Good morning, everyone, and welcome to Bank of Ireland's 2018 annual results announcement. Last June, we published our strategy to 2021. Today we'll show how we're delivering against that strategy. We've made particular progress in growing lending in our wealth and insurance business, reducing costs, improving asset quality, and transforming our business. We also face some challenges which we are addressing. I'm going to outline our 2018 progress. Then Andrew Keating, our Group CFO, will take you through the financials in a bit more detail. As we set out at our Investor Day last June, we have three strategic priorities: to transform the bank, to serve customers brilliantly, and to grow sustainable profits. We remain highly focused on these priorities, and they guide everything we do. I'll go through each in turn. Firstly, transform the bank.
This includes three elements: transforming our culture, our systems, and our business model. Culture is extremely important. It makes a tangible, positive difference for all of our stakeholders, including our customers, colleagues, and our shareholders. That's for a number of key reasons. A healthy culture reduces our cost of risk, it improves the quality of our earnings, and it drives better customer outcomes. Having the right culture actively supports our sustainable financial performance. Changing culture isn't easy. It does take time. We're making progress, and we will continue to transform our culture in the year ahead. Our systems transformation continues at pace. In 2018, we laid the foundations of our new core banking platform. This is significant in a number of ways. It completes the underlying technology on which our future developments will stand.
It gives our systems more stability and the capacity for a single view of our customers. It means we're now in a position to start adding products and services to the new platform. In Q4 2018, we successfully moved the first customers to this new platform, trialing personal loan and deposit accounts on a pilot basis. This has allowed us to fully test the system, the user experience, and our ability to open and service accounts. Later this year, we will launch our new mobile banking app. This is the first large-scale customer deliverable using our new technology. With regard to transforming our business model, we're also delivering. We're becoming more streamlined and efficient. We've reduced our FTEs by 5%, including an 8% decrease at senior management level. We've embedded a mindset of cost effectiveness across the bank.
For the first time in five years, we have delivered a cost reduction. Our second strategic priority is to serve customers brilliantly. A cornerstone of our strategy is to grow customer lending. In 2018, we delivered net lending of EUR 1.3 billion, an increase of 13%. This is the first time we've seen net lending growth in the last decade despite headwinds. We've turned a corner. In Ireland, we've seen mortgage lending grow by 17% and held our market share. We've reentered the broker market, as set out in our strategy. Personal lending has increased by 25%, and our wealth and insurance business has achieved a 20% income growth. In the U.K., we are continuing to take steps to improve returns. We've delivered new mortgage lending of GBP 3.3 billion and new consumer lending of GBP 1.6 billion. We've had a strong year serving our corporate and global markets customers.
As we set out last June, being the leading supporter of home building and buying in Ireland is a core part of our strategy. We funded the construction of more than 5,000 homes nationwide. We've seen new lending up 21% to EUR 4.4 billion in our corporate bank. Our leveraged acquisition finance business, which accounts for around 10% of group income, further grew its customer base. These are strong lending results, but our customers also value the changes we are making. They've been telling us they want us to blend our physical presence and personal touch with more responsive and intuitive digital options. We're listening to them and we're taking action. In 2018, we improved cash services at almost half of all branches in Ireland. We recruited more than 200 colleagues to work in the frontline, and we continued to innovate and invest in our digital channels.
For the majority of our customers, this is how they bank with us. We have over 10 million interactions on our mobile app each and every month, up 25% year-on-year. Four out of five of product sales now take place online or on the phone, with more than half being completed entirely digitally. In the coming weeks, we will also launch a new brand campaign. This is core to the strategy we set out last June and supports our drive to build a strong consumer brand and to become the national champion bank in Ireland. I also want to talk about one of the key issues our customers are facing right now. Indeed, it's something that we're all focused on, Brexit. All of us would, of course, benefit from clarity on this issue.
In the absence of clarity, we manage the uncertainty as much as possible. As a bank, we are ready to deal with the challenge. We are prepared, whatever the outcome. Last year, we were subject to two ECB stress tests. These demonstrated our capital resilience in the event of any downturn. We're working with our customers, supporting them to prepare their businesses for Brexit. We offer tailored support to meet diverse needs. This includes an FX facility to support businesses retain certainty on their cash flow and profit margins, and we've launched a EUR 2 billion Brexit fund. This is designed to help businesses respond to Brexit however it unfolds, as well as to identify potential opportunities for investment and also growth. Transforming the bank and serving customers brilliantly will support the achievement of our third priority, to grow sustainable profits. Here again, our results show our delivery.
Today, we are reporting underlying profit of EUR 935 million with a net interest margin of 2.2%. We have reduced our costs by EUR 48 million, equal to 3% compared to 2017. We made further progress in reducing our NPEs, which are down 24% to EUR 5 billion. NPEs now represent 6.3% of our customer loans, and our focus is on reducing our NPEs further over the coming year. Our headline return on tangible equity for 2018 was 8.5%, or 7.2% on an adjusted basis. Our CET1 ratio is on target at 13.4%. We generated organic capital of 180 basis points in 2018. We've invested this in loan book growth, transformation, and meeting ongoing regulatory capital demands. We are also increasing our dividend from EUR 0.115 to EUR 0.16, or EUR 173 million. We are six months into a 40-month strategy, and we're delivering.
We're transforming, improving our culture, laying the foundations of our core banking platform, and making our business more efficient. We're improving customer service, increasing net lending, and supporting our customers to navigate Brexit. We're growing sustainable profitability with underlying profit of EUR 935 million, lower costs, reduced NPEs, strong organic capital generation, and an increasing dividend. Our strategic focus for 2019 and beyond is clear. We are confident that we will drive further lending growth and a further reduction in costs. I'll now hand you over to Andrew to take you through the financial statements in more detail and to give more guidance on the outlook for 2019.
Okay. Thank you, Francesca, and good morning, everyone. Last summer at our Investor Day, we laid out the group's strategic plan over the next few years, and this plan is built on income growth, transformation of our cost base, and increasing our return on equity to in excess of 10% by 2021. I'll now take you through our progress during 2018, and then how we're delivering on this plan. For 2018, the group is reporting an underlying profit of EUR 935 million. I'll go through the P&L in more detail in the following slides, but the three key insights here. Net interest income is lower by about EUR 100 million, and that's predominantly driven by the impact of lower margins this year as compared with 2017.
This lower net interest income, however, is largely offset by a circa EUR 50 million reduction in our cost base and an improvement of about EUR 50 million in our cost of risk. Turning first to loan volumes. We outlined our ambition last June to grow our loan book by 20%, with two thirds of that coming in Ireland and the balance from our U.K. and international businesses. In 2018, we grew the balance sheet by EUR 1.3 billion, and approximately half of that growth was in Ireland and the other half was in the U.K. and international. Taking Ireland first, where the net loan book has grown by EUR 600 million. In our mortgage business, we increased new lending volumes by 17%. That's in line with the growth in the market, and it means we've maintained our market share of 27%.
We successfully reentered the broker market at the end of the year, and we're well-positioned to support and benefit from the expected 50% growth in this market by 2021. Our Irish consumer business also performed strongly, and we grew our market share. In the SME market, our market share has also increased. Demand for credit and the size of the SME market continues to be impacted by the ongoing Brexit uncertainties. Our corporate banking business, which includes property lending, had a very strong year. The corporate loan book here in Ireland grew by EUR 800 million, and that business has now already achieved 40% of their three and a half year target. Moving to the U.K., where the net loan book has grown by EUR 700 million. Consistent with our strategy, we've invested in those areas which are generating attractive returns.
The consumer lending, motor finance, and corporate loan books have all grown in 2018. The growth was partly offset by a reduction in the U.K. mortgage book, as the competitive pressures in that market have been more intense and more persistent than we had anticipated last year. That's also impacted on our margins, which I'll now turn to. Our net interest margin for 2018 was 220 basis points, and that's a few basis points lower than we had expected. It's primarily due to the margins on U.K. lending, which have been lower than anticipated. The intensity and persistency of the level of competitiveness in the U.K. market has impacted our margin in three ways. New lending rates have been lower than expected, and the pace of refinancing by customers has increased.
Those two impacts have reduced our underlying NIM by three basis points, and that's expected to persist into 2019. Separately, we've had to make a non-recurring adjustment of about EUR 25 million to our net interest income in December. That adjustment is one-off in nature, about 10 basis points in Q4, but critically, it does not impact our go-forward NIM in 2019. In Ireland, our proven track record of pricing discipline continues. You'll have seen that we recently increased our mortgage pricing for longer duration mortgages. Given the quantum of capital that has to be held and the expected future direction of interest rates, we would expect further price increases in the mortgage market over time. Turning to the outlook for our margin for 2019.
As we progress towards delivery of our ROTE target in 2021, our margin will benefit from our loan book growth and the fact that our front book margins, on average, are higher than in the back book. In 2019, however, we expect that those benefits will be largely offset by the ongoing U.K. competitive pressures. Separately, given the expected disposal of our U.K. cards portfolio this year, and the cost of future Emerald issuance, we're guiding that our margin will dip in the near term to 216 basis points before recovering in subsequent years back into the 220s. Turning now to business income, which was EUR 672 million in 2018. That's EUR 10 million higher than the previous year. We're Ireland's only bank insurer, and our wealth and insurance fee income has grown significantly.
It's up 20% on last year as we benefit from the investments that we're making in that business. Additional gains were modest in 2018, while valuation and other items gave rise to a net charge of EUR 22 million, primarily reflecting movements in equity and bond markets during 2018. Turning now to costs. As you know, on Investor Day, we committed to reducing our cost base to EUR 1.7 billion by 2021. That costs would reduce each and every year until then. We're making good progress on that commitment. Despite the pressures from wage inflation, about 2.5%, higher IT run costs, and the higher depreciation charge as we invest in our businesses, our absolute costs are down EUR 48 million in 2018. That's 3% lower than the previous year.
We expect costs will be lower again in 2019, we'll meet our target as planned of a €1.7 billion cost base in 2021. Just to give you a little more color on how we're achieving these cost reductions and efficiencies. The transformation program is right across the group, it's across multiple programs. It's broad, it doesn't rely exclusively on new technology to deliver benefits. For example, key programs that delivered benefits in 2018 include strategic sourcing and simplifying the organization. For example, under strategic sourcing, today we have 65% less daily rate contractors, we've reduced our non-IT professional fees by a third. In terms of simplifying the organization, we've redesigned our spans and layers to enable a more agile organization, we're more than halfway through the execution of that design. It's already supported an 8% reduction in senior management across the group.
Turning now to asset quality. In 2018, we reduced our non-performing exposures by 24%. They're now down to €5 billion. Importantly, this didn't trigger any additional impairment cost. In fact, we had a write-back of €36 million in 2018. Our future impairment guidance is unchanged. Absent the change in the economic outlook, we expect a net impairment charge of between 20 and 30 basis points in the years 2019 through 2021. Our NPE ratio improved by 200 basis points in 2018 to 6.3%. We have the lowest NPE ratio of any Irish bank. We expect further reductions in NPEs in 2019 and beyond. Given the evolving regulatory framework, we're keeping all options open to accelerate these reductions. We have the capital and liquidity to support our growth and our strategic objectives. Our liquidity and leverage ratios are strong.
Customer deposits, primarily sourced through our retail networks, are funding 100% of our customer lending. Our fully loaded leverage ratio is 6.3%. We also now have our MREL targets from the regulatory authorities, the issuance requirements are very manageable at about one to two billion EUR per annum for the next couple of years. Turning now to capital. Our capital ratio today is strong at 13.4% on a fully loaded basis, that's after the deduction of the proposed dividend. Our capital guidance is unchanged. We expect to maintain a CET1 ratio in excess of 13%. That's on a regulatory basis and on a fully loaded basis by the end of the O-SII phase-in period. Our improved position in the recent EBA stress test and the consequent material reduction in our P2G requirement demonstrates the resilience of our capital position and future outlook.
We continue to generate capital organically at a rapid pace, 180 basis points in 2018. At Investor Day, I clearly set out the framework for how we invest and allocate that capital. First, we have to allocate 200 to 250 basis points to support a 20% growth in our loan book. We invested the first 40 basis points of this in 2018. Secondly, we're investing 50 to 60 basis points of capital each year in our transformation programs, I outlined earlier how these are facilitating the growth in our businesses and the improvements in our efficiency. The third area for capital allocation is regulatory demands. When we assess the various regulatory initiatives that are underway, we expect to allocate circa 80 basis points over the next two years to deal with the demands as they arise.
To be clear, this 80 basis points doesn't impact our capital guidance of 13%, but rather relates to the calculations of risk weights and the stock of capital that we're required to hold against defaulted assets. Fourthly, and crucially, we come to dividends and distributions. The board's clear confidence in our capital position and outlook is reflected in the increase in our dividend this year from EUR 0.115 to EUR 0.16. There's no change to our dividend guidance. We expect that the dividend will further increase next year and thereafter, building to a payout ratio of 50% of sustainable earnings over time. Standing back from all of this, the key purpose of our strategy is, of course, to deliver attractive and sustainable returns to our shareholders. We've committed to increasing our return on tangible equity to in excess of 10% by 2021.
We've made tangible progress on that journey in 2018, and we're fully committed to delivering on that target. In summary, and to conclude, we expect to continue growing our loan book out to 2021. Our investment in transformation is delivering. We're continuing to reduce our costs and our NPEs. We're generating capital at a rapid pace. We're increasing returns, and we'll deliver on our commitments to our shareholders. Thank you all very much. Francesca and I will now take your questions.
If you could raise your hands if you have a question. We've got a couple of mics in the room. Introduce your name and your institution. We'll take a few questions in the room, then we go to the calls, then back into the room. First question, Diarmuid.
Good morning. It's Diarmuid Sheridan from Davy. Three questions, if I may. Firstly, on margins, could you please run through your assumptions for 2019, specifically on the pricing environment in both Ireland and the U.K., and maybe provide a little bit of maybe some further details in terms of how you think you can achieve your 2021 targets of about 2023. On the wealth management performance, obviously, that was very good in 2018. I wonder if you could maybe provide some details about the initiatives which took place in 2018 and what further initiatives in 2019 and 2020 that you may have planned in that business. Finally, on capital, thank you for the detailed guidance, first of all, on particularly the regulatory consumption. Could you please provide your thoughts on why 13%, you still believe that's the correct level of capital?
To what extent are there other regulatory kind of initiatives, maybe it's the wrong word, but headwinds that may come through? I'm specifically thinking around BMP and impairment levels, which I think you call out as a SREP piece in your presentation. Thank you.
Okay. Thank you, Diarmuid. I'll ask Andrew to comment on margins and capital. I'll go to talk about wealth.
Okay, Diarmuid. Thank you for that. As you say, in terms of 2019, in terms of our net interest margin, what we've looked at is clearly your exit NIM was at about a level of 220 basis points. The structural factors that are supporting our net interest margin, which are around growth in our loan book, the fact that on average, our front book margins are higher than our back book spreads, will continue to act as a positive influence on our net interest margin. However, for 2019, we've projected that those structural benefits will be offset by the persistent competitive environment that we have in the U.K.
As we go forward beyond 2019, beyond that dip down to 16 basis points, we think that those structural factors, we project that those structural factors, will start to have a stronger influence on the net interest margin and will offer support to bring the net interest margin over the subsequent periods into the 220s in terms of that piece. In terms of the U.K., as I say, we've highlighted the competitive pressures that are there, they've been intense and persistent. In Ireland, one of the things that you'll have seen, I think I called it out in my presentation, you'll see that we increased our prices for longer duration mortgages recently. We've also made some adjustments to our deposit pay rates. They've come down. We've also widened the scope of negative interest rates in terms of our customers.
If I think about mortgage pricing over time, Diarmuid, the quantum of capital that we need to put against mortgages, together with the expected medium-term outlook for interest rates, mean that we would expect that mortgage pricing in Ireland is likely to increase over the next number of years. Beyond that, I think if I stand right back from it and I look at our net interest margin and the drivers behind the net interest margin, I think the next big move with net interest margin is, A, likely to be upward, and B, it's more likely to be driven by interest rates. Quite clearly, that's not something we're factoring into our guidance to you this morning. In terms of interest rate policy changes, that's something that is likely to be further away. On the capital side then, I'll pick up a couple of things on that.
One is 13%. We've been very clear this morning that our capital guidance is unchanged, and we expect to have in excess of 13% as our CET1 ratio. One of the things that we've been conscious of is there are a range of regulatory initiatives underway. Whether it's TRIM, whether it's things like definition of default, whether it's NPE coverage ratios, et cetera. We've looked at all of the regulatory initiatives that are underway, and we wanted to give you two pieces of insight in relation to those. One was, what's the cumulative impact of all of those different initiatives that are underway today? That's the 80 basis points that I spoke about. That's covering the period right out to 2021. The second thing was the timing of that impact.
I think that's where we said, from a timing perspective, our expectation is that that 80 basis points of impact is more likely to arrive between 2019 and 2020. Clearly, if the regulators decide to change some of the other capital requirements, that's not something that I have any insight to today. We've had no discussions around that piece. It's very much in that space. Those 80 basis points have nothing at all to do with the ratio, and they're more to do with the calculation of risk weights or the expected losses, et cetera. What gives us confidence around that 13% is the engagements that we have with our regulator. I referenced in the speech the EBA stress test last year. Obviously, a number of years ago, we had quite a disappointing outcome.
Our result last year, we were anonymity in mid-table was where we ended up. I suppose ultimately what that demonstrated was the improvements and the investments that we've made in strengthening the resilience of our balance sheet to capital. On the back of that EBA stress test, our Pillar 2 guidance reduced materially as a direct consequence of that. I appreciate I haven't shared with you what the Pillar 2 guidance, that's in line with regulatory preference. That Pillar 2 guidance, the reduction in Pillar 2 guidance, has meant that it supports our belief, which we set out on Investor Day, that our capital of 13% is appropriate, and that's what we would expect to continue to apply over the next number of years.
Okay. Thanks, Andrew. On the wealth and insurance piece, we called that out in our Investor Day as a key area of growth because the demographic backdrop supports it. We have a growing population that is becoming more affluent, but is also aging, so people are getting to start families or thinking about their retirement, and the provision of state or employer pension cover or facilities has reduced. There's an opportunity for us to offer that to our customers. We are Ireland's only bank insurer, and that has enabled us to really focus on penetrating our customer base. We've increased our penetration from 23% to 26% in terms of insurance provision. We've increased our market share by about 1.5%, and our gross premium income is above €2 billion for the first time since last decade.
You see that come through in the other business income, good growth and contribution. The way we're doing that is through being very focused on our customer base, but also digitization, improving service. If you are a first-time buyer and you take out a mortgage with us, before the process to also get protection as part of your mortgage conversation was quite cumbersome. We've now streamlined that and made it very digital. It's seven questions in seven minutes, and as a result, seven out of every 10 first-time buyer mortgages that we provide take insurance with us. In terms of how we take that forward in 2019, more of the same. Focused on using analytics and digitization to better penetrate our base.
We're looking at some new technology around screen sharing with our customers so that we can help them through a protection journey, and we're also thinking more thematically about the role of financial well-being in Ireland and how we can support that. That's something that, as we go through our brand rollout, will also be a key feature.
Could I just go back, Jim, because I think when I spoke to you about the margin in 2019, I'm not sure if I mentioned the U.K. credit cards and Emerald. Maybe just to be clear on that. Clearly, the positive structural factors I spoke about, they will come through. We expect they'll be offset by the competitive pressures in the U.K. The 220 underlying will stay broadly in line with that 220 level. I think we've called out that the U.K. credit cards is going to be sold during 2019. That will have a structural reduction of three basis points in earn-in, with a modest amount of Emerald. We've taken a basis point off for that, and that's where you get from 220 down to 216. I think I hadn't covered that when I spoke to you earlier.
Okay. Next question, I'll go to Owen.
Good morning. Owen Callan from Investec. Just three quick questions from me. Just following up with Andrew on that credit card point, obviously, it's going to have an adverse impact on NIM if the credit card book is sold. That's presumably dependent on when it's sold during the year. If Brexit got kicked out six months, would there be less of a negative impact, therefore, presumably, on NIM, depending on when it's sold? Then just on regulatory charges, I see you are expecting or guiding for a sizable increase in regulatory charges this year from about EUR 100 million the last couple of years to EUR 115-EUR 120. If you could maybe just go through the moving parts that you're expecting on that. Then on the dividend, you've increased it, obviously helpfully year-on-year.
Is there now enough visibility on dividend payout guidance or your assumptions around dividend that we can move to an interim? Are we still be looking for it next year for a full year?
Okay. Andrew will respond on the regulatory charges and the dividend. Just on U.K. cards, we can talk about sort of potential timing of any transaction, but the focus for the U.K. cards business is on improving our overall ROTE. We talked more broadly about our U.K. strategy. We need to improve our profitability. We spoke in June about the need to invest in things that are going well, improve things where we have a right to compete, but we need to get better at it, and reshape or reposition. The U.K. cards portfolio was firmly in the reshape, reposition sort of category. The impact on our U.K. ROTE of not having a U.K. card business is about a positive 80 basis points.
Andrew can talk about the NIM and potential timing, but that is a key driver of our decisioning to improve the ROTE in our U.K. business. Andrew.
No problem. Yeah. Just to close out on that, clearly the U.K. credit card, that business is a 100% cost-to-income ratio business, Owen. Ultimately the transaction around that will unlock some capital, and it will not impact PBT. Of course, individual line items like NII, like fee income, and like costs will be impacted by that, adding up to that 100% cost-to-income ratio we spoke about. On the regulatory charges, really just two small items there. One is around the fees we pay to the various regulatory authorities. They're moving to a new framework of recovery of the cost of that regulation. That adds a couple of million EUR to our payment. The second piece is around the bank levy.
Our bank levy is linked very much to the amount of interest we pay on deposits, and our share of that contribution will go up by a couple of million EUR, just reflecting the allocation methodology that the government have put in place in relation to that. That's what's driving it into that kind of 115 type range. On the dividend, delighted that we increased the dividend this year to EUR 0.16. I think our dividend guidance is very clear in terms of that we expect that dividend to increase on a prudent and progressive basis. We'll increase in 2019, and we'll build towards a 50% payout ratio over time. I think the idea of an interim dividend hasn't been a strong feature of board discussions to date, Owen.
I think that, again, it's a decision, of course, for the board, but it's not one that I'd be factoring in for 2019.
Yeah, just to add to Andrew, to complement Andrew, the dividend policy hasn't changed. Exactly what we said in our interims and at our Investor Day. Thank you. I think to Eamonn had his hand up.
Yep. Then we'll go on to the lines.
Eamonn Hughes from Goodbody. Maybe just pick up a little bit again on the margin. Kind of you talked about moving Andrew kind of closer to the 220 plus number in 2021. I'm just wondering about the bridge, thinking about 2020. Is it possible you could get to there by then? Secondly, just I suppose you again flagged that you'd made some kind of moves in relation to your mortgage rates, and I know it's early days, it was only a few weeks ago, but what are you seeing, I suppose, in a holistic sense around the approvals and drawdowns flows in Q1 to date, certainly in the Irish mortgage market.
Finally, we've seen some media speculation around, I know you're not going to comment specifically around wage inflation and negotiations with unions, but if you are seeing a tick up in wage inflation, is there any sort of offsets elsewhere we could maybe see to give us a bit more confidence about the EUR 1.7 billion figure in 2021?
Okay. I'll ask Andrew to talk on margin. I can give you a bit of an insight into what we're seeing, particularly on the entry to the broker market in mortgages. If you want to cover wage inflation, more broadly, we can both comment on costs that we're very pleased in terms of progress. The margin question.
Okay. Yeah, in terms of the net interest margin, Eamonn, clearly, that's a very important component to it. It's just one component, of course, the ROT target, but an important one in terms of that. As I say, we've taken action already in terms of in our Irish business, in terms of increasing mortgage pricing. If Francesca will talk a little bit about the impact of that. We've also taken action to further reduce certain of our deposit rates. It's going to be modest in terms of there are certain deposit rates that were sort of at 10 basis points, and we've taken that right down to five basis points. We've also, though, broadened the scope of customers for whom we will pay negative rates. Again, those sorts of actions will continue through 2019 and obviously into 2020, and so on.
I've signaled the fact that given the quantum of capital that we need to put against the mortgages, and given the likely track of medium-term interest rates, the recent decision to increase longer duration mortgages, that trend is likely to continue as we go forward from here. In terms of getting back into the 220s, that's certainly something that we see beyond 2019. I don't see us getting back into the 220s in 2019. I certainly see how we would get there as we go into 2020 and into 2021. The NIM in those years should average in that sort of 220s area. The drivers behind that is very much going to be linked to the fact that we still have reductions in our low-yielding assets.
Things like NPEs, things like trackers in Ireland, they're continuing to pay down in the same direction that we've had over the last number of years. As we replace those with newer assets, those newer assets are clearly at higher spreads. On average, as the book turns over, the average spread on new business is higher than the average spread on the back book. Obviously, the loan book has grown in 2018. We expect it to grow further in 2019 and beyond. As the loan book grows, we'll of course benefit from the spreads that we're generating on the new lending, and that will provide that support to the NIM recovering into the 220s. In terms of interest rates, at this stage, we're not expecting any change in the ECB rate environment until 2022. The guidance isn't dependent on any change in interest rates.
Do you want to talk about what we're seeing on the mortgage side, and then we can talk about cost.
Sure. On mortgages, we entered the broker market at the back end of 2018. Today we have a relationship with about 20 brokers. That will more than double to around 50 during the course of 2019. In terms of our share of that market and the contribution to our market share, it is still quite muted because it is just in November that we entered. The broker market is becoming a more important part of the Irish mortgage landscape. Brokers would have represented nearly a quarter of business for the total market in 2018. Actually, in the Q4, that started to tick up, and we would expect that percentage to increase over time to maybe a third. Our strategic decision to enter that market is the right thing to do because it broadens our distribution reach.
We looked at our pricing at the start of this year. We're a price leader. We reduced our pricing on shorter-term mortgages, kept them at 3% for three year, and slightly increased on the longer-term mortgages, and that reflects the pricing, the value of money, and also the capital requirements that we have attached to mortgages. It hasn't impacted our competitiveness with the cash-back offer, with the broker entry. We brought our industry award-winning broker platform from the U.K. into Ireland. That's been well received by brokers. I've been happy with the business. We've maintained our 27% market share, and there's some things we target, and there's some things that we observe, but I don't lose sleep over if our market share on mortgages goes 1% up or down between one month and the other.
If we are in the 25%-30% range for market share on mortgages, that feels right, but we don't chase market share. When we look at growing our mortgage business, we look at it from a risk perspective, from a pricing perspective, and how that contributes positively to our ROTE targets, and then we look at broad volume. I'm pleased with the progress that we've made this year and the trading environment on mortgages.
Maybe more broadly on cost, I suppose in terms of cost, Eamonn, clearly you've seen us reduce the operating expenses in 2018. It's the first time in four or five years that those operating expenses have come down. It's very consistent with what we set out at the Investor Day last June, that costs will come down every year. 2019 costs will be lower than 2018, 2020 will be lower again, and we'll approach our target or get to our target of EUR 1.7 billion by 2021. We're very clear on the fact that we're fully on track to achieve that target of lower costs every year and arriving at that destination of EUR 1.7 billion. Within that, we of course recognize that there is going to be inflationary pressures. We had in 2018, for example, we had wage inflation on average about 2.5%.
We've recently concluded our discussions with the staff representative bodies, and they're going through the next stage of that process. That works out in broad terms at about 3% wage inflation for 2019. We also have to accommodate higher IT run costs because I suppose we've got the run costs from the old systems and the new systems, and we have, of course, higher depreciation and amortization charges that you see coming through our P&L. We've factored those items into our projections, Eamonn, and despite those inflationary items, we still have a very clear line of sight on how costs will reduce in absolute and in total terms.
You saw, as I say, the reduction of 3% in total terms, EUR 50 million in 2018, and we've tried to share with you this morning a range of the initiatives and programs that are underway that are not dependent on technology delivery, et cetera. We still see a line of sight to reduce our total level of operating expenses in 2019, 2020, and 2021 as we approach our target that we've set out. Obviously, that's really important in terms of thinking about our commitment around getting ROTE up to in excess of 10%. The cost reduction is clearly a very important part of that journey.
Just to add to that, when we look at our overall commitment towards ROTE, the cost line is one that we absolutely 100% control. It is an area, a lever that we are pulling hard. We can pull harder. We're still investing in our business. While we've reduced our FTE by 600, about 5%, we've also recruited in other areas. That reduction has been in areas that reflect changes in customer behavior. We've also gone further in terms of our strategic sourcing, which has come down by just over EUR 50 billion. That's the reduction in dependency on daily rate contractors, non-IT consultants, our property. There's an absolute shift in mindset to being more cost efficient, and it is to make us an easier bank to bank with for our customers and work in for our people. I might just go to the line now.
We've got six callers on the conference call. I'll take a few, then come back into the room.
Thank you. The question comes from the line of Alastair Ryan from Bank of America. Please go ahead.
Thanks very much. Good morning. First on the U.K. Just a little more detail, if you could, on the Post Office. That's something you've been working on, shifting from sort of a volume driven relationship to one where pricing is more important. How quickly you think you could take a little bit more out of funding costs there, if at all? Second, just on this sort of never ending regulatory capital inflation that I'm sure you're a lot more sick of than we are. If you did go down the route of selling some NPEs, would that help? I picture that some of the old NPEs are a particular subject of increased capital requirements, and therefore, if you did sell them, there'd be some relief to that 80 basis points. Thank you.
Thank you, Alastair. I'll cover Post Office, and Andrew will talk about capital and NPEs. Just broadening the Post Office question, just the context of the U.K. We had a low single digit ROTE in the U.K. business. We committed to doubling that to a high single digit ROTE. Still not good enough, but a step in the right direction. Since Investor Day, we are moving in the right direction. We've got the three levers of improve, invest, or reposition. I would say that the Post Office is a very important relationship with us we've had for many years. That partnership goes on. The contractual end of that is around 2023. We're absolutely committed to working with the Post Office beyond that. It's a relationship that has been very beneficial in the past and today, and we see that as going forward as well.
In terms of sort of improving performance, there is an opportunity for us to reduce costs in the U.K., and that's operational costs, and those have gone down 2% in the U.K. last year, but also the cost of funding. You'll see that the detail in the book, that has also reduced, and that's primarily through the Post Office.
Okay. Maybe just to touch on capital, Alastair, and again, as I say, just to repeat, the capital of 80 basis points, that does not impact on our capital guidance of 13%. It really goes to the risk weighting and the regulatory expected loss. Clearly, I think last June, we did signal that given the evolving regulatory framework, and clearly that has obviously continued to evolve further as we've touched on this morning, that does mean that we're keeping all options open to accelerate the reduction in our NPEs. We've set out, there's hopefully a useful slide in the appendix to our book this morning, slide 46 for your reference, which sets out our current NPE position in relation to Irish mortgages.
Within that, we're somewhere between three and five times better today than the rest of the industry, and overall with the lowest NPE ratio in Ireland. What we have highlighted there is the portfolio of buy-to-let mortgages that are in arrears, and we've given you some disclosure about the quantum of loans that are in arrears for the buy-to-let mortgages, and also what the net interest income, and importantly, what the CET1 capital intensity is. In looking at managing the evolving regulatory framework, there's clearly an opportunity initially in looking at the amount of capital that we have invested in the buy-to-let portfolio, and that's why we've prioritized that particular portfolio in our thinking, and why we've given you the disclosure here. That's our focus right now.
Executing a transaction which would accelerate the reduction in our NPEs would clearly unlock some of that capital and the evolving capital that the regulators are looking for us to hold. Also we would say that we have all options on the table in relation to the amount of capital that we have invested clearly in the other NPE portfolios, be they owner-occupied mortgages, other asset classes, et cetera.
Thank you. Very helpful.
Thank you, Alastair. Let's go to another question on the line.
As reminded, ladies and gentlemen, please press star and one to ask the question. Our next question comes from the line of David Lock from Deutsche Bank. Please go ahead.
Good morning. Two for me, please. The first one is just on the NIM in the U.K. Just wondered if you could tell us a little bit more about what you're expecting around competition. I'm conscious that you're saying in 2019 it's going to be a bit lower in terms of the NIM, and it should rebound into 2020. How do you feel about that if the competitive pressure stays here for quite a while? Particularly the particular segments that you're operating in within the mortgage market in the U.K. It looks like high LTV pricing has come in quite a bit. Just wondered if you could give a bit of color on that. Then secondly, on capital. I guess two parts to this.
The first thing is, do you think at any point in the future there will be some kind of reflection of the extremely high risk weights that you will be holding, in Ireland, in other parts of your capital requirements? In other words, in terms of a lower Pillar 2 requirement or a lower other form of the stack that you're operating at. I think this is the fourth time we've had an upward shift in mortgage risk weights. It seems like none of these effects really get added together in terms of thinking about the risk of the overall business. The second part is just when I look at the loan growth, which was, I think, EUR 1.3 billion for the year, you're saying that you consumed about 40 basis points of capital for that.
That feels like a pretty high capital cost for a pretty small amount of lending around about 100% risk weight. What's driving it? Is that just because the stuff that's rolling off is very low risk weight, or is there something in there that we can't see? Thank you very much.
Thanks, David. Andrew will respond again on margin and capital and risk weights, but if I can just make a comment on the competitive environment in the U.K. Obviously the U.K. mortgage sector is particularly competitive. Back in our Investor Day, we would have signaled our intentional shift away from the sort of lower LTV remortgage business, which is very crowded and focusing on more niche lending and higher margin segments. That pivot to niche is exactly what we've been doing. Our remortgage flow is now about a third of our business. That is down from what was probably at 36%, and it's certainly less than the market. The market is closer to about 40%. We've seen an increase in our first time buyer business and our focus in the niche space.
We did some tests and learns around later in life and family link type propositions. We're now generating some good early business from more tailored and bespoke solutions for customers. The focus is on building out more in the higher margin niche space, and also on retention of our existing book and improved use of technology to maintain our business. Andrew, do you want to talk more on NIM and capital?
Sure, yeah. Maybe if I go and touch on the capital piece. Just to deal with the piece around 40 basis points, David, first. Clearly at the time of Investor Day, we said we needed to invest, or we would expect to allocate about 200 to 250 basis points across the three and a half years. As expected in year one, our corporate loan portfolios, which include obviously corporate Ireland, but also corporate U.K. and our international leveraged acquisition finance businesses have been strong drivers of that EUR 1.3 billion growth in our balance sheet, and that's as we would have expected. Those asset classes would clearly attract higher risk weighting than, for example, U.K. mortgages or Irish mortgages, despite your comments.
Over the next couple of years, clearly the overall growth in the portfolio, the 20% growth in our balance sheet that we signaled will be more evenly spread by the time we get to 2021, and therefore that will feed into that piece. The 40 basis points, it reflects some kind of mix change in the balance sheet just around what's happening in terms of the redemptions and new drawdowns. It particularly reflects the fact that the growth in our balance sheet is more concentrated to the corporate portfolios, which attract a higher risk weighting. In terms of more generally, in terms of the capital stack, David, again, we tried to set out on, again, just for reference, slide 51, what the various components of our capital stack are.
We call out on that page the fact that the outcome of the EBA stress test last year clearly was an improvement in terms of our ranking. That's not unexpected given the investments we've made in strengthening the resilience of the balance sheet, reducing the level of NPEs, further sustainable profits, less volatility in the pension, for example. The outcome there is very reflective of the progress we've made over the past couple of years, and we saw that then translate into a material reduction in our Pillar 2 guidance, quite apart from the separate adjustment to do with the capital conservation buffers. That reduction in P2G, and I appreciate we don't give a disclosure on that piece because of regulatory preference, but that is a not unimportant sign in terms of as you think about the capital stack.
Clearly, when you look at something like P2R, for example, the range of what the P2R could be is between one and two and a quarter percent. We're at the top end of that range at two and a quarter percent today. Certainly when we look at other organizations that we might regard as being at a sort of a similar place to where we're at, could our P2R come down by 50 basis points plus or minus? I think over the next number of years, I think that's possible. Clearly, I can't guarantee that to you because that's a decision for the regulators.
Certainly we're going to continue to invest in strengthening the balance sheet, continuing to reduce our NPEs, and certainly our expectation is that that will get reflected in the capital stack over time. I think that's there are kind of the questions on the capital side.
Okay, thank you very much.
Thank you. We'll take another couple of calls on the line then maybe come back into the room. Yep.
Our next question comes on the line of [Chan Seo] Yoon from UBS. Please go ahead.
Hello. This is [ Chan Seo] from UBS. I want to ask two questions, please. Firstly, on margins again maybe in a different way. Slide 19 states your 2019 NIM guidance assumes that competitive pressure in U.K. mortgages can be offset by other lending. My question is, why this couldn't offset the competitive pressure in U.K. in Q4, and why you think this can do it in 2019? How is it different to Q4? I think it's really important because understanding this will help us assessing the resilience of your 2019 NIM guidance. Secondly, just to follow up on the U.K. cards, your cost target of EUR 1.7 billion ex-levy, is it possible that you can do more on cost given the disposal of card book, or was this disposal in your EUR 1.7 billion target anyway, there is probably little delta? Thank you.
Thank you. I'll cover off the costs and the U.K. cards piece, and then Andrew can talk again about margin. We could always go further than the EUR 1.7 billion, but we also want to be investing in our business. EUR 1.7 billion is a cost base that also reflects investment in our technology, in our transformation, and on growth opportunities. If there are opportunities to be more efficient and effective, we'll certainly take them. For the U.K. cards business, there's an assumption that they wouldn't be in our portfolio as part of our cost reduction. That is one of many steps we're taking to improve our cost line. Andrew.
Okay. [ Chan Seo] , just in terms of the margin. In terms of the U.K. competitive pressures through 2018, clearly that has impacted our Q4 NIM, which obviously bakes all that, brings it right up to date in terms of the impact of those competitive pressures, and it impacted it by the three basis points that we set out. In terms of what we've seen since that time, the mortgage margins have been more stable in the last couple of months than we would have seen. They effectively came down to the current level, and they've sort of hit a level now that has been more stable in the past couple of months.
Francesca referenced earlier the fact that as part of our overall strategy, as we move into other kind of niche areas, whether it's in terms of the lending into retirement, whether it's in terms of the recently launched tailored underwriting, that will offer an opportunity to do more volume at the higher margin end, and overall that will help in terms of cushion if there is to be further competition. We assume in terms of giving you that guidance, we don't assume any improvement in the competitive position during 2019. That's the basis on which we are comfortable that the U.K. competitive environment will be offset by those structural factors that we described.
If the U.K. margins were to reduce by a further 25 basis points from the 1st of January, clearly they haven't, and I don't expect it, but if that was to happen, the impact on our group margin would be in the region of one to two basis points. I don't expect that to happen, [ Chan Seo] . I'm just giving you that to give you a sense of the resilience of the 216 to an unexpected further compression in U.K. mortgage margins of 25 basis points, which I don't expect.
That is very helpful.
Should we stay on the line?
The next question comes from the line of Chris Koch from Autonomous. Please go ahead.
Good morning. Thank you for taking my questions. I just wanted to come back to the 80 basis points of regulatory drag that you've cited in the slides, please. Could you unpack how much of that is related to regulatory coverage requirements? Specifically, you also cite in the slide the sort of calendar provisioning requirements, which are going to build over time. How much of the 80 relates to that versus sort of further TRIM impact, if there are any of those? Is the 80 basis points pre or post any mitigation actions you can take? For example, is the 80 factoring in potential for accelerated NPE divestments to avoid those calendar provisioning requirements? That would be the first point, please. Secondly, just to follow up David's question really on risk assets intensity.
I think you said at the strategy day the risk intensity of growth would be about 60%. Your RWA to loan intensity at the end of the year is now at 62. It sounds from this regulatory drag commentary that this is actually going to head higher. Is there any change to that 60% intensity on growth? Are you expecting some underlying downdraft from, for instance, improving LGDs as collateral prices improve, et cetera? I think over the last couple of years, if we haven't seen these periodic hits from higher regulatory requirements, you would have seen your risk asset intensity declining on an underlying basis. It's just it keeps stepping back the other direction. Are you expecting that to continue to still get down to that 60? Thank you.
Let me take those questions in reverse order, Chris, if that's all right. The risk-weighted assets intensity, clearly, of the Irish assets are very high. They continue to be very high, and we set that out, and we've chatted a little bit about that before in terms of where we're at. In terms of the translation of that into the capital allocation framework, we've obviously signaled the 80 basis points, but the average risk weighting over the 3.5 years, the average 60% intensity, in broad terms, that would be consistent for the new lending. Clearly, that 200-250 basis points covers a range, and it also reflects our expectation that the loan growth will come from right across our business.
I think we said it in Investor Day that about two-thirds of that loan growth will come from Ireland, and a third from overseas. That's what we would expect when we come to the end of 2021, and we see that loan growth, that will be in that space, and broadly in that risk-weighted intensity. I'm not changing any guidance associated with that. In terms then of the 80 basis points, and obviously as you rightly point out, you've got the 80 basis points, and you've got the impairment guidance of 20-30 basis points that we've guided at Investor Day, and that we repeated today, no change. That is designed to cover all aspects of regulatory initiatives that are underway. It covers all of those.
It doesn't cover any extra mitigation, Chris, over and above what we would be projecting as part of normal reduction in NPEs over that timeframe. Within my three-year projections, clearly, I expect the NPEs to continue to reduce further. We've factored that into the calculation of the 80 basis points, but we haven't considered further or extra mitigation above that as we respond to the evolving framework. That's something that, of course, you'd expect that we will manage over time, which of course we will. I think we need to sort of stand back from it. Ultimately, our capital today is at 13.4%, we talk about the fact that we'll have in excess of 13%. We're very comfortable with that. We talk about the dividend, in terms of how that will trend. Again, no change in terms of what we've guided to you previously.
We talk about the fact that we're very focused on delivering the ROTE of in excess of 10%. All of those kind of three, they all have to get triangulated in terms of ensuring and supporting our complete focus on delivering on our commitments as we've set them out.
Why don't we take one more call, then come back into the room, and then we'll go back to the call line if there are more.
The next question comes to the line of Andrew Coombs from Citigroup. Please go ahead.
Good morning. If I could ask one on NIM and then a couple related to loan growth. First on interest margins, I think we've covered the competitive angle in significant detail, but on MREL, you're guiding to only a one basis point hit. I thought it might be a bit larger than that. Could you just elaborate on your 2019 issuance plans, and also just remind us what the coupon was on your August and September issuance. Second question on loan growth. You've obviously reiterated the targets for retail Ireland, retail U.K., but I note there's no quantification on your loan growth expectations for 2019. You have outlined you do expect net loan growth. Given some of the things you've mentioned, the accelerated NPE rundown, you've got the U.K. credit card book to come out, you've got the ongoing tracker roll-off.
Should we expect muted growth in 2019? My final question, which is attached to that is, given some of the extra regulatory capital hits you've flagged today, what do you prioritize now? Do you prioritize hitting those growth targets for 20% in retail Ireland, the 10% in retail U.K., or do you prioritize the progressive dividend? I know you'd obviously like to do both, but which one's the priority? Thank you.
Okay. Andrew, do you want to go first on NIM and MREL, and I can talk about sort of prioritization of what's important to us and our loan growth outlook.
Okay, great. Yes, we've set out in the document, Andrew, what our MREL requirements are going to be in terms of the next number of years. Our target effectively represents about 26.4% of RWAs, the reference date for that is December 2016. That comes out at about EUR 13.3 billion. To hit that, our MREL issuance is in the region of EUR 1 billion-EUR 2 billion per annum, and that's what we would expect. That MREL issuance will be issued out of Holdco rather than out of the OpCo entity. From memory, the recent issuance that we did back in August and September was in the region of 4%.
Okay. On our loan book growth, we would have stated very clearly in our strategy day our ambition to increase our total loan book to EUR 90 billion by the end of 2021. That wasn't a top-down target. That was a summation of the opportunities that we saw in retail Ireland, in our U.K. business, and in corporate banking. We are the leading lender in the fastest-growing economy in the European area. We feel confident about our positioning and our franchise in Ireland. Corporate banking, very strong franchise again, and a key focus on supporting home building in Ireland, where we see, given the supply-demand dynamics, good sustainable and domestic demand for house building in Ireland. In the U.K., I've talked multiple times about the strategy of improving, investing, and reshaping.
The improvement and the investing will generate, and we're seeing that come through in some of our consumer lending improvements in the U.K. that would also generate loan book growth. We're not chasing volume. When we look at what we prioritize in terms of our lending decisions, it is risk and return, and then volume. We stay committed to the targets that we set out relatively recently. That was when we knew about Brexit. It is predicated on some sort of Brexit deal happening. Our macroeconomic forecasts, our consensus views that also carry that assumption of some sort of deal with a reasonable transition period coming through. We stay committed to that end state, and as I said in my opening, our outlook for 2019 is costs going down and loan book continuing to grow.
Just more broadly, when we prioritize what's important to us, obviously loan book growth, cost reduction, NPE improvement, all very important, but ultimately are seeking to meet our ROTE commitments that we made back in June about being a ROTE over 10%, and that is our focus. If that should support, and it's a matter for the board, support the continuation of a progressive and prudent dividend policy.
Okay, thank you.
Why don't we come back to the room for questions? There's one here.
Hi. Good morning. Pierce Byrne, Cantor Fitzgerald. I have two quick questions, to Andrew, for you. What impact have you seen in the widening of the negative rates on your deposit base, and do you expect your loan deposit ratio to continue to trend lower in FY 2019? Maybe just in terms of your kind of wider funding plan for FY 2019, have you any thoughts on how the impact of a new TLTRO program by the ECB may impact your funding plans given the capacity that's already on the balance sheet?
Okay, Pierce. Yeah, no problem. Look, our liquidity position is very, very strong. In terms of the year just completed, we've actually repaid a big chunk of our TLTRO. You can see our level of wholesale funding is very modest in terms of the piece, and obviously, we have a loan-to-deposit ratio of just at 100%, just under 100% today. Issuance was really going to be done for MREL compliance purposes rather than for funding purposes. Clearly, in terms of the negative rates piece, that really reflects the fact that if we have surplus liquidity, then we earn negative rates when we place that money with the central bank or with other institutions. Really we're just having to pass that on to a broader range of customers today. We haven't seen material sort of shifts in relation to that.
Clearly, we set those prices taking a very clear account of what's happening from a liquidity and funding perspective. Given the strength of our liquidity and funding position, that's not something that we've been happy to make the decision to both increase the level of negative rates and then to broaden the scope of it. In terms of our loan-to-deposit ratio, clearly we'd prefer the loan-to-deposit ratio went north rather than south. That's what our focus is in terms of growing the balance sheet, we will obviously expect to grow that balance sheet in 2019. Within that context, we'd be comfortable from a risk appetite perspective for the loan-to-deposit ratio to be higher than 100% LDR. I know a number of years ago, there was a regulatory target of 122%.
I'm not sure we'd be comfortable back up at that level, but certainly, the loan-to-deposit ratio could drift north to 110% or even a little bit higher if we make sure that we fund the extra 10% through long-term wholesale funding. We don't have any appetite for short-term wholesale funding. In terms of if there is to be a further TLTRO in 2019, again, that's a matter for the ECB. We'd obviously evaluate that in terms of the trade-off between liquidity and capital in relation to that. Given the strength of our liquidity position, we'd have to look at how we would manage that in terms of the cost of the various funding sources that we would have. You'd expect us to do that in the normal course.
Other questions in the room? Stephen.
Thanks. Good morning. Stephen Lyons from Davy. Just a couple of questions from me, please. First of all, just on expected losses, there was quite a significant increase in expected losses in regulatory capital during 2018. Just maybe if you could illustrate what were the actual drivers of that and across what portfolios? Secondly, just on the NPE slide, you've got that comment around SREP guidance on coverage levels. Maybe if you could just give a bit more specific detail on what are those desired coverage levels, over what time, and also did I interpret correctly earlier on when you implied that was maybe part of your 20 to 30 basis points guide, or is that separate? Thank you.
Okay, Stephen. The increase in expected loss, Stephen, will be particularly impacted by the Irish mortgage book. Effectively, TRIM affects both the risk weighting for mortgages, but also the expected loss. The total capital treatment that we've called out impacts on both the RWAs, but also the expected loss, and that's been a particular driver, essentially, to date. You'll be very familiar with this in terms of if our LGD goes up, it affects both the RWA calculation, but also the EL calculation. The predominant increase in expected loss would be linked to the TRIM on Irish mortgages.
In terms of NPEs, certainly the SREP guidelines effectively are that between now and the mid 2020s, the guidelines from the regulator is that the coverage ratio for secured and unsecured loans would increase to effectively for an NPE that was seven years old on the secured side, would have to have 100% coverage. Effectively, you need to get to a coverage level of about 50% by 2020, 2021, that sort of zone, and then effectively increase from that 50% level of coverage up to 100% by the mid 2020s. That's to do with the secured side. Unsecured, you need to get to 100% coverage again, but at an earlier date, there's like a two to three-year timeframe.
When we look at our guidance, which covers both the impairment charge plus the 80 basis points of capital, all of those two together will cover all of the impacts from the various regulatory engagements and initiatives that we have. Whether it's on the impairment guidance or whether it's on TRIM or on definitions of default or IRB models, guidelines, et cetera. We've done a complete scan of the horizon to see what everything is, and we've estimated for you what the impact of that will be, and over the next three years, effectively, that comes to the 80 basis points plus the impairment guidance that we're sticking to.
While the 80 basis points takes us all the way to December 2021, we expect that that 80 basis points is likely to arrive based on the timing of those regulatory initiatives, partly in 2019 and partly in 2020. There's nothing waiting for us there in 2021.
Just to complement that evolution of regulatory thinking on NPEs is what's informing our stance on having all options on the table and working hard to progress that and giving an update to the market soon. Okay. Let's go to the phone lines. We have three more questions.
Thank you. Your next question comes from the line of Aman Rakkar, Barclays. Please go ahead.
Morning, Francesca. Morning, Andrew. Thanks for the call. Just two questions, if I may. Just a bit more detail on the Irish mortgage market this year. I was interested if you'd give us a review on pipeline into Q1, and what your expectations are for that specific part of that market in 2019, in terms of gross lending and your experiences on redemptions would be useful. The second question is, just to interrogate your 2021 targets, it sounds like you retain the commitment to reach a greater than 10% ROTE target. It sounds like six months down the line, the income environment's a bit more challenging than you were expecting. Just interested if you could update us on basically how you think things are progressing. Do you think that's a fair characterization of things? Income perhaps a little bit worse, the outlook than you were expecting beforehand.
It sounds like you've got some cost levers to pull, it just sounds like you retain confidence and conviction in your targets. I was just interested for your thoughts there. Thank you.
Okay, thank you. In Ireland, in terms of the mortgage market, we've got the supply-demand dynamic that we've talked about at length previously. We see increasing demand for housing, and that not being necessarily met by supply. You need to have a supply of around 35,000 houses per annum to meet the demand of just domestic demographic change and population growth. We don't see that demand being met until about 2023. Between now and then, you'll see that increased focus and a bit of pressure on pricing in both the Irish mortgage market and also rental markets. Our outlook, and this is broad consensus, is that there'll be about 23,000 new residential units coming on stream in 2019. House prices increased by about 6.5% last year, predominantly actually outside of Dublin. Consensus view is that will continue around 5% in 2019.
Our focus is very much on the fixed rate offering. We see that Irish consumers like the certainty of fixed rate mortgages. We've been very consistent in our strategy. We were offering fixed rates when it was maybe 30%+ of the total market, and that's now significantly increased. Indeed, 92% of all of our new mortgage business is fixed rate. Pricing is a factor, so is distribution, but also other elements, whether that's cashback or flexibility or portability. Those are areas that we're all highly competitive on. Just more broadly on how committed are we to the strategy we set out seven months ago? We continue to be committed to that strategy. Our outlook, I mentioned this before, is predicated on the GDP growth that is actually in Ireland is more positive than it was on our Investor Day.
GDP growth for Ireland is about 4.5% for 2019. It was 3.6% back in June. The outlook for Ireland is more positive. In the U.K., it's very similar to what it was back in June. Both of those GDP outlooks are predicated on some type of deal being done on Brexit. EUR 90 billion is not the North Star target. Our ROTE is. We feel a summation of all of our competitive positions and just broadly maintaining market share in our current franchises, given GDP growth and market outlook, would get us to EUR 90 billion. We don't chase that volume. We will look at returns, and the risk aspects of those. Right now we are seeing positive loan book growth in 2019.
I think just to support that, Francesca, ultimately, of course the margin guidance in terms of the U.K. and competitive pressures there, we've covered at length. In terms of your characterization, you know what I mean, in terms of the net interest income. In the near term, that might be a little bit tougher. Offsetting that, we've had a very good performance in our wealth and insurance business. Very high conviction around cost, et cetera. I think they're all, as well as the way I think about them and the way we think about them, is that they're all effectively inputs into the ROTE target. That's the target that is absolutely paramount, and that's the one that we're very focused on, delivering that in excess of 10% by 2021. All of the other inputs into that are things that we're managing microscopically, as you'd expect.
If for reasons outside of our control, we didn't see that loan book growth come through, we'll pull harder on the levers that we do control, in particular cost. Okay. We've got two more calls on the line.
The next question comes from the line of David Wong from Credit Suisse. Please go ahead.
Yes, good morning. Thank you for taking my questions. I just had one question, really. I find it interesting about your expectation of actually Irish mortgages will reprice, I guess, over the next couple of years. I guess my question is that, in the context where you've got house price growth slowing down, how much do you think mortgage credit becoming more expensive over time will actually impact the growth and recovery of the Irish housing market, though would be my question. Many thanks.
David, I think ultimately in terms of the driver of the mortgage market, clearly is the demand. That demand, as Francesca has said, is in the sort of 35,000-40,000 units per annum. Clearly there's been a, while the good news is that we increased, as a country, the production of new homes to about 18,000 last year. It's still a long way short of what's required by about 50% over the next couple of years to 2021. We expect to see the mortgage market, which in total in 2018 was about EUR 8.7 billion. We see 50% growth in that market over the next three years. That's going to be the key driver of the volume in the mortgage market.
In terms of the price of mortgages, the price of mortgages clearly has to reflect both the risk, the return on capital, as well as the input costs to that mortgage. From that perspective, clearly the amount of capital that our regulators wish us to hold against the mortgage book have increased over the last period. We've seen that, and we've discussed that at length. That's what feeds into the price adjustments that we announced recently and our expectation over the next period. Do I think that that price adjustment is going to in some way dent the growth of the mortgage market? I certainly don't believe that, because the underlying drivers are much more linked to the demand for homes and housing, and that's the key driver.
Yeah, I would just add to that. You mentioned, David, house pricing sort of increase slowing down. It was 6.5% last year. Market view is it will be about 5%. It's still an increase, and probably a lot of first time buyers would welcome that. I think that's a reflection of supply coming on stream, plus an intentional device, but through some macroprudential rules to make sure that the growth is sustainable. I don't think that is problematic. That actually points to a more sustainable property market than if we saw price increases actually going beyond the 6.5% we saw in 2018. Thank you. We'll take the last call on the line, and then we'll wrap up with any pending questions in the room.
The next question comes from the line of Martin [Lütke] from Goldman Sachs. Please go ahead.
Yes, good morning. Could I just have a follow-up on the U.K. competitive situation, and this time more from the deposit, from the funding side. I was just wondering if you could comment what kind of competitive movements you see in the deposit side, and what kind of levels you think you have in order to manage the funding costs in the U.K. more broader. Thank you.
Okay, Mark, in terms of the cost of funding in the U.K., there's a number of different components to that. There's obviously the rate we pay our customer, there's the cost of acquisition through our partnership structures, and there's the mix of funding that we have. The mix between deposits, different types of deposits, and wholesale funding, of which we have very little right now. One of the things that we look to do, of course, is to optimize all of those levers, to optimize and reduce the cost of raw materials that feeds into our lending in the U.K. Clearly within the broader market, we're mindful of both the surplus of liquidity that certain of the ring-fenced banks have in the U.K. and the effect of that, in terms of the deposit market. Also the withdrawal of TFS from the Bank of England.
Again, that's something that is in our mind. What we're looking to do all the time is to improve the returns we're generating on the lending, in part by looking at the rates we have to charge our customers, also in terms of the input costs and the totality of that cost of funding, which as I say, is dependent on the mix of that funding. It's dependent on the rate we pay to our counterparts, and it depends on the cost of acquisition through our successful partnership model.
Thank you. Do we have any more questions in the room? No. If not, we'll bring the session to a close. Thank you very much for your attendance and questions, see many of you very soon. Thank you