Earnings Call: H2 2017

Feb 26, 2018

Good morning, everyone. You are all very welcome to our 2017 annual results presentation. These are my first results as Group CEO of Bank of Ireland. Therefore, before we delve into the results in some detail, I would like to say that I am delighted to lead and to shape the next stage of Bank of Ireland's development. Founded in 1783, Bank of Ireland is one of Europe's oldest financial institutions. As we have always done, we are transforming to meet the needs of our customers. I look forward to speaking with you all as we continue on this journey of transformation over the years ahead. This morning, I will focus on four key items. First, an overview of our 2017 business and financial highlights. Second, my initial impressions since I joined the group. Third, our ambition, purpose, and values, which we have now established. Finally, our strategic priorities for 2018. Andrew Keating, our Group CFO, will then take you through the financial performance for the year. I would like to reference some of our business highlights. I am pleased to report that the group had a strong performance in 2017. Importantly, in what is a pivotal moment for Bank of Ireland, the group is restarting dividends for the first time in 10 years. Bank of Ireland was, for the fourth year in a row, the largest lender to the Irish economy. We grew our market share in residential mortgages in Ireland, and we grew our new residential mortgage lending in the U.K., supported by our strategic partnerships. We are transforming our culture, our technology, and our business models. We are making strategic investments, which will improve the sustainability, efficiency, and competitiveness of our business. We are well-positioned to both support and benefit from the strong economic growth forecast in Ireland, with the U.K. economy also expected to grow. We project loan book growth in 2018, whilst our NIM is expected to be modestly lower than 2017. We have set out our strategic priorities, which I will cover shortly, and we will be hosting an investor day on the 13th of June. Turning now to the financial highlights. The group generated an underlying profit before tax of EUR 1.1 billion in 2017. The net interest margin for the group was 2.29% for 2017, an increase of nine basis points from the previous year. In terms of non-core, the group incurred a charge of EUR 170 million in respect of a tracker mortgage examination. Gross new lending volumes of EUR 14.1 billion were 11% higher year-on-year. Our market share of residential mortgages increased from 25% in 2016 to 27% in 2017, with a strong 29% share in the most recent quarter. We are maintaining strong commercial and risk appetite discipline across all our businesses while we achieve this growth. Our asset quality continues to improve. NPEs reduced over this period by 31% to EUR 6.5 billion and are now about 8% of customer loans. We reduced our impaired loans by 35%, down EUR 2.2 billion, to about 5% of customer loans. Our impairment charge for 2017 was EUR 15 million, down 90% on the previous year. The group generated strong organic capital of 140 basis points during 2017. Our fully loaded CET1 ratio increased to 13.8%, and the volatility in our pension deficit has reduced materially. We expect the IFRS 9 transition to have a modest impact on our capital ratios of approximately 20 basis points. The board's confidence in our capital position and our outlook is reflected in our decision to recommence dividend payments. Our dividend will be 11.5 cent per share, and that's EUR 124 million. Dividends will increase on a prudent and progressive basis, and over time, will build towards a payout ratio of around 50% of sustainable earnings. I joined Bank of Ireland as Group CEO in October of last year, and I wanted to share with you my first impressions of the group. The history and heritage of the bank is striking, with long-established businesses in both Ireland and the U.K. This history and heritage is a strength. We have solid foundations for growth, and these foundations are rooted in our customer franchises, the commitment, drive, and loyalty of our colleagues, and the positive growth expectations for the economies in which we operate. There are, of course, challenges ahead. We must transform our systems, reduce costs, and increase efficiency. Brexit also remains a headwind for both the U.K. and Ireland. However, we are addressing these challenges head-on, and I'm excited about our future prospects. We are transforming our culture, our technology, and our business models to achieve our ambition of being the national champion bank in Ireland with complementary U.K. and selected international diversification. Bank of Ireland has strong businesses operating in attractive and growing markets. We are Ireland's leading retail and commercial bank. We remain the largest lender to the Irish economy. We hold the number 1 or number 2 position in all segments, and we will re-enter the mortgage broker market this year. This will further support the growth of our mortgage business. We have the largest market share in business banking. Bank of Ireland provided over 50% of all new lending to the agricultural sector in Ireland in 2017. We are also Ireland's only bancassurer, and we're well positioned to both support and benefit from ongoing economic growth and demographic change. Our retail U.K. business primarily operates through partnerships with two of the U.K.'s most trusted brands, the Post Office and the AA. Our full-service retail and commercial bank in Northern Ireland is performing well. During 2017, we acquired Marshall Leasing, which complements our well-established motor financing business, Northridge Finance. We continue to be Ireland's number 1 corporate bank. Overall, new lending volumes were up 13% year-on-year to EUR 3.6 billion. This lending included significant funding for housing development in Ireland and support for two out of every three FDI projects into the country. Our international acquisition finance business, which accounts for around 10% of group income, holds a leading position in the mid-market sector and had another very successful year. We generate attractive margins and fee income from this business within a disciplined risk appetite. The economic backdrop in our core markets of Ireland and the U.K. remain supportive. The U.K. economy saw employment gains in 2017, leading to a multi-decade low for unemployment. Notwithstanding Brexit uncertainties, the U.K. economy is expected to grow. Economic growth in Ireland is very strong as consumer spending, construction activity, and exports grow. Additionally, the number of people at work in Ireland nears record levels. Ireland is expected to be the fastest-growing economy in Europe for the fifth year in a row. Critically, credit growth in Ireland for both households and businesses is now turning positive after many years of de-leveraging. Our position as the largest lender to the Irish economy leaves us incredibly well placed to benefit from this credit expansion. Results announcements are, by definition, focused on past performance. However, since I joined the bank in October, we have taken a number of important steps which we believe are critical for the future development of Bank of Ireland. We have defined a new purpose and values for the bank. We have set out our three strategic priorities. I have engaged extensively with each of our businesses and met with many of our colleagues, our customers, and our wider stakeholders. I have personally committed to resolving the tracker issue as quickly as possible, ensuring every impacted customer is compensated appropriately, and we are on track to meet that commitment. I am committed to the successful implementation of our technology investment to replace our core banking platforms. This is a key priority for the group. We have committed to reducing costs in 2018 and further improving our efficiency. I am strengthening our leadership capabilities across the group. We will re-enter the mortgage broker market this year, and we have announced Investor Day in June, where I will expand further on the strategic priorities we have defined, along with our growth plans for the group. Our ambition is to be the national champion bank in Ireland, the Bank of Ireland. For me, national champions have several common attributes. Strong market shares, focused businesses, are drivers of economic growth in their markets, are capital generative with positive potential returns, are typically employers of choice with an aspirational brand, and are seen as consumer champions. In all of these attributes, we can become the national champion bank in Ireland. This is our destination. The route that we are taking is guided by our purpose, and we are already well on the way. It is widely acknowledged that the most purposeful companies in the world are the most successful. Why is that? I believe it is because those who work in purposeful companies understand not only what they do, but why they do it. Since joining the bank, I have launched with my team a new purpose. Our purpose is to enable our customers, our colleagues, and our communities to thrive. Every word of this purpose was selected carefully. To enable someone is to empower them, to give them the ability to do something. Our customers are incredibly important, and without them, we would not have a business. Our colleagues are the lifeblood of our organization, and our communities are fundamental to our business. Communities include our shareholders and our regulators, as well as the places where we live and work. Importantly, our purpose is underpinned by our values to be customer focused in what we do, to work as one group and one team within the bank, to be agile in how we work, and to take accountability. With our ambition, purpose, and values defined, I have set out three strategic priorities to guide all of our work. To transform the bank, to serve customers brilliantly, and to grow sustainable profits. Our first priority is to transform the bank, focusing on our culture, our technology, and our business models. Transforming our culture will build a work environment where colleagues are closer to our customers. Our technology investments will drive efficiency and enable us to meet our customers' expectations in this increasingly digital age. Transforming our business models will simplify our organization, streamline our business, and empower our colleagues. Our second priority is to serve customers brilliantly. Customers are the core of our business, and their expectations, their behaviors, and preferences are changing rapidly. We are transforming the way we serve our customers and putting them at the center of everything we do. Our third priority is to grow sustainable profits. We will achieve this by growing our revenues across diversified income streams, maintaining disciplined commercial pricing and risk appetites, driving efficiencies to transform our cost base, and strategically allocating capital. These strategic priorities, along with the investments we are making, will ensure we develop our businesses to serve our customers brilliantly and deliver attractive, sustainable returns to our shareholders. I look forward to our investor day in June 2018, where I will expand further on our strategic priorities and our growth plans for the group. I am now going to hand you over to Andrew to take you through the financial statements in more detail. Okay. Thank you, Francesca, and good morning, everyone. I am going to start with our strong financial performance in 2017. The group generated an underlying profit before tax of EUR 1.1 billion for the year. Our net interest margin increased by nine basis points to 2.29%. Our asset quality improved significantly during 2017. We reduced our non-performing exposures by 31% to EUR 6.5 billion. They are now down to around 8% of our customer loans. The group's impairment charge, it fell by 90% to just two basis points. Our strong generation of organic capital continues, and our fully loaded ratio increased by 150 basis points to 13.8%. I will now expand on the key components of our underlying profits for the year. Total income was over EUR 3 billion, and that includes net interest income of EUR 2.25 billion. That was slightly lower than the previous year, but that is primarily because of weaker sterling. Fees and other income were EUR 0.8 billion. They arise from diversified business activities, including bancassurance, foreign exchange, and transactional banking fees. In total, those activities, which represent our sustainable business income, amounted to EUR 662 million, an increase of circa 8% on last year. Separately, we had additional gains of EUR 74 million, as well as gains from valuation and other items. Operating expenses were EUR 1.8 billion, and that is up about 3% year on year. Our technology investments to replace our core banking platforms are progressing, and we invested a total of EUR 195 million last year. Of that amount, EUR 111 million was charged directly to the income statement. An ongoing highlight of our performance is the continuing improvement in our asset quality. As a result, our impairment charges for the year were just EUR 15 million, or two basis points. The group separately incurred a non-core charge of EUR 170 million in respect of the tracker mortgage examination review. The group expects that this charge will be sufficient to compensate and redress all of our impacted customers. Turning to net interest margin. The net interest margin for the group was 2.29% last year, and that is an increase of nine basis points. Despite the drag from the low interest rate environment and the impact of excess liquidity, we were able to increase our net interest margin as a result of our strong commercial discipline in the pricing of new lending, the actions we took to lower our deposit costs, particularly in the U.K., and the maturity of the expensive CoCo Bond back in mid 2016. Our margin reduced by eight basis points in the second half of 2017, from 2.32% in the first half to an exit NIM of 2.24%. The factors behind this reduction had less to do with the net margin we earn on our customer-facing activities, where we continue to be commercially disciplined and broadly in line with half one, but more to do with the actions we took to address a number of technical and structural requirements. We issued Tier Two and CRT securities in advance of MREL and TRIM outcomes. We held excess liquidity ahead of the final phase-in of the LCR requirements at the start of this year. We sold certain bonds in September to protect about 10 basis points of capital in advance of the transition to IFRS 9 on the first of January last. Given our ongoing commercial discipline on pricing, we expect the average 2018 NIM to be in line with the exit NIM of 2.24%. Moving to customer lending. New lending last year was EUR 14.1 billion, and that is 11% higher than the previous year on a constant currency basis. An important driver of that increase was the increase in our mortgage lending in Ireland. That was up over 40% year-on-year. Our market share in Irish mortgages increased last year to 27%, and that market share grew in each and every quarter. Following recent regulatory proposals in relation to broker commissions and other payments, we will reenter the mortgage broker market later in 2018, and that will further support the growth of our mortgage business. In the U.K., new lending was GBP 4.6 billion, an increase of 11% versus the previous year, and that was driven primarily by U.K. mortgages. In our corporate business, new lending increased by 13% to EUR 3.6 billion. Total redemptions and repayments were EUR 15 billion in 2017. That includes EUR 1.2 billion from payments we received on impaired loans and from the rundown of our non-core business banking loan book in Great Britain. As Francesca referenced earlier, credit growth in Ireland is now turning positive, and assuming no change in FX rates, we expect our loan book to grow in 2018. Turning to fees and other income, which totaled EUR 801 million in 2017. Business fee income from our banking activities was EUR 662 million, an increase of 8% year-on-year. These fees are diversified and sustainable. They include commissions from our payment activities, foreign exchange income, and from our life and pensions business. Additional gains of EUR 74 million were lower than the previous year, due primarily to the gain on Visa Europe that we made back in 2016. Valuation items on financial instruments resulted in a net gain of EUR 65 million this year. Moving now to operating expenses, which were EUR 1.8 billion in the last 12 months, an increase of 3% compared to 2016. We have continued to maintain our focus on cost management, while at the same time making appropriate investments in our businesses, our infrastructure, and initiatives to further enhance our customer propositions. Total staff costs of EUR 900 million include wage increases of 2.5% as part of our career and reward framework. Other costs of EUR 724 million reflect investments in our businesses, products, processes, and people. We continue to progress our core banking transformation program. This year, we invested a total of EUR 195 million in this program. Of this amount, EUR 111 million, a little over 50%, was charged directly to the income statement. This strategic program will drive long-lasting efficiencies and revenue growth in our business. It is a key enabler in the achievement over the medium term of our cost-income ratio target of less than 50%. As Francesca said earlier, we are taking further actions now to simplify our organization, to improve our efficiency, and to reduce costs. As a consequence, we expect to reduce our operating expenses in 2018. Transforming our business is required for our long-term sustainability and competitiveness, and it is one of our key strategic priorities. The investment in our core banking platforms is a critical enabler of this business transformation, and we continue to strengthen the leadership capabilities on this program. Significant milestones were achieved during 2017, including upgrading certain payment engines and their associated infrastructure, expanding and delivering business value from our enterprise data warehouse, and installing and integrating the hardware and software associated with Temenos. By the end of next quarter, we expect that our modern infrastructure will be largely in place, including Temenos, and by the end of the subsequent quarter, our new payment engines. These will be very important milestones for us and will enable us to commence the testing of this new core infrastructure. The subsequent step will be to start live testing for some initial digital products with friends and family, hopefully by the turn of the year. While this important technology work is ongoing, we are at the same time delivering the digital bank, and significant progress is being made. At this stage, 79% of our customers are digitally active. That is an increase of 15% in the past year. 98% of all interactions with our customers are now being handled via self-service or direct channels. In terms of growth and efficiency ambitions, we are clear that we have the right strategy and the right technology. Turning to asset quality, there are three key messages. We materially reduced the level of NPEs and impaired loans, impairment charges are reducing, and the impact of IFRS 9 is lower than expected. Taking each of these in turn. Last year, we reduced our non-performing exposures by 31%, or EUR 2.9 billion. They now amount to EUR 6.5 billion, which is about 8% of customer loans, compared to 11% at the start of last year. Within that, we reduced our impaired loans by 35%, or EUR 2.2 billion during 2017. Impaired loans are now approximately 5% of total customer loans. Since their reported peak back in June of 2013, we have reduced our impaired loans by 73%. Looking forward, we expect further reductions in 2018 and beyond. The net loan impairment charge for 2017 benefited from impairment reversals, particularly on the Irish mortgage portfolio, and in total, it amounted to EUR 15 million, or 2 basis points. That compares to a charge of EUR 176 million back in 2016. Under the new IFRS 9 accounting framework, and with a likely slower pace of write backs, we expect the impairment charges to trend towards more normalized levels. As a consequence, we expect that our impairment charge for 2018 could be up to circa 20 basis points. IFRS 9 addresses impairment, classification and measurement, and hedge accounting, and it came into effect on the 1st of January last. The impact on our capital ratios of moving to IFRS 9 is lower than expected. After tax, we expect, or an estimate, that the impact will be a reduction of EUR 120 million in shareholders' equity and a reduction of 20 basis points in our CET1 ratio. Substantially, all of that impact relates to the impairment loss allowance on our customer loans. Moving to funding and capital, we have the liquidity and the capital to support our growth and to achieve our strategic objectives. All of our liquidity ratios continue to be robust. We're a deposit-funded institution. Our customer deposits account for 100% of our loans and are sourced predominantly through our retail distribution channels. Our monetary authority borrowings of EUR 5 billion reflect the group's usage of cost-efficient term funding facilities. Our new holding company was established last year, and it's been assigned investment-grade ratings. In September, we issued our inaugural Tier 2 bonds from that holding company, and future senior and junior debt issuance for MREL purposes will be issued from the holding company. Turning to capital, we continue to grow and protect our capital. The increase in our capital ratios to 13.8% at year-end is predominantly driven by our strong organic capital generation of 140 basis points. Of this 140 basis points of capital, we invested 40 basis points in the program to transform our core banking systems, and the dividend payment of 11.5 cent per share amounts to 25 basis points. The group expects that dividends will increase on a prudent and progressive basis, and over time will build towards a payout ratio of around 50% of sustainable earnings. The capital benefits from the credit risk transfer transaction that we executed back in November were 50 basis points. As we noted at the time, that capital ratio benefit could be absorbed following the outcome of the TRIM process expected later in 2018. Separately, there were some RWA methodology changes, which had a positive impact of approximately 25 basis points. As I mentioned earlier, the IFRS 9 transition will have an impact of circa 20 basis points on the 1st of January. Today, we've also updated our capital guidance. The group now expects 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 in July of 2021. This guidance includes meeting applicable regulatory capital requirements, plus an appropriate management buffer. Thank you all very much. I'll now hand back to Francesca to summarize the presentation and give you our outlook for 2018. Thank you, Andrew. In summary, it's been a strong year, and we are continuing to focus on growing our profit sustainably. There are several key takeaways. Gross new lending volumes of EUR 14.1 billion were 11% higher than in 2016. We materially improved our asset quality. Our fully loaded CET1 ratio has increased to 13.8%, and we are recommencing dividend payments to our shareholders for the first time in 10 years. Looking forward, we are well-positioned to benefit from the economic growth in both Ireland and the U.K. We forecast loan growth in 2018, with our net interest margin expected to be modestly lower than 2017. We expect to reduce costs in 2018 and further improve our efficiency. We're committed to the successful implementation of our technology investment to replace our core banking platforms. We see our future development, both for this year and into 2019, in the context of our three strategic priorities: transforming the bank, serving our customers brilliantly, and growing sustainable profits. I look forward to our investor day on the 13th of June, where I'll expand further on our strategic priorities and our growth plans for the group. Andrew and I will now take your questions. As we go to questions, Lisa's got the mic. If you just raise your hands, state your name and your institution, and we'll take questions first from Dublin before we go over to London. Good morning. It's Diarmaid Sheridan from Davy. Firstly, I'd like to welcome you, and I'll do so by asking a couple of questions, if I may. Obviously, you've got significant experience and expertise in the U.K. market, Francesca. I just wonder if you could give us your first impression of the Bank of Ireland business in the U.K. and how you see that business developing in the coming years, please. Secondly, clearly the transformation program is, as you've said, a critical strategic priority for the group. I wonder if you could give us some thoughts around that, specifically around the delivery of it in the coming years. Finally, perhaps one more for Andrew. Obviously, on net interest margin, slight weakness in Q4. I wonder if you could maybe walk us through some of the moving parts, both in Q4 and as we look into 2018. Thank you. Thank you, Diarmaid. I will take the first two and then pass to Andrew on NIM. The U.K., clearly a really important part of our business, and I have been reviewing the performance and potential in all parts of the bank since I arrived. I do not want to prejudge the outcome that we are going to talk about in June in the investor day, but I believe the U.K. is a market I know well, and I believe attractive returns can be achieved. There are three items just to pull out. One about partnership, diversification, but also scale. In terms of partnership, we are very well established in the U.K. We have fantastic relationships with two of the most trusted brands in the U.K., and also a whole network of mortgage intermediaries. It is a fantastic franchise. The quality of those partnerships, and maybe we will look at others, I think is very strong. Diversification. Ireland has historically been a quite cyclical economy because of its openness, and anchoring ourselves to a larger and historically more stable economy, we believe provides diversification and better sustainable returns over the longer term for our investors. The third one is about scale. Even though we are increasing our market share in Ireland and the Irish economy is growing, it is still going to be a smaller market than the U.K. The U.K., just in terms of the scale and the size of the financial services sector, is quite material. I would also flip that around. Our own scale is attractive. I worked, as you know, for many years at one of the very large banks, and we were quite jealous of some of the smaller banks, like Bank of Ireland, that are able to pick and choose which product, which segment, and which channel they want to compete in. We are more nimble and niche, and we can pick and choose where we want to compete. We are not encumbered by a large physical network or requirement to offer all products to all customers. Those three things combined, for me, tell me that there is opportunity for us to optimize and potentially grow our business in the U.K. I feel very committed to the U.K. market. Just going to the second point about core banking. Given the spend levels that Andrew has articulated and the impact that the core banking program and transformation in general is expected to have on our financials, I have spent quite a bit of time looking at this program. As I said, my assessment is the right strategy, the right technology, and I am committed to the program. Core banking links to our broader transformation. It is not surprising, like many well-established incumbent European banks, our technology, in some areas it is over 30 years old, and it is very focused on product, overnight batch processing, and some manual elements, and we need to be more customer focused, straight through, and real time. Transformation in general, including core banking, is necessary. It is critical. But a program of that size does have challenges. These programs are multi-year. They are complex. They are challenging. At times, we have to make trade-offs between the cost of the program, the functionality, and the timing. That's expected. That's normal in a program of this nature. Right now, we're challenging ourselves on how much should we be focusing on the back end to improve efficiency, for example, transactions and processing, as well as the focus on the front end, which is what is visible to the customer. That's a debate we're having, and we'll talk more in June. Overall, good progress is being made. As Andrew said, we've got live proof testing of some products at the end of this year. We will have the functionality of a single customer view internally for all our retail Ireland customers. Progress is on track and we'll talk more in June. Andrew, do you want to do the NIM? Yeah, sure. Diarmuid, as you say, our net interest margin in the second half was about 8 basis points lower than the net interest margin in the first half. We had an exit NIM of about 224. I think in the presentation we outlined the reasons behind that reduction in our net interest margin. I emphasized that the reasons were not really to do with the margin we're generating on our customer-facing activities, i.e., the competitive pressures, et cetera. That wasn't what gave rise to the reduction in NIM. Rather, it was a number of structural transactions that we did back in the second half of last year, linked to the getting ready for MREL and linked to the CRT that we did back in November, et cetera. I suppose I've been clear as well that the guidance for next year, the net interest margin will be in line with that exit NIM of in the region of 224 basis points. If I stand back from our net interest margin and look at what's been happening, clearly over the last four or five or six years, we've had a very significant expansion in our net interest margin. I think probably grown by over 100 basis points in that time period. The key drivers over that time period have been, on the one hand, a very commercial discipline in terms of pricing of the assets, but also then a very significant reduction in the cost of raw materials, the cost of deposits and wholesale funding to Bank of Ireland. What we're seeing now is that our total cost of raw materials now is down a blended average of just under 40 basis points. We're starting to hit towards the end of the opportunity to reduce that further. We've EUR 75 billion in deposits, at that very low level, Diarmuid. If I think about the potential for future NIM expansion, I'm optimistic and positive. The reason I'm positive about that is really linked to balance sheet loan growth. I think that's going to be a very important driver of the development and expansion of our net interest margin from here. As Francesca referenced in her presentation, if you look at the macroeconomic data, the macroeconomic data would point to the fact that credit expansion in Ireland is now turning positive and is expected to move forward. We've confirmed in our presentation this morning that we expect our loan balance sheet to grow in constant currency terms over the course of 2018, and of course, beyond that point as well. Even if I look at our early trading in the last couple of weeks, we've been pleased in terms of the volume of lending that we've seen come through, both on the mortgage side, the business banking side, et cetera. That's been something that's been positive. I'll remind you, Diarmaid, that our front book spreads are higher than our back book spreads. We talked before and continue to talk about the fact that our front book spreads are on average, about 300 basis points higher than the cost of raw materials. Of course, that's positive as we have the EUR 14 billion odd of new lending last year. As the balance sheet starts to grow, well, then that front book spread will continue to add further positive tailwinds to our net interest margin. The timing of that growth in our balance sheet during 2018 is more likely to be in the second half of the year rather than in the first half of the year for seasonal factors we've spoken about before. But in essence, the quicker that the balance sheet grows, and obviously expect that to happen now, the quicker that balance sheet grows, the quicker we will get the benefit of that 300 basis points of positive front book spreads, and therefore the quicker that the margin will start to develop. When I put it all together, I just go back to the guidance, which is in line with our exit NIM of 224. Thank you. Thank you. Owen Callan from Investec. Good morning. I just have three questions, if I may. First of all, obviously you've signaled that you're looking for OpEx to reduce in 2018 versus per year, and obviously that would be a bit of an inflection point versus the strong kind of increase we've seen in recent years for a variety of reasons. I'm just wondering if you could give us some idea of where you're seeing those efficiencies and cost savings likely to arrive, whether it's on the staffing side or technology side or somewhere else. Secondly, on the loan book growth, you've obviously also signaled some constant currency basis that there will be, hopefully, loan book growth this year. I'm just wondering, again, if you could maybe pinpoint where you're seeing the opportunities to grow and maybe where if there is still some lagging elements to that, particularly obviously SME Ireland. Any thoughts on that would be very helpful. Then thirdly, obviously on the dividend, great to see it initiated, and I know you said that 13% fully loaded on regulatory CET1 as a minimum. Given that you're already above that, how should we expect the dividend to progress in the coming years? Obviously, notwithstanding that it's difficult to forecast that fully. Okay. Thanks, Owen. I'll answer the first two on OpEx and loan book, and then Andrew Keating will cover dividends. So in terms of our expenses, I thought it'd be useful just to talk about the context of how they've increased recently and then talk about what we're doing to reduce them. So for context, much of the cost inflation that we've seen in recent years has been driven by, one, the need to meet regulatory requirements. So, spends on IFRS 9, PSD2, BCBS as examples. But the second factor is around the investment that we've made strategically in our people and our propositions and in our infrastructure, which we think is necessary. But stepping back, it is clear, given our cost income ratio, that we do need to improve our efficiency, and I've made the commitment that our 2018 costs will be lower than 2017. We can't simply wait for core banking to deliver to get some of that efficiency from our infrastructure. We need to look at ways to do that in the meantime, while also supporting growth and service of our customers. So there's four things that we're looking at right now. One is around customer journey. So if you look at an end-to-end customer journey, take a mortgage, every time there's an intervention where you've got to stop and print a piece of paper and bring it into your branch, or the individual has to speak to their manager or there's a referral callback. Every step where that happens, it's a nuisance, an annoyance to a customer, but it's a cost for the bank. So we are looking, particularly for mortgages, such an important journey for many of us, looking at those journeys and others to see where we can take out the nuisance factor, but also help reduce cost and efficiency. So customer journeys is one. A second is around our digital bank. We are seeing increasingly desire and appetite for many of our customers to do things more digitally. So we've digitized 250 customer journeys, giving customers more optionality to go online and do things end to end if that suits them, is a key part of improving our efficiency. Third is strategic sourcing. So we're looking at all of our outsourcing arrangements and third parties, and challenging ourselves to make sure that they are optimal. For example, we've had a 50% reduction in contractor numbers in 2017. The last point is about simplifying our organization. This is about having the right people with the right skills in the right place, doing the right job. Just while we look at how we simplify our organization, we have put a recruitment freeze out from the start of this year. That excludes our colleagues in the frontline, so branches, contact centers, and our corporate and business banking RMs, we continue to recruit. We want to grow both our business, but also serve our customers brilliantly. But we are looking at how we can simplify and streamline our own organization. Those are sort of four of the ways that we hope to deliver a reduction in cost. I'm not going to give you a quantum, and it's something that we can cover when we meet in June. Loan book. Just very briefly, we see a big driver of loan book growth, we expect to be the Irish mortgage market. So we're seeing sort of market expectations about a 20% growth in the total market to EUR 9 billion in 2018. We're also seeing, you've got that in the book, the graph that shows household debt going into a net positive in a sustainable way after years of deleveraging. We've really seen that come through in 2017. In the second half of last year, we did start seeing net increase in our mortgage book. SMEs are on an inflection point, and you can see that this is the year that we expect that increase in confidence to take on a bit more debt. It is a cautious sector. This is a sector that has a psychological overhang of the financial crisis. It's a sector that may be more exposed to Brexit and uncertainty, and they may look to wait and see. It is a sector that has benefited from a prosperous economy, and they've used a lot of the cash that's been generated to invest in their growth. But we're having conversations and supporting our customers as we believe they reach that inflection point. I'll pause there and pass over to Andrew on dividend. Okay. Thanks, Francesca. Owen, so look, obviously, it's important for us to start the dividend journey this morning, and we had the announcement of the EUR 0.115 per share, EUR 124 million, in terms of dividend. That comes on the back of a very strong capital print of 13.8% at the year-end on a fully loaded basis. It is our first dividend in 10 years. We were always going to start modestly on that journey. The board will make the decisions from year to year as to what the quantum of dividend. But I think what's important is the board guidance this morning, which is that that dividend is going to increase. It'll increase prudently, but progressively. Over time, it will reach or it'll build towards the target payout ratio of 50% of sustainable earnings. I think when I look at that, yes, we have increased our capital guidance this morning to excess 13%, but as you noted, we are already above that level. The quantum of capital that we are generating, the organic capital that we are generating on a quarterly basis is very strong. I mean, you have seen it yourself over the last number of years where we have been generating capital at a rate of about 35 to 40 basis points. Without getting into profit forecast territory, I would not expect the change of capital generation in the next period to be any different to that level. What are we doing with that capital that we are generating? We are investing in our core banking system, about 40 basis points per annum. There are dividends to come off that as well. Our philosophy around capital generation, Owen, is that that capital belongs to the owners of the company, to the shareholders. We do not have a philosophy of trying to hoard that capital. We have been very clear this morning in terms of our excess 13%. It was very important for us to give the certainty and clarity to the market around that level ahead of our investor day that is upcoming in the middle of June. So we are pleased to have started the dividend. It will build from here. I cannot prejudge what the board will decide from year to year. But the pace of capital generation and the investments that we will be doing, whether it is in core banking, whether it is in growing our balance sheet, which will be a very positive development at the start of this year and obviously continue to build into 2019 and beyond. The capacity for dividend payment will come from that, which will be positive. Lisa, you have a question here. Thanks. Eamonn Hughes from Dublin. From, sorry, from Goodbody. Sorry, welcome to Dublin, I meant to say, Francesca. Thank you. Just in relation to kind of pick up maybe on the capital point there, Andrew, just kind of to get a I know the CET1 is at 13.8, but if there was a little bit of volatility with discount rates, whatever, over the next while, would that be kind of a, it's 13 kind of post-dividend, or would that be on a pre-basis, just to be clear on that from a factual perspective? Maybe just on the volume growth story, you've chatted a lot about Ireland, I suppose mortgage market and SME, just the U.K. wasn't in there in terms of commentary, in terms of net growth. Just to get a sense around that. Your thoughts around as the economy continues to improve, have you budgeted for a pickup in redemptions, maybe within your guidance? Then maybe finally, on the broker side in Ireland, on the mortgage market, any sort of sense as to what that could be a contributor in terms of your, I suppose, your volume aspirations? Okay. Andrew will do capital. I'll cover the other bits on volume in U.K. and mortgage broker. Yeah. Okay. Look, Eamonn, I think the capital print of 13.8 is obviously a very strong print this morning in terms of our capital. Clearly our positive outlook, we'd expect that we will have continued to generate capital at that sort of rate of 35 to 40 basis points per quarter that I referenced to Owen earlier. We have said in our capital guidance that we will be excess 13% on a regulatory basis and on a fully loaded basis at the end of the O-SII phasing period. You know that the O-SII will start to kick in July of 2019, and then it'll take three years to July of 2021 before that's fully in there. That does accommodate, if you like, if the fully loaded ratio was, for whatever reason, to dip below 13%, that's not necessarily something that we expect, but it was the fact that we're starting at such a strong ratio, the fact that we have an IFRS 9 impact that's better than expected. We have done the CRT transaction ahead of the potential for TRIM outcomes later on this year, and that positions us very strongly in relation to that. The decision around dividend, Eamonn, clearly is one for the board that they will look at each year. But, in terms of our guidance, I suppose it is to the essence of your question, I would note that it is 13% regulatory and then 13% fully loaded at the end of the O-SII. Our regulatory capital today is 200 basis points higher than the fully loaded. Fully loaded is 13.8%. Regulatory capital is 15.8%. Clearly, the regulator looks at both ratios, but with a particular focus on the regulatory ratio when thinking about dividend, et cetera. Okay. On the U.K. and volume growth. We anticipate growth in the U.K. Like I said, we are committed to that market. We have got fantastic franchise, great partners. Through the mortgage intermediaries, we would expect sort of volume growth of around 20%. in 2017, we would have seen total new lending go up by 12%, and that is driven primarily by mortgages. In terms of economic prosperity, meaning people will deleverage more, we actually anticipate redemptions to be static. We think that with confidence, people as well as paying off debt, also are likely to take on maybe a little bit more debt in a sustainable way. We have built in, I will just explain our thinking behind that. It aligns to our growth strategy. We have got great momentum in our Irish mortgage business. I have explained market share has gone up. We have got a fantastic fixed rate offer. Nine out of 10 of our customers take the fixed rate approach. It is popular. We have got the scale and the appetite well within strong commercial pricing and risk discipline to keep to grow. For us, with that momentum, and given that we expect the market to grow net for the first time in years, giving the 20% of the market that do take a mortgage through a broker access to Bank of Ireland mortgages is, I think, makes sense in terms of growing our business and getting our product out there. The second thing is, and these were some of the reasons why we did not re-enter before, is positive developments around the Central Credit Register. The bureau information is evolving, but we are looking from an entry point, sort of in the second half of 2018. We think that coupled with our own expertise, proven expertise in underwriting, that feels like the right time. The other element that we previously questioned was the transparency of commission payments between banks and brokers, and whether those were always in the best interest of customers. We feel that is also moving, and Bank of Ireland is actually going one step further and being explicit in the amount of commission that the bank is paying the broker in the offer letter to our mortgage customers. Those things coupled, we think it is the right time to enter and support our growth. I do not know if we may move on to the telephone lines to London. We have got a few callers on the line, and then I can always come back to Dublin. Can we go to the lines, please? Thank you. We have our first person from the queue. David Lock from Deutsche Bank. Please go ahead. Your line is now open. Morning, everyone. Just a very quick one really on capital, following up the questions from Dublin. You are clearly generating a lot of capital, 140 basis points a year. You have guided 40 basis points for the core banking system. That is still 100 basis points of core banking system of underlying capital generation over the coming years. It feels like from what you were saying, Andrew, that you have effectively feel you are pre-funding effectively the IFRS 9 headwind and potential TRIM headwind this year. I just wondered the caution on future capital distribution, really, because even if you pay out 50%, you are clearly going to be building capital very, very fast over the coming years. Just wondering what that capital is going to be used for. I appreciate your targeting returning to growth, but I cannot imagine that is going to consume a lot of that capital in the coming couple of years. Thank you. Okay. Maybe Francesca, I will take that question. Excuse me. David, good morning. Yes. Ultimately, in terms of the way we think about the capital is that we are starting into 2018 from a very strong position. We have pre-dealt with, if you like, the IFRS 9 and our expectations around TRIM. Clearly, I do not have certainty in terms of the TRIM outcomes yet. That is something that will emerge over the course of 2018. But as we looked at that, I suppose that was the philosophy behind doing the CRT transaction back in November. In terms of the capital generation, it is as you said, 35 to 40 basis points a quarter. In terms of the uses of that capital, certainly in core banking, we have guided and continue to guide at an investment level of about 40 basis points per annum. Loan growth clearly is something that we have confirmed is going to start to happen in 2018, and obviously then look to further development and growth in 2019 and onwards. The remaining capital, it does, as I say, belong to the shareholder. That is the philosophy of the management, that is the philosophy of the board. But the board will make that decision on a per annum basis. They have been very clear, in the guidance that we have provided with you this morning, that the dividend will increase. It will increase, as you would expect, on the prudent, but also on a progressive basis. It will build over time towards that payout ratio of 50% of sustainable earnings. I think those comments are what is feeding into to where we are at. I think the strength of our starting position, plus the pace of generation is what is in our minds. Clearly, it is the first time in 10 years since we have paid a dividend, David, and so we are not going to come out of the blocks at 100 miles an hour in the early period. I think that is just really what is kind of feeding into our perspective. Clearly, if our capital ratios were to build beyond what we would expect or what we would need, there is lots of choice open to the board at that time. But that is getting ahead of ourselves in terms of where we are at today. Just one small follow-up, if I may. Risk weightings for new business, I just wondered if you could give a bit of color on the kind of key customer segments, say, U.K. mortgages and Irish mortgages and Irish SME, what your flow risk weighting is and what your stock is. We just get an idea of how much capital you might be using when you are starting to grow the book. Thank you. Yeah, sure. Certainly, David. Again, we give a lot of disclosure on the RWA intensity in our slide deck. I'll just give you a page reference, David, number 48, page 48. You'll see there where we talk about the breakdown of our RWA intensity for the stock, and then we break it down as well for each of the individual asset classes. You'll see some movement year-over-year, particularly around corporate, and that's to do with the impact of the CRT transaction back in November. The second thing I'd say in terms of the disclosure is we've published the Pillar 3 document today as well, and so there's a very significant amount of detail in there that will deal with your technical questions around the RWA intensity for both the flow and for the stock. You'll see all of that detail in those two documents. Thank you very much. Thank you. Thanks, David. Let's take another caller on the line. Thank you. Our next person in the queue is Nick Baker from Goldman Sachs. Please go ahead. Your line is now open. Good morning from my side as well. Two questions from me. The first is really around your volume ambition in Irish mortgages. Should we take it that you are looking to take a meaningfully higher flow share going forward than you have done in the past? Because clearly, if you are at 29% in Q4 and are looking to add further distribution channel to that would imply sort of nudging towards the low 30s. Do you think that is a fair working assumption? That is the first one. Then the second, I would be keen to get your thoughts around the 2018 stress test. I appreciate the results do not come out until later in the year, but just given the progress that the Group has made on NPEs over the past few years and also the updated assumptions, are you optimistic about a better outcome necessarily than last time around? Thank you. Okay. I will respond on our mortgage ambition in Ireland, and Andrew will cover stress test. You are right, our market share has been going up 25%, 27%, and then the last quarter last year, 29%, and we are looking to open up to a new channel later this year. That will be prudent and progressive in the way that we open up that channel as well. I know that our fixed rate strategy is working, that we have been very successful in attracting customers, particularly in the first time buyer market, which is particularly important. I think the fixed rate strategy that we are following is particularly attractive for first time buyers. We are also mindful that a mortgage is, no one buys a mortgage. You buy a property, you move home, and a mortgage is an enabler. It's also, in our role as a national champion bank, we think that just in the psyche of many of our consumers in Ireland, being progressive and responsive to their needs in mortgages is absolutely key. We're number one or number two in all segments in the domestic market. I would like to see our mortgage business grow, but we are going to continue with the same commercial discipline around pricing and risk appetite in achieving any growth. Over to you, Andrew. Okay. Nick, thank you on the EBA stress test. I suppose the way I think about that, because I suppose it's hard for me to predict the outcome of that for Bank of Ireland, much less for the other 42 banks that would be happening around Europe. But I suppose how I do think about that position and that stress test is I look at where we're at today versus where we were at the start of the previous stress test. There are a number of factors that I would point to in relation to that. One is our starting capital position. Our starting capital position, whether on a fully loaded or on a regulatory capital basis, today, we're 250 basis points higher than at the start of the previous stress test. Secondly, on impaired loans. Our impaired loans, today, are EUR 4 billion, so they are about EUR 6 billion lower than the EUR 10 billion we had at the start of impaired loans we had at the start of the previous, 2016 stress test. If I look at the stress test macros, they're probably neutral to more favorable this time in Ireland compared to last time out. U.K., broadly similar other than house price falls. House price falls are more severe this time out, but the average LTV on our resi stock of 62% and the de minimis level of NPEs in our U.K. mortgage book act as relative shields in relation to that. The final point that's on my mind when I think about the EBA stress test is the impact last time out of the static balance sheet assumption. We had, if you remember, kind of the expensive CoCo bond in our balance sheet last time out. We had 2 billion more tracker mortgages. The static balance sheet assumption, I suppose, worked against us a little bit in the sense that it was assumed that we would be replacing that expensive CoCo bond. We would be replacing the 2 billion odd of tracker mortgages at a tracker rate. That's just a feature of the methodology. Clearly the fact that we have neither of those elements in our balance sheet, and particularly the CoCo not on our balance sheet this time out, should be a helpful piece. We'll engage with the EBA in terms of that process. That's something that will go on over the course of 2018. There'll be lots of work to be done at an operational level. Those factors are things that are certainly there in my mind as I think about the entry point into the EBA stress test this year. Great. Thanks. That's very helpful. Can I just ask one follow-up on the mortgage side? Yeah. Within your planning assumption for NII going forward, do you expect a further competitive response on the pricing side from other players in the market as you continue to scale up that volume? Do you think that current pricing levels are pretty much reasonable at this level? Thank you. Thanks, Nick. The mortgage market in Ireland is a competitive one. We've been able to maintain pricing discipline by offering our attractive fixed rate products. There's a cashback element as well that's been differentiating. We will continue to work within our own discipline and risk appetite as we look to grow the book. Pricing is a key element, but also so is process, and we're actually looking at, from an intermediary perspective, we've been in the intermediary mortgage market for years in the U.K. We've got a very good proven end-to-end platform there that we're going to bring over from the U.K. and implement in Ireland. So the speed of decisioning and that journey is also a key differentiator, not just price. But we'll continue to be disciplined, and our fixed rate mortgage strategy is evidently working. Customers are voting with their feet, and it's available to all our customers, both on the front and on the back book. And maybe just to add to that, Francesca. Thanks, Andrew. Sorry, Nick. Again, just to give a little bit of an update in terms of what we're seeing in terms of the mortgage products that we have. We have, as Francesca said, very much a focus for our flow on fixed rates, and they're available to all of our back book customers. In terms of our SVR customers, what we're seeing is that the pace of customers switching out of our back book SVR into our front book fixed rates, that pace continues as we've seen in the past. It's roughly at a rate of about EUR 1.2 billion over the course of the year. That works out at about one in six customers who switch from the back book SVR rate into the front book fixed rate. The other thing we keep an eye on is how many customers actually leave Bank of Ireland out of that back book SVR. The numbers there are much closer to sort of one in 60 or one in 70. Now, of course, I suppose I don't want to lose any customers, but the fact that we're retaining 59 out of 60 or 69 out of 70 customers in Bank of Ireland is something that continues to be a positive piece for us. Thanks, Nick. May we go to the next call? Yeah. Thank you. We'll take our next question over the phone. Chris Cant from Autonomous, please go ahead. Your line is now open. Hi there. Good morning. Thanks for taking my question. I just wanted to return to capital, if I may. I'm just trying to understand your commentary on dividend and capital requirements. If I understood you correctly, you're saying you want to target more than 13% on a transitional basis as a minimum, with 13% fully phased at the end of the O-SII phasing period in 2020, and you're at 15.8% on a transitional basis today. If I take your capital generation of 40 basis points a quarter, I allow for the IT spend of 40 basis points next year. I assume TRIM knocks off 50 basis points, which would consume the entirety of your CRT from the fourth quarter. It looks like you'd be around 16.5% at the end of 2018 pre-dividend, which is obviously a long way north of the more than 13% you're guiding to. It'd be a long way north of 13% on a fully phased basis as well, in all likelihood. I'm just trying to understand why you're not more willing to talk about upping the payout ratio more quickly. I appreciate that you might want to introduce some kind of strategy around ordinary versus special or buybacks, but why can't more capital come back to shareholders? Would the board be willing to consider a special dividend next year if you're ending in the mid-16s on a transitional basis? Okay. Thanks, Chris. I'll take that question. Talk of buybacks and special dividends, I think credibly, Chris, is probably premature for this year. I think given we haven't paid a dividend for 10 years, it's not likely that we're going to be coming out of the blocks at 100 miles an hour, as I said earlier. I'm not going to prejudge the board, but I would be very surprised if we're at 50% payout ratio in 2018, Chris. I think the dividend will build on a prudent basis, but also on a progressive basis building up towards that 50% payout ratio of sustainable earnings. Within that context, if the capital does build, as I said earlier, if the capital does build to a level, then I'm sure the board will take account of that and consider that. As I said, the board's philosophy is clear, which is that the capital does belong to the owners of the company. We've tried to give the market certainty and clarity this morning ahead of our investor day in June, and that's why we increased our capital guidance to excess 13%. It's why we shortened the time period to being at the end of the O-SII in 2021, rather than the end of the phase-in of the other regulatory matters. We are making those adjustments at the same time or at the same moment where we have a very strong capital print, where we have a very positive outlook and confidence in the continued pace of our capital generation. That increase in guidance is happening on the same day that we kickstarted the dividend. As I say, in time, opportunities for buybacks or special dividends, they're certainly out there, but that's not for this or next year. Thank you. From everything you've said, it sounds like you're likely to end the year significantly in excess of 13%. Is that fair? That'd be a first world problem, Chris, I think, if that happens. Right. Thanks. Okay. Thank you, Chris. Let's stay with London. Couple more calls. Thank you. Our next person from the queue is David Wong from Credit Suisse. Please go ahead. Your line is now open. Good morning, all. It's David Wong from Credit Suisse. A couple of questions if I may. Number one on non-performing assets. You had an 8% NPE ratio this year. Do you think you could actually reach a sort of normalized level around 5% by the end of year 2018? If you do, would you start to think about perhaps scaling back the activities of your non-performing loans unit and whatever cost implications that might have? That's my first question. The second question is just to approach the NIM guidance in a different way. Talking about full year 2018 NIM of 2.4, which is broadly flat on Q4 2017, would you consider that as conservative guidance given the sort of positive dynamics in terms of the front back book you have talked about? Within Ireland and the U.K., do you foresee or do you expect, rather, different sort of trends in the NIM for full year 2018, which blends into a steady overall group NIM? I'm sorry, last one. The third question is just on the cost guidance. When you said 2018 cost to be lower than 2017, does that include any FX exchange impact from sterling? Because I would imagine that sterling's running at a slightly stronger rate than it was for the average of 2017. Many thanks. Okay. I'll ask Andrew on the. Actually, the last one we can do quite quickly. That's on 2018 being lower than 2017 is on a constant currency basis. Andrew will answer the first two. Sure. Okay, David, thanks for your question. NPEs obviously very significant further progress in 2018. 31% reduction in NPEs down to 8.3%, down from 11.3 at the start of the year. Obviously, within that, impaired loans at 5%, which is positive. Certainly, we are looking to continue the journey down. We have said that we expect that there will be further progress on NPEs in 2018 across each of the asset classes. Getting to 5% by the end of 2018, that feels perhaps a little quicker than we might be targeting internally. I think we will get to 5%, but I would be thinking more around getting there in that level in around about 2019. One thing I would say is that our colleagues who work in the workout teams have obviously a very strong track record of outperforming their targets. It is one part of the book where we will continue to encourage those colleagues to continue with that track record that they have. I know that they are very focused and continue to be very focused in executing the strategies that have been so successful for us. I think as we continue to make progress, we will all the time look at the allocation of resources across each of the different areas of the bank. I suppose given the caliber of the people and the experience set of those colleagues, what we have found already is that those colleagues transition very well to a range of other senior roles, whether that is underwriting or whether that is new business lending. The skills and experience that they have had in being so successful on the NP reduction makes them very valued colleagues from our perspective. In terms of our NIM guidance, excuse me, for this year, clearly the Irish and U.K. markets are very different. The NIM would be stronger in Ireland for all sorts of obvious reasons than in the U.K., but the dynamics will continue to be what they have been in the past. In the U.K., the mortgages is the one area of our book where the front book spreads are lower than the back book spreads. That is a dynamic that has been playing out in the U.K. market and is likely to continue to play out in the U.K. market during 2018. More generally, in Ireland, the front book spreads are higher than the back book spreads. One of the important factors has been the pay down through normal monthly repayments of the tracker portfolio in Ireland. We have got some disclosure in the book there, which explains that the pace of pay down in the tracker book has continued at our traditional pace. It came down by about EUR 1.2 billion-EUR 1.3 billion over the course of the year. Then, of course, because of the tracker mortgage review, we did adjust back in about EUR 350 million of trackers back into the tracker population following the outcomes of that tracker mortgage review. So net-net, the book dropped by about EUR 800 million-EUR 900 million over the course of the year. If I think about the NIM guidance, 224 is what we are setting out that takes account of all those dynamics. There are one or two technical factors, which we've kind of called out in the book, around the NAMA subordinate bonds, which has an impact of about, a kind of a headwind, if you like, in 2018 of about 2 basis points. There's some detail on slide number 44 if you want to look at that later. Essentially, that's to do with an outcome of IFRS 9. It has no impact on the economics of the bank, but it does impact the reported NIM. The tracker will impact our NIM by 1 basis point as a headwind in 2018. But I suppose the positive dynamics were, on average, the front book spreads are higher than the back book, and the loan book growth over the course of 2018 mean that those couple of technical factors are more than offset, and that's why we're comfortable with our overall NIM guidance, which takes account of all those factors being in line with our exit NIM of 224. Thanks, David. Will we go on to our next question? Thank you. Our next question is from the queue. It's Namita Samtani from Macquarie. Please go ahead. Your line is now open. Good morning. I've got two questions, please. The first question is on capital from a slightly different angle. On the updated capital guidance, the group's expected to maintain over 13% versus previous guidance of over 12%. So what's really changed or come to light that wasn't known when the previous target was set to make the change today? Is it the unknown of TRIM, or is it the increase in the countercyclical buffer in the U.K., or are there any potential further headwinds you see? And the second question is, what percentage of new Irish mortgage lending is sort of first-time buyers versus those borrowers who are remortgaging or topping up? Thank you. Okay. Andrew to do capital. I'll cover on the FTP. Yeah. Thank you very much. Yes, we have increased our capital guidance to excess 13% on both regulatory and fully loaded basis in the time frames that we set out. I think it was important for us. Our objective today was to give clarity and certainty to the market around that long-term capital guidance ahead of the upcoming Investor Day in June. The factors, if I look at the regulatory requirements, our SREP and P2G has been stable last year versus this year. The U.K. have announced a countercyclical buffer. The impact on Bank of Ireland will be about 30 basis points by the end of this year. That's clearly taken into account. We've also looked out to the phasing of the O-SII buffers. They don't start until July of 2019, and it goes on until July of 2021. We've looked at that as well. Those factors have been important. We've also had a look at peer group banks. These are banks which have a similar risk profile and similar national champion ambitions to ourselves. When we look at those, we certainly formed a judgment that excess 13% was the appropriate level to go to. We think it was important to do it on the same day that we're starting our dividend, i.e., starting to pay back capital. We think that's a very clear statement of positive confidence and positive outlook in terms of the continued pace of our organic capital generation. We think that that level is our steady-state capital guidance over the coming years. As I said, if TRIM was to have a different outcome over the course of 2018, that would clearly impact the reported capital ratio, but it would not impact the capital guidance. I think we're comfortable with that. We see this guidance now as being, I suppose, essentially, we've made a move to take account of everything we know about today, everything we anticipate to happen over the coming years, and we see that as being our steady-state guidance ahead of our Investor Day presentation in June. Yeah, and just on first-time buyers. First-time buyers are a really important part of the Irish market. in 2016, they were about 46% of our business, and now they've increased to 49%, and I'd actually expect that to go over half in the year ahead. That's driven by growing economic prosperity, challenges obviously in house prices, the supply and demand mismatch that we cover in the pack, but also population growth and smaller household sizes is leading more people to buy property. Our increase in market share last year, a lot of that was driven by first-time buyers. Our market share increased from 23% for first-time buyers to 26%. Our view is the fixed rate mortgage offering, with the cashback is particularly attractive to people getting their foot on the property ladder. Thank you. I think there's probably one more caller on the line in London. That's the end. Or maybe not. Is there Your phone, Ian Sealey from Citigroup. The line is now open. Good morning. It's Ian Sealey from Citigroup. Two questions, please. Firstly, on the Irish broker mortgage market, could you talk about was there any sort of impact to the economics of that market, whether there's any longer term impact on margins and also potential cost benefits going forward? Also on that market, what sort of mortgage market segments is it focused on? Is it first-time buyers or is there a different part of the market? Second question's on costs. Obviously, 40 basis points to the core banking platform this year. Should we expect something similar for 2018? How should we think about capitalization versus expense to evolve going forward? Just one clarification on total cost, total expenses. When we think about it falling in 2018, is that total expenses including the core banking platform and the regulatory cost? Thank you very much. Do you want to do costs first? Let me do cost first. Just to provide the clarity, so when we talk about operating expenses falling, it's the line that we call operating expenses, which is the EUR 1.8 billion, rather than the total costs of EUR 2 billion. So our focus, we are going to continue to invest in our core banking platform. We do have regulatory levies, et cetera, and they're going to be at broadly similar levels in 2018. So when we talk about the reduction in operating expenses, it's very much in the space of light and heat, salaries, premises costs, et cetera. It's at EUR 1.8 billion level that will drop. Regulatory levies, they were EUR 99 million in 2017, they'll be basically the same level in 2018. On the investment in core banking then, we will be investing in 2018 at broadly similar levels, about 40 basis points of capital. What we've said, and we will continue to say, is that the capital ratio is impacted on the day I write the check or the day we transfer the money. We don't tend to write so many checks anymore. But the capital ratio is impacted on that day. The accounting treatment we've set out is that roughly 50% of that investment will hit the P&L immediately, and roughly 50% will be initially capitalized in the balance sheet and then come back to the P&L through depreciation and amortization charges in future years. So the experience we had in 2017, EUR 195 million of investment, EUR 111, so a little over, I think it's 56%, 57% hit the P&L immediately. That sort of experience I would expect to repeat in 2018. Yeah. On the mortgage, the broker market in Ireland, so it's currently about 20% of total originated mortgages are through brokers now. We would expect that to increase, to rise. And we see customers sometimes liking that level of guidance and advice. It doesn't mean we won't continue to invest in our own owned channels, which we will do, so through our branch network and mortgage advisors. And first time buyer, it's a very important part of the broker market. It gives us optionality as well, and it's not as if we're not changing our approach to pricing as to compete in that market. It is an optionality to build on the momentum of the success that we've had in terms of the year-on-year growth in mortgage lending. Okay. Very useful. Thank you. Thank you. Are there any other questions in the room? Yep, please. Oh, couple. Perfect. Can we just get a microphone to Ed. Thank you. It's John Cronin at Goodbody. John, good morning. Hi. Hi there. Just a couple of questions. One is on the NIM guidance for 2018. Look, a lot of moving parts, particularly some tailwinds in the mix. Noting your comments around the fixed rates or the fixed rate mortgage pricing strategy working, just trying to tease out what that means from an SVR perspective and what kind of compression we could expect to see in that line over the course of 2018. Secondly then, just a broad question in relation to RWA intensity and how your IRB models, how that intensity is likely to evolve on a three-year view in respect of existing stock rather than flow. Thank you. Thank you. Okay. John, thank you for that very straightforward non-technical question on IRB models. Look, ultimately, in terms of 78% of our assets are on an IRB model basis. We set that out in both the Pillar 3 and in the slides. As over time, if I model the dynamics that play in terms of RWA intensity, clearly, if there are going to TRIM effects, et cetera, we've seen the effect of that. That will increase the RWA impact. Clearly, we've had the CRT transaction last year, which obviously reduces the RWA intensity for some of our corporate loans. In terms of the more organic impacts, clearly, we're coming off the back of a very deep recession in Ireland, and clearly, that feeds into the average loss experience, which will mean that the RWA intensities are relatively high when you look at our intensity relative to other continental European countries. Over time, that RWA intensity is likely to reduce as you have more good years feeding into the models. I'm afraid I can't tell you what the impact will be in three years, other than that would be the direction of travel, John. I think on the NIM guidance, as you say, there are some moving parts, and we've taken all those moving parts into account in giving you the NIM guidance over the course of 2018. I think on your specific question around the SVR pricing, John, we have had a very commercial and a very disciplined approach to that pricing strategy over the last number of years. We've been very, very consistent about the investment that we're making in terms of the fixed rate strategy, and the SVR rate has remained unchanged over that last three years or so, where this has been a topic of discussion for us. Today, I'm not anticipating any change with that strategy. The things that we look at is there some sort of change dynamic happening from our customers in the SVR book? I think I made some comments earlier about the fact that one in seven is switching to a cheaper kind of front book price, but one in 70 is leaving the bank. As those customer behaviors continue, well then, that's something that we keep an eye on. The second thing is what's happening in terms of the front book market share, and as Francesca has identified, our front book market share has been growing quarter on quarter through 2017. We are now looking at reentering the broker market later on this year. Again, the feedback we get from our customers is that they really appreciate the fixed rate products. I think there is, particularly where you've got interest rate increases happening in the U.S., people are starting to talk more and more about the potential for interest rates to increase on this side of the Atlantic. I suppose in that context, I think our fixed rate offers give customers a very good value, very attractive proposition for our customers, whether they put all of their mortgage into fixed rate or whether they do some sort of a half-and-half type of structure where half would remain variable or half might go to fixed. Certainly, that strategy that we've had has been successful, both from a customer perspective and also from a bank and a shareholder perspective. We've just got four minutes to go, and there's one more. This is the last question. Lisa, just in the front row. Thank you. Stephen. Hi, Stephen. Thanks very much. Good morning. Just if I could return to asset quality as a topic, you had a very strong reduction in NPEs in the period, so it would be helpful to just understand that better, the various factors at play and their weighted contributions towards that reduction. Then just for our sakes, looking forward in an IFRS 9 environment, at a very low 2 basis points charge in the period on a net basis, it would be useful for us to understand what the new to default charge underlying that would have been. Thanks very much. Thanks. Okay. Maybe let me deal with those, Stephen. Yes, look, NPEs have come down 31% over the course of the last 12 months. We've had reductions in every asset class over the course of the year. We include some disclosure, which will break that down for you on an asset class by asset class. What you'll see is that every asset class is coming down with particular reductions in the investment property and land development exposures over the course of the last 12 months. As we look forward, we would expect that will continue, that sort of a reduction will continue. I mean, the pace of reduction will depend on a range of factors from year to year, but certainly, that's something that the track record we have there has been very positive. I think in terms of IFRS 9 and the impact there, we have benefited from write-backs. You'll see that in the last three or four years on the Irish mortgage portfolio, we've had cumulatively a net reversal. Rather than a net charge, we've had a net reversal cumulatively of about EUR 650 million. There will be some further reversals on the Irish mortgage book as part of the IFRS 9 transition. We'll give you that disclosure in June. Therefore, the pace of those reversals is likely to slow over the course of the next year or two. It won't stop, but they'll continue to expect it to slow. As we look out, that's really what's driving our sense that, look, 2 basis points of a bad debt charge, that's not a sustainable level in terms of where we're at. We think that over the next couple of years, it will trend back towards a more normalized charge, and that could be up to 20 basis points, is how we think about that. Thanks very much. Thank you. Thanks, everyone, for your support of the bank and coming this morning and your inquiring questions. Thank you. The team, Andrew, and I, we look forward to continuing the conversation today and in the coming days and weeks. Thank you very much, everyone. Thank you.