Earnings Call: H1 2017

Jul 28, 2017

Okay. Good morning, everybody. You are all very welcome to our interim results this morning. Over the last six months, we have delivered a very positive performance. This morning, Liam McLoughlin, the Chief Executive of our Retail Ireland division, and myself will take you through the business and financial performance before we move to questions and answers. Last February, at the time of our full year results presentation, we outlined our strategic priorities for the year ahead, and Bank of Ireland continues to deliver against those priorities. We are Ireland's leading bank and the largest lender to the Irish economy. We are growing our market shares in both business banking and mortgages. Our international businesses are performing well, and they provide us with diversification and attractive lending opportunities. We are transforming our businesses, enabled by our investment in technology, and this transformation will ensure our long-term sustainability and competitiveness. Our asset quality continues to improve, and we expect to recommence dividend payments early next year. Turning to our financial performance, we generated an underlying profit of EUR 480 million in the last six months. This strong result was driven by an expansion in our net interest margin, it was up five basis points, tight control of our costs, and lower impairment charges. They are down to 14 basis points. Our balance sheet is also strengthening. Our core loan books grew by EUR 500 million in the last six months, and our asset quality continues to improve. We are generating capital, 70 basis points. Pension volatility is reducing. And we increased our fully loaded capital ratio to 12.5% at June. Liam will now give you some more details on the economic backdrop and the progress in our businesses over the last six months. Thank you, Andrew, and good morning, everyone. The economic backdrop in our core markets of Ireland and the U.K. has been supportive for our businesses. Ireland is set to be the fastest-growing economy in the Euro area for the third year running. The increased number of people in employment, higher consumer spending, and ongoing investment by businesses are all underpinning our Irish franchises. Brexit has clearly generated some risks and uncertainty. However, we are confident in the robustness and flexibility of our diversified business model to deal with headwinds that may arise. We have made conscious decisions to retain and invest in businesses where we can achieve sustainable competitive advantage. We have generated about 70% of our total income from our Irish businesses. We are Ireland's only bancassurer, and the leading personal business and corporate bank. We are in the number one or number two position in all segments of the market. We are the largest lender to the Irish economy, with increased market shares in business banking and residential mortgages while maintaining strong commercial discipline on pricing and risk appetite. Given the strength of our franchise in Ireland and the sustainability of the market structure, we are well-positioned to support and benefit from ongoing Irish economic growth. We have also retained attractive international businesses, supporting a robust, flexible, diversified business model. This diversification gives additional opportunities to manage and deploy our capital and liquidity and allows us to develop, manage, and grow profitable businesses. About 20% of our total income was generated by our U.K. businesses. These businesses in Great Britain are predominantly focused on the consumer sector. They operate primarily via a long-established partnership with the Post Office and our more recent partnership with the AA. These are two of the U.K.'s most trusted brands. About 10% of our total income was generated by our U.S. and European acquisition finance business. This business has an excellent track record through several cycles over the past 20 years and continues to perform strongly. We recognize our customers' preferences in the way they want to bank with us are changing rapidly, and their financial requirements are evolving. In response, we're transforming our businesses to efficiently and sustainably meet these changing expectations, enabled by technology. Last February, we announced a multi-year business transformation investment program. Work is progressing this year to stand up the infrastructure stack to host the Temenos application and complete the design specifications. In addition to this, significant progress has continued to be delivered in the transformation of our business in order to align with and benefit from the new technology investment. At all times, we're focused on looking at ways to make our customers' engagement with us easier and more efficient. We continue to simplify and digitize our customers' solutions and services. For example, over 100 legacy products were retired in the first half of 2017. 400,000 customers transitioned to new solutions with minimal disruption. Every month, about 20 million interactions take place to our mobile app, online banking, ATM, and contact centers. 97% of all customer transactions take place through digital, ATM, or telephone channels. Less than 3% of our customers' total transactions are now conducted over the branch counter. As a result, our branches continue to evolve, and we're adapting their role and services they offer. We're retaining strong branch nationwide presence, but our branches changed into business development hubs, immersed in their local communities, driving and supporting local commerce. We're continuing to invest in our network this year. Staff are moving from behind the counter onto the floor, or where our customers do their business, allowing them to provide personalized financial and banking services. Strategic investments to replace our core banking platform in this digital age is critical, and we look to the future to ensure long-term sustainability and competitiveness. This program is making progress. When implemented, this transformation will deliver powerful customer analytics, integrated digital channels, structural cost efficiencies, support business growth, and provide strategic optionality. Thank you. Now I'll hand back to Andrew to take you to the financial statements in more detail. Thank you, Liam. I'll start with the group's income statement. In the first half of this year, we generated a profit of EUR 480 million, and three key factors underpinned this result. A solid income performance, tight control of our costs, and lower impairment charges. Total income was EUR 1.5 billion, and that reflects our increased net interest margin. Operating expenses were EUR 881 million, and that's broadly in line with last year. An ongoing highlight is the continuing improvement in our asset quality. As a result, our impairment charges were EUR 59 million. That's 40% lower than last year. Turning to our net interest income, which was just under EUR 1.2 billion for the last six months. Two factors are at play here, volume and margin. On the volume side, our average interest earning assets are largely unchanged. On the margin side, we expanded our net interest margin by 5 basis points to 2.32%. 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 and the actions we took to lower deposit costs, particularly in the U.K. Moving to customer lending. Our core loan books are growing by approximately EUR 500 million since December. New lending during the first half was EUR 6.6 billion, and that is broadly in line with last year. In Ireland, our new lending volumes were EUR 3.4 billion. An important driver of that increase was our mortgage lending, which was up over 30% year-on-year. Our market share in mortgages also increased this year to 26%. In the U.K., our lending in 2017 was slightly lower than last year, and that is a direct result of our strong discipline on both pricing and risk. Lending in our corporate business was broadly in line with last year, and the pace of redemptions was consistent with the level that we have seen in recent years at just over EUR 7 billion in the first half. We will continue to maintain that commercial focus on pricing and risk. Turning to fees and other income, which were EUR 369 million in the first half. The fees and other income from our banking activities were EUR 328 million, and they increased this year broadly in line with GDP. These fees are diversified and sustainable, and they include commissions from our life business, fees from our payment activities, and foreign exchange income. Moving to operating expenses, which were EUR 881 million in the last six months. That is broadly in line with last year. We continue to maintain tight control over our costs while investing in our businesses, in our people, and in our infrastructure. Staff costs increased by 1%, and that includes an increase of 2.5% as part of our career and reward framework, which is aligned with our strategic objectives. Levies and regulatory charges were EUR 63 million for the period. We continue, as Liam said, to progress with our core banking transformation program. In the first half of this year, we invested a total of EUR 105 million, of which EUR 55 million, 50%, was charged directly to the income statement. This strategic investment will deliver long-lasting efficiencies, and it will be a critical enabler in the achievement over the medium term of our cost-income ratio target of less than 50%. Turning to asset quality, and there are three key messages. Impaired loans are continuing to reduce, impairment charges are reducing, and we early adopted the EBA's classification of non-performing exposures. Our asset quality continues to improve. Since the reported peak, we have reduced our impaired loans by 65%. During the last six months, we reduced our impaired loans by EUR 800 million, or 13%. Looking forward, we expect to achieve further reductions in the second half of this year and beyond. At the same time, our loan impairment charge was 40% lower than the same period last year at 14 basis points, or EUR 59 million. In the second half, we expect that the charge will be lower again. Finally, the impact on our provisions and capital ratios from that early adoption of the EBA's classification is immaterial. Moving to funding and capital. We have the liquidity and capital to support our growth and achieve our strategic objectives. All of our liquidity ratios continue to be robust. We are primarily a deposit-funded institution. Our customer deposits account for more than 95% of our loans. The rating agencies continue to recognize the progress that the group is making, with recent upgrades from Moody's, Standard & Poor's, and DBRS. The new Holdco was established in the last six months, and it has been assigned investment grade ratings. Future senior and junior debt issuance for MREL purposes will be issued from this Holdco. Turning to capital. We continue to grow and protect capital. The transitional CET1 ratio increased to 14.4% in the first half of this year. The group's fully loaded capital ratio also increased by 20 basis points to 12.5% at June. The increase in our capital ratio is predominantly driven by our strong organic capital generation of 70 basis points. This was offset by the investment in our core banking platform of 20 basis points and an increase in our pension deficit of 15 basis points. In line with the regulatory framework and guidance, we have also made a deduction of 15 basis points for a potential dividend in the first half of next year. While, of course, any dividend is subject to board approval, this deduction of EUR 70 million represents 20% of the sustainable earnings in the first half. Going forward, we expect to maintain our capital ratio in excess of 12%. That includes an appropriate management buffer above minimum regulatory requirements. In summary, it has been a strong first half, and we are well-positioned to deliver on our strategic objectives. We have a diversified business model with strong, proven retail and commercial franchises. In our core Irish market, we are growing our market shares in the key business banking and mortgage sectors. We have an experienced and commercially focused management team with a proven track record of generating and protecting capital. We are making key strategic investments. These will underpin our franchises for the next generation and provide cost efficiencies, ensuring that we deliver attractive and sustainable returns for our shareholders. Thank you all very much. Liam and I will now take your questions. Okay, so what we might do is take a couple of questions in Dublin and then see if there are any questions on the phone. Diarmuid. Thank you, and good morning, and well done on a good set of results. Andrew, maybe coming to the final piece of your presentation around the capital and the decision to introduce the accrual for the dividend, I wonder if you might just go into a little bit more detail around the thought process there, and specifically whether regulatory authorities would need to have been aware of that in advance of you in stating that deduction, if you like. Then as a follow-on to that, just in terms of the 20% level that that was cut at, if you like, is that something that, A, we should expect to see in the second half of the year continuing to accrue through until year-end when obviously your decision will be made? Thank you. Okay, thanks, Diarmuid. The board set out a very clear dividend policy back in February of this year, and we've repeated that policy again this morning. The board, as you say, will make their decision at the end of the year. We do expect to recommence dividend payments in early 2018. Where there is such an expectation, and particularly on the back of the strong results that we announced this morning, Diarmuid, the regulator and the regulatory framework require us to make that deduction, where that dividend is foreseeable. It is at 20% of the first half profits, and therefore, I would expect that EUR 70 million would increase over the course of the second half of this year, in line with the profitability that we will generate at that time. Owen? Good morning. Owen Callan from Investec. Just two quick questions. Firstly, on net interest margin, obviously, a decent increase expansion in NIM on the half year. I'm just wondering what dynamics are kind of supporting that, both in Ireland and the U.K., particularly obviously given the competitive situation in Ireland, but also the U.K. market and where the gain's coming from and where maybe are the path of least resistance going forward. Also in terms of the transformation that you're undertaking, particularly on the retail side and the technology underpinning that, what's the color that you can give us on what you've progressed so far? Also, where can we see further kind of changes happening, particularly on the retail network in terms of scale, in terms of staffing, in terms of the value that the branches can do, what should we expect to see change in the future going forward? Okay. Well, do you want to take the piece on transformation first, Liam, and I'll pick up the NIM then as a second piece. Sure. Well, Owen, I suppose the transformation program is a very fundamental investment and strategic direction the bank has taken. It's a part of a multi-year investment program that we announced last February. At the moment, I suppose from a. It's enabled by technology, and on the technology side, the work at the moment here is very much kind of the heavy lifting around putting in place the hosting solution. Next year, we move into kind of calibrating the Temenos solution that we've chosen as our solution of choice, testing within that kind of area. The work at the moment is very much around transforming our business. We're seeing is a very significant shift in customer behavior around moving towards digital enablement and digital experience. And we're supporting that. At this stage, I think I mentioned 97% of our engagement interactions and transactions with customers are now done through a digital means of one kind or another. There are a number of different channels that we offer to customers in that space. Less than 3% go into our branches. We've taken a position in terms of reposition the branches as being very much that kind of business development hub in the community, with very extensive enterprise program that actually run across our 250 strong footprint. We haven't reduced our branch footprint in the last six years because we see these, our hubs playing a very progressive role in communities, and that will continue. Our enterprise program last year would have been in about 90 of those branches. This year, we've moved 160. That investment in the community, working with all cohorts and community startups, seniors, is actually going very well. We see that program continuing over the next couple of years. Continue to make the customer journey as digital as possible so that when the new technology solution does land, actually, it's as closely aligned. It's very much we kind of see this kind of getting fit for that solution when it's ready and up and running. Just on the net interest margin, Owen, the same three dynamics, I guess, continue to play out in terms of our net interest margin that was spoken about before. There's sort of one negative and two positives. The negative is the drag from the low interest rate environment and the level of liquidity that's in the system at the moment. On the positive side, it's very much the positive margin impact from the level of new lending. We did EUR 6.6 billion of new lending, and the front book margins on our new lending are higher than our back book margins. The second important dynamic, second positive important dynamic is continued reduction in the cost of money, the cost of raw materials for the bank. They're down in the first half of this year, now down to about 41 basis points. We've taken action across all of the deposit portfolios, but I think where we've seen particular strong action taken in the last 12 months is on our U.K. deposit book. The cost of our U.K. deposit book has essentially halved this time versus last year. On the cost of that book, the average cost of that book a year ago was about 125 basis points. The cost of that book this year is down to about 80, 81 basis points. Those three dynamics will continue to play out in relation to our net interest margin, and they contributed to the net five basis points improvement at an overall group level. Eamonn Hughes from Goodbody. Just firstly, maybe just in relation to TRIM, it's obviously topic the last couple of days in terms of comments from some of your peers. I suppose any sort of updated view from yourselves. Noticed RWAs were down in the period, maybe some of that was FX related, so maybe just some comment on TRIM firstly. Secondly, I think, Liam, you mentioned in your intro piece about structural cost efficiencies will be delivered from the new investment program. Is there anything you can elaborate on that, timing, magnitude, anything like that, any color would be helpful. Then finally, maybe just in terms of the credit line, clearly very good performance in H1. You're guiding lower number in H2, and as you said in the piece, just thoughts about maybe even sustainability that into next year as well. Sure. Okay. Maybe just to pick up a couple of those technical points, Eamonn. In terms of RWAs and foreign exchange, I think we've said before that we hedge our capital ratios very, very tightly to exchange rate movements. If I look at, in the first half of this year, our exposure to foreign exchange fluctuations and volatility has been very, very tight. Typically, today, our hedging is run at a 10 percentage point change in the value, typically of sterling or dollars, would not give rise to more than a three to four basis points impact on our capital ratio. So we're very, very tightly hedged from that. I think in terms of the RWAs, really, it's a function of what's happening with the balance sheet in terms of the size and the mix in relation to that. In terms of TRIM that you referenced, I think ultimately that's a process that obviously is ongoing and is expected to continue to be ongoing through this year and into next year. We did take a, what you might call a preemptive action back last December, to increase some of the risk-weighted assets on certain cohorts. We haven't taken any further action in relation to that. I think when we look across Europe, I think one of the things that gives us a relative shield, if you like, is our relatively high risk-weighted asset intensity when you compare us to other European institutions. That's not an absolute guarantee, but it is a relative piece, Eamonn. I think on the credit side, then maybe Liam, you might want to just touch on the transformation program. On the credit side, we have had continuing progress in terms of reducing our level of impaired loans. You see they're down over 65% from peak, and they're down EUR 800 million, 13% in the first half. We do expect that we will continue to see reductions in that level of impaired loans. The solutions and the strategies that we've been adopting and employing, they're the ones that are going to continue because they've such a strong track record of success in that regard. It does mean that the bad debt charge has reduced, as I say, 14 basis points in the first half of this year. We do expect the second half to be lower. I think as we go into next year, I think because of the way we work through our impairments and in terms of the release of the impairment provisions, particularly around mortgages, we've chatted about that before, I think we will have a lower than normalized charge for the next, going into 2018 as well. Eamonn, in relation to structural cost savings, this is very much a kind of a multi-year investment program over a range of four to five years. There are a range of cost savings that have come from this program here, particularly both from an efficiency point of view as well, but also from a technology point of view in terms of run and change costs as we go through the program. The reality is we will dual run in terms of the investment cost for a couple of years, while we're delivering the savings, particularly those that will emerge from the business transformation. I suspect you're going to see 2019, 2020 is the period you're going to see those structural changes coming through. Okay. Maybe we go to London for the next question. I think we have a couple of questions on the call from London. Our first question comes from David Lock, Bank of Ireland. Please go ahead. Hi. I am not from Bank of Ireland, but I am from British Bank. I have three, please. The first one is on your quarter one target. I just wondered if you could kind of clarify or give any more color around the 12% target and your management buffer. Is it fair to assume that given the volatility of the pension, that there is not another buffer, if you like, implicitly on top of that due to the movements we have had in interest rates, which have obviously impacted the pension deficit. I guess what I am trying to get at here is, if we do have a fall in spreads again, it is so volatile quarter on quarter. Is there potentially a higher buffer on top of that 12%? That is the first one. The second one is on costs. I note you had a career and reward framework at 2.5% pay rise, which I think you have talked about before. I just wondered if you could confirm if there is another career and reward framework agreement in place for 2018. The third question is on deposit pricing in the U.K. I note in the appendices, you describe that you have 81 basis points, I think, for the cost of U.K. deposits at the end of, well, for the total first half of 2017. I just wonder what the exit rate was for that, because clearly when we look at the liability costs, it is the U.K. that still stands out as the expensive element. I just wondering how much potential further movement there is downwards on that. Thank you. Okay, great. David, thank you for those questions. Of course, you would always be welcome to come and work for Bank of Ireland if that opportunity ever arose. I suppose in terms of, let me take the capital and the deposit pricing, and then Liam will chat a little bit more on the cost side. On the capital target, we have said that we have our capital target that we expect to maintain above in excess of 12%. That is on a transitional basis and obviously fully loaded as we come through the rest of the phasing period. That is it. There is not any other sort of buffers, if you like, built into that. It does accommodate an appropriate management buffer over the minimum regulatory requirements. On the pension side, David, we have taken a number of actions, even in the last six months as part of our multi-year program of dealing with the pension scheme. There is some material, again, in the back of the appendices around slide 42, 43, which set out some of the impacts of the additional hedging that we have taken. The effect, what that means is that the level of volatility in the pension deficit is reducing, and you can see some of the significant reductions in that at the bottom of that page 43 when you get to it. That again will help us in terms of and we have seen that those hedging actions, they have proven to be effective during the first half of this year. On U.K. deposit pricing, again, we are pleased with the progress that we have made there. Reducing it from directionally 125 basis points to directionally 80 basis points over that last 12-month period. As we have spoken about before, it is typically a 12-month maturity book, and therefore, the exit rate will have been a couple of basis points lower than that. That is something we are going to continue to keep an eye on, and look at opportunities to continue to widen the margin in our U.K. business. Obviously, the interest rate cycle there is some differing views on that at the moment. Regardless of what happens with the interest rate cycle, we will be looking for opportunities to widen the margin in our U.K. business. Maybe on the career and reward framework cost piece, Liam. Sure. Dave, in relation to your cost question, the background to that actually was a negotiated arrangement at the end of 2015 in relation to two years, 2016 and 2017 of 4.75% with our staff, 2.5% as Andrew had indicated earlier, paid in relation to 2017. A new arrangement will be put in place in relation to 2018, and beyond. I suppose very much, while the number is 2.5% in 2017, the 1% increase in staff costs is an indication of the efficiency that is been put into the business in terms of recovering some of that increased cost through productivity and other initiatives under the business transformation program. We are seeing some of those benefits coming through already. Thank you very much. Our next question comes from Alastair Ryan, Bank of America. Thank you. Good morning. On volumes please, slide 29, very helpful. Could you just give us a sense by bucket. Business banking volumes in Ireland were pretty stable year-over-year. That's probably slightly better than the market. Whether you can pick that up, give us a sense of your pipeline if you could please. In mortgages in Ireland, obviously the approvals data is very strong, but not all of those are necessarily translating into drawdowns. Then thirdly, in the U.K., a very dynamic market. Your point well taken on your improving relative cost of funds position, but just whether you're finding the opportunities to lend at good margins there. So whether there's a pick back up in U.K. mortgage volumes ahead. Thank you. Sure, Alastair. I'll take the first two questions there in relation to business volumes in Ireland and mortgages. The number in terms of SME lending in Ireland, as you say, a steady number, a good number of actually EUR 1.5 billion approximately, and it's across a range of sectors. So we're seeing good traction and good progress in sectors such as manufacturing. The PMI factor has been positive for a number of months and quarters at this stage as well. Agrifood has been very positive. We've seen a strong recovery in commodity prices, particularly around dairy, and that's led to a strong recovery and an upside in that space. We've seen other sectors such as hospitality, retail convenience, all perform very strongly. I suppose the one sector where we'll be seeing some concern probably is in the motor sector, driven by the position in relation to currency depreciation from sterling. But the industry SIMI numbers here would indicate new car sales down about 10% half year and half year, and that factor is true to our numbers. So most sectors performing well even in a Brexit context, and we're encouraged, and we're seeing a good pipeline into the second half of the year. If I look at mortgages, if I stand back, look at where we're at, we've seen a 31% growth in our mortgage numbers in the first half of 2017. The market itself is doing very well. The consensus numbers here at the moment here, which we would appreciate would be in the order of a mortgage book in Ireland of EUR 7.5 billion. Our pricing proposition here in fixed rate pricing actually is very attractive, competitive, and we're seeing good engagement. Our market share in H1 up to 26%, 25% in 2016. Encouraged by the activity and again the pipeline positive in that space as well into the second half of the year. Liam, that must be the first time you have ever answered that question without claiming to be the largest lender to the Irish economy. I suppose maybe just in terms of the U.K., switching across to the U.K., I think you know, Alastair, that obviously, the market in the U.K. is 15 times bigger than Ireland, but it is obviously a much more competitive environment and the dynamic over there. That influences, I suppose, our approach to that market. I know we talked last year about in the second half, pulling back a little bit, not from a risk perspective so much, but more from a pricing perspective. In the second half of last year and early into this year, we have been developing a range of new products and propositions that are proving very attractive to our customers, and on which the return dynamics are more attractive, and we are very positive about that. It is across the spectrum of the products that we have. Particularly on the mortgage side, we obviously have the partnerships with the intermediaries as well as with the Post Office in terms of originating those products, particularly some of those attractive new propositions that we are developing. Personal lending is going well for us, and we are pleased with the progress we are making on the personal lending side. I think the one area that we continue to be cautious about is on the credit card space. The competitive dynamic, particularly around balance transfers, is not something that we have a significant appetite for, and our positioning in that particular sector reflects our perspectives on balance transfers, Alastair. Grand. Thank you very much. Our next question comes from Namita Samtani from Macquarie. Good morning. I've got two questions. The first is there any update on IFRS 9, and are there any possible other headwinds to core Tier 1 to come? The second is, you mentioned you've taken the NPE definition now, so what is the non-performing exposures as a percentage of total loans? Thanks. Namita, good morning. Just picking up a couple of those points. IFRS 9, obviously it's coming down the track on the 1st of January next year. Pardon me. On the fully loaded ratio, we'll be immediately impacted effectively in a 24-hour period by IFRS 9. In terms of the quantification of that impact, we're still working through the modeling, et cetera, associated with that. We haven't confirmed a particular number in that space. I think some of the analysts would have a range of between 50 to 75 basis points. We'd obviously hope to be closer to the lower end of that range rather than the upper end of that range, but we still have work to do in terms of the modeling, et cetera. That is really the particular area of focus for us when thinking about the capital demand side, Namita. I think I referenced my comments earlier around the dividend and the regulatory framework, et cetera, in relation to putting aside the 20% of the first half profits. On the NPE definition, we have adopted that. We have adopted that early. We have included a couple of slides to show the reconciliation between the NPLs and the NPEs, and when you look at the various detail tables and the metrics, they have all now been fully aligned and updated to that harmonized EBA definition that will be impacting all of the European banks. At an overall level, the level of NPEs is down at 10% of the advances. That is down from 11.5% a year in December. Within that, the level of impaired loans is now down at sub 7%. So our impaired loans are 6.7% of our balance sheet, and that is down from a level of 7.5% at December. Okay, thanks very much. Our next question comes from Nick Barker from Goldman Sachs. Please go ahead. Yeah, good morning, gents. Two from me, if that's all right. The first was just on your NII sensitivity on slide 26. I know it's been increasing in size on the positive side over time. Is that something you'd expect to continue to see as we roll through and as the NPE stock continues to reduce? Are there any particular hedging dynamics playing through that NII sensitivity that you think is worthwhile calling out? The second question really is just around the dividend guidance, because I appreciate you speaking to a number of around EUR 70 million for the accrual, and you're talking about 20% of sustainable earnings. That kind of implies that you feel that you're taking the current earnings through and seeing most of that as sustainable. But particularly, how do you view the spend on the core banking program and also asset quality, which you just mentioned you think will be below normalized levels in 2018? How do you view those two in the context of sustainable earnings as you're defining them? Thank you. Okay. Maybe let me just take those. I'll just take them in reverse order, Nick, if that's okay. On the 20% of sustainable earnings, as you say, there's very little difference between the reported earnings and what we're seeing as sustainable. We do adjust out the non-core items in relation to that, Nick. Of course, we take off the AT1 coupon from that's payable as well. Within that context then, there is the investment in the core banking. I think we set out when we launched this program publicly back in February, we did say that each year we were going to be investing between 35 and 45 basis points of our capital in that program. We did signal that we felt about 50% of that investment would be charged directly to the income statement, and the other 50% would be capitalized on the balance sheet. Of course, you know, Nick, that it's all 100% deducted from the capital ratio, the day we write the check, essentially. But we are taking that into account, the 50% level that's gone straight to the income statement, which is a number of EUR 55 million in the first half of this year. That has been deducted in arriving at that sustainable earnings calculation for the dividend in the first half of this year. In relation to the interest rate sensitivity, I think essentially that's really a function of the balance sheet at the relevant reporting date. I think we've said for a while that we, as an institution, are clearly leveraged to higher interest rates, and that higher interest rates will be a positive from a Bank of Ireland perspective in terms of the income and reported profits. You see that playing out with the additional disclosures we've set out this morning. Those disclosures clearly focus on the income side. They don't take account of the impact on pension and a range of other matters. They are a calculation, I think, which is in line with what other institutions are doing, which is essentially saying, this is what the impact would be in that sort of parallel shift all happening on one day and assuming that static balance sheet. It's in that space. I don't think it'll change materially from period to period, Nick. Obviously, it will depend on what happens to interest rates, but if the interest rates stay as they are today, I don't think the actual overall quantum of impact will materially change. Understood. Thanks. Can I just come back on the sustainable earnings point? What level of cost of risk are you thinking about when thinking about sustainable learnings? Because, I appreciate clearly it's going to be lumpy, but if it's going to be lower into H2 17 and then lower again in 18, that feels quite a bit below where most people think the through the cycle number would be. Are you saying then that you'd be comfortable building that into the sustainable earnings number? Certainly in terms of the next 6, 12, 18 months, Nick, I think we would expect to be below what a normalized charge would be. Certainly in that time period, I think, we'd be comfortable to have a lower than through the cycle number included in our calculation of sustainable earnings. Great. Thanks a lot. Okay. Next question. Is there another question in London? Next question is from Chris Cant from Autonomous Research. Hi there. Thanks for the call. I just wanted to follow up on the earlier question on TRIM and wondered if I could push you a little bit more. I appreciate you took the RWA top up with full year numbers. One of your domestic peers, and they recently increased their guided capital impact from TRIM. One of your other domestic peers indicated yesterday that they felt their domestic risk density could increase on mortgages, and they were a little bit ahead of where you were in terms of domestic mortgage at year-end as well. I am just curious, are you concerned that you will see additional RWA inflation above and beyond what you saw at full year? Or are you confident with that bit? Thanks. Okay, Chris. Thank you. I think in terms of other institutions that operate in this jurisdiction, I think it is obviously critical that we take account of the risk profile in those institutions as well. We have tried to include a helpful slide to give a comparison of our own risk profile on mortgages, both in terms of the 90-day arrears mortgages, but also in terms of the There is a lot of focus sometimes on the 720-day arrears mortgages. These are the mortgages that are two years or more in arrears. So we have set that out in slide number 35. And I suppose the key message from that slide is that our level of mortgage arrears is somewhere between 25% and 33%, depending on whether you are looking at the owner occupier or buy-to-let market. Which essentially means that while we have work to do in terms of continuing to progress with our customers on resolving those arrears levels, the reality is that for the rest of the industry, they have a challenge that is three to four times bigger than Bank of Ireland. So I think it is important when thinking about the RWAs and the intensity around RWAs to factor in the relative risk profile of the different institutions. I think overall, I think I made the comment earlier that, look, TRIM is an ongoing process. It will go on, we think, through this year on into next year. We did take that preemptive action. We do think our RWA intensity is at the relatively conservative end, notwithstanding that better risk profile that I have spoken about. That offers relative shield rather than an absolute shield. Chris, ultimately it is an ongoing process, and I cannot give you any sort of cast iron guarantees while that process is ongoing. But I think overall, you can get a sense from my tone in terms of how we are feeling about it. Okay. No, that is very helpful. Thank you. Our next question comes from Brajesh Kumar from Société Générale. Thank you, and good morning all. Brajesh Kumar from Société Générale Research. Not from London, from all the way from Bangalore, India. Just to follow up on your comment on Holdco issuance. Any time frame by when we can expect that to happen? In general, I will appreciate any additional color on your issuance plan. Thank you. Okay. Thank you very much. The resolution authorities clearly outlined their preferred resolution strategy for Bank of Ireland, and we're working ahead through that process, and we've set up the Holdco successfully earlier on this year. I think we've confirmed this morning that any relevant senior or junior debt issuance for MREL purposes, which will be the key driver of any issuance, will be taking place from that holding company. We certainly think that the MREL requirements over the next couple of years will be very manageable. We are looking at the timing and start of that program, and that's something that's likely to start over the next 6-12 months, and it's a program that will continue on for a couple of years. Obviously, the timing on any particular issuance will depend on a range of factors, including market appetite, pricing, et cetera. Okay. If you can add, have you internally looked at your MREL requirement? Any number you have? We have looked at the MREL requirements, and we are still waiting for final confirmation of those from the regulatory authorities. We are hoping that will come in the next six months or so. As I say, when we look at what those requirements are, I think they are fairly accessible in terms of the methodology that has been published. Certainly, when you look at that, the level of MREL issuance that we would have over the next couple of years, given the progress that the bank has made, the strong results this morning, the recognition by the rating agencies, we see that program of issuance to be very manageable over that time period. Very helpful. Thank you very much. Our next question comes from David Wong from Credit Suisse. David, good morning. Yes. Good morning, all. It's David Wong from Credit Suisse. I just had one question, just on your net loan growth expectations for 2017. I know that on a constant currency basis, the gross new lending, you cite it as flat year-on-year in the first half. I think, could we maybe talk about both the gross new originations and redemption profile, what you expect for H2 17, please? And perhaps also, maybe to the extent possible heading into 2018. Many thanks. Okay. So maybe in terms of the loan growth, I think redemptions have been running at a fairly consistent pace over the last number of years. It's typically around about EUR 7 billion per half-year period. And that's broadly what we would expect going into the second half of this current year. I would say, obviously, and highlight there are a range of redemptions that I'm sorry, I'm slightly schizophrenic. All customers paying us back is always a good thing. But in terms of the essence of your question, I think there are redemptions that we are focusing on, and they're redemptions in the non-performing loans, non-performing exposures, but also redemptions in the low-yielding tracker book. And our colleagues are working hard at continuing to reduce those portfolios as quickly as possible. In terms of on the asset origination side, in terms of gross new lending, EUR 6.6 billion in the first half. I think we'd like to see that growing in the second half when we look at the economic outlook, the pipeline that we've seen, and the propositions and franchises that we have. I think we would be hopeful of that 6.6 billion growing in the second half of this year. I think we would also have seen consistently that, for example, in certain of the mortgage portfolios, particularly in Ireland, there is a seasonality factor that means that the fourth quarter is typically a heavier quarter for drawdowns with a knock-on consequence on the first quarter. This year, of course, the first quarter is behind us with the fourth quarter ahead. Again, I think that would be a contributing factor to our outlook for a little higher than the 6.6 billion in the second half. Understood. Many thanks. The ultimate- Okay. I think we are done with questions in London. I do not know if there are any further questions in the room here in Dublin. Okay. In that case, I would like to thank you all very much for your support and interest in the bank this morning, and I look forward to engaging with you over the next couple of days and weeks. Thank you all very much.