Earnings Call: H2 2019

Feb 24, 2020

Good morning everyone and welcome. Over the year, we have continued to make progress against our 3 strategic priorities to transform the bank, serve customers brilliantly, and grow sustainable profits. This morning, Miles and I will set out the progress that we've made, updates 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 1,000,000. Operating profits pre impairment grew by 10% we delivered strong net lending growth of 1,000,000,000. Wealth and insurance income increased by 11% costs reduced by a further 4% achieving a 2nd year of positive jaws. 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 percent in 2020. In the UK, the economy has been resilient with moderate GDP growth and a strong labor market We expect these trends to continue in 2020. 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 UK. These factors represent challenges to all retail banks including Bank of Ireland in our core markets. Our 3 strategic priorities guide us in how we think about our business end 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 2,000,000 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 UK and 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 brands 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 reduce our non performing exposures. We have the lowest NPEs of any Irish bank. Transforming technology in banks takes time. Integrating back ends 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 whilst 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. In 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 1,000,000,000 equating to an average of 50 to 60 basis points capital per annum until 2021. Investment in modernizing our banking systems will continue beyond 2021 but at a lower level of capital investments. Our transformation is delivering tangible customer benefit Our new mobile app has launched to all of our colleagues and is being rolled out to our customers starting in quarter 1. 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 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 enable 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. 2 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 UK, 2019 saw continued implementation of our plans to enhance our return on tangible equity or roti. We've seen good growth by pivoting our mortgage offering to higher margin business and we grew our consumer lending. We reduced UK costs by 18% last year. We've taken steps to improve the funding of our UK operations. And we extended our partnership with the post office to at least 2026 with better alignment of share value. We continue to reposition our UK footprints, 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 UK 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 UK, 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. But let me be absolutely clear. Increasing returns in our UK 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 4th 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 1,000,000 to 1,000,000,000 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 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 well-being strategy. We've reduced the group's carbon footprint by 40% since 2011, We established a €1,000,000,000 sustainable finance fund to support personal and business customers, and we were the 1st 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 UK business while 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. But simply it has become more challenging. External headwinds have impacted the time frame for delivery of some of our Investor Day commitments. Today, we are refreshing 3 of the group's targets. We are setting a new ROCE target of circa 8% by 2021, which Miles will provide more detail on shortly. In the longer term, we still target a rotary of 10%. As I've already mentioned, we are lowering our target cost base to 1,650,000,000 in 2021. And on capital primarily reflecting a recent increase in the UK 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 built towards a payout ratio of around 50 percent of sustainable earnings. The group is proposing a dividend of in respect of 2019, a year on year increase of 9%. I will now hand you over to Miles, 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 the challenging backdrop, I'm pleased to present a strong financial performance. We've 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 $758,000,000, with operating profit up 10% stable net interest income, other income of 4% and operating expenses down 4%. The group's impairment charge was $215,000,000, reflecting a more normalized level of impairment and losses on a small number of large exposures. Our non core items for 2019 include 67,000,000 relating to the tracker mortgage examination covering 1 compensation, 2 program costs and 3, provisioned 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 percent in 2019 from the UK card disposal competitive pressures in the UK 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. And pricing discipline will remain key. Both for lending and for the application of negative interest rates to corporate and larger business balances. Nonetheless, lower interest rates represent a material headwind for NIM. For full year 2020, we expect NIM to 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. However, 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 2,000,000,000 That's been driven by new lending of $16,500,000,000 spread across our markets. In Ireland, had a 24% share of a mortgage market that Brexit impacted Irish Business sentiment with more caution on investment decisions. Even with this impact We continued to grow our SME market share and last year, we increased new lending by 3%. In the UK, 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 2,000,000,000 and we expect retail Ireland to account for a greater proportion of overall lending 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 a deeper penetration into our own customer base. In retail Ireland, income was $13,000,000 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 1 process efficiencies in org design, resulting in lower staff costs 2, lower third party costs and 3, UK 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 the 2% improvement in the cost income ratio. And on transformation, we invest $263,000,000 in 2019, of which 38% was capitalized. And we remain committed to operating within our 1,400,000,000 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 $50,000,000 to $1,650,000,000 with a clear line of sight on the required initiatives. We reduced non performing exposures by a third of $1,500,000,000 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 2 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 UK 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 provision, we expect the net impairment charge to be at the upper end of the 2030 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 1,000,000,000 to 1,000,000,000 of senior debt per annum to 2021. And 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 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 regulated demand which is expected to consume up to 80 basis points of CA21 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% in excess of 13.5%. This reflects the announcement by the Bank of England of an increase in the UK countercyclical buffer. This adds 30 basis points to requirements effective from December 2020. Now there are 2 potentially offsetting capital requirements that may emerge. These are: firstly, the introduction of a systemic risk buffer in Ireland, the timing sizing an application of which remains unknown. And secondly, new EU capital proposals allowing regulators to permit issuers to partly meet their P2O 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 2,000,000,000 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 3rd 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 to 30 basis points range. And we will continue to generate capital supporting our dividend policy while progressing towards our 2021 RoTE target. So 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 ROCE 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 professional financial targets that Francesca referred to earlier. On Rovi, 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 2 years with further reductions in 2020. And we are setting a new target cost base of 1,650,000,000 in 2021. This will bring the net reduction in operating costs to $250,000,000 since 2017. We expect to maintain a robust capital position with a target CET1 ratio in excess of 13.5%. And on dividends, we reaffirm our policy as unchanged. Okay. So, Mars 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, Demid just here. Thank you. Good morning. It's Dermit Sheridan from Davy. Three questions, if I may. If I could maybe start off with miles you referred to return on tangible equity and the 10% longer term target. We think about the cost and transformation aspects of those, I mean, how should we think about those supporting going 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, I mean, clearly continues to be 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 miles, again, you alluded to the kind of offsetting measures. I just wonder to what extent are those incorporated into 13.5 percent? I appreciate some of those are unknown at this point, but 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. So I'll take the slightly different order. I'll answer on the UK and just give you some how I think about the RoTE in excess of 10%, and Miles will talk more about the component parts of our OT walk and then capital. So so the UK we we remain committed to our UK business, but as I said in my opening comments, improving returns is an absolute imperative. We're committed to the UK because we've been there for 40 years through a series of cycles, but there's no misplaced nostalgia or romanticism at the fact we've been there for 4 years is the reason why I'd want to say there is because we still see, attractive returns being possible in the UK 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 we are making good progress. So we set out our invest, improve reposition strategy. We've invested in growth in niche segments. We 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 relation with an extension of the partnership and we've also improved our costs in the UK. They're down by about 20% in the last 2 years. And we've repositioned. We've exited unprofitable businesses such as, UK card. So our strategy is working. However, we acknowledge that the external environment is tougher. The low of long 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 ROCE not necessarily something that's going to be delivered by 2021 but we're certainly pursuing it as we, as as we grow and improve our roti. We constantly challenge ourselves on returns in all of our geographies, in all of our products and segments and the UK is no different. Your question was is there anything more we can do continue on the improve invest and reposition strategy. We, you know, we we we challenge ourselves on different scenarios always about shareholder return and we don't want to take any action. For example, accessing any parts of any part of of the group that would be dilutive to RoTE and we believe accessing any part of the UK would be dilutive Obviously, if things if the environment were to change, we would always challenge ourselves and finding ways to improve shareholder returns. So that's how we think about the UK. And just in terms of the RoTE and the movement to we're reporting a RoTE today of 6.8 Miles will 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 ROCE 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 than we would achieve in excess of 10% quicker, but we see a path to get to get into in excess of 10 through continued loan book growth which we're demonstrating today include 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. But our past to Miles to talk about sort of the ROCE and the component parts and also capital? Sure. So, generally, the increase in revenue from 6.8% to our revised target of circa 8, a fundamental part of that is the cost reduction to 1,650,000,000 by 2021. But of course, we don't stop our cost reductions at that point. It continues. And so, we talked about the progressive improvement in ROAD beyond 2021 and part of that most definitely is further efficiencies. And 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 our operating expense. And secondly, just the efficiencies that we would expect to get from a longer term transformation program. And on capital, so in setting the greater than 13.5% target, it reflects everything we know today as best as we can know and that and we have incorporated the UK not 0.3% that's included. Now I talked about those 2 major events which is the introduction of a systemic risk buffer of which details are unknown, but we have assessed its introduction in other jurisdictions And in particular, it's offsetting relationship with OCI buffers. And secondly, the ongoing dialogue in relation to meeting P2O requirements from non CET1 capital such as Tier 2 and 81. I mean that is a helpful development. And we see that development as having real potential and being a viable opportunity. And so setting our target at 13.5% is our takes account of all of those moving parts. Eamon. Eamon Hughes and Goodbody. Maybe just two points, one on capital, one on NIM. Just in relation to the NIM, you've given guidance previously which kind of rounded to 2021 as well. So maybe just try and get our heads around your thought process on that given that you've given the number for 2020, 205. And so it's just in relation to that, we've seen obviously a big pickup in terms of liquid assets have there been any actions kind of even year to date and conscious it's quite early still. But to give you a little bit of comfort around that, 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. Then maybe just in relation to the AIB moves and mortgage rates today. I'm conscious it's only happened this morning in the papers but how should we think about that in relation to maybe NIM sensitivity? Just then on capital, Miles actually just alluded to it there in relation to your answer to Durham. 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 guys? Thank you. Thanks, Eamon. I'll answer briefly on how we think about our mortgage pricing and then pass to miles on more broadly on NIM and capital. So in 2019, there were 19 price changes in the Irish mortgage market. We did 2 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 our market share in the second half of twenty nineteen increased. So 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. So 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 twenty nineteen, we had a good we had a good 6 months. Our 4th quarter market share was getting closer to 25% in December, we we had market share of 28%. That was a particularly strong month. So 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, Martin. So, Aaron, 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. And I'm not providing Pacific 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. And in relation to the transformation spend and beyond 2021. Just to reaffirm first of all that we remain very comfortably within the 1,400,000,000 envelope. And given the nature of activity, it is elevators right now by designs, it's investing heavily and where we want to be at. And beyond 2021, it will be lower not providing precise guidance and what that would be Any more questions in the room? You can come back to the room. We'll go. I don't know if you have any questions on, on the line, a couple of callers on the line. Go to the first one. We have questions over the phone line. Your first question over the phone lines is from Alisa Ryan of Bank of America. Please go ahead. Your line is now open. Thank you. Thank you. Good morning. Just on the IT upgrades, I'll admit to struggling from the outside, on just where you are with that. I mean, you sound very confident on the numbers today. You were a little slow rolling out the app for retail. Just you just expand a little for us please on what we should see to measure the progress that you're making? Because I think you're sure goals are quite clear on that. Clearly, just what markers should we be looking forward to see that externally that your sort of deliveries on track because clearly it's such a large project and you're sort of over the hump in a way, certainly with the core the core platform. But how do I think about measuring that? I think that'd be quite material for you over the next 12 months. Okay. Thanks, Alice. I'll respond to that. So we are we are making progress. We're hitting key milestones. We're within the budget guidance that we've given and we're very clear on what we want to achieve. And I think we're demonstrating tangible benefits. So Our costs are improving, our our customers are willing to feel the benefit now of the change that we're making in our technology and we do have increased stability in our overall our overall system. As Miles said, we won't be done on the 31st December 2020 that was never the intention investing in technology and staying current and relevant as you'd expect is an ongoing activity but we're not going to be investing at the rate that we are currently that 50 to 60 basis points primary of capital, allocation will reduce in 2020, to and beyond. In terms of how to sort of track our progress, we are as we set up as we stand up new technology, we're migrating customers and then commissioning the old technology. So for example, the 2,000,000 migration to of customers to a new car's platform will enable us to decommission that platform as we migrate our customers onto the new mobile app, which is a Terminos technology, we will decommission the old and that ability to stand up new technology, migrate and then, stand down and decommission all technology to sign a progress. More broadly, our cost improvements So the cost improvement we're making by having just more efficient processes whether that's through, Terminals and the investment that we make we continue to make or whether it just improving some of our end to end processes like the example on on accounts opening or our mortgage journey is enabling us to grow while our costs are coming down. So you're seeing a 2nd year successive positive jaws. We're seeing a total cost in the last 2 years of gross cost improvement of 1,000,000 or 11 percent whilst growing our business. So that's another evidence point. And in terms of our positioning with customers, complaints are down. Our participation and market share, we choose to compete is is compelling without necessarily competing exclusively on price. Those sort of key measurements and aspects that we would articulate around our transformation journey. Thank you. Thank you. Thank you, Alisa. Your next question comes from the line of Aman Rocar of Barclays. Your line is now open. Please go ahead. I had one quick question on your hedge disclosure. So thank you very much for this new disclosure. It's very interesting. Just regarding your strategy on the hedge, so it does look like you've actually quite materially increased your balances in 2019, if I look at the volume of the hedge, it's gone to 1,000,000,000 from 1,000,000,000. So it looks like you've you've loaded on the hedge pretty significantly, at a time when interest rates are particularly low. So I was kind of hoping to interrogate the kind of the strategy and the thinking behind that. And the second bit is, I think you also really helpfully call out the yield difference in kind of the average yield and the front book yield on that. So it doesn't 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? And as part of that, can the yield actually turn negative on on that hedge. And I guess, is there anything you can do as part of your your toolkit in terms of essentially investing in certain assets or kind of diversifying what's gone into that hedge to kind of offset that drag? Or is that basically unavoidable? Is that something we should just basically model as a drag over the next couple of years? Sure. So let me just firstly respond with a broader comment, just on that interest income. And so You've heard me say that I expect interest income to remain broadly in line with 2019. And just to examine that briefly, so 2020, interest income will benefit from 1,000,000,000 of new lending, which equates to about 1,000,000 of income next year. Now I expect that increased income will be largely offset by lower income from structural hedges of about 1,000,000 come back onto that number in a second. And also the cost of additional MREL issuance to be around 1,000,000. So there are the big moving parts, on why net interest income will be flat thereabouts in 2020. In relation to the precise question, so a couple of things to call out, but one is we have a policy that we apply. We've set that out and that's about, hedging 100 percent of equity and about 80 percent of free funds And 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. But equally it's higher than the overnight rate, right? So we are earning more on our structural hedges than we would if those funds were simply placed or overnight. So it's a lower level of income, but it's still a higher level of income relative to overnight rate. And the precise impact. So I've called out, that 40,000,000 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 3.5 year average. That's about 4,000,000,000 of hedges that we'll roll over this year and comparing that to the historically higher rates of hedges It's about 100 basis point decline. So 4,000,000,000, 100 basis points, 40,000,000 impact to 2020. Okay, thank you. Amanda, do you have another question or? Sorry, sorry, sorry, just regarding 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 a non interest bearing free funds or something just that you basically increased the size that hedge by 3rd in 1 year. So I just wondered where that was coming from. So I think if you look at the build up in, on the liability side of the balance sheet, you'll see that. So deposits and current accounts grew by 5% year on year and that's the primary driver for the increase in the average hedge balance And your next question, ma'am, comes from the line of Alicia Chung of Exane. Your line is now open. Good morning, everyone. Two questions from me. Firstly, on your NPEs, obviously, you're continuing to make good progress on reducing those. That's out 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. So first of all, what would you be targeting over the next couple of years and also what will be the impact of the definition of default on your NPE ratio? So how much of a step up could you see going forward? And secondly, just looking at your the strong increase in your business income see 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 of market share and customer base penetration? And 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? So, let me go I'll answer on the other business income and Wealth Insurance and how we see that growing. I'll touch on MP but then ask Miles to provide more on guidance and how the definition of default will impact that going forward. So yeah, as you mentioned, it is an area of growth we've committed to investing in our Wealth Insurance business, our overall business income grew by 6% to the 1,000,000 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% to 22% increased penetration of our customer base in life and pensions, to, 30 over 30% to 22% and we feel positive about that improvement, that there's three reasons why we feel confident and positive about the outlook and the continued growth in our Wealth Insurance business. 1 is the demographic backdrop. So Ireland as a market is attractive for for Wealth Insurance, you a growing population, full employment, increasing disposable income, and 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 and we're certainly keen to to to serve them in addressing those needs. The second reason to to be confident is our distribution model is unique, so in Ireland. So Bank of Ireland is the only bank issuer in Ireland we see attracts opportunities to continue serving our customer base as well. And we've seen our bank channels perform particularly strongly in 2019. So new business generation was close to 30% up in our in our own banking channels. And the third is investment we're making in digitization of the offering. So we invested in having a a life advice platform which enables customers to explore and pick a, an insurer, 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 and we're looking forward to 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've been digitizing our own back office. So we have reduced our costs you've got a cost income ratio in our in our Wealth Insurance business, up 50% and some very positive jaws. So they're the sort of dynamics. Looking forward, we would 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 on NPEs before I pass to Miles, so we we improved as you said, Alicia our NPE ratio by 190 basis points to 4.4% and we did do that again through a combination of organic and inorganic action. So 60% of that improvement so about 900,000,000 was through organic action. That's just working with our customers to find solutions and 40% was from in organic. So those those were the transactions we did that involved NPE securitization and sale and we were certainly seeing a combination of both as opportunities to continue to to manage our MPs effectively going forward. But I'll ask Miles to give more more color. Yeah. So having got to $3,500,000,000, we don't stop. The work continues. And again, it will be from both organic workout, which is supported by a benign macroeconomic environment, but also for other transactions and we've talked about and we've signaled in our results deck to potential for an Irish mortgage transaction this year and that will also feature. And in relation to the definition of default, its impact really is that it will 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 region of 80 basis points that captures the impact of definition of default. There's other things in there as well, IRV models, etcetera, but the DOD has caught on that. So it'll the trend, we will continue to make improvements in NPEs, but the pace of adoption will be will slow down from DOD. Elisa, I sent you the 3rd question about margin. I just wanted to just clarify what the query was. Sorry, the question, is that me, the question on margins? No, no, I didn't ask a question on margins. Okay, perfect. But 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. So we capture, so calendar provisioning is captured through a combination of our guidance on the impairment charge. At the upper end of 30 basis points sorry, 20 to 30 basis point range and is also captured to some extent in the regulatory guidance for capital of 80 basis points. And that's because we have a choice to take counter provision either as an impairment charge or as a capital deduction. So we have in setting out our capital targets and our capital progression that captures our view on how MPs will reduce, over the coming years. Okay. 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. Can your line is now open. Please go ahead. Good morning. It's Chris Kent from Autonomous. Thank you for taking my question. 2, please. On the UK business, you mentioned that you think any business exit 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 UK, which would be retained if you were to seek to shut down some of that business? And could you give us a sense of how big the central cost allocation to the UK is? And then just to follow-up on structural hedges Thank you for the disclosure there. If I look at your commentary around sort of 7 year swap rates If I think about what 7 years, what rates were 7 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 presume please maturing next year and then 0.5% in 2015, which would mature in 2022. So obviously you've grown the hedge in recent years, but it looks like 2020 might be the worst year in terms of rollover. So if rates stay as they are, should we expect that hedge headwind do you tires at 1,000,000 to decline a bit in absolute terms into 2021, please? Thanks, Chris. Miles will cover the structural hedge first and I'll I'll respond to the UK. Thanks, Chris. So yes, the, the impact of, the historic hedges rolling off that were put on at higher rates compared to the rate environment that we, that we're experiencing now is the driver for that impact. And your assessment is, I think, broadly, broadly good. I've talked about the, the 2020 impact of 40,000,000 based on 100 bps decline. And that is that's the trend that we see in for that time period And in setting our roadie target for 2021, it being circa 8%. We've captured what we expect to be the impact of the structural hedge on that year. And Chris, on the UK, so you know the UK is a profitable part of our total group. It's 23% of group profitability. Not having a UK business would be dilutive our overall, RoTE and not in the best interest of of shareholders. Part of that is because of cost allocation, and the question is, well then why aren't we managing our costs and of course we are and we've demonstrated that the 11% gross reduction in group costs overall and the UK has been a big contributor in both both in terms of its own direct and also the indirect allocation that goes to the UK. So becoming more efficient as a group, it will help improve shareholder returns and also improve the UK performance. If we if we want to if we didn't want to be in the UK, we have to be in the UK, 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 of the market and the fact that we have demonstrated our ability to pivot to parts of our lending book that have higher returns. So the growth in bespoke with a quarter of a 1,000,000,000 of new business written in 2019 is at around a 30 basis point margin premium to mainstream mortgages and we're come we're happy with that growth and keen to see more in in in this current year. The growth that we've seen in our personal lending and in Northridge business is prime It's 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 UK business is more positive to our roti than they're not and we're doubling down on our improved investment reposition strategy, to make it a bigger contributor. Okay, thank you. Thank you, Chris. Thank you. And we have one more question, ma'am, over the phone. And this comes from the line of Dara 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. I mean, 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? And then just a clarification on the NPE regulatory capital question. So just to be clear that you're your outlook for the NPE reduction in 2020 is already reflected in the regulatory charge of 80 basis points. Okay. Thank you. Before Mars 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 stages very clear on what we will achieve between now and then 2021 and and and our our target entity but the external technology environment is evolving. Regulatory Expectations and priorities are also developing and expectations where our own customers are also changing. So 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 1,400,000,000 budget for transformation by the end of 2021 50 to 60 basis points is our parameter that we work within it and we will continue to invest in technology but at a lower rate. But that's our guidance for 2022 and beyond. And just, Darren, to confirm to you that, our MPE trajectory does capture the impact of definite show default, which is captured in the 80 basis points of regulatory headwind we refer to. Okay. I think we have no more, questions on the line. Go back to the room, do we have any further questions, from people in Dublin? Just maybe one follow-up. Just on the net lending number for 2020, you talked about 2,000,000,000 miles, I think it was earlier on. I think even just looking at the slides, the mortgage book was maybe slightly down in FY 'nineteen. So maybe just kind of broad brush RN and U. K. Corporate, how we should think about that make up of that plus 2? Sure. I would like more of our 2,000,000,000 net lending growth to come from Irish mortgages and Irish SMEs. I mean Irish SME segment has been really impaired or impacted by Brexit uncertainty. That optimism is now more cautiously positive but Brexit uncertainty is not as dissipated, but not necessarily disappeared. But we have a great franchise, great market share, great positioning and indicators of it, net lending in Irish estimates is more like to grow, and our ambition is for part of that 2,000,000,000 to be from Irish SMEs. The mortgage market, we have a, you know, full year 24% latter part of the year higher than that mark share of a growing market and we see and it's so linked to housing completions and as housing completions come, on stream, we've broadened our panel and our reach, we would certainly want more of the 2,000,000,000 to come from that part of our franchise, and then marginally, I want to expand more. Yeah. So I just 2019, we have net lending of 1,000,000,000 and that's the, also the guidance for 2020, but the makeup is quite different So 2019 was more biased towards our UK and our international businesses and that was in the main due to a little bit on the mortgage side for sure, but also on the SME pace on the SME market where credit information was more subdued than we would like, reflecting, Brexit concerns and our SME customers just being careful about making investment decisions 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, Raymond. 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 I'll call those sessions for today. Thank you.