Good morning, everyone, thank you for joining our 2018 interim results presentation. This morning, I'll give an overview of some of our key highlights for the first six months of the year. I'll also give an update on how we are performing against our three strategic priorities. Andrew will then take you through the financial performance in a bit more detail. In the first half of this year, we have made good progress in the pursuit of our ambition. That ambition is crystal clear, to be the national champion bank in Ireland, with U.K. and select international diversification. It is underpinned by the strategy that we set out recently at our June investor day to unlock growth in our Irish business and grow our loan book, accelerate and broaden our multi-year transformation program, increase returns in our U.K. business, and meet the financial targets we have set ourselves.
Turning to our H1 2018 highlights. The group's profitability has increased, supported by growth in our loan books, a reduction in our cost base, improvement in our asset quality, leading to strong capital generation. Taking each in turn. We are reporting a strong financial performance with underlying profit before tax of EUR 500 million. We have grown our net loan book by EUR 500 million while maintaining commercial pricing and risk discipline. We've seen strong growth in Irish mortgages and in our U.K. mortgage and consumer business. Gross new lending volumes of EUR 7.7 billion were 16% higher than the same period last year. We've also reduced costs by 3% when compared to the second half of 2017. Our target is to reduce costs each and every year until 2021. We are on track to achieve this. Our asset quality has continued to improve.
In the first six months, our non-performing exposures reduced by 10% and now stand at 7.5% of customer loans. Reflecting this ongoing progress, we show a net impairment gain of EUR 81 million. We've made consistent progress in the reduction of NPEs from their peak, and we continue to have the strongest performing loan book of any bank in Ireland. We are strongly capitalized. We generated organic capital of 90 basis points during the first half, with our CET1 ratio increasing to 14.1%. Bank of Ireland's next chapter is about growth and transformation. The key enablers for this are our strong businesses, our proven strengths, and the attractive markets that we operate in. Combined, we see significant growth opportunities. The economic outlook in Ireland continues to be supportive. We see this through projected demographic change, employment growth, housing demand, and economic expansion. Confidence is driving Ireland forward.
Credit formation is now increasing after many years of deleveraging. Significant investment is also being made in Ireland's property market and infrastructure. This is creating real opportunities for Retail, SME, and corporate lending. Each of these will continue to support our loan book growth ambitions. Increasing prosperity, coupled with a demographic shift in age profile, is also driving the need for wealth management and retirement planning. Ireland is our home market, and these factors taken together indicate a positive future. As the largest lender to the Irish economy and Ireland's only banc assurer, we are well-positioned to benefit from current and future opportunities. As we set out at our June investor day, we are committed to the U.K. market, and our strategy is focused on increasing returns. We see our U.K. and international diversification as offering us additional attractive opportunities to manage and deploy our capital and liquidity.
This is allowing us to develop and grow profitable new business. Earlier this year, I set out three strategic priorities for the group. Transform the bank, serve customers brilliantly, and grow sustainable profitability. Since defining these priorities, our focus has been on making strong progress towards their delivery. I'll go through each in turn. Transforming the bank means changing our culture, our systems, and our business model. This transformation is critical because it will support our growth ambitions, improve customer service, and drive greater efficiency. On culture, in late 2017, we announced a major reset. We defined our purpose to enable our customers, colleagues, and communities to thrive, and we started to embed a set of values with each colleague in the bank to be customer focused, accountable, agile, and to work as one group, one team.
So far this year, more than 6,000 colleagues have attended purpose and value roadshows in Ireland and the U.K. Culture doesn't change overnight, but we are seeing staff engagement levels and cultural indicators improve steadily since the end of last year. Our systems transformation is also progressing well. Replacing our core banking platform is a big part of this. Phase 1 was completed in April, delivering a single customer record for over 2 million customers. We will also test personal loan and deposit products later this year on a pilot basis. As I set out our June investor day, to further support our growth plans, we will launch our award-winning U.K. mortgage platform in Ireland as part of our re-entry to the mortgage broker market later this year. Our new mobile app and digital wealth channel will be launched in the first half of 2019.
We're also continuing to make Bank of Ireland a more streamlined organization, one that's flatter, less siloed, a better place to work, and closer to our customers. This will drive greater efficiency and is completely aligned with, and indeed supports, our growth ambitions. Another key priority for us is to serve our customers brilliantly. Customers are the core of our business, and their expectations and preferences are changing rapidly, so we are transforming the way we serve our customers. We are listening to what matters to them and we are taking action. Within our branch network, we are actually increasing the number of full-service branches by more than 160%, and we're putting more staff in the frontline, increasing customer-facing roles by more than 15%. In parallel with this, we continue to innovate and invest in our digital channels.
In H1, over 40% of customer product sales in Ireland were completed digitally end to end. That is up 20% on the same period last year. Our third strategic priority is to grow sustainable profits. Our strong financial performance in the first half of 2018 demonstrates good progress in delivering on the financial targets we set out at our June Investor Day. Firstly, ROTE. Headline ROTE for the first half of 2018 was 9.6%, or 6.8% on an adjusted basis. Our target is to exceed 10% in 2021, and we're on track. Secondly, efficiency. We reduced our costs by 3% compared to the second half of last year. We are committed to reduce costs each and every year to 2021. This is to achieve a reduction in our total cost base to EUR 1.7 billion. Thirdly, the group expects to maintain a CET1 ratio in excess of 13%.
Our fully loaded CET1 ratio at the end of June was 14.1%. This capital will be deployed to support attractive loan growth opportunities, to transform our systems and business model, improving service and efficiency, meet regulatory capital requirements, and to benefit our shareholders. Finally, we remain committed to increasing our dividend. This will be done prudently and progressively and will build over time towards a dividend payout ratio of 50%. We have had a strong H1 2018 performance against our strategic priorities, and it shows we are well on the way to becoming the bank we want to be by 2021. By then, we see Bank of Ireland as a trusted brand that has retained customer loyalty and acquired new business while enabling the success of the fastest-growing economy in Europe, Ireland.
A bank that has made some tough calls to be more efficient and fulfill its potential and is recognized as a progressive and diverse employer of choice. A bank with a talented team that is courageous and robust in its execution, demonstrating a track record of delivering attractive and sustainable returns for our shareholders. I'll now hand you over to Andrew to take you through the financial results in more detail and to give some guidance on the outlook for the rest of 2018. Thank you.
Okay. Thank you, Francesca. Good morning, everyone. We've had a really good start to 2018. We've grown our loan book, cut our costs, we reduced our NPEs, and we increased our capital to 14.1%. Over the last six months, we generated a profit of EUR 500 million. That reflects a solid income performance, a reduction in our cost base, and net impairment gains and write-backs during the period. Total income was EUR 1.4 billion. We continue to maintain our strong commercial discipline on pricing, and our net interest margin for H1 was 223 basis points. A particular positive in our performance is the actions we're taking to reduce our cost base. Compared with the second half of last year, we reduced our operating expenses by EUR 27 million. That's 3% over the last six months. Our transformation program continues to progress.
We invested EUR 141 million in the first half, of which EUR 51 million was charged directly to the P&L. On asset quality, we reduced our non-performing loans by 10% over the last six months. The positive economic environment and outlook is supporting the ongoing improvement in our asset quality. As a consequence, we had a net impairment gain in the first half of EUR 81 million. Separately, we incurred non-core charges of EUR 46 million, primarily relating to the cost of our restructuring programs, which are an important part of the transformation of our business model. Turning now to the key areas of financial focus from our Investor Day: growth, transformation and efficiency, and capital generation. Starting with customer lending and growth. Our loan book grew by EUR 500 million in the first half of this year. New lending was EUR 7.7 billion.
That's 16% higher than the same period last year. Of this, we lent EUR 3.8 billion to Irish customers and businesses. An important driver of this growth was the increase in our mortgage lending here in Ireland. It was up over 30% year-on-year, and we maintained our market share at 28%. As we announced previously, we expect to re-enter the broker market for Irish mortgages later this year. While we'll start cautiously with this, over time, it will provide further support to our growth ambitions in the mortgage market. In the U.K., new lending was GBP 2.6 billion, an increase of GBP 700 million. That's primarily been driven by the growth in our U.K. mortgage business, together with the growth in our motor finance and personal loans businesses.
In our corporate division, new lending increased by 9% to EUR 2.1 billion, with growth in both our Irish and our U.K. and international businesses. We expect further growth in our loan book during the second half of this year. Turning to our net interest margin, which was 2.23% for the first half of the year. Our NIM of 223 basis points reflects the lower yields on our liquid asset portfolio and the IFRS 9 reclassification impact of certain NAMA bonds. When it comes to customer lending and deposits, our NIM is benefiting from the positive impact of higher margins on front book lending. As a leading bank in this market, we will continue to maintain our strong commercial discipline on pricing. We expect the NIM in the second half of 2018 to be in line with our full year guidance of 224 basis points. Turning to fees and other income.
Sustainable business income from our banking activities were EUR 323 million, broadly in line with the same period last year. At our Investor Day, we set out the attractive opportunities that we have to develop and grow our wealth and insurance business, particularly by unlocking opportunities within our existing SME and affluent customers. In the first half, our wealth and insurance business contributed EUR 115 million to our business income. Moving to operating expenses, which were EUR 882 million in the first half. We reduced our costs by EUR 27 million, or 3%, compared with the second half of last year. Total staff costs were marginally lower this year. The impact of salary increases under our Career and Reward Framework were more than offset by the reduction in our staff numbers. Other costs were EUR 339 million.
We reduced these other costs by EUR 28 million in the last six months, that's reflecting the actions we're taking to transform our business model and drive out further efficiencies. In addition, we continue to make good progress on our broader transformation program. In the first half, we invested a total of EUR 141 million in this program. Of this, EUR 51 million, 36%, was charged directly to the income statement, EUR 39 million, or 28%, was capitalized as an intangible asset, and the remaining EUR 51 million was charged as a non-core restructuring cost. This strategic and multi-year program will drive long-lasting efficiencies and support revenue growth in our business. We will reduce operating expenses every year between now and 2021 to meet our cost targets of EUR 1.7 billion and 50% cost-income ratio. Turning to asset quality.
In the first half of this year, we reduced our level of NPEs by 10% to EUR 5.9 billion. Our NPE ratio is 7.5%, and it's the lowest in Ireland. In response to recent changes in the regulatory capital framework, we'll continue to keep our successful NPE reduction strategies under review. We expect further reductions in our NPEs in the second half of 2018 and beyond. This is our first reporting period under the new IFRS 9 accounting standard. Over the last six months, the group's loan portfolios have performed strongly. We achieved better than expected outcomes on the resolution of NPEs. We had higher than expected recoveries from loans that were previously written off, and the economic environment and outlook today is more positive than we had expected at the start of the year. As a consequence, we had a net impairment gain of EUR 81 million in the first half.
Looking forward, absent a deterioration in the economic outlook, we expect that we will have a net impairment gain for the full year 2018. For next year and beyond, our guidance is for an impairment charge in the range of up to 20 to 30 basis points. Moving to funding and capital, we have the liquidity and capital to support our growth and to achieve our strategic objectives. All of our liquidity ratios continue to be robust. Our customer deposits account for 100% of our loans, and they are sourced predominantly through retail distribution channels. Our wholesale funding requirements remain modest. Our MREL target is around EUR 13.5 billion by January of 2021. To comply with this, we anticipate MREL-related issuance of between EUR 4 billion and EUR 5 billion over that timeframe.
Turning to capital, we increased our fully loaded CET1 ratio to 14.1% at the end of June, that was predominantly driven by our strong organic capital generation of 90 basis points. We continue to rigorously manage the allocation and investment of that capital. In the first half, we invested 20 basis points of capital in supporting the growth of our loan book, and we invested 30 basis points of capital in our transformation program. With regard to the regulatory capital framework, there have been two recent developments. At the start of July, the Central Bank of Ireland announced the introduction of a countercyclical buffer of 1% from the middle of next year. In line with the proportion of our risk-weighted assets in Ireland, this will impact us by 60 basis points. Separately, the TRIM process, with respect to our Irish mortgages, completed at the end of last week.
As a result, we expect to make changes to the credit risk models for Irish mortgages in the second half of this year. The estimated pro forma impact would be a reduction of around 70 basis points in our CET1 ratio. As you know, we executed a CRT transaction last November to pre-fund the first 50 basis points of this impact, and we've a range of potential options to offset the remaining capital impacts. Our capital and dividend guidance remains unchanged. The group continues to expect to maintain a CET1 ratio in excess of 13% on a regulatory basis and on a fully loaded basis by the end of the O-SII phase-in period. That includes meeting applicable regulatory capital requirements, plus an appropriate management buffer. On dividends and distribution, our policy is also consistent and clear.
We expect our dividends to increase from the EUR 0.115 we paid earlier this year. The increase is on a prudent and progressive basis, and over time, the payout ratio will build to around 50%. Our CET1 ratio of 14.1% at June is after making a provision for dividends in line with regulatory requirements of EUR 75 million, and that's equivalent to an annualized dividend of EUR 0.14 per share. In summary, we've had a strong first half, and we expect that to continue. As we look forward, we're well-positioned to benefit from the economic growth here in Ireland and in the U.K. We expect further growth in our loan book in the second half, with a net interest margin of around 224 basis points.
We'll further reduce our costs and operating expenses, we'll continue to reduce our NPEs, and we'll have net impairment gains for the full year 2018, assuming there's no change in economic conditions, and we'll continue to generate strong organic capital. In this way, we'll progress towards all of our 2021 targets. Thank you very much. Francesca and I will now take your questions.
Okay. If you can raise your hand, we go first to Diarmaid at the front there. Thank you.
Good morning. It's Diarmaid Sheridan from Davy, and thank you for a very clear presentation. Three questions, if I may. We've obviously seen quite a bit of movement in the mortgage market recently with some pricing reductions. I wonder if you could possibly provide your view of the market and how you're positioned, in the context of those cuts. I suppose that kind of leads us on neatly to my second question around TRIM. Obviously, a higher than expected impact guided. I wonder when you think about that, how you believe you might offset some of those impacts in terms of bringing down the very high risk-weighted asset intensity that that's implying. And finally, around Brexit, I mean, we've seen a lot of noise, probably more noise than we have certainty around what the outcome of Brexit will be.
I wonder how you view that against your near and more longer-term strategy for particularly the U.K. business. Thank you.
Thank you, Diarmaid. I'll respond on Brexit first, then mortgage, then Andrew can cover TRIM. With Brexit, we always think of Brexit in three ways. One, as our legal entity, in the U.K., and the impact it can have on our U.K. operations. Given the U.K. is a ring-fenced entity, it's separately regulated, it's self-funded by retail, granular retail deposits with a relatively low dependency or requirement of wholesale funding, we are in a decent position as we go into Brexit. We hedge our capital ratios against exchange rate movements, I believe we are taking all appropriate steps to deal with any technical aspects of Brexit in terms of our U.K. legal entity. What exercises us much more is the impact that Brexit may have on our customers, both here in Ireland and also in the U.K.
Specifically to your question on the U.K., we six weeks ago at our investor day, shared our multi-year strategy, including for the U.K. We confirmed our commitment to the U.K. market. That was six weeks ago. We still knew that Brexit was going to happen. We still see the U.K. as a market of scale, growth opportunity, and diversification. Despite the Brexit uncertainties, we still see opportunities for targeted and disciplined profitable growth in the U.K. I mean, the U.K. economy, despite the uncertainty, still has a growth forecast. Our outlook is for a GDP forecast of 1.6% in 2019. You've seen the U.K., we've seen statistics where unemployment at 4.2% is the lowest in 42 years. Earnings growth is decent and slightly lower inflation.
Even though we set out a target to improve and reshape some of the parts of our business, the strategy that we set out six weeks ago is unchanged. We stay close to any alteration in the political or economic environment, but our strategy hasn't changed in the last six weeks. I think what is a very live debate at the moment is the impact and the sentiment amongst our Irish customers. I think consumer households in Ireland feel very positive, but it's the small businesses, SMEs, but also some of the larger corporates who we're in constant contact with to understand their individual needs, but the overall sort of consensus or sentiment. I think every time there is any negative coverage, speculation around political outcomes, around Brexit, we do see the business confidence dip.
The sort of conversations that we're having with our customers are how to help them diversify their suppliers. A lot of them are looking at alternatives to U.K. suppliers, potentially to avoid border or ports logistical issues. We see customers also looking at diversifying into other European markets, and maybe markets they haven't considered before. Brexit's become a bit of a catalyst for Irish companies to look at expansion beyond the U.K. There are some larger corporates who are actually increasing their manufacturing or their presence in the U.K. as a mitigant. We're not seeing any Brexit-specific credit issues in our portfolio. We haven't made any changes in our policy or strategy, but we stay incredibly close to the matter as it evolves over time.
On mortgages, we stated our aim is to be the leading supporter of home building and home buying in Ireland. We have outperformed the market in the first half. Our lending growth in mortgages in Ireland was 30% year-on-year. The market grew by 22%. We've held our market share of 28%, I think, very positively. We don't set market share targets, but we'd always expect to be in the 25%-30% range. Particularly for first-time buyers is a very important part of the Irish mortgage market. They're now nearly half of all new business in the total industry, and that's an area we have actually, we sort of over-indexed in our market share. We keep pricing under review. We've seen and noted movements by some of our competitors.
We still see that our one, five, and 10-year offer with cashback provides the best deal for customers over the fixed period of that mortgage. We keep our pricing under review. We also, looking in the sort of broader context, we see that the cost of money to banks and the cost of capital and the amount of capital that's allocated to mortgage businesses increase in recent months. When we look at opportunities to change our prices, it's not an area of focus at the moment. What an area of focus is kind of improving our efficiency and our processes so that our cost and ability to originate is better, and as Andrew said, broadening our distribution channels by the entry into the broker market for mortgages in the latter part of this year. I'll pass to Andrew to talk more on TRIM.
Okay, great. Diarmaid, as you say, the TRIM impact for Irish mortgages is 70 basis points. We'd pre-funded about 50 basis points of that, it's a little bit higher than that, but very manageable in the context of a 14.1% fully loaded CET1 ratio. I think the big piece from my perspective, Diarmaid, is the fact that we have now clarity and certainty over this particular issue. Clearly, as you can imagine, we've had quite a number of our colleagues who've been working very hard in dealing with the process and the engagement, et cetera, with the ECB, and that came to a close last week. What that gives us now is the opportunity to actually focus away from the process and the calculations and really focus on the strategic issues. How much capital have we invested in our mortgage NPEs? That's a significant amount of capital.
There are very clear opportunities that we want to start assessing now that we have that certainty and that clarity. That's something that we'll be taking forward as we go through the next number of months.
Thank you. Next question will go to Owen.
Thank you. Owen Callan from Investec. Just three questions as well, please. The first one on NPEs. I note you said that the NPE reduction strategies will be kept under review in response to the associated and evolving regulatory capital framework. I was wondering if you'd maybe give us a bit of color on what you're thinking of there, and maybe which options may be higher up the priority list than others. Also maybe how that interacts with the previous answer you gave on TRIM and obviously the increasing regulatory requirements around capital. Secondly on dividends. Obviously, you've accrued a certain amount of capital against a full year potential dividend, and you've said that's EUR 0.14 on an annualized basis.
Should that be the sort of guidance, without asking you to preannounce the full year 2018 dividend today, is that the sort of guidance that we should be looking to build in for the full year? Finally, on costs. Obviously, if we look at it year-on-year, it's about 1% lower. If we look at it versus the second half of last year, it's about 3% lower. Obviously lots of those cost cuts would have only been arriving midway or towards the end of the period. How much of a tailwind are we starting to see build there that we should look to really start to kick in the second half of this year and even into 2019? Thank you.
Thank you, Owen. I'll cover our NPE strategy and costs, Andrew can talk more on the dividend. On our NPE strategy, as you know, we've had a very successful strategy over the years in reducing our NPEs. We've reduced our NPEs more than any other bank, down nearly 75% versus their peak. Our arrears performance, simply mortgages, is four times better than the wider industry. We have another 10% down. We've gone from 8.3% at the end of last year of NPEs as a potential total book to 7.6%. We're well on route to get to the 5% at or below that we would like to. If we carry on with our existing strategy, we would expect to get sub 5% in the next 18 to 24 months. That has worked well to date.
To be honest, the question and the debate right now is less about our ability to get below 5% NPEs, and it's much more about how we deploy capital in an optimal way to support our broader growth and transformation strategy. The reality is that the amount of capital that we're required to hold against our non-performing exposures is significant, and it is rising. There's a real incentive to get to the 5% as soon as possible. When we look at our capital, it can go in one of four ways. It can be used to invest in new lending to support our business and personal customers and corporate customers, particularly in Ireland. It can be used to invest in our transformation to make us more efficient, improve service, and transform our business models.
It must be used to meet regulatory requirements, and then finally, the reward of our shareholders by paying a dividend. Within a finite set pool of capital, if one of those factors, so in this case, regulatory requirements increases, then it reduces the amount of capital that we have available for the other three important strategic pursuits. As a consequence of that, we have changed our wording from saying no immediate plans to being open to all options. Capital is not free, and there's a cost associated with it. We have to be optimal in the way that we manage it. We are looking at and considering all options. Nothing is off the table in terms of how we further reduce our NPEs. In terms of cost, I think we're pleased with the progress we've made in the first half.
€27 million down, or 3% less than the second half of last year. That's been achieved at the same time as some of the cost lines have increased. The Career and Reward Framework, the salary increases to our more junior colleagues, has gone up by 2.5%, and we also are funding or paying for the additional depreciation for transformation in previous periods. Net-net, we've still managed to have a more cost-efficient base in the first half. A lot of that is from better negotiation of third party contracts and better sourcing strategically. We also have seen some of our employee numbers reduce. Our outlook for the second half of this year is that we would expect operating expenses, including the transformation, to further reduce in the second half.
Annually, we stick with our guidance that's still quite recent around our annual costs reducing every year from 2018 to 2021. We assume that regulatory fees and levies will remain more or less in line with the full year 2017. That's around EUR 100 million-EUR 105 million, and the transformation spend of about EUR 275 million per annum, typically to continue. Our outlook is positive in terms of meeting cost income ratio of 50% in 2021, reduce cost year-on-year, and getting to that EUR 1.7 billion cost base in 2021.
Okay. Maybe on the dividend, Francesca, I know you won't be disappointed. I'm not about to pre-announce the full year dividend. The board, clearly, that's a matter for them to look at at the turn of the year. I suppose at this stage in the year, we do have a regulatory requirement to make a deduction for a foreseeable dividend. That deduction, the quantum of that deduction must be consistent with our policy. It has to be an increase in last year, prudent and progressive associated with that. That's I suppose what when the board and I were discussing this, we said we'd put in the EUR 0.14 per share as a level which was consistent with that piece in line with the requirement from a regulatory perspective. The decision around the full year dividend will be made at the full year.
It will be around that time, it'll be very much consistent with our dividend policy, which is again, very consistent and very clear, which is that it will be a higher dividend than last year. It'll increase prudently and progressively. The board is not in their philosophy to hoard excess capital. To the extent we have excess capital, we'll deal with that. That's what our policy is. It's very clear in terms of that piece, that's what the board will use as a framework for making the decision at the year-end point. Okay. Eamonn.
Eamonn Hughes from Goodbody. Just three, if you don't mind. Maybe Francesca, can I just pick up just the business lending number? Looks like it was kind of flat to slightly down. Would I kind of tie that back into your earlier comments around Brexit and maybe implications on Irish customers. Secondly, just on deposits, maybe Andrew, on page 31, that great slide that has all the detail. Your U.K. deposits and C&T deposit costs were up. Is that a base rate impact from tail end of last year, or how should we think about the exit rate at June, and maybe kind of trajectory over the next 12 or 18 months picking up, particularly in the capital markets day, you talked about those costs potentially going down. Finally, just on page 40 on the capital detail. You've flagged the profile over the next number of years.
I suppose you throw in a P2G there as well. I'm just picking up on the earlier comments around comfort on 13% CET1, which is great. Again, maybe should the countercyclical buffer and TRIM continue to tick up, would that be something that could be under review?
Okay. Let me just quickly cover off the business lending, then Andrew can go through the other two questions. You're absolutely right. SME lending was EUR 1.4 billion in the first half. That is 6% down versus the same period last year. What we've seen is just the Well, a couple of good things, in that you've got a growth economy and a lot of businesses are cash generative, and they don't necessarily need to borrow. Also that's combined with some concerns or reticence around the impact of Brexit. We've seen after, I think we had the regular pulse that we do with our business customers, we had sort of a 23-month high. Then in the last month or so, we've seen a dip. That is quite volatile, and that is very responsive to coverage of economic or political scenarios.
We continue to support our customers during those periods. We believe that over time, assuming that there isn't a incredibly hard or disruptive Brexit, that the normal credit formation will continue to grow in SME lending. At the moment, we are seeing a little bit more softness in that confidence, and customers deferring some of their decisions to a bit later in the year.
Okay. Eamonn, just to cover deposits and then capital. I mean, deposits, what you've highlighted is exactly correct. This is the gross rate we pay to our customers, there is, of course, a base rate impact in relation to that. I suppose when you look at the fact of interest rate rises, you see the benefit of that coming through the asset side, as well as a slight tick up in terms of the actual gross rate we pay to our customers. Ultimately, interest rate rises in the U.K., and we'll see what Mr. Carney does later on this week, they're an opportunity for us to widen our margin in the U.K. That'll come through repricing of the asset side and some more modest repricing on the deposit or the liability side.
Our focus, as we said at Investor Day, is to increase and continue to increase the margin in our U.K. business, to support the doubling of our ROTE from low single digit to high single digit. Clearly, that's a lever that we have available to pull. In relation to the capital, as you say, the slide sets out what the trajectory of our capital is. The Pillar 2 guidance is it's not disclosed, Eamonn, in terms of that's, I suppose, in line with the regulator's preference. As we look at our capital target, I think we've been very clear this morning that we continue to expect that in excess of 13% is the appropriate capital level that we would have. That's obviously on a regulatory basis, and we're vaulting over that piece, but on a fully loaded basis as well, by the end of the O-SII period.
Of course, we're at 14.1% today. Even if you pro forma the 70 basis points of TRIM, we're still significantly above our target capital level. As we go through the next number of years, there are pluses and minuses that might happen to the regulatory capital requirements. I mean, countercyclical was introduced this year. Perhaps if the economy continues to develop and grow as we would expect over time, could that increase? We'll have to see what happens in relation to that. I suppose it was only announced two or three weeks ago. It hasn't applied yet, we'll see what happens.
On the other side of that, I think we would have an expectation that when you look at the continued development of the bank and the business over the next number of years, as we continue to see the effectiveness of the hedging on the pension side and less volatility associated with that, when we see continued years of sustainable profit, and I suppose in particular, when we see the ongoing progress that we're making with reducing our NPEs and getting down to that level. We would see an opportunity for some of the regulatory capital requirements in terms of P2G, et cetera, to abate and to come down. When we look at the potential for pluses and potential for minuses over the next number of years, Eamonn, we continue to believe that the in excess of 13% is the appropriate capital target for us out to 2021.
Of course, as the different range of regulators make their decisions on an annual basis, we'll continue to keep focused on that. Right now, when we look out over the period to 2021, we would think that in excess of 13% is indeed the appropriate target.
Thanks, Andrew. We still have no questions on the conference line, we'll stay in the room. Yeah, please.
Morning. Piers Marron, Cantor Fitzgerald. I just have two quick questions. One on loan growth. Given the positive start to the year and a couple of tailwinds into the second half of this year, is there any change to the guidance for net loan growth? Second question, you've touched on a lot of it on Eamonn's question just around deposits. On a kind of a longer term timeframe, how do you view the slowness of the ECB to react to rate rises, and how is that going to affect your deposit strategy going forward?
Okay.
Do you want to deposits?
Yeah, no problem. I mean, look, ultimately the decisions of the ECB are clearly for the ECB, they have their own processes for making those. I think from our perspective, we have to deal with the interest rate environment that's in front of us. I suppose, in that context, rate rises in Eurozone have been kind of mañana, beautifully for a long period, I think our own expectation, I think at Investor Day, we set out very clearly that we don't expect any interest rate rises to happen in Europe until the very back end of 2019, maybe not even until 2020. That's the type of environment that we're expecting. Clearly, if rate rises were to happen more quickly, more at a faster pace over the next couple of years. That'd be a positive from our perspective.
I mean, like all retail and regional and commercial retail and commercial banks, we're leveraged to higher interest rates, and we set out some of the usual sensitivities in the appendix to your slide deck this morning. Rate rises, we will generate more margin and more revenue, that's not something that we're focused on today. What we are focused on is continuing to grow our loan book, which we think will help our margins given the attractiveness of front book margins, and executing the other aspects of our strategic transformation. Certainly from our perspective, when it feeds into the overall margin, we've had a number of years where we've had the very strong and continuing commercial focus we have on the asset pricing side, the very significant work we've taken to reduce our cost of money over the last number of years.
Let's call that kind of phase 1, if you like, of our margin story. If I look at the next phase of our margin story, I think that it's much more likely in the next couple of years to be driven by loan book growth. We've covered some of that. Then beyond that, maybe as you get out into the later stages of our plan, there is the potential for interest rate policy changes to have a positive further tailwind effect to our margin at that time. It's not something that we're factoring in in the next one to two years.
On loans, there's no change to guidance. We set out an investor day, a 20% increase in our total loan book from EUR 76 billion to EUR 90 billion. Today, we're showing in the first six months that's increased by EUR half a billion. We always said that it wouldn't be a sort of flat line. It would be more back-ended as normal credit formation comes through in Ireland. We are exactly where we would have expected to be, and we're confident, subject to obviously the external environment, that that will continue to grow in the latter part of 2018. Partly because there's a seasonality, particularly around Irish mortgages, where you always see more business coming through in the second half. We have some questions on the line. Can we go to the conference call, please?
We will now take our first question from Alastair Ryan with Bank of America. Please go ahead.
Thank you. Good morning. First, just a question on seasonality. Your second half typically a bit faster than your first half on volumes. Can you give us any sense of how that's playing out this year, please? Second, I mean, the regulators dropped a number of things on you that you hadn't expected at the beginning of the year, and we hadn't, the countercyclical buffer and the size of the TRIM. Are you aware of anything else they've got going on at present? I know they picked a countercyclical buffer out of nowhere, but is there anything more on that side? Finally on the U.K., just on mortgages, it's been quite a difficult market in the first quarter, better in the second quarter. Could you give us a sense of volume and margin progress in U.K. mortgages, please? Thank you.
Okay. Thank you very much, Alastair. I'll ask Andrew to go first, the difficult question about regulator.
Look, we choose, Alastair, to work in regulated markets, I guess you guys choose to cover regulated markets, and that comes with a number of features. I mean, like ultimately, I suppose we've set out in the slide deck on page 40, the full range of the different components of our regulatory capital requirements and who sets them and what frequency they set them with, and the sort of ranges and how they might evolve, and that's really to try and sort of help people in terms of the essence of your question. Certainly countercyclical, I think we would have been thinking about the fact that obviously when the U.K. introduced their countercyclical buffer, that might be something that Ireland would look to do. Did it happen a little bit earlier than we thought? It probably did.
Ultimately in thinking about the multi-year period for our strategy, I think it's kind of very much in line with what we expected. TRIM, I think we've been working through the TRIM process for quite a period of time. I think we had done the pre-funding for 50 basis points. It came out at 70, a little higher than we expected. As I said earlier to Diarmaid, I think the key thing for me is that we now have clarity and certainty in relation to what the TRIM impact is on Irish mortgages, and that allows us to switch our attention and focus away from the process and the calculations and much more towards the strategic allocation of capital that we have to our NPEs.
As I said maybe at the start of the answer, we do choose to work in regulated markets, and we have to just learn to adapt and deal with what's happening from that perspective. Certainly as we look at all of the information we have today, our capital guidance is unchanged. It's the excess 13% I spoke to Eamonn about. In terms of our dividend and distribution policy, that's entirely unchanged from what I would have said to you previously. Hopefully that gives you some comfort in terms of the excitement that we've seen over the last number of months.
Okay. Alastair, on seasonality in the Irish market, specifically the mortgage market, I can't give you a firm projection, but typically the second half, particularly around mortgages, and given the dynamic of the Irish mortgage market, we would expect to see more volume coming through in the second half. We have a good pipeline of business. We're looking at ways to better manage that pipeline through better processes and better service to customers. It's not just about price differentiation, but we do have a very competitive offering, but there's opportunities for us to get better at reducing the cost of origination for the shareholder, but also improving the experience for the customer. We'll also be entering the mortgage broker market in the latter part of 2018.
I don't think that's going to have a huge impact in terms of volumes or market share at the entry point, because it would just be towards the end of the year. I've entered a broker market before, you don't want to go too quick at the very beginning. That will be a gradual opening up of a channel, which it's becoming more and more important in the Irish market. The broker market is now about 22, 23% of the total mortgage market in Ireland, and we obviously want to participate in that part of the business. In terms of U.K. and specifically U.K. mortgages, this is a fiercely competitive market. You've got 65 lenders and 5,000 products on the shelf in one shape or form.
Our focus is to reposition away from the mainstream remortgage market, where the competition is particularly intense, and focus on some of the underserved segments, particularly first time buyers. We've looked at later in life offers as well, and some very profitable niches, they're not the focus of the larger scale high street banks. We are strictly controlled in our credit approach to those segments. It's a well-diversified book. I'm confident about the quality. We are in line with industry averages, in terms of lending criteria, prudent, and we're not overly focused in the London market. It's interesting, I've looked at the London market, and given commentary at the moment about London property prices. Our average balance in Greater London overall is about £190,000, and the vast majority, 94%, are at LTVs below 70%, so much lower risk profile.
We continue to compete, and we've seen some decent growth there, but we're very focused in terms of our risk and pricing and not chasing volume.
Thank you.
Thank you.
We will now take our next question from David Lock of Deutsche Bank. Please go ahead.
Morning. Thank you for the presentation. I've got three, please. First one is just coming back on your comment about non-performing loans. I think you said that it will take another 18 to 24 months to get down below the 5%. Just wondered, given that one of your competitors, which has a much higher NPE balance, is targeting the end of 2019, perhaps why you're not expecting to get to the 5% level faster given where you are. I just wondered if you're inferring any kind of slowdown or headwinds in reducing that non-performing loan book over the coming results periods. Second question is on other income. I note Retail Ireland was a bit weaker due to the strategic customer initiatives and solutions that you cite. Just wondered if those initiatives are now complete, or if we should expect some further pressure going forward.
Finally, on the TRIM impact. Appreciate the commentary around your look at potential measures to offset this. I guess one of those measures could be a sale of those NPEs or some kind of transaction. I just wondered if you could give us roughly the income that is associated with your NPE book, as it would help us work out any kind of yield on that NPE book at the moment. Thank you very much.
Okay. Thank you, David. I'll touch on NPEs, that will lead into the TRIM response from Andrew, he'll also cover the other income, particularly from Retail Ireland. On NPEs, we talked about getting to 5% between 18 and 24 months. That's quite conservative. We would expect to be, if we carry on doing what we're doing, and based on our experience and track record to date, and the improvement we've seen in the first half, we're probably getting there within 18 months. That's the back end of 2019. I've said that we are now keeping all options under review, and we wouldn't rule out any approach at this stage, given the additional capital that's being allocated to NPEs. I don't want that to impact our growth and transformation strategy. We are looking actively, everything is on the table.
If we were to use another approach, we could get to the 5% in a quicker period of time.
In terms of the yield on the NPE for the mortgages, I don't think we give quite that disclosure, David, but just maybe to help you. If I look at the mortgage book as a whole, roughly about half of it is in trackers, then the rest is split between fixed and variable. The NPE book, there'd be a slightly higher proportion of trackers in there than in the total book, and a slightly lower proportion of fixed rate mortgages, just because if you think about the origination profile of the mortgages in Ireland. I think, if you look at the proportions that are in those 3 categories from a total book, then slightly more trackers in the NPE book, slightly lower number of fixed rates that are in the NPE book.
To the extent we were to do any transactions, we'd give you that disclosure at that time so that you can model out what that impact might be. In terms of Retail Ireland, certainly, I think we will continue to look at the propositions that we have. I think we had a number of particular items that we wanted to do as we were looking at the use of robotics, but also as part of our preparation for IFRS 9. When we looked at, as we were preparing for IFRS 9, we were looking at a range of impairment triggers that might arise, and that might be if somebody missed a payment on their credit card or if they went over their overdraft limit on an out of course type of way.
Obviously, within the IFRS 9 framework, the whole policy and purpose of IFRS 9 is to have larger provisions and earlier recognition and to de-risk impairment triggers that might come from customers, just from an administrative perspective or just they forgot to make the payment, et cetera. Rather than that creating a trigger for IFRS 9, we used our robotics capability to start enhancing the customer service by basically sending them a text message to say, "Don't forget your bill is due next Friday." Of course, customers are reacting positively to that. They're paying their bills on time. They're not going overdrawn as they might have previously. Of course, that has a short-term impact in terms of the revenue that we might get, the fees that we might get from late payments or from out of course payments.
That cost, and you see that coming through in kind of slightly less fees in the financial results, but that's significantly outweighed by two things. One is the improvement in customer experience and the improvement in customer satisfaction, and in particular as well, the much better IFRS 9 outcomes than we might otherwise have had. As we look at that trade-off, that's something that we thought was something that we would do that every day of the week and twice on Sunday. That was a particular piece, which you do see reflected in this morning's results. That was done as part of the preparation for IFRS 9. It's not that I'm expecting materially more of those types of impacts as we go forward, David.
Thank you. Just to follow up, on TRIM, I just wondered if there was any kind of offset that you might expect in Pillar 2R and Pillar 2G specifically for TRIM. I know you've talked about how those two should come down over time as the NPEs reduce, but is there a component of Pillar 2R and Pillar 2G which would have related to the uncertainty of the TRIM process? Thank you.
Again, maybe I'll take that. Francesca, I don't think it's quite as granular as that, David, in terms of their individual line items. Certainly, if that is the case in Frankfurt, it's not something that's been shared with me. I think within the P2G, I think that's set more taking account of the overall risk profile of the institution. As I said earlier, we would see opportunity with the continuing reduction of NPEs, the continuing demonstration of the effectiveness of the hedging of the pension scheme, together with the progress we're making on transformation and the increasing track record of sustainable profitability that that offers particular opportunity for the P2G to come down. I think on the NPEs and the TRIM effect associated with that, NPEs are going to come down.
The only question is over what's the sort of the sequence or the timeframe in relation to that. That's where there may be some trade-offs and opportunity to accelerate that reduction, and unlock the capital that we have invested, the significant capital we have invested in the mortgage NPEs and doing that more quickly. We'll look at those opportunities as we go forward. I don't think it will impact directly onto the regulatory capital target. Of course, as we get the NPEs down and unlock the capital that's invested in RWAs, well, then of course, that will improve the actual reported capital position that we have.
Great. Thank you very much.
Thank you, David. Let's stay on the conference call for a few more questions.
We will now take our next question from Chris Sheridan from Autonomous. Please go ahead.
Hi there. Thanks for the call and thanks for taking my question. I just wanted to come back on this discussion that's been ongoing on NPEs and the TRIM impact. From the way you're talking about it sounds like quite a lot of the increase in mortgage risk assets as a function of TRIM relates to NPEs specifically. The way you're talking about needing to reduce NPEs or potentially taking more aggressive action to release capital. Sounds like quite a lot of that 70 basis points is related to NPEs specifically. Is that the correct inference? Secondly, if you can reduce NPEs more aggressively, I'm looking at your slide 41, which gives the sort of average risk densities by country. Obviously, Ireland is a huge outlier on the mortgage book.
Your 70 basis points, just quick math suggests you're going to something like a 35%-36% risk density for Irish mortgages. Where would you expect to end up if you could divest of all of your mortgage NPEs? Could we get that lower towards sort of Italy, Portugal type level? Thank you.
Thanks, Chris. One for Andrew.
Okay, no problem. The TRIM process affects a number of things, Chris. It affects NPEs, and it affects the models for expected loss. Okay. Within that, as you say, it impacts both the performing book as well as the non-performing book. It does affect both of those. I would say probably Maybe about 50% or a little under 50% would be on the NPE book. I think the more relevant piece, though, is the actual quantum post-TRIM. Now that we've got certainty and clarity on TRIM, the quantum of capital that we have invested in our NPE book, which is a combination of both the expected loss and the risk-weighted assets, is quite material. I think that's why we're drawing attention to that part of the capital allocation this morning.
We have certainty now, that gives us the opportunity to focus our attention on, are we comfortable with that allocation of capital? Are we comfortable with the return profile of the NPEs for the quite significant amount of capital that we have? To the extent that we have opportunities to optimize that, well, of course we're going to do that. As Francesca said earlier, we have lots of opportunity to invest our capital in terms of supporting our loan growth, in terms of supporting our transformation to make the bank better for our customers, colleagues, stakeholders, of course, to reward our shareholders. Now that we've come to the end of the process of discussion and calculation, et cetera, that does unlock the capacity for us to focus on that. In terms of the risk weighting, certainly it is high.
That does reflect the fact that we still have the high level of NPEs in the mortgage book. As they come down, that will have a positive impact on the average risk weights. As you say, once we apply the updates to the models, the 29% on page 41 will increase. We obviously would expect it to reduce as we bring down those NPEs through whatever strategy is considered to be appropriate. Our expectation is that it will come down closer to the level of some of the other European countries. I don't know, in terms of within those countries, if they have similar TRIM-type exercises that are ongoing. That's not something I'm familiar with. If they have, it could be that the 19%, for example, in Portugal or the 18% in Italy, that they may go up. I don't know.
We'll have to see how that emerges. Certainly, I would expect that with the NPEs at a much lower level than they are on the mortgage book, well, that will have a material reduction in the average risk weights that we see within the portfolio.
Thank you, Chris. Should we stay on the line? Another question from the conference call.
We will now take our next question from Jason Napier from UBS. Please go ahead.
Hi. Thanks for the presentation. I've got three questions, mainly on U.K. Firstly, U.K. new lending, I see that consumer new lending has grown by 80% year-on-year, and it now accounts for 35% of the total new book. I just wonder if this will be the right level of mix we should expect going forward. Secondly, to follow up on the U.K. margin expansion, is it fair to assume the margin at the higher yields actually came from the GBP 2.5 billion in the business book on the back of higher LIBOR? Did you see higher yields on other books as well? Lastly, also very quickly, can you please update on the progress of legacy book rundown in the U.K.? I think you had EUR 5.6 billion at year-end. Thank you.
Okay. Maybe Andrew, start on margin and legacy. I'll talk about the new origination.
Okay. I think in terms of the margin for our U.K. loans, Jason, I think there are two effects there, as you've identified. One is the base effect. One is there is a slight mix effect where we would have an increase in the level of consumer lending, which is clearly at higher yields as compared, if consumer lending is now a slightly higher percentage or mix of our total U.K. business. That will feed through to a slightly higher margin as distinct from, say, mortgages, which are clearly a much lower yield than the personal lending. I think in terms of legacy U.K., I think there are two legacy portfolios that we signaled at the investor day, Jason. The mortgages and also the commercial book. I think the commercial book will reduce over the next number of years.
Effectively, it'll reduce to zero over the next number of years by 2021. That's where I would expect that to go. I think on the mortgage side, though, I think the mortgage, the book that's in our legacy branch, from memory, was about GBP 4.5 billion. I think that's likely to reduce by about 20%-25% over the next number of years. That's what our experience has been in the first half of the year. It's not that we expect it to all to amortize by 2021. The commercial book, which is about EUR 1.1 billion, will go probably to zero, and the mortgage is EUR 4.5 billion. Sorry, I think I may have mentioned sterling. EUR 4.5 billion, it's likely to be down by about 20%-25% over the period to 2021.
Okay. On the growth in the U.K. What we're seeing in the U.K., our growth in the U.K. is entirely consistent with the guidance that we gave in our investor day. Sometimes we see different seasonality and different trends. We're going to see some more seasonality come through in the Irish book, potentially growing more for mortgages. We've got the impact of some uncertainty because of Brexit sentiment in Ireland. That has resulted in some of the growth in the net loan book improvement coming from the U.K. That's predominantly in mortgages and in our unsecured lending. I mean, the unsecured lending is from Northridge, which is a great business. We acquired Marshall Leasing last year. It's a very good platform. We continue to grow from a distribution perspective, as opposed to taking on more credit risk.
It's more about our distribution, our geographical coverage, and exactly the same with personal lending to the AA. That's a key partnership. It's still a relatively new partnership, we've talked in the past about the opportunity to do more and deepen the AA relationship. What we're seeing is an expansion of distribution and improvement in the relationship as opposed to going in a different space on the credit curve.
Thank you.
Thank you.
We will now take our next question from David Wong from Credit Suisse. Please go ahead.
Good morning, all. Thank you for taking my questions. I have three, please. First, on slide 25, I wanted to focus a bit on the corporate banking gross new lending. It's up year-on-year, but I think one of your peers which reported earlier is actually talking about very strong year-on-year growth in the corporate side of the business. I think they're talking about things like real estate finance, commercial real estate finance, which has been driving that. It would be helpful perhaps if you could help us better understand the dynamic which are applying to your corporate book over here, if possible. The next question will be on slide 27. Just a quick question on U.K. mortgage mix. In terms of the gross lending from year end 2017 to H1 2018, it's actually the buy-to-let book that's grown slightly.
I'm just curious to know if that's actually a segment you're also targeting more. The last question is just on slide 31. Just picking up a bit on the deposit costs which we covered earlier on in discussion. You enjoy the period where you've been able to use the deposit cost to offset some of the pressures on earning assets as they come through, do you think that we are actually at a sort of turning point in terms of the overall deposit costs for the group, given that Ireland deposits have now been stable and U.K. and the corporate and treasury deposit costs have actually gone up half-on-half? Many thanks.
Okay. Thank you, David. If I go to page 27, you talked about the U.K. mortgage book changing. If you look at it's a relatively small change from the GBP 7.5 billion to the GBP 7.7 billion in buy-to-let. That isn't a reflection of a fundamental change in strategy. You can see from the average LTVs that we're in a good space there on the BTLs. That isn't a fundamental shift in our appetite or change in our risk appetite. That's absolutely within the disciplined approach that we've taken to date. In terms of corporate banking growth, you can see there on the previous page 25, that property has been strong, and that's very linked to our ambition around being the leading supporter of home building and buying.
We have very strong relationships in Ireland, we are seeing, given the supply and demand gap, property construction coming through, despite it not necessarily being at the level to meet the demand from Irish consumers. You'd see there that also corporate banking U.K., some growth. The big change there, the delta is leverage acquisition finance, which has reduced slightly. That is a reflection of our risk appetite as well. Whenever we look at taking on new lending in any part of our portfolio, we look at risk first, then pricing, then volume. We don't chase deals, we say no if it doesn't necessarily meet our risk appetite.
Okay, David. In terms of the cost of the deposits, slide 31, which sets out the gross rates that we pay to our customers. Clearly in the Irish side at this stage now, we have about EUR 50 billion of deposits, including current accounts and checking accounts at an average cost of about five or six basis points. It doesn't feel to me that there is materially more opportunity in those books to reduce the cost further. We already have a couple of billion of deposits where we're paying negative rates associated with that. I think in terms of, and I suppose those prices are likely to sort of stay at that level until there's a change in the interest rate environment in Europe. I think Mr. Draghi has been pretty clear that that's not likely to happen until the back end of 2019.
It might well be that he doesn't actually get to change rates in his tenure. I think more if you look away from the Eurozone, you look at sterling and you look at dollars, clearly interest rates are going up in the U.S., and you see some of that impact in the corporate and treasury deposit gross rates that we pay to our customer. In the U.K., similarly, rates have already started to tick up. We'll wait and see what Mr. Carney decides to do later on this week. I think the bigger issue, though, is really about if rates go up, we will benefit. What will happen is we may end up paying a little bit more on the deposit side, but we will actually more than offset that and increase that on the asset side of the balance sheet.
Assets will reprice to reflect the higher yield curve and higher interest rates, and it is likely that there will be a lag, or not all of any interest rate policy changes will be passed on the liability side. That's where the margin will expand, and the revenue will expand associated with higher interest rates. We set out on page 30 of the slide deck what our sensitivity is to higher rates. Like all retail and commercial banks, we are quite heavily leveraged towards higher rates. This sensitivity clearly follows the usual. It's a mechanistic piece to give people a sense of what the impact is. Certainly, as rates do start to go up, that is an opportunity for us to increase rates.
How it's likely to manifest is higher yields on the asset side and higher, but less on the deposit and funding side.
We've got a couple more questions on the conference call, then we'll come back into the room. On the line?
We will now take our next question from Aman Rakkar from Barclays. Please go ahead.
Morning, Francesca. Morning, Andrew. It's Aman Rakkar from Barclays. Most of my questions have actually been asked. I've just got one small one, actually. Your liquidity coverage ratio, I've noticed it's gone up 3% half on half, but that's actually already from quite a high number. You're operating at 139%. Just kind of thinking about, are you running with significant surplus liquidity? What do you see as your kind of stable LCR? And if so, kind of why is that? You've talked about liquid assets being a drag on NIM for quite a while now. Just kind of wondering how you kind of think about that going forward.
Sure, Aman. I mean, I think, look, when we look at the liquidity ratios, we're pretty comfortable in terms of where they're at. The LCR is a shorter-term type of metric. It looks out over a period that's really over kind of the next one, two, three months. The net stable funding ratio has a slightly longer duration, and that's at about 127%. I think we're broadly comfortable. When we look at peers across Europe, our ratios that we are running to are not out of line with what we would expect to see from others. Clearly, we're in a very comfortable position from a liquidity perspective. For us, it's about optimizing the mix, the duration, and the cost of that liquidity. I wouldn't be signaling that the ratios are going to change materially up or down in terms of where they're at this current broad level.
Thank you. Thank you, Aman. We have one more question on the line.
We will now take our next question from James Bermond of Societe Generale. Please go ahead.
Hi. Good morning, everyone. I just had a couple on the broker channel, please, in Ireland. I was just wondering if you could tell us when you launch, what proportion of the broker market will you be covering? Where do you think that number's going to be, say, at the end of next year, just so that we can see how this channel will ramp up. In terms of the products, are you going to be offering precisely the same products as you do through your existing channels? Are you going to be varying kind of pricing and credit quality metrics? Thanks.
Okay. Thanks, James. As you can imagine, this is a very competitive market. In terms of our positioning as we enter the broker market, we will announce that in due course when we're good and ready and when it's the right time. The 2 things I can say is, 1, this is about also improving the end-to-end experience in both our interaction with the broker and with the customer. We're bringing across from our U.K. business, which is very focused on intermediary market, which is a very developed market. We're bringing our award-winning broker platform from the U.K. to Ireland, which I think is a great example of the synergy of having both the U.K. and Irish businesses. The other key point is one of cautiousness. I've entered broker markets before. It is a different dynamic. It's 22, 23% of the total market now.
Our participation in that may cause an increase, it may not necessarily. We will go slow at first as we develop relationships with brokers, as we build up our volumes. I would expect any increase in market share to come through in the latter part of 2019. It would be a cautious and considered expansion of what could be a very important channel for us.
Okay. Thank you.
Thank you very much. There are no more questions on the line. I'll just come back into the room. Yes. Darren. We'll go Darren. Gentleman there. Yeah.
Morning. Darren McKinley, Merrion Capital. I wouldn't say a technical question, but just looking at page 22, there's this slide in net interest income and operating profit. Obviously, over the last few years, they've both been trending down. We very much know about your outlook regarding operating costs. I mean, can we expect an improvement sitting here next year on both the net interest income and operating profits?
Great, Darren. Maybe I'll take that question for Francesca. I think certainly, Darren, in terms of the dynamics behind their pre-provision operating profit, their loan book, we already have seen EUR half a billion growth in our loan book, and we'd expect to see that further growth, we've guided that we're going to see further loan book growth in the second half of this year. Obviously we've got our medium term target of growing our loan book by 20% by 2021. Obviously, there's a timing effect that comes through with that in terms of when the assets get put on the balance sheet, that will be positive.
On the net interest margin, we've said that there are tailwinds to our net interest margin in terms of full book pricing being higher than back book pricing, et cetera, as people repay us on the tracker side, for example, in Irish mortgages, as we put on new assets. That will be helpful to our margin, albeit we are mindful of the competitive piece that's there. That's why, again, we've given you very clear guidance in terms of that the margin will increase by one basis point in the second half of the year. On fee income, again, we've a very diverse and sustainable fee income line. We've continued to invest in our wealth and insurance business. We picked up some of that on Investor Day, that's something that we see continued progress on.
On the other obviously big dynamic of the pre-provision profit is our operating expenses. They've come down sort of in the sequential periods by 3%. We're guiding that the second half of this year will be down a bit more, we've said that next year, the 2019 costs will be lower again. I think when you put all that together, I think we would expect to see the operating profit improve from the level that it's at in 2017 and 2018.
Thank you.
Thank you, Darren. Maybe the final question. Steve.
Thanks very much. Stephen Lyons from Davy. Just a couple of questions. Just firstly, on the U.K. credit card outlook, you mentioned at the capital markets day that that was a lending line that was under review. Any developments on that front? Maybe just as a pro forma impact, if you no longer had that business, what might that do from a returns perspective for the U.K.? Secondly, just a nice IFRS 9 question to round it off. If I look at the day one adoption, the provision stock went up in the period, yet it was a surprise to see that the regulatory EL deduction actually also went up. I would have thought that the reverse would have actually happened. How should we actually think about that?
Is that possibly a risk to the provision stock, or is it more a bedding in process that if we look forward, maybe we might see that EL number actually come down? Thank you.
Okay.
Thank you. The U.K. credit cards, we mentioned in the Investor Day that we were doing a strategic review. That strategic review continues. I look forward to giving an update at the right time. If we were not to have that business on our books, we would see an improvement in our ROTE. It is a business that we know is fiercely competitive. It is dominated by 0% balance transfer, and it has a high cost base. Even though we've had success in aspects of that business, we just don't see the opportunity to be ROTE accretive. Andrew, just help me on this number.
0.8%. Just under 1% improvement in ROTE if we were selling the U.K. credit card book at book value.
It's quite a big number, so it's important to clarify. We'll give an update in terms of where we are with that portfolio as soon as we can.
Okay. Maybe to deal with the very straightforward and commercial question, Stephen, on the expected loss. Look, there's two things happening, right? You've got your expected loss, and you've also got the IFRS 9 provisions. As a result of the, you'll have seen that we've had a net impairment gain on the IFRS 9 provisions. Not all of that translates into the expected loss, which is calculated on a regulatory basis. For a set amount of, if the expected loss level is consistent from period to period, if you've got a write-back on the IFRS 9 provisions, then your expected loss deduction, which is a delta to the IFRS 9 provision, will go up, and it's as simple as that. I think the more commercial aspect of that, the key focus there really goes back to the comments I made earlier about mortgages.
We have a very significant amount of capital invested in mortgages that's linked to both the RWAs, but also to the level of expected loss that is calculated using the regulatory calculations. That total quantum of capital is material, and we've signaled that we want to reassess whether the return profile of that is sufficient to support the amount of capital we've allocated to our NP mortgage book, and that's something we'll be keeping a close eye on over the next period of time.
Thanks so much.
Thank you, Stephen. Do we have any more questions in the room? No? If not, I'll bring the session to a close. I just want to thank you all for your time and attention, and really good questions, both in the room and on the line. Andrew, myself, and the team, we all look forward to seeing many of you soon. Thank you very much.
Thank you very much.
Thank you.