins.
Okay, perfect.
I did want to have, if it's okay, I'll have one follow-up question on the NPEs. The reduction that you're expecting over the next couple of years, is that already baked into your calendar provisioning guidance, or could we expect that as the NPEs roll off, that that also reduces the calendar provisioning guidance that you've already given the market? Thank you.
Calendar provisioning is captured through a combination of our guidance on the impairment charge at the upper end of 30 basis points, sorry, 20-30 basis point range, and is also captured to some extent in the regulatory guidance for capital of 80 basis points. That's because we have a choice to take calendar provisioning either as an impairment charge or as a capital deduction. We have, in setting out our capital targets and our capital progression, that captures our view on how NPEs will reduce over the coming years.
Okay. Thank you.
Thank you. I think we've got one more call on the line.
Yes, ma'am. The next question comes from the line of Chris. Yo ur line is now open. Please go ahead.
Good morning. It's Chris Cant from Autonomous. Thank you for taking my question. Two, please. On the U.K. business, you mentioned that you think any business exit there would be dilutive. Could you just elaborate on that, given where you're expecting returns in that business to be? Is it partly a function of central costs being allocated to the U.K., which would be retained if you were to seek to shut down some of that business? Could you give us a sense of how big the central cost allocation to the U.K. is? Then just to follow up on structural hedges. Thank you for the disclosure there.
If I look at your commentary around sort of seven-year swap rates, if I think about what seven-year swap rates were seven years ago, 2013 looks to have been quite a rich year in terms of investment rates within your back book of hedge positions at 1.3%. That would have dropped to 0.9% in 2014, which presumably is maturing next year, and then 0.5% in 2015, which would mature in 2022. Obviously you've grown the hedge in recent years, but it looks like 2020 might be the worst year in terms of rollover. If rates stay as they are, should we expect that hedge headwind you quantified as EUR 40 million to decline a bit in absolute terms into 2021, please? Thank you.
Thanks, Chris. Myles will cover the structural hedge first, and I'll respond on the U.K.
Thanks, Chris. Yes, the impact of the historic hedges rolling off that were put on at higher rates compared to the rate environment that we're experiencing now is the driver for that impact. Your assessment is, I think, broadly good. I've talked about the 2020 impact of EUR 40 million based on 100 basis points decline. That's the trend that we see for that time period. In setting our ROTE target for 2021 at being 8%, we've captured what we expect to be the impact of the structural hedge on that year.
Chris, on the U.K. The U.K. is a profitable part of our total group. It's 23% of group profitability. Not having a U.K. business would be dilutive to our overall ROTE and not in the best interest of shareholders. Part of that is because of cost allocation. The question is, well, then why aren't we managing our costs? Of course we are, and we've demonstrated at 11% gross reduction in group costs overall, and the U.K. has been a big contributor both in terms of its own direct and also the indirect allocation that goes to the U.K.
Becoming more efficient as a group, it will help improve shareholder returns and also improve the U.K. performance. If we didn't want to be in the U.K., we don't have to be in the U.K., but we choose to be because we are convinced that we are able to develop and deliver more profitability and greater returns to our shareholders for the reasons that I set out at the beginning. Despite the external challenges, the attractiveness to the market and the fact that we have demonstrated our ability to pivot to parts of our lending book that have higher returns. The growth in bespoke with EUR 0.25 billion of new business written in 2019 is at around a 30 basis point margin premium to mainstream mortgages.
We're happy with that growth and keen to see more in this current year. The growth that we've seen in our personal lending and in Northridge business is prime, is within appropriate risk parameters, and we see opportunity to do more. Are we challenging ourselves on improving our returns across all of our businesses? Absolutely, yes. Right now, having the U.K. business is more positive to our ROTE than not. We're doubling down on our improve, invest, and reposition strategy to make it be a contributor.
Okay. Thank you.
Thank you, Chris.
Thank you. We have one more question, ma'am, over the phone.
Thank you.
This comes from the line of Daragh Quinn from KBW. Your line is now open. Please go ahead.
Hi. Good morning. Just a follow-up question on the transformation program and looking beyond 2021. You've indicated you expect the investment to fall, but you're still unable really to quantify by how much. When do you think you'll have visibility on what the outlook for costs and investment in 2021 will be? Just a clarification on the NPE regulatory capital question. Just to be clear that your outlook for the NPE reduction in 2020 is already reflected in the regulatory charge of 80 basis points.
Okay. Thank you. Before Myles answers on NPE on transformation, it's not a matter of us trying to work out how much we're going to spend on technology. We're very clear on what our ultimate end state is. We're very clear on what we will achieve between now and the end of 2021, and our target end state. The external technology environment is evolving, regulatory expectations and priorities are also developing, and expectations of our own customers are also changing. To be overly explicit on what that technology or expectation or customer need is in 2022, 2025, I think there's a level of explicitness that doesn't necessarily add value to our outlook. What we've said is that we will be within our EUR 1.4 billion budget for transformation by the end of 2021.
The 50-60 basis points is our parameter, we work within it. We will continue to invest in technology, but at a lower rate. That's our guidance for 2022 and beyond.
Just, Daragh, to confirm to you that our NPE trajectory does capture the impact of definition of default, which is captured in the 80 basis points of regulatory headwind we referred to.
Okay. I think we have no more questions on the line. Going back to the room, do we have any further questions from people in Dublin? Eamonn.
Just maybe one follow-up, just on the net lending number for 2020. You talk about EUR 2 billion, Myles, I think it was earlier on. Just I think even just looking at the slides, the mortgage book was maybe slightly down in FY 2019. Maybe just kind of broad brush Ireland, U.K. corporate, how we should think about that makeup of that + EUR 2 billion.
Sure.
Yeah, I would like more of our EUR 2 billion net lending growth to come from Irish mortgages and Irish SMEs. The Irish SME segment has been really impaired or impacted by Brexit uncertainty. That optimism is now more cautiously positive. Brexit uncertainty has dissipated but not necessarily disappeared. We have a great franchise, great market share, great positioning, and indicators are that net lending in Irish SMEs is more likely to grow, and our ambition is for part of that EUR 2 billion to be from Irish SMEs. The mortgage market, we have a full year 24%, latter part of the year higher than that market share of a growing market. It's so linked to housing completions.
As housing completions come on stream, we've broadened our channel and our reach. We would certainly want more of the EUR 2 billion to come from that part of our franchise. Myles, you may want to expand more.
Yeah. Just 2019, we have net lending of EUR 2 billion, and that's also the guidance for 2020. The makeup was quite different. 2019 was more biased towards our U.K. and our international businesses. That was in the main due to a little bit on the mortgage side for sure, but also on the SME market where credit formation was more subdued than we would like, reflecting Brexit concerns and our SME customers just being careful about making investment decisions in that environment. We see 2020 being more weighted towards Retail Ireland. That's a combination of our mortgage market share, the growing mortgage market itself, but also renewed confidence in the SME sector in Ireland.
Thank you, Eamonn. Any more questions in the room? No more on the line. In which case, we thank you very much for your time today, and I'll call the session to a close. Thank you. Thank you very much.