Good morning, everyone, welcome to Bank of Ireland's 2019 interim results. I'll share a number of highlights from our first half performance, then Andrew will provide a more detailed update on the financials. I'll also set out our view of the external environment, one year on from the publication of our strategy, our outlook and actions from now until 2021. I'm pleased to report a solid financial performance with an underlying profit of EUR 376 million and a 9% increase in our pre-provision operating profit. There are a number of highlights that have contributed to this performance. The first is net lending growth. For the sixth year in a row, Bank of Ireland is the largest lender to the Irish economy, with total new lending of EUR 7.7 billion and net lending growth of EUR 1.2 billion.
We've seen a strong performance in corporate banking and we're the largest lender to Irish SMEs and the agriculture sector. The second highlight is asset quality improvement. Bank of Ireland already has the lowest non-performing exposure, NPE ratio, of any bank in Ireland. We're very clear on our ambition to drive NPEs down further. That's good for our bank and good for the health of the wider Irish economy. In the first half, we've delivered a further reduction in our NPE ratio to 5.3%, down EUR 800 million. We are now within touching distance of our near-term target of NPEs below 5% by the end of this year. The third highlight is business transformation. This means transforming our culture, our systems, and our business model. We're investing in our transformation at the pace we set out previously. We're delivering key milestones, and we're demonstrating cost reduction and other benefits.
I'll look at each component part within our transformation program. Culture is a commercial imperative. Good culture attracts and retains the talent we need to develop our businesses. Good culture reduces risk and cost and builds customer loyalty. We're making good progress and our culture is strengthening. On systems transformation, we've delivered a number of key milestones. We've completed the largest customer migration in the history of the bank. We've moved 2.1 million customers to a new First Data platform for debit card and ATM transactions. This gives us and our customers more stable systems for hundreds of millions of transactions each year. We've also modernized our payments infrastructure and automated over 100 processes to improve customer experience. On business model transformation, we are creating a leaner, simpler, and more agile organization.
We are removing management layers, reducing headcounts by 4% year-on-year, and making changes to our U.K. business model. We have sold our U.K. cards business and exited non-profitable current accounts and ATM operations. The fourth highlight is cost reduction. We've set a clear cost target as part of our strategy, and we're delivering. We've reduced our cost by 3% compared with the first half of 2018. That's after absorbing costs linked to IT investment, various regulatory requirements, and wage inflation. Excluding IT investment, we have reduced our day-to-day operating costs by close to 5%. With revenue up and costs down, we've achieved positive jaws of 4%. Combined, these actions have contributed to strong capital generation. In the first half, we generated organic capital of 90 basis points. Our CET1 ratio increased by 40 basis points and now stands at a robust 13.6%.
We have made an accrual of EUR 100 million in respect of a dividend in 2019, in line with our policy. We've delivered a strong performance in the first half, we are, of course, influenced by the external environment. In Ireland, the economy is strong. GDP growth is well above the Euro area average. The labor market is growing, unemployment is at a historically low rate. While in the U.K., we see more moderate growth, we still see a growing labor market with low unemployment. Nonetheless, aspects of the external environment are more challenging than when we set out our strategy a year ago. In particular, the interest rate outlook has moved significantly, lower for longer rates are impacting margins. As an illustration, since the start of the year, there has been a 100 basis points reduction in market expectations for five-year swap rates in 2021.
Brexit uncertainty has still not been resolved. This remains a concern, especially to businesses in Ireland and the U.K., which is impacting sentiment and also credit demand. Mindful of these challenges, I will shortly deep dive into our Ireland and U.K. businesses and our transformation program. I will set out the actions that we are taking to offset the uncertainties and to guide our business between now and 2021. I'll first hand over to Andrew to go through the financials. Before I do, you will know we recently announced that Andrew will be moving on from Bank of Ireland towards the end of the year. I would like to take this public opportunity to personally thank him for his exceptional commitment to the bank, especially since taking on the role of CFO in 2012.
Andrew has played a key role in the Bank of Ireland story since that time, and on a more personal level, since I've been in the role, has provided excellent support to me. Thank you.
Okay. Thank you, Francesca, for those very kind words, and I suppose for your support to me since you joined. It's been an enormous privilege for me to have been the CFO and director of this great bank for the past 7.5 years. I'll certainly miss everyone and wish you all well. On to the financial results for the, my 16th and final time. We've had a good start to 2019. We've grown our loan book, we've reduced our costs, and we've reduced our NPEs while improving our strong capital position. Over the last six months, we generated an underlying profit of EUR 376 million. Total income increased by 1%, and we reduced our costs by 3%. As a result, we've grown our pre-provision operating profit by 9% to EUR 435 million. Our impairment charge was EUR 79 million, or 21 basis points.
Included in our non-core items was customer redress charges relating to the conclusion of the Tracker Mortgage Examination. The associated amount of EUR 55 million covers three things: compensation payments, additional costs associated with the program, together with an increase in the provision for a potential fine. Turning now to lending volumes. We grew our loan book by EUR 1.2 billion in the first half of the year. All geographies of Ireland, the U.K., and international contributed to this growth. In Ireland, we lent EUR 3.8 billion to Irish customers and businesses. As Francesca has already said, that makes us the largest lender to the Irish economy. In our mortgage business, we lent EUR 1 billion, and our market share was 23%. We've maintained our track record of commercial discipline on risk and pricing.
In addition, we're investing in developing our product propositions, expanding our distribution network, and progressing our re-entry into the broker channel. The SME market is a very strong element of our franchise. By some distance, we're the leading bank for SMEs in Ireland. At EUR 1.5 billion of new lending in the last six months, despite Brexit uncertainties, we've grown our market share, and we're well-positioned to support and benefit from expanding credit demand in this sector. We're the number one corporate bank in Ireland. Our business has performed strongly, contributing EUR 400 million of lending growth in the last six months. In the U.K., we're broadening our distribution network, and we've selectively investing our capital in those sectors that are generating more attractive returns.
That's enabled us to prudently grow our loan books by EUR 600 million in higher return sectors such as consumer, bespoke mortgages, and corporate portfolios. Finally, our international corporate business grew by EUR 400 million. We have continued our conservative approach to asset selection. Typically, we only underwrite the one in five loans that meet our strict credit criteria. Moving to our net interest margin, which was 216 basis points for H1. We continue to maintain our strong commercial discipline on pricing. Over the last six months, the yields on our liquid assets have been lower, at 17 basis points, negative. However, we've seen total loan book spreads stable at 284 basis points. We've grown the loan book at front book spreads that continue to be higher than the back book, and there's been a stabilization in the level of competition in U.K. mortgages.
When I spoke to you in February, I expected that the tailwinds to our NIM would support its growth into the 220s over the next couple of years. As you all know, since then, there's been a very significant and a material reduction in the interest rate environment, that's a headwind for all retail and commercial banks, including Bank of Ireland. As a result of that lower for longer interest rate environment, I now expect our NIM for the full year 2019 will be slightly lower than the 216 basis points for the first half. Looking to 2020 and 2021, the trend will be for a net reduction in our NIM of mid to high single digit basis points from that 216 level.
Francesca will set out shortly the actions that are being taken to mitigate these financial impacts so that our ROTE will continue to grow to target levels. Onto fees and other income. As you know, we're exiting U.K. cards and ATMs, and they contributed EUR 21 million of fee income last year. On a like-for-like basis, our business income of EUR 311 million was EUR 9 million, or 3% higher than last year. Retail Ireland was broadly stable, while our wealth and insurance business benefited from the investments we're making, increased activity, and economic growth. Valuation and other items gave rise to a net gain of EUR 28 million in the first half. On to costs.
We continue to make good progress on our commitment to reduce our costs with a net 3% reduction in the period. Staff costs reduced by almost 5%, reflecting a decrease in FTEs and a change in mix, with fewer management layers. Taking other costs and depreciation together, they reduced by a net EUR 14 million half-on- half. This net reduction reflects the benefits from the ongoing transformation of our processes and from strategic sourcing, and partly offset by higher depreciation associated with technology investments. Exiting U.K. cards and ATMs reduced our costs by EUR 26 million. All of the efficiencies that we're generating are enabling us to absorb wage inflation, regulatory costs, and the ongoing investment in our transformation program. We're on track to deliver our commitment to reduce costs every year to EUR 1.7 billion in 2021. Turning now to asset quality.
In the first half of the year, we reduced our NPE ratio by 100 basis points to 5.3%. This is the lowest NPE ratio of any Irish bank. The securitization of an Irish buy-to-let mortgage portfolio unlocked 30 basis points of capital. We expect further reductions in NPEs, and we're keeping all of our strategies under review. Our impairment charge was 21 basis points in the first half, and absent a change in the economic environment or outlook, we expect that our net impairment charge will be between 20 and 30 basis points in the next couple of years. On funding and capital, we have strong liquidity and leverage ratios. Our customer deposits are primarily sourced through our retail distribution network, and while our loan-to-deposit ratio is below 100%, it gives us the funding and capital to support our growth and strategic objectives.
We have our MREL targets, which are very manageable. We'll be issuing EUR 1 billion-EUR 2 billion of holdco securities this year and next. Moving now to capital. Our position and outlook is very strong and our guidance is unchanged. We increased our capital ratio by 40 basis points since January, and it's now 13.6% on a fully loaded basis. We continue to generate strong capital organically, 90 basis points in the first half, and in addition, the NPE securitization unlocked a further 30 basis points. In terms of our guidance, we continue to expect to maintain a CET1 ratio in excess of 13%. It's on a regulatory basis and on a fully loaded basis by the end of the O-SII phase-in period. Over the last 12 months, I've set out clearly how we invest and allocate that capital.
In the first half of this year, we invested 30 basis points of capital in supporting the growth in our loan book, and we invested 25 basis points in our transformation program. In terms of future regulatory capital demands, the 80 basis points I guided you to in February is unchanged. Finally, on dividends and distributions, at the half year, we accrued for a dividend of EUR 100 million, and that's equivalent to an annualized dividend of EUR 0.185 per share, an increase from EUR 0.16 last year. There's no change to our dividend guidance. We continue to expect that dividends will build on a prudent and progressive basis towards a payout ratio of 50% of sustainable earnings. In summary, we've made good progress with our strategic objectives and targets, and we expect that to continue in the second half.
As we look to the full-year outturn, we'll grow our loan book further, our total costs will be lower than last year, and we'll reduce our NPEs below 5% while strengthening our capital position. We're committed to increasing our return on tangible equity to the target level of in excess of 10%, and thereby delivering on our commitments to our shareholders. I'll now pass you back to Francesca. Thank you all very much.
Thank you, Andrew. Earlier, I set out our view of the evolving external environment. Much of that is outside our direct control, but what we can control are the actions that we take to grow and transform Bank of Ireland and to deliver on the strategic ambition that we set out one year ago. These actions are especially important for our Irish and U.K. businesses and for our systems transformation. Ireland is one of the fastest growing economies in Europe, with increasing population, employment, wealth, and construction. We are Ireland's leading retail and commercial bank, with over 2 million customers and strong market shares. This gives us a strong position from which to capitalize on Ireland's development and grow our business. Our multi-year strategy leans into this. We are the leading supporter of home building and buying, and are financing the construction of more than 6,000 new homes in Ireland.
We see more potential here and have a development fund of EUR 750 million to further grow our home building business. We also see upside potential in an expanding mortgage market. We're accelerating the onboarding of new mortgage brokers in what is a growing section of the market. We're innovating. We recently launched a EUR 1 billion sustainable finance fund with a range of home and business loan offerings, including a green mortgage discount. In business lending, domestic demand still lags European peers. As the leading business bank in Ireland, we are well placed to benefit from growth in credit formation. Ireland's growing population and increasing disposable income brings demand for wealth management. We are Ireland's only bancassurer and are uniquely positioned to benefit from this. When we set out our strategy in June 2018, we spoke about investing, improving, and repositioning our U.K. business to increase returns.
In terms of investment, we have launched higher margin bespoke mortgages in the U.K. This pivots us away from mainstream and more into niche. Within 100 days, we have GBP 100 million worth of bespoke mortgage offers. We've also increased new lending in higher margin personal loans and grown our profitable Northridge car finance business. These actions are shifting our product mix and increasing returns. In terms of improvement, we have reduced operating costs in the U.K. by 19% in the first half. This has delivered a cost income ratio of 60%, down from 66% year-over-year. We completed a transaction to diversify our funding base, which also reduced our cost of funding. Our focus is on further reducing our costs and optimizing margins in lending and deposits. In terms of repositioning, we've exited our U.K. cards business as well as non-profitable ATMs and current account operations.
Combined, these actions are improving the returns of our U.K. business. On systems transformation, we're making progress, achieving several key milestones and all within the budget we set out last year. This includes migrating customers to a new platform for ATM and debit card transactions and modernizing our payments infrastructure. Our focus is on translating our work and investment to date into tangible customer and efficiency improvements. That includes the release of our new mobile app later this year, with customer migration continuing into 2020. This app will expand the services available to our customers on mobile, it will also give us the platform from which we can enhance services on a rolling basis into the future. In wealth and insurance, where we're already generating income growth, we are launching new digital platforms this year.
These will transform how our customers access advice, get a quote, and purchase a product. We've set out our progress in the first half and delved into our Irish and U.K. businesses and our systems transformation. We've also clearly called out the evolving external environment, which is more challenging than when we set out our strategy a year ago. ROTE in excess of 10% is the key financial target for Bank of Ireland. We are committed to this. While it will be more difficult to achieve, there are a number of actions we are taking to hit the target. We're keeping a relentless focus on costs. This is not new. Cost reduction has been a top priority at Bank of Ireland for the past 18 months. It's clearly working.
Costs will continue to reduce every year from now until 2021, and we're confident in achieving our cost-based target. We are now looking at other efficiencies to reduce operating expenses further. We're targeting selective growth in key areas. This means growing where we see high quality and attractive returns. For example, in capital light wealth and insurance, and by building on our unrivaled SME franchise in Ireland. We will maintain our pricing discipline across all segments and stay focused on simplifying our business and delivering our systems transformation. These actions will create revenue capacity, reduce risk, improve customer experience, and support growth, as well as deliver further efficiencies. We will continue to manage our capital efficiently. We keep all options on the table to optimize capital, and we allocate it prudently to support our growth. We'll provide updates on key actions in our next reporting cycle.
I'm pleased with our performance for the first half and the highlights that we have shared this morning. We see further opportunity in our Irish business, in home building and buying, in business lending, and in wealth and insurance. The actions we are taking in the U.K. are improving returns, and our transformation is delivering, with more to come. Looking ahead, our actions respond to the external environment, and they set out how we will develop our business to 2021 to achieve our strategic ambition. Thank you for your attention, and we very much look forward to answering your questions. Okay, we'll take questions in the room first and then go onto the line. If you don't mind giving your name and institution to help everyone in the room. We'll go with Diarmaid first.
Good morning. It's Diarmaid Sheridan from Davy. Thank you for the presentation. Francesca, maybe starting where you finished off around return on tangible equity and meeting your 10%+ target. It very much feels like that will be a cost-based lever that you will look to pull. I just wonder if you could comment a little bit further around when we might get some visibility of when that might be achievable, and what specific areas you might be looking at. Maybe Andrew would be remiss on one final time not to ask about margin. Your outlook obviously is lower on the rate impact. I wonder if you could maybe just detail that a little bit further for us, please. Finally, on the capital intensity of your loan book growth.
Obviously, you've set out targets of 200- 250 basis points of overall capital intensity to reach the EUR 90 billion target. 30 basis points this year, followed by 40 basis points last year. It feels like it's still quite heavily capital intense. When should we expect that to be maybe a little bit lower in terms of that? And are you still comfortable with your guidance around the capital intensity of the growth? Thank you.
Thanks, Diarmaid. I'll start on ROTE and then pass to Andrew. We're committed to the target of over 10% ROTE by 2021. We've acknowledged it will be more difficult because of lower for longer interest rates and some of the uncertainty around Brexit impacting credit formation. We have options, and we have choices, and things that we absolutely can control. I outlined the six of them at the end of the presentation. Cost is one of them. It's not the only one. We have demonstrated over the past 18 months our capability and the opportunity to take out cost strategically. We talked about 3% down, but if you exclude our core banking investment, that's closer to 5%, and that's the same time as investing in our business. The actual gross savings are EUR 60 million in the first half.
We feel confident about that. There is potential to do more. Obviously, the interest rate environment has changed relatively recently, and we're not providing a new guidance or target on cost reductions today. If we do that, it will be on the basis of a really well thought through and grounded plan. There are other areas that we also see opportunity to further contribute to ROTE. We talked about the growth in the key areas. Wealth and insurance, we're well positioned. Capital light, we are unrivaled in our SME proposition. It's a separate question, even though we've seen more of the net loan book growth coming through from corporate banking over the first six months, we would expect more of the growth to be coming from our Retail Ireland operations in the second half and beyond.
I'm not going to go through each of those levers. I would say on the prudent price management, our loan asset spread is slightly up. We have been consistently disciplined commercially in how we price. Our front book margin is around 300 basis points across the entire bank, and that's higher than our back book. The discipline that we have around growth is always about risk, then pricing, then volume, and that philosophy hasn't changed. Just on simplification, we gave a lot of examples about the U.K. and what we have done successfully in the first half to simplify and make our U.K. business model more profitable. When we look to the future, we also see across, in Retail Ireland as well, from an end-to-end process perspective, there are opportunities to improve the efficiency of our processes.
Not all of that is dependent on core banking technology. Some of that are just better processes and changing our approach to re-engineering. If you like, that sort of builds our stairway to ROTE, and we feel that we have those levers in our control, and we'll be providing an update on the combination of those levers that we're pulling to achieve ROTE in our future reporting cycles. I'll pass to Andrew. The only point I would just add on the third around corporate banking is we've seen proportionally more growth in corporate banking in terms of the first six months. That is high quality, ROTE accretive, and good risk quality business.
As the national champion bank with ambitions for national champion bank in Ireland, supporting Corporate Ireland and investing in infrastructure has a knock-on impact to SME credit formation and household incomes, which is obviously part of our strategy. Andrew.
Great. Okay. Thank you, Francesca. Diarmaid, on the NIM, maybe a couple of comments in relation to that. As Francesca has said, the commercial discipline that we have in terms of risk and in terms of pricing has long been a feature and a hallmark of Bank of Ireland. As you've heard Francesca say, that philosophy is completely unchanged and is going to continue. In terms of the first half, we achieved our NIM of 2.16%. Liquid assets were off a little bit. As we pointed out in the presentation this morning, the loan asset spread increased by a basis point or so. There has been, though, this very significant change and material downgrade in terms of the interest rate environment, interest rates across the piece have been lower.
In addition to the normal sort of 1% sensitivity that we give, we thought it was important to set out how we think our net interest margin is going to perform over the next couple of years in our presentation this morning. As I think about through the full year 2019, while we've done 2.16% in the first half, I think the average for the year is likely to be slightly lower. Thinking like maybe 1 basis point, maybe 2 basis points, that sort of space. As we go out into 2020 and 2021, the trend, because of the interest rate environment, that trend is going to be for a lower NIM. It's going to be somewhere in the sort of mid to high single digit basis points from the 2.16% level. Okay?
It'll be a trend down to that level rather than sort of a, if I use Francesca's stairway comment, it won't be in that space. It'll be more of a trend in that direction. The growth of the loan book plus the commercial discipline point act as some mitigance to that, but we still think the NIM will lower because of the 100 basis points decline in the interest rate environment in the last couple of months. Switching to capital. When we set out the investor day in June of last year, as you say, we allocated between 200 and 250 basis points of capital to support the growth in our loan book. That 200 and 250 basis points was to cover a 20% growth in Retail Ireland, a 10% net growth in our Retail U.K. business, and a EUR 4 billion growth in our corporate business.
What's happened in the last kind of 18 months has been that the corporate businesses that Tom leads has been at the front of the peloton. We always would have expected that. They've generated about EUR 3 billion of balance sheet growth over the last 18 months, so very much within our expectation of about EUR 4 billion of balance sheet growth for our Corporate. Of course, that business is more capital intensive than, for example, mortgages that are in Ireland or the U.K. That's fully accommodated within the 200- 250 basis points that we set out. In terms of going forward from here, while Corporate has been a very important part of the growth, and as Francesca said, it's a very high quality business from a risk perspective and from a return, ROE perspective.
As we think about the next two and a half years, the proportion of the balance sheet growth is going to come more from the less capital intensive areas. More from mortgages, more from SME, more from consumer. That will mean that over the next couple of years, the capital allocation of between 200 and 250 basis points, it continues to be the appropriate amount of capital to support the growth that we have. We're not going to continue to grow our balance sheet in the same pace or with the same mix of capital intensive lending as has been the case over the first 18 months.
Let me go to Owen next, and I'll come to Eamonn afterward.
Morning. Owen Callan from Investec. Just three quick questions, if I may. On the U.K., you've obviously made three strategic moves or decisions around how to refocus that business this year in terms of the cards business, the ATM network, and the current account proposition. Do you feel you have the right kind of model or business mix there now going forward, or is there other kind of business lines or operations that you're maybe still looking at whether they should be part of that? On costs, you've had a very consistent kind of 3% annualized reduction over the last couple of years, which is very impressive.
Is there still the ability to go at that kind of run rate into the second half of the year and into 2020, or does it get a bit stickier and a bit more difficult to find that level of cost savings going forward still? Just on the wealth and investment, it's been one of the standout areas in terms of amid that weak volume and weak margin environment, you've been talking about the wealth and insurance, rather, division has been able to really show some strong growth. Is there other opportunities you're looking at within that broader space as regards M&A? Obviously, I'm sure you're always willing to look at something, but is that, let's say, a relatively active consideration, or is it very much organically focused at the moment?
Okay. We'll both do a little bit of all of those three. Just on the U.K., you're right, we've been very clear. I think we've made good progress in the first half in terms of the invest, improve, reposition. We've made a quite deliberate shift in the product mix of new origination. Within mortgages, taking a step back, not entirely, but reducing our emphasis and our weighting on the lower loans value remortgage space, which is very tight margin, focusing more on the pivot to niche. We're seeing high quality at an underserved segment that isn't necessarily well served or designed to be well served by some of the larger banks. I'm very pleased with the initial progress we've made. I mean, it's 100 days, so it's early, but high quality, good profile, and well received by the broker network that we distribute through.
In terms of the product mix, we are originating more from our personal lending and Northridge business. That isn't because we've loosened credit criteria or changed our risk appetite. That is very much a reflection of deepening our distribution. Personal loans will be predominantly from the AA, but also the Post Office and some from our Northern Ireland franchise, and we've improved the processes there. We've actually improved our margins while we've been growing. We're not just priced for volume. We're priced for risk in the appropriate way. On Northridge, this is a business that we've had many years of experience in. We've broadened the number of partners that we work with and also covered more of the U.K. geography. The business mix, we are happy with the changes we're making and always looking for new opportunities to create more value.
I think the model that we are creating now is providing better returns than we had previously. On costs, I wouldn't read too much into the 3% every half. We've talked about year-on-year reductions, but we've not given guidance on half-on-half. You asked whether it gets more sticky. I think we've made some sticky and difficult decisions already to get to the numbers we've achieved. It's not about low hanging fruit. We've made difficult decisions around reducing our senior management by 7%. We've closed 30 odd service centers, and we've exited some businesses that we've been active in in the U.K. for a while. Those were tough decisions, and we'll continue to make the right decisions to improve the efficiency of our business in the U.K., but also across the group.
In terms of wealth and insurance, the backdrop of the Irish economy and the demographic change really supports us. Households are becoming wealthier, job security has increased. You've got good demographic trends around aging population that's probably under protected or under pensions, and you've got more younger people, well-educated, entering the workforce who need wealth management needs and protection. We also have the advantage of a large retail customer base. The penetration of our customer base, last time we presented our results, we would've talked about a 26% penetration, which was up from 23%. We now saw in the first half a 29% penetration. The backdrop is helping us, but our positioning and our customer base is, there's fantastic opportunity for us to do more from a digital perspective, and that's one of the key milestones that we've set ourselves as well.
I'll pause there, and Andrew may want to cover some of the detail also on costs.
Yeah. I suppose just on the costs, Owen, I think we set out a year ago a very clear target to take our cost down every year and to hit EUR 1.7 billion in 2021. Clearly we've evidenced the reduction in that cost as we've gone through each of the periods. That continues to be our focus right now. Of course, we said that the external environment has changed in terms of the interest rates, that's going to be a headwind to top line revenue. You'd expect us to see what levers, what self-help options we have to pull, cost is a very obvious one of those. We are looking at what further opportunity is there for greater efficiencies to bring us below a figure of EUR 1.7 billion.
We're not announcing a different number today, but we are going to work, as you'd expect, and as we are doing, but work out what opportunities are there to be more efficient even than that EUR 1.7 billion . What I'd also say is that when we set out that plan to EUR 1.7 billion , we fully accommodated the inflation around wages, for example, for our colleagues, but also around the higher depreciation charges associated with the investments that we're making in technology. Of course, the higher cost of complying with some of the expectations and regulations of our regulator. We've gone beyond, we've absorbed all of those costs, and I think that's important. Still brought our overall cost level down 3%, as you saw in the presentation this morning. That continues to be our focus.
This is about reducing the absolute level of costs as we go through to 2021. That's, I suppose, a mechanic really to help support our overall strategic ambition to increase our ROTE up to that target level of 10%.
Thank you. Eamonn.
Eamonn Hughes from Goodbody. Can I just come back to the NIM just in terms of first question I want to ask about capital and NPEs as well. Just in terms of NIM, you mentioned Andrew, in terms of capital consumption over the next couple of years. Can we take it that that NIM kind of guidance over the medium term is still kind of premised on hitting a EUR 90 billion loan target? It is obviously important in terms of recycling, you were talking earlier about the new business being at higher than the stock. Just to get a bit of comfort around that. Secondly, I suppose it is kind of the first time we have been able to chat to you publicly since the SRB discussions that were out there.
Maybe thoughts around future capital targets, whether there's any offsets around P2R, things like that, how you're feeling about that? Then finally, maybe in terms of NPEs, you've kind of stuck to the, or hitting the 5% number by the end of the year. That's great. You're making progress there, obviously, which is fantastic. Just maybe thoughts over the next year or two, in terms of future targets around that, because it will be important in relation to the capital number?
Thank you, Eamonn. Let me just talk a bit more broadly about the EUR 90 billion total loan book target, because it's something that a guidance that we were quite explicit about a year ago. We're pleased with the progress and the EUR 1.2 billion net increase and continuing as the largest lender in Ireland. We recognize that lending growth depends on the external environment. It's less certain now than it was a year ago, mainly because of Brexit. I think a year ago we would've assumed that Brexit would've been resolved, and the Brexit uncertainty is creating some reticence, particularly in Irish SME growth. The issue isn't if EUR 90 billion is the right number, it's when.
I'm keen to get through another six months of trading, and hopefully in the next six months, the other side of Brexit, just to have a better idea of that credit formation. Some of those external events will inform our journey to 90 billion. Regardless, we've never chased volume at the price of commercial discipline or risk. Our philosophy around when we look at lending opportunities, looking at risk, then price, and then volume, is unchanged in that context. I'll leave Andrew to talk about NIM and capital in a bit more detail. In terms of NPEs, just sort of key message there is we are at 5.3%. We talked about being in touching distance of being sub 5%. We are about EUR 300 million -EUR350 million of being 5% based on loan growth outlook for the end of this year. That would be important.
We're not just doing that as a result of the inorganic actions we've taken. Of the EUR 800 million reduction we've seen so far this year, a little bit more than half of that is working out solutions with customers, and the rest would've been the securitization that we've done. Even just through organic working through with customers, we feel comfortable at the 5%. We've said it before, and we'll reiterate it, all options to reduce NPEs are on the table. That can include other securitization or loan book sales. The trajectory and the go forward pace of reduction beyond 5% does depend on other factors such as the rollout and introduction of definition of default, which we expect in 2020. When we look at the normalized level of NPE ratios amongst European peers, you'd expect seeing that to continue to go beyond 5% over time. Andrew.
Okay. Excuse me, if I speak to the capital piece, Eamonn. The systemic risk buffer, clearly the Central Bank have looked for the authority to look at that. I suppose as we sit here this morning, we don't know if or when it's going to be introduced, and whether it applies to Bank of Ireland, and what the offsets might be in terms of whether it's the O-SII buffer or whether it's a P2R, et cetera. I think there is some developments out of European legislative space as well, which might influence both the timing and the potential quantum of what might come in. I think your point is right in terms of P2R, Eamonn. We have the same P2R today as we had five years ago. Okay?
Obviously in that last five years, the risk profile of the bank has changed and strengthened very significantly from the investments that we've made in reducing NPEs, sustainable profits, volatility and capital ratios, et cetera. Are the regulators ever going to adjust the P2R ahead of a Brexit type scenario? I mean, that's very understandable. Certainly as we think about the progress that the bank has made over that time period, and the improved resilience of the balance sheet and the de-risking of the balance sheet, we'd be very optimistic about the opportunity for P2R. We have to get beyond the Brexit piece. I think unlocking capital in the balance sheet is something that is important. We've emphasized the ROTE has been the very major target.
You've seen us take some actions in the first half of the year in terms of unlocking 30 basis points of capital to do with the buy-to-let securitization. We are looking at doing further transactions to unlock capital. Clearly, the decision to exit out of U.K. cards also unlocks some capital in the second half of the year, and that's something we're going to continue to do over the next number of years, Eamonn, to make sure that our capital is optimized, and appropriately allocated, and supportive of our overall targets.
Thank you. We'll take one more question in the room. We'll go to the call. We'll come back to the room. Gentleman there.
Good morning. Pierce Byrne, Cantor Fitzgerald. Just two questions from me. Just on mortgage pricing and market share, just I suppose how you feel about the moves you made earlier in the year on mortgage pricing, and the impact that might have had on share, and where you see that going forward. Just on the credit impairment, are you happy with that level of credit impairment? Is that a normalized rate we can look at going forward? Thank you.
Thank you. I'll answer on mortgages, Andrew on credit impairment. Our market share in Irish mortgages for the first half this year was 23%. We don't chase volumes, we've never set a specific market share target. Again, it's risk, then price, then volume. I've previously said that we feel most comfortable with a market share range of 25%-30% in Irish mortgages. During the first half of this year, we would've stepped slightly outside of that. Two key drivers from our perspective. One is the rise in the broker channel. Brokers are now 25%. One in four mortgages in Ireland are originated through a broker, we have reentered that channel less than one year ago. It's still a relatively new channel which we are growing, we've expedited our growth within, in a sensible way.
We would've previously mentioned that we were looking to have 50 broker partners by the end of 2019. We have that this week. We've developed more relationships to more brokers more quickly, but in an appropriate way. As well as that market share reflecting our relative newness in the broker channel, there's also a pricing factor. We would've increased some of our prices in January, which we believe was the right thing to do at the time, given the interest rate environment and the outlook. Since then, the interest rate environment has changed quite significantly, and we've reflected that in some of the propositional and pricing changes we've made recently. We would've changed some of our five and 10-year fixed rates to ensure that we remain competitive and we're not leaving good business on the table. We also did some innovation.
We tested that for some higher value mortgages, some customers prefer a lower rate in the cashback offer. Many of our customers, particularly first time buyers, really like the cashback offer. We found that some actually just wanted a better rate. For mortgages over EUR 400,000, we are offering a rate of 2.5% at the moment. We also offer a 20-basis point discount for people buying a new home that is sort of BER rated energy efficient. Those are some of the examples of innovation. As we look into the second half, feeling comfortable with our pipeline. I'm excited about the opportunity to originate more through the broker channel. I feel confident about our trading. We're the largest lender in Ireland. I don't overly exercise myself on week to week or month to month market share numbers on mortgages.
Pierce, you asked about the impairment, yes, I mean 20-30 basis points is the kind of the guidance that we've set out a year ago, restated this morning. We think that certainly, we're getting more into that sort of normalized level. Clearly with the NPEs coming down now to 5.3%, touching distance, as Francesca said, obviously we go beyond that as we go forward. One of the things that if you think about the first half charge, Pierce, there were probably a very small number, two or three discrete cases in Corporate Banking where we had a particular provision that we set up for those cases. Then we also took an opportunity to increase the coverage ratio in our Irish mortgage portfolio. You'll see that the coverage ratio has increased from directionally 20%-21% to directionally 25%.
The reason we're doing that is really as part of preparation to get ahead of or in advance of the NPE calendar provisioning issue that is upcoming, starting at the back end of next year. For various technical reasons, it's much more capital efficient to take some of those charges through the P&L, a lot of them to do it as a sort of a capital deduction. Therefore, you'll see us looking to increase our coverage ratio within the context of 20- 30 basis points guidance that we've set out, Pierce. If we happen to get some collections post write-off or something like that, you'll see us taking the opportunity to actually up our coverage, in advance of and in preparation for the NPE kind of provision because of the capital efficiency that comes with that. Yeah, comfortable with 20- 30 basis points.
Thank you, Pierce. Why don't we take a few questions on the conference call?
Thank you very much. The first question we have today on the line comes from Alastair Ryan from Bank of America. Please go ahead.
Thank you. Good morning. One specific and one more general, please. The EUR 0.185 dividend you've accrued for the first half, how good an indication should we think that is for where you end up at the full year? Is that a floor now or that's where you're expecting the board to land? Obviously, it's quite early, I appreciate, but that's quite an important figure. The second, more general, just a few more pointers on how you're getting on with the core banking platform, the implementation of the new IT structure. You sound pretty confident, but it's just very hard from the outside for us to see where you've got to. What are the best pointers for us to look at? Thank you.
Thank you, Alastair. We'll go first on Andrew on the dividend.
Alastair, good morning. First thing I'd say is the board has made no decision about dividend for this year yet. Quite obviously, the timing of that decision will be as part of the year-end preparation in December, January, February time. The board's policy on dividends is very, very clear, which is that it's going to increase this year over last year. It'll increase, of course, prudently and progressively towards our longer term target of 50% of sustainable earnings. At this half year point, we must make an accrual for the dividend in line with the capital rules, and the board has gone for around some number of EUR 100 million. That happens to equate to EUR 0.185, which is obviously an increase on the EUR 0.16. I don't think you should take it as being particular guidance either way in relation to that. It is an accrual.
It is consistent with the policy. Ultimately, the decision around dividend will be one that the board will take at a later stage. You've seen over the past couple of years, when we restarted the dividend two years ago, that we've almost had a track record of inconsistency, if you like, in terms of the half year accrual versus the year-end piece. It is a half year accrual piece, and the decision for the board, the board has not taken that decision. The board will take that decision in December, January time.
Thank you. If I answer the question about core banking in two ways. One is about progress in regards to spend, and another one is progress in terms of milestone achievement. You'll remember, Alastair, a year ago, where we talked about our broader transformation strategy, which includes systems change but also business model change, and we broadened and deepened that to the EUR 1.4 billion between that point and 2021, and we guided that would be equal to 50- 60 basis points of capital or an average spend of EUR 275 million per annum. Obviously, that will help us improve efficiency, competitiveness, and reduce expenses over time. Core banking is an important component of it. When we look at the overall transformation spend, what we've shared today is the first half, we've spent EUR 138 million and 25 basis points.
We're not a penny or a basis point over where we said we'd be. The spend is exactly where we indicate it is. In terms of milestones, we've talked more broadly, but these are key aspects of our core banking delivery. The change in our payments infrastructure, the change in our ATM and debit card infrastructure being the single largest migration of customers in the history of the bank, are big milestone deliveries in the first half. We've also made some progress in some of the cyber and security deliverables in the first half, and improving our insurance underwriting process. The second half, the big focus for us is on the mobile banking app.
We have the technical functionality now, we are going to be rolling that out to customers during the second half of this year, although the rollout will continue into the new year. I don't want to rush rollout. We want to make sure that we're doing it in a very sensible and appropriate way for our customers. There's other areas, operationalizing the single view of customer. I've talked about having that functionality, rolling it out so that we are using it to engage with our customers will be important. I've mentioned the wealth insurance investments, and how we will change our origination to give competitive advantage there. The spend is as we said it would, and I'm going to be more explicit on milestones that we delivered against and that we will deliver to over the coming months.
Thank you. Thank you. Very clear.
Let's stay on the conference call.
Thank you very much. The next question comes from the line of Andrew Coombs from Citi. Please go ahead.
Good morning. If I could have some follow-up questions on the interest margin guidance. You talk about mid to high single digit down over 2020- 2021. Can I firstly ask, that's a cumulative impact rather than a per annum guidance? Could you just provide the trajectory? Is it front-loaded? Is it spread on a linear basis in your view? The third question relating to that NIM guidance would be how does that split out between the U.K. versus Ireland. Certain NIM questions, my broader question just to finish out, you've reiterated the greater than 10% return target despite the lower NIM guidance. Is the same true of your less than 50% cost income target as well? Thank you.
Thank you.
Yeah. Let me talk about the NIM, Andrew, first. Just to clarify, yes, the mid to high single digit is cumulative and is not per annum. Okay. By the end of 2021, what my expectation is that the NIM in 2021 will be mid to high single digit, lower than 2016, not per annum. Okay. Just to be very clear on that piece. I think the trend is for it to trend down to that level. Is it going to be precisely linear or kind of slightly in that space? I think the expectation is that it is going to trend in that sort of space. I can't confirm it's exactly going to be a dead straight line, in relation to that, but it will be trending down to that point.
I think in terms of U.K. and ROI, clearly, our Irish NIM and our U.K. NIM are very different. There are different drivers behind those. The interest rate environment in both geographies has been pretty equal. The U.K. probably has come down on a similar measure by sort of 75 basis points, the EUR by about 100 basis points. There'll be some impact from those, both interest rate environment updates have been factored into the NIM guidance that I've shared with you this morning. I think for Francesca, you're going to talk about the ROTE and cost income.
Yeah. The cost-income, specifically. When we talk about cost, we gave three very clear pieces of guidance. One, EUR 1.7 billion cost base by 2021. We're saying today that we're confident about that and looking at if there are opportunities to go beyond. We talked about a reduction year-on-year. We're achieving that. That still stands. We talked about cost income ratio. You'll see the cost side of that is progressing well. The cost income ratio does depend on revenue. If you look at our cost income ratio in the group, it's gone down from 66%- 65%, so there is still more to go. You look at parts of our business where we've really focused on improving profitability, such as the U.K., and the cost income ratio there has gone from 66%- 60%.
It just shows you the opportunity for us to do cost takeout while growing, as we have in the U.K. We've talked about positive jaws today, and that's not a substitute for our cost income ratio target, but it does show you the positive trajectory that we are on with revenue at 1% and cost down 3%. It is challenging, but it is still part of our cost guidance. When we just take a step back and look beyond ourselves, and we look at our U.K. or European peers, banks like us are getting closer to the 50%, so it feels like absolutely the right thing to do to be driving our efficiency over the coming strategic period.
Thank you.
Thank you. Thank you, Andrew. We'll take another couple on the line. Maybe come back to the room.
Thank you very much. The next question on the phone today comes from the line of Chris Kent from Autonomous. Please go ahead.
Good morning. Thank you for taking my question. I just wanted to come back on NIM and understand exactly what's driving the pressure here. You referenced a front book NIM of around 300 basis points that hasn't changed, you cited lower swap rate expectations in your presentation. Is it the structural hedge that is weighing on your NIM guidance? Could you provide some detail on your structural hedge program for us so we could understand this? What's the current contribution to NII? How big is the hedge in terms of the notional? What's the tenor of the swaps you're using there? Just as one further minor point of detail, you referenced capital efficiency with regards to taking provisions in the P&L rather than waiting for a capital deduction. Is that just the tax that you're referring to there, that you get a tax shield on the provisioning charge? Thank you.
Okay, Chris, good morning. Maybe I'll take those questions. Let me start on the capital side. No, obviously the tax isn't what I'm thinking about. While, of course, we get a tax deduction, you'll be familiar with the fact we have a large deferred tax asset, from that perspective, it's not in that space. Really, I suppose from a technical perspective, Chris, I'm thinking about the interplay between provisions and the regulatory expected losses. We have a, if you like, our capital ratio of 13.6% today, this morning. It's after taking the deduction for the IFRS 9 provisions. In addition, it's after taking a further EUR 400 million or 80 basis points deduction for the higher level of regulatory expected losses. As the IFRS 9 provisions were to increase, the level of regulatory expected losses wouldn't automatically increase by a similar level.
There's an opportunity there in terms of that EUR 400 million to deal with that from a capital efficiency perspective. Just on the net interest margin, again, in terms of the sensitivity, you'll have seen that the kind of instantaneous impact of 100 basis points up or down, we've given that usual disclosure that others give on slide 39. I think that's obviously a kind of instantaneous static balance sheet, no changes, et cetera.
What we have factored into the guidance of the mid to high single-digit reduction in margin over the next couple of years cumulatively, to Andrew's point earlier, is the fact that we have the benefits from the tailwinds from the higher front book spreads and a growing balance sheet. Certainly, in terms of the yield you've seen on our liquid assets, of course, is coming down because that very much reflects the interest rate environment. In terms of our structural hedge, we have continued with our usual approach there, which is effectively we hedge the free funds at an average of three and a half years. We essentially have a portfolio of swaps that get rolled over. Every year, in broad terms, 15% of the swaps mature, and then we reinvest in a new swap and effectively in the new seven-year swap.
As that caterpillar hedge, sometimes people refer to it as that caterpillar hedge continues to progress, you'll see that's where you get the impact from the 100 basis points reduction in the, for example, the market's expectation for five year that we highlighted this morning. They're the dynamics that are happening, Chris, in relation to the net interest margin. The tailwinds that we've seen in the first half that we're continuing, which are driven by our commercial discipline and pricing, which are driven by growing the balance sheet, which are driven by growing the balance sheet with better front book spreads than the back book for factors like rolling off of trackers, et cetera, are positives, but they are being impacted then by the impact of the interest rate environment on liquid assets and on that caterpillar hedge. Thank you very much.
In terms of the hedge, are you able to share a number on the contribution? If I think about some of the large U.K. banks, it's about 10%-12% of NII is generated from the structural hedge. Is that about the right level, higher, lower? Any guidance there would be useful. Thank you.
I'm sorry, Chris, I don't have that number with me this morning. If we decide to disclose that, I'll come back and tell everybody in relation to that. We'll look at that certainly between now and the year end in terms of disclosure. If there's an opportunity to disclose it in advance of that, we look to do that.
Okay. Thank you.
Thank you.
Thank you, Chris. Another question on the line.
Thank you very much. The next question today comes from the line of Charms ol Yoon from UBS. Please go ahead.
Hello. I got two questions, one on NIM and one on ROTE again. Can I please follow up Andrew's question regarding the split between euro and sterling in a slightly different way? Can you split the rate sensitivity you disclosed in the slide 39 into sterling and euro, if that's possible, please. Secondly, on ROTE, when I see consensus 2021 number, it has ROTE of 9.1% for underlying PBT of EUR 1.1 billion, slightly below EUR 1.1 billion, suggesting that you will need probably EUR 1.2 billion underlying PBT to hit 10% ROTE target. Given the top-line pressure you flagged, it looks reasonable to me that EUR 1.1 billion consensus will probably come down to a touch below EUR 1 billion. Effectively, you require about EUR 200 million of cost savings plus fee income growth to hit 10% ROTE. Firstly, can I please check if this math is broadly reasonable?
If not, where you see consensus is wrong, maybe loan book growth or fee income or even capital base, please. Thank you.
Good morning, Charms ol. I probably won't get into kind of auditing your spreadsheet this morning, Charms ol, if that's all right. In terms of the euro and sterling interest rate sensitivity, we don't give that disclosure, so that's not something that I can help you with in relation to that. In terms of the ROTE, I think certainly there is top-line revenue pressure, as we've called out this morning. We are, as Francesca said, looking at self-help options. Francesca set out on the slide in her presentation six levers that we're looking at. Cost, clearly is, you'll have noticed, was the first one of those six. That's not an accident, as you'd expect. We are looking at opportunities to be more efficient than is implied by the EUR 1.7 billion, but not announcing an update on that number this morning.
We're continuing to look, as you'd expect, and as we are doing, looking at further opportunities there. There are other levers in terms of that will help bridge the gap caused by that revenue headwind across the various six levers, self-help options, so whether it's capital efficiency or capital light, wealth insurance, et cetera. There's a range of things we can look at there, not exclusively on the cost side. Okay, thanks, Charms ol.
Thank you. I just want to check how many questions there are in the room still. Any more questions in the room? Yeah, please. Stephen. Stephen.
Thanks very much. Good morning, Stephen Lyons, Davy. If I could probe two areas of particular book growth in the period and your comfort around risk appetite, which you've already commented on, but maybe just to get a little bit more. The first on leveraged acquisition finance. We've seen particularly the Central Bank flag that as an area of possible concern for the two Irish banks. I note in the period, in addition to growth, you've opened up a further office in Madrid. Maybe if you can highlight that added comfort through historic loss experience, maybe diversification of particular sectors. Secondly, in the U.K., I think it mentions in the deck that part of the personal loan volume growth was improved credit risk process in the period driving increased applications. Could you elaborate a bit more on that?
That comment around Northridge below industry arrears and losses, et cetera, could you maybe just elaborate a bit more, give us some comfort on those numbers? Thanks very much.
Thank you, Stephen. On our leveraged acquisition finance business, this is a profitable part of the Bank of Ireland franchise, EUR 170 million of PBT last year. We've been doing this since 1997. We've had a low loan loss track record during that period, an average of 70 basis points per annum from 2002- 2018. This is a high margin business that is appropriately risk priced. High margin of around 4.3%+ fee income, it's also relatively low cost or not high dependent on the infrastructure of the rest of the organization. The cost income ratio in that part of our business would be in the sort of sub 20% space. It does provide material diversification in terms of product, but also geography for us, which we feel comfortable about. We've also got a diversified client base.
We've actually broadened our client base by 9% in the first half of this year. We continue to work with repeat business and in partnerships with well established and large sponsors who've got a good track record. Our average deal size would be around EUR 20 million. Again, that diversification within a diversified portfolio is important. The top 10 deals would represent about 8%. We feel comfortable. Obviously, we're very cognizant of risk. 80%-85% of deals we reject, with nearly 80% covenanted on the total book. It does provide profitable diversification for us. In terms of the U.K., we would've been quite explicit in our strategy a year ago about the invest in part of our strategy to grow and diversify.
We talked about targeting growth in our personal lending and Northridge businesses, and we're doing exactly what we said. These are prime mass lending only. In personal lending, we do that predominantly, not exclusively through the AA. It's about a bit more than half of the business, but also the Post Office, so two very trusted brands, plus our Northern Ireland franchise. We've demonstrated very good growth half-on-half or year-on-year, but just in terms of market share, we're 2.6% of the market, and we operate exclusively in the prime area. Even if, as we grow, we would still be in the up to sort of 3% market share range that we feel comfortable with. Net lending credit quality is up. Margin is up. We have invested in pre-screening tools. We've also invested in our processes.
We are getting customers quicker than we did in the past. We would rank very positively compared to other prime players in the U.K. We don't want to be the slowest process because you get adverse selection. We're the opposite of that. We've also, to give ourselves assurance, we've done some external benchmarking on the quality of our origination versus peers. We would see that we are more conservative than many of our peers. Our minimum income is higher, and the minimum age of applications is higher, and we have higher bureau scores. We feel comfortable in terms of that origination. On Northridge, again, it isn't about loosening credit scores or risk appetite. It is about broadening distribution. We have about 2% market share, and we have broadened our dealer relationship.
99%+ of our new business is dealer or broker led, and the dealership, in particular, in the southeast of the U.K., we've broadened. We've been conservative in terms of sort of residual value assumptions as well. We're very cost conscious as we broaden the distribution of that consumer lending portfolio. Thank you. Yep. We've got three callers on the line, so let's go through those pending questions.
Thank you very much. The next question today comes from the line of Alicia Chung from Exane. Please go ahead.
Morning, everyone. Just wanted to turn back to NPEs and some of the future regulatory headwinds, if that's okay, as my first question. Obviously you previously guided to 80 basis points negative impact from TRIM, definition of default and NPE coverage ratios, which is very useful to get that forward looking view. I understand now that TRIM is broadly complete, and you're not expecting a material impact on the corporate loan portfolio. As such, is there any reason that we couldn't expect you to lower the guidance of the - 80 basis points impact? Secondly, as you increase your coverage ratios, can we expect that capital impact to fall even further from there? That's the first question. The second one is just looking at your corporate loan spreads, which you give on slide 40.
What is driving the increase in corporate loan spreads over the last half year, despite the fact that swap rates have fallen? Is this reflective of market trends? Is this specific to Bank of Ireland, and has the mix in corporate lending changed for Bank of Ireland? Thank you.
Okay. I'll pass to Andrew on both. Just on the capital guidance. We've been very clear in previous reporting cycles about our view of regulatory capital requirements. We've been explicit. It reflects our desire to be prudent and transparent in our approach to capital guidance. I think the only change is just in terms of timing of the 80 basis points headwinds that we would've communicated before. We would've been conservative in thinking that was more 2019, 2020. Realistically, that's probably more likely to be 2020, 2021. Andrew can expand a bit more.
Sure. Yeah. Hi, Alicia. Good morning. Look, the 80 basis points was obviously the net impact of a range of different regulatory programs that are underway. You mentioned TRIM, definition of default, NPE, also things like IRB repair, et cetera. What we thought was useful in February, and again, restating the number today, is to basically put all that together, and you don't need us to break it down program by program, and say, look, the net impact from those programs is a headwind to our capital of 80 basis points. Clearly, you've seen this morning that we're effectively pre-funding for some of those headwinds by unlocking, for example, the 30 basis points out of the NPE securitization that we did. TRIM is done for mortgages, Ireland and U.K. at this stage, and so that's in the balance sheet this morning.
Definition of default, that's something that's more likely to come in in 2020, and obviously that'll impact on the amount of capital we need to put against the regulatory defaulted assets, and will impact the pace of NPE reduction next year. On the NPE provisioning, that obviously kicks in at the back end of 2020, Alicia. As I was explaining to Chris earlier, it is capital efficient for us to, where that's possible within the 20-30 basis points guidance, to start doing some proprietary work in relation to that because we're able to get some advantage and offset in relation to the level of regulatory provisions that are already set up and that are already a deduction from our capital ratio. We think 80 basis points continues to be the right level.
We're not targeting to use 80 basis points, but we think that's a reasonable estimate of what the net impact of those various regulatory programs are. Clearly, as we go through those, and to the extent we see some upside associated with that, of course we'll keep you up to date. I think the key thing for us is that when we look at our capital position, our capital position is very strong and the outlook is clear, certain, and positive. Our operations have generated 90 basis points of organic capital in the first half. We unlocked the 30 basis points by doing the first transaction on NPEs. We're looking at a second transaction at this stage, very much trying to pre-fund the impact of that. We're at 13.6% today.
That's an increase of 40 basis points since January, and obviously continuing to generate capital on a daily basis, and that's above our long-term guidance of excess 13%. Sorry, on the corporate loan spreads, you had a question there. That's really just a mix issue, Alicia. Within the corporate portfolio, the way we think about it is that there are four portfolios between Corporate Ireland, Corporate U.K., Property, and LAF, and you'll have seen the numbers that we've disclosed in the deck this morning. The couple of basis points increase in the corporate and treasury spread, well, it's not even a spread, it's the gross rate that the customers pay us. It's before taking off the cost of money.
That's increased by high single-digit basis points, and that really reflects our commercial discipline in terms of the pricing that we're doing for new origination in that sector, together with just the evolving mix in relation to that.
Thank you, Alicia.
Lovely. Thank you very much.
Thank you. Stay on the lines.
Thank you very much. The next question today comes from the line of Aman Rakkar from Barclays. Please go ahead.
Morning, team. Yeah, it's Aman Rakkar from Barclays. First of all, Andrew, congratulations on your assignment at Bank of Ireland. I wish you the best of luck in your new role. I just had three quick questions. First of all, regarding your NIM guidance, it looks like it reflects the move in the longer term interest rate environment in Europe. I was wondering, does that factor any movement in policy rates? If we had a cut in the depo rate or any movement in the refi rate, on the depo rate, it looks like you've quite significantly reduced your balances at the central bank, so presumably not a big impact there. Any kind of color you could give would be helpful.
On mortgage pricing, Andrew, I was wondering if I could invite you to update your comments that you gave at full year regarding mortgage pricing. You suggested that perhaps mortgage pricing could rise in Ireland. I wonder if you still thought that was a relevant comment, particularly in light of fairly substantial mortgage risk weight increase at AIB as they signaled on Friday. It's a bit bigger than perhaps the market was expecting. I guess the third one on cost, perhaps for Francesca, is, I think you've indicated a few times now the potential cost levers that you've got to pull. I was wondering, what exactly would cause you to reappraise your cost target? Is it a significant deterioration in the operating environment from here? Is that the interest rate environment softening even further than the forward curve implied?
Is that bigger moves on policy rates? Is that pricing pressure in Ireland, the U.K., or is it actually just a matter of timing and it's just, you kind of really want to fully prepare that cost plan that is probably quite inevitably going to come back to the market. Thank you.
Thank you. We'll take them in that order.
Okay, great. Well, Aman, good morning, and thank you very much for your kind comments. In terms of the NIM, certainly if I think about the ECB rates, certainly we factor that into our thinking. Obviously, the ECB are considering what their policy is around the depo rates, et cetera. I think we're not really expecting a change in the refi rate from the ECB. I think there are reasons that you'll understand where that feels less likely to us. We have factored in adjustments to the depo rate that the ECB are currently reflecting on. In terms of pricing generally, clearly, my comments earlier about maintaining our very commercial approach to risk and to pricing, are the appropriate comments. That's something we keep under review at all stages. Francesca?
Sure. On cost, it reflects the opportunity we see to be more efficient. I said this before, it's very easy to take costs out badly. We obviously don't want to do that, and we haven't been doing it. We've been very strategic in what we've done. I'm not giving more guidance or targets today, because we want to make sure that any plans, if we were to go beyond the guidance we reset, are well thought through. You may recall we talked about our cost reduction. There were sort of five areas. One was simplifying our organization, and that's where we've seen a lot of the cost reduction so far.
In the EUR 60 million gross saves that we achieved in the first six months of this year, about EUR 24 million of that would've been from simplifying our organization from some headcount reduction year-on-year. Also the changes we've made in the structures and the spans and layers within the bank. Another area, resourcing strategically. This is about how we use externals, suppliers, key strategic contracts. About EUR 10 million of the EUR 60 million so far this year is from strategic sourcing, and we would see opportunity to do more there. A third area is delivering the digital bank, that isn't an area that necessarily some of the costs that we've shared so far reflect. A big enabler of that will be as we roll out our new mobile banking app and other digital innovation.
That will enable us to be more efficient, so we see potential there. Also in terms of enabling brilliant customer journeys, I touched on our end-to-end journeys and some of the opportunities just to be slicker, and that doesn't require heavy tech investment. Some of that can be done as a precursor to some of our core banking milestones. It takes out costs that often trips up our customers in terms of callbacks or some paper-based or manual processes. The last point is actually a really good cost to be taking out, and that is about enabling a more agile way of working. In a competitive labor market in Ireland, the demand for more agility is incredibly high.
We've reduced our physical Dublin office space, so this is not about branches, but our head office space, by about 24% over the last 18 months. That isn't because we've reduced necessarily headcount, it's because we've allowed more agility. We have more agile enabled desks. Those sort of opportunities tell us that there is scope to be more efficient. Also we need to right-size our cost base to revenue. The interest rate environment is impacting many European banks and is impacting margins. It's a natural place to look at, but it isn't the only lever or option that is open to us. Thank you. We have one more caller on the line with a question. We'll finish up in the room.
Thank you very much. The last caller on the phone at the moment is the line of Martin Leitgeb from Goldman Sachs. Please go ahead.
Yes, good morning. Just two questions from my side, and the first one is a follow-up on earlier comments on mortgages in Ireland. I just wanted to understand whether you expect to increase your market share in Ireland from here. This just follows some comments by one of your competitor who decreased pricing, and as a consequence, expects its share to increase from here. I was just wondering whether you still expect your share, via the broker channel and so forth overall to increase in Ireland. The second question is just broader on ECB monetary policy and the impact. I'm just trying to understand, just looking at where your deposit costs in Ireland are at the moment, I think around seven basis points.
Do you expect to be able to pass on some of the adverse pressure or headwinds which are coming from monetary policy to customers? Would we expect to pass on something to retail customers, whether that's current account pricing, interest rates, or if you're thinking here that given the pricing here, there's little you can do on the liability side to offset? Thank you.
Okay, thank you. I'll answer the first one on mortgage market share. We're at 23%. We previously talked about a range of 25%-30%. I feel our proposition and our distribution and our pricing is more competitive as we go into the second half than where we were in the first half. We don't chase market share. When we look at our internal targets and scorecards, market share isn't top of the list. We will price appropriately. We won't trade shareholder value for pure volumetric achievement. I believe we're competitive. I know our pipeline for the second half. There's some seasonality in there, and we're looking forward to a good trading next period.
Great, Martin. Your second question was just in relation to ECB policy, I suppose really, I think you're interested here in terms of negative rates. We already do apply negative interest rates to our institutional large corporate and top end of SME customers. With certain various thresholds around volume of deposits and negative rates that vary between - 40 basis points and - 100 basis points, depending on the size and nature of the counterparty. Your particular question was around whether we would start looking to apply negative rates to personal customers. That's not something we've done to date. The other feature, I suppose, that's in that space is around central bank regulation around fees, et cetera, for personal customers and for small business customers. That'll be an issue that we'd have to reflect on as well.
I suppose in simple terms, I think currently our position is that we haven't yet, or we haven't to date, charged negative rates. That's not something that we're planning to do, I can't give a guarantee that that won't be something we may have to revisit at some moment. It's not a focus for now, Martin. Okay, thank you very much.
Thank you very much.
Thank you. We've finished all calls on the line. Anything else in the room? If not, I'll just say a few words just to thank you for your time this morning, and for some really good questions, both in the room and on the line. Just to recap, we've reported a solid performance for the first half. We've reported good progress versus the strategy we set out a year ago. We're cognizant of the evolution in the external environment, particularly around interest rates and Brexit uncertainty, but we've reiterated this morning our commitment to the 10% ROTE. It's very much our financial North Star. We have options open to us and within our control to achieve that target. Thank you very much for your attention. Thank you.