Morning. Welcome to our 2019 half year results presentation. I'm going to give a short presentation on the progress made so far in 2019. After which, our CFO, Eamonn Crowley, will provide a more detailed review of our financial performance. Then I will be happy to take your questions after that. Perhaps I could now ask you to turn to slide four. I'm pleased to say that business performance so far in 2019 has been strong, in particular in mortgage lending.
We outperformed the market, grew total new lending by over 22% to EUR 713 million, thereby maintaining our market share of circa 15% from the end of 2018. The bank is reporting a profit before tax of EUR 28 million and an underlying profit of EUR 42 million. This represents a better quality of earnings, the ongoing strength of the franchise, and our ability to compete.
Indeed, with most of the legacy issues behind us, management now has a strong foundation on which to deliver profitable growth for shareholders. We have a clear management agenda, a stretching but realistic financial plan, and the emerging capabilities to compete strongly in the Irish retail and SME market.
In spite of the significant headwinds, notably low for longer interest rates, a penal capital regime, and a lack of balance sheet scale, we are confident that we can deliver sustainable profitable growth and increase the intrinsic value of the franchise materially. Let's look at some of the numbers. The bank's net interest margin for the first half of 2019 is 182 basis points, showing an increase of five basis points on half 1 2018.
We report a pro forma CET1 capital ratio of 14.4% on a fully loaded basis, which remains well above both regulatory requirements and the revised management target of circa 13%. Progress on the scale of properties in possession has been strong with a total of 1,400 properties sold over the last 18 months, with 434 sold and/or sale agreed in half 1 2019. NPLs remain at EUR 1.7 billion, equating to an NPL ratio of 10%.
We remain committed to and confident in meeting the mid-single-digit target in the medium term. We are happy to report that Moody's have upgraded the bank's credit rating by two notches to investment grade and maintain their outlook as positive. Indeed, the bank has now received upgrades from Moody's, Standard & Poor's, and DBRS following the announcements of both Projects Glas and Glenbeigh and the bank's 2018 results.
Turning to slide five on financial performance. We have recorded an underlying profit of EUR 42 million, down EUR 31 million or 42% from H1 2018, primarily due to deleveraging of NPLs and the associated loss of income, and the absence of one-off gains from treasury activities reported in 2018. We saw the net interest margin increase by five basis points year -on -year from 177 to 182, driven by active balance sheet management.
Operating expenses, excluding regulatory charges of EUR 145 million, remain broadly in line year on year. However, this performance masks the underlying reduction in operational costs, which were reinvested in the future of the business, including in areas such as digital transformation and in new and redesigned branches. Self-funding investment is the bank's default philosophy. A modest impairment charge of EUR 5 million in H1 2019 compares to a nil charge at June 2018.
The underlying loan book is performing well, reflecting stability of the portfolio and the current macroeconomic environment. In terms of the balance sheet, retail deposits, including current accounts, increased by EUR 100 million. Indeed, current account balances are the highest they have been in more than 10 years. The performing loan book, which stood at EUR 15.2 billion, shows a modest decrease from EUR 15.3 billion at 31 December 2018, where both heightened activity in the mortgage switcher market and the pace of repayments slightly exceeded the flow of new business in the first half of 2019.
We are not making any announcements on mortgage pricing today, but as this is an area that we have been looking at, we plan to make an announcement in this regard shortly, which we think our customers will like. Of course, it would be remiss of me not to reference the tracker mortgage examination of TME.
The TME and enforcement process at PTSB has concluded. 99% of impacted customers have received redress and compensation. We paid a fine of EUR 21 million and have concluded the work. We repeat our apology for what happened. Turning to slide six. We are a really important part of the Irish retail and SME banking landscape, and have proven this by continuing to grow new business across all customer lending segments.
Total new lending grew by 22% in H1-19. Mortgage lending, which represented almost 86% of total new lending, increased by 18% compared to H1-18, where the mortgage market grew only by 11%. This is an impressive performance that shows the strength of the brand, the quality of the bank's propositions, the value of the multi-channel approach, and the passion and commitment of my colleagues to deliver fair customer outcomes. Growth has not been achieved at the expense of credit quality.
Since 2012, we have focused much more on affordability as the key credit risk test as against asset value. For the vintages written since 2012, we have had de minimis defaults and more than acceptable LTV. We have not changed our underwriting criteria and keep a watchful eye on book performance. Whilst one cannot always legislate for a macroeconomic impact such as Brexit or a global financial crisis, we remain diligent and true to old-fashioned banking principles.
The data would suggest we have gained advantage through proposition and service. Today, our mortgage application levels continue to grow despite a slight plateau in the second half of 2018, which was seen across the market. The mortgage market is expected to grow to circa 10%, and at EUR 10 billion even, which provides a positive backdrop for our business.
While the market remains competitive, efficient distribution and disciplined pricing, coupled with a strong intermediary proposition, position us well for the future. Personal term lending grew by 16% year-over-year. The majority of our personal loan applications now originate through digital and voice channels.
We have fully automated our personal term lending journey, such that real-time decisions, document upload, and payout can all be fulfilled digitally, thereby eliminating the need for manual intervention. Our objective is to roll all or some of this automated customer journey across the product range. SME lending was EUR 31 million for the first half of the year. SME lending has now grown by 63% over the last two years, albeit from a low base. We're confident we can build a real market presence in the segments we choose to serve, micro, small, and top-end small. Turning to slide seven.
You can see from this slide that we're seeing positive trends in terms of both customer base and customer activity metrics. Customer satisfaction, measuring the experience customers have for online branch and mobile app transactions, is at number 2 in the market. 80% of customers are very satisfied with their experience on the mobile app.
Net Promoter Score, the degree to which our existing customers recommend us to potential customers, consistently remains within the top two in the market. Customer commitment, tracking the preferred choice for a customer's main banking relationship, remains within the top two in the market. These are all important measures of performance as we work to deliver our vision of being the bank of choice. In 2018 and so far in 2019, we continue to invest in all our channels, including the branch network.
We want our branches to be economically profitable, attractive, state-of-the-art locations for customers to come and discuss their most important banking needs with us. We find many customer journeys start and maybe finish online, but that the face-to-face element remains an integral part of the banking relationship.
What is changing is the role of the branch, not the need for the branch. In simple terms, we will continue to invest in the branch network as long as the economics of doing so remain viable. By way of example, in February 2019, we opened the first AutoCash location in Omni Shopping Centre. This tested the so-called connect format with enhanced digital capabilities and an operating model that educates our customers on all channel options. This format has proven really successful to date.
For example, 100% of cash transactions have been automated or service requests have been completed by the most efficient channel. For example, the processing of SWIFT payments via the Open24 sales and service center, or customer updates via the same center, or in-app facilitation such as through online end-to-end term loans. We're open 50 hours versus the standard 35 hours over a strict paid period, Monday to Saturday.
The same continuous improvement mindset has been applied to the bank's direct banking offer. Where we've improved the efficiency and effectiveness for those who, for example, are required to complete the personal loan process in person. In this regard, customers can now complete and fulfill their loan requirements by phone. We've continued to improve our digital offer to allow customers who want to do more business with us digitally to do so, and we're making significant progress in that regard.
Finally, we've also improved our offering to intermediaries, which remains a very important part of the market. In the first half of 2019, phase I of our mortgage broker portal was launched, which allows intermediaries to track various mortgage applications to payout milestones. This is a differentiating factor and one that strengthens further our relationship with intermediaries. Looking forward, Permanent TSB has a long banking history spanning over 200 years, making us one of Ireland's longest-serving financial services institutions.
Throughout this time, the focus has been on delivering exceptional customer experience and connecting with local communities. That experience over two centuries shapes our culture and influences how we will grow the bank profitably over time. We have a really clear view of the future. Our governing objective is to maximize sustainable shareholder value. Our vision is to be the bank of choice.
Indeed, we are crystal clear what that means for each of our key stakeholder groups, namely capital or shareholders, customers, colleagues, communities, and compliance or regulators. Collectively, we refer to the stakeholder group as the five Cs. Our ambitions are described in a focused and succinct manner. The bank of choice for our capital base. We provide sustainable growth and predictable economic profit for our shareholders.
The bank of choice for our customer base. We deliver personal customer experiences and fair customer outcomes that quite simply set us apart. The bank of choice for our colleagues. We give everyone the opportunity to be the very best they can be. The bank of choice for our compliance obligations with regulators. We embrace, commit to, and deliver our regulatory obligations. The bank of choice for our community. We support the community by having a positive and meaningful impact.
We believe that the bank of choice vision can be delivered by leveraging the structural advantage, core competencies, and strategic assets we hold. Namely, we have a focused retail and SME bank in the Republic of Ireland. We have a straightforward operating model. We have a dedicated and professional management team. We have technology infrastructure that is smaller and less complicated than our peers, with renovation and enhancement that can be delivered in a modular fashion rather than through a total rebuild.
Most importantly, we have proven expertise to deliver transformation. For example, restructuring our commitments, the ReIPF, Network 2020, projects Glas and Glenbeigh, and digital transformation to name but a few. We have a clear management model. We undertake an annual rolling full-year fact-based and alternatives-driven strategic and financial planning process.
We know that this process delivers the right agenda, the right financial plan, and the right performance priorities. We'll complete the annual cycle shortly, but it's a reasonable hypothesis to say the priorities will be to drive digital transformation, to grow quality earnings, to focus relentlessly on efficiency and effectiveness, as this is the key battleground in the low for longer interest rate environment.
To deliver fair customer outcomes and to embed a high-performance culture. As I said, the performance priorities are dynamic and will continue to evolve as the Irish retail and SME banking environment continues to change. The great news for us as a management team is that we're moving further away from the work of repairing the banking and spending more and more of our time and effort in growing the organization profitably.
As an example of the agenda and a strategic performance priority, if we turn to slide 10, I'll give you some more detail on progress being made in relation to driving digital transformation. We've spent the last 12 months developing the bank's strategy for digital transformation. The work has been led by the chief technology officer with support from both in-house and external subject matter experts. The work's been tested against external benchmarks and the bank's decision rules.
We're now firmly in execution mode, we'll provide progress updates at future reporting cycles. The digital transformation program is built around four delivery pillars: customer journey and experience, technological infrastructure, ways of working, and fintech partnerships. Each delivery pillar has an outcome-focused execution plan that's tracked rigorously for both milestone or financial commitments whilst retaining the right to pivot as new facts or learnings are uncovered.
We think we're in a really good place. Of course, the core owner of the work is to transform the way we serve our customers. We'll do that by delivering a better service at a lower cost, transforming technology platforms to deliver a digital-first omni-channel customer experience. Understanding customer needs more effectively by having a single view of each customer across all our systems, and by having a safer, more secure infrastructure as the need for cybersecurity continues to increase.
Whilst all of this may seem a noble aspiration, we'd like to give you confidence that the work has started and that we are building digital momentum. Please turn to slide 11. Slide 11 gives a pretty good snapshot of the digital momentum we have built so far this year.
310,000 active customers used our mobile app, up 23% on full year 2018, with over 16,000 personal loans being applied for through our app. More than 600,000 customers used the app and/or the desktop in H1 2019, with 27 million successful customer account logins to the app in the first half of the year. 45,000 app travel notes were added to customer accounts, thereby reducing inbound and outbound call volumes in Open24.
100,000 knowledge base and automated web chat service customer responses were provided. We got further enhancements in the pipeline this year. For example, we are planning to launch both credit card and overdraft end-to-end application in-app in H2 2019. To conclude, I'd like to summarize the satisfactory progress that we're making against our performance priorities.
We are delivering on our promises, recognizing that we must overcome significant headwinds to build a sustainable bank. However, I can say with confidence that the foundations are strong. We've grown our total new lending by over 22%. We've maintained mortgage market share at circa 15%. We've focused on cost management by delivering cost-saving initiatives required in order to invest in the business.
We've a capital base that is comfortably above both management and regulatory minimum requirement. We've an organizational culture that is focused on rebuilding trust with customers and delivering profitable growth. We've a digital transformation program that's grounded in fact, clearly governed, and ambitious in its delivery aspiration.
We've a clear plan to compete for talent by providing a modern working environment. All in all, it's been a productive first half to 2019. We're in a good place recognizing the headwinds we have and the challenges that dynamic change will always bring. As they say, we will overcome. I will now hand you over to Eamonn.
Thank you, Jeremy. Good morning, everyone. I will discuss the financial performance in detail. First, we will just turn to slide 14. The Irish economy is forecast to grow at 5% in 2019 and continues to be one of the fastest growing economies in Europe. The economic fundamentals underpinning the growth are very strong, with consumer spending continuing to grow around 3%, which is a key positive.
The labor market is also showing very positive signs with employment growing by 3%, leading to an expected reduction in the unemployment rate of 4.7% in 2019. This is the lowest level we've seen since 2005. When you look at the housing market, the picture is also very positive in that the mortgage market, having grown to EUR 8.7 billion last year, is expected to increase by 13% to over EUR 9.8 billion.
Whilst the housing market has continued to grow at a pace, of course, that has been somewhat subdued, particularly with housing supply for both new and secondhand properties, it still remains that mortgage drawdowns in Ireland will reach around EUR 10 billion in 2019. While Brexit uncertainties continue to remain, our business is not directly impacted.
However, no deal Brexit would likely have a negative impact on the Irish economy and would, in time, impact the bank's business. Let me just turn to the income statement on slide 15. The key message I want to convey today is that we continue to rebuild the bank's underlying profitability, and this has been outlined in some detail as well by Jeremy. I'd like you to focus on the profit before exceptional items and tax of EUR 42 million, which has decreased by 42% or EUR 31 million year-on-year.
However, any comparison with the first half of 2018 should take into account that we have a smaller balance sheet post NPL deleveraging. We had the benefit of some material one-off Treasury income in the first half of 2018. Net interest income has reduced by 6%. This was driven by lower income on NPLs of EUR 26 million, lower income from Treasury assets of about EUR 6 billion. That's due to the natural maturity of some high-yielding Treasury assets off our balance sheet.
This has been offset by significant progress on lowering our funding costs, where we lowered our funding costs by EUR 18 million year-on-year. We've also increased interest income from our performing loan book by EUR 5 million in the same period. If we look at net of other income, it's EUR 12 million.
This primarily relates to gains on the disposal of properties and possession, together with some movement on Treasury instruments. The prior year amount, as I mentioned, which was EUR 22 million, was influenced by EUR 25 million of gains related to the sale of Treasury assets and the closure of a derivative position in the first half of 2018.
Operating expenses were broadly flat. We'll outline the makeup of operating expenses in a later slide. There's a modest impairment charge of EUR 5 million. This reflects the fact that the underlying loan book is performing well and is reflecting the stability of both the portfolio and the current macroeconomic environment. Exceptional items in the first half relate to the restructuring and other costs of EUR 12 million, and EUR 3 million relating to the tracker mortgage examination fine.
The bank paid a fine of EUR 21 million during the first half, but we had provided for this in prior years, and this led to a net charge of EUR 3 million in the current period. If we now turn to slide 16, we can look at the net interest margin and net interest income in more detail. Net lending income, which is performing loan income less deposit costs, grew by 8% year-over-year.
Income from the performing loan book increased by 3%, and as I mentioned, this equated to EUR 5 million. While this amount is small, it does show that we continue to grow good quality interest income in our P&L. The net interest margin was 182 basis points, and that's a five basis points increase versus the reported number in 2018, and was in line with our expectations.
The average yield is at 205 basis points, and this is a seven basis points reduction when compared to last year. This is primarily as a result of lower yields on legacy treasury assets, i.e., the maturity of high-yielding Treasury bonds, and also the provision of reduced fixed rates for mortgage customers as we compete in the market.
We continue to actively manage the cost of funds, with the half year costs coming in at 27 basis points, and this is a 10 basis points reduction versus the same period of 2018. This was achieved through a range of funding actions, including retail, corporate, and institutional deposit rate management. We should expect to see some further reductions in the second half of the year. Overall, we expect the net interest margin to remain stable through the second half of 2019.
Let's now turn to the loan book slide, which is slide 17. Our performing loan book was EUR 15.2 billion at the end of June. This is broadly in line with the loan book at the end of 2018. The performing loan book is broken into home loans, which represents EUR 11.4 billion, which is 75% of our loan book. Buy-to-let loans of EUR 3.3 billion, which is 22%. Other portfolios making up around half a billion EUR, which is 3% of our loan book. The performing mortgage book totals EUR 14.7 billion. The average yield on this loan book is 2.33%, which has been relatively stable over the past number of years.
You can see from the top right-hand side of the slide that in the first half of 2019, the average yield on new mortgage lending was over 3% at 3.02%, which is a reduction of 19 basis points versus the first half. This reduction is in line with market trends and continues to be in line with our desire to remain competitive, but also maintaining price discipline on this book.
We lent approximately EUR 700 million in the first half, this represented a 22% increase year-over-year. As mentioned by Jeremy, we have maintained our mortgage market share around 15%, a positive trend, this is a level that we expect to continue throughout the remainder of the year.
If we take a closer look at the total loan book, and this is EUR 16.9 billion, and obviously includes NPLs, EUR 9.6 billion of this is tracker mortgages, and they yield 1.28%. The tracker book is now 57% of the total loan book, and this is reduced from 62% versus the same at the end of June 2018. You can see we're starting to change the proportion of tracker mortgages in our book, and it's on a downward trajectory.
We've EUR 4.2 billion of variable rate loans, and they yield 4.16%. We have EUR 2.7 billion of fixed rate loans yielding 3.28%, and then we've around EUR 400 million of other loans, and they yield around 10%. 80% of the mortgage loan book is paying capital interest. Let's now turn to the operating expenses slide in slide 18.
Our operating expenses remain broadly flat year-on-year, and as mentioned by Jeremy, our desire here is that we will invest in the business while keeping our operation costs flat. Total operating expenses, and this is before regulatory charges, was EUR 145 million, and this increased slightly by EUR 2 million year-on-year, which was in line with expectations.
However, for the remainder of the year, we expect operating costs to come in flat versus 2018. The operating cost increase was due to wage inflation of just over EUR 2 million and the impact of ongoing investment in business and technology programs, and that equated to over EUR 6 million of an investment in the first half. We actually funded this by way of payroll and other savings of EUR 6 million to come in relatively flat versus last year.
The impact of the introduction of IFRS 16 reduced other costs by EUR 4 million with an equal and opposite increase in depreciation and amortization. As mentioned, we will continue to focus on cost management. We expect our operating costs to remain flat as we further invest over the coming years. No periods of reporting, I should say. On a like-for-like basis, our cost income ratio when you exclude registry costs was 69%.
As mentioned earlier, last year was heavily influenced by one-off income on the top line. Let's now turn to our non-performing loan book. As we know here, significant progress was made during 2018 as we reduced the non-performing loan book from EUR 5.3 billion down to its current level of EUR 1.7 billion. That's the lowest among the five banks that are looking at NPLs by a distance, actually.
As you know, we've achieved this balance sheet transformation by executing two portfolio sales during the second half of last year. We also ran a voluntary surrender campaign for isolate customers. We continue to work with our customers to deliver organic recoveries and cures. Looking forward, and again, as mentioned by Jeremy, we are committed to meeting a mid-single digit NPL ratio in the medium term, and we estimate that around EUR 300 million of NPLs in the current stack are on a path to cure in the next 18 months.
We will consider all options in connection with reducing the NPL balance, including loan sales, securitizations, social solutions such as Mortgage to Rent, and our aim is to reduce our NPL position while at the same time protecting our capital position. As you will see from the table on the bottom left-hand side of the slide, our asset quality and level of provision coverage remains at an appropriate level, with an expected credit loss of EUR 1.1 billion on EUR 16.9 billion of assets.
We have an overall 6% coverage rate, and we believe that is appropriate. If we move to slide 20, we can demonstrate the progress we've made in properties and possession. This is an area where we've been extremely active and we've made very good progress in the first half of 2019. At the end of December 2018, we had just over 1,000 or nearly 1,200 properties. In the first six months, we took possession of 123 properties. We've either sold or sale agreed 434, leaving a stock of 882 at the end of June. Alone in July to date, we've sold 153 of those.
There's another circuit 200 properties for sale as well. We can see in the next one to two, three months those properties will sell as well. We plan to exit the majority of these properties over the next six to 12 months. The numbers themselves speak to the way of the progress we're making and the impact they're having also on our P&L. If we move now to slide 21, our funding position remains strong.
Our strategy, as outlined in previous presentations, continues to fund our balance sheet with customer deposits while also keeping other funding lines open and accessible. That's where we are at this moment. All funding and liquidity metrics remain strong and are well above regulatory requirements.
We are now over 95% funded by customer deposits, which as mentioned by Jeremy, our current account balances, for instance, have increased significantly and they're at the highest level in 10 years. That in turn highlights the loyalty and connection and activity that we have with our current account base. Our indicative MREL target has been set at 25.8%. We believe the total issuance will be in the region of 1 billion, which we have to issue before the 1st of January 2021.
We will start the process in September, October, and that depends on market conditions. We intend then to come to the market next year with two further issuances. Our regulatory capital ratios remain comfortably above the minimum requirements. Our core equity Tier 1 ratio on a fully loaded basis is 14.4%, and it's increased by 40 basis points from the December 2018 level.
Our core equity tier 1 ratio on a transitional basis is 16.8%, which represents a slight reduction versus December. This is based on transitional rules, the reduction is a normal part of the journey towards the fully loaded ratio. If you look at our core equity tier 1 minimum regulatory transitional requirement, it is now at 11.45%.
That's increased in 2019 as a result of the introduction of 62.5 basis points from the capital conservation buffer and it also includes the introduction of the countercyclical capital buffer of 1%, which was introduced on the 5th of July, only three weeks ago now at this stage. 11.45 represents the minimum. You can compare that against 16.8. We have plenty of headroom with regard to where our capital position is.
The management core equity tier 1 fully loaded target now has moved to 13% given the movement in the requirement by way of having these additional buffers. If we just turn to slide 22. This is just to sum up in effect. To echo what Jeremy has said, we continue to show both commercial and financial progress in the bank and in our numbers.
We increased the total lending volumes by over 22% or EUR 700 million, leading to a 15% share of the mortgage market. We've increased our NIM at the same time. We've reduced our funding cost significantly in order to offset the impact of NPL reduction. We're implementing bank-wide initiatives to reduce complexity and improve efficiency across the bank. As a result, we're making cost savings to pay for digital transformation.
That is a core platform and a core piece of our strategy by way of how we move forward. It's our promise to the market around our transformation. Reducing NPLs remains a key focus of the bank, and we're committed to reducing that NPL ratio to mid-single digits. As I mentioned, we will do that on the basis of protecting our capital position.
We continue to make progress with our franchise, which is supported by the growing Irish economy. We also have to recognize the challenge of the lower for longer interest rate environment and the ongoing resolution of legacy issues that we have in the bank.
We believe over the next six to 12 months, we will make further significant progress in closing those, as demonstrated by the closure of the tracker mortgage examination issue in the first half. In that regard, I thank you for your attention, and Jeremy and I will now take some questions. We will take them from the floor first and then move to the telephone. Thank you.
Thanks very much. Can we just pick up on the margin? Can I have the year guidance for this year compared to in relation to each one? Kind of moving forward, just to kind of factor in at the end, if it were to back off, Jeremy, can you factor the European interest rate environment from both yours and the bank's perspective.
Maybe just looking a little bit further out, maybe into next year, and kind of also matching it to your comments earlier on in relation to the mortgage pricing. Maybe you can give a little steer as to how you think the margins should progress into 2022. Secondly, just in relation to Brexit, I know it's kind of a difficult question a month out for any prime minister in the U.K.
We're heading toward the end of October, maybe just thoughts around running to the company year to then to sort of start tackling how you think NBC will be looking at moving into later in the year or into next year in relation to.
I'll just pick up on the interest margin, Jeremy, you might comment on the mortgage mark, please. There's an ECB meeting happening this morning, so we have to wait and see what comes out of that by way of the decisions or further direction from the ECB on interest rates. Basically, the interest rates will stay as they are.
One of the impacts we would have is MREL issuance, and like all other banks, we have to reach our MREL target by early January 2021. We purposely delayed our movement into the market by way of an issuance because we have two things we wanted to demonstrate: progress by way of NPL reduction, and obviously, its associated impact on the capital position.
We also wanted to demonstrate in the first half of this year that clearly we're making progress on all fronts by way of our banking business, that's a key measurement for anyone who would buy the paper. We also wanted the other banks to set benchmark pricing in the market, the two larger banks in that regard. Hence we're coming to the market.
We only have about EUR 1 billion to issue, but it will have an impact. If you look today, it will have an impact on our net interest margin, which will move our net interest margin down to around the mid-170s level. We would see that level for probably the next two years, given the way interest rates are not moving at the ECB.
In that regard, we would be looking at some recovery in that number in a couple of years' time as we grow our larger SME position and a larger consumer finance book, together with the natural reduction of your tracker proportion. You're reducing low-yielding tracker mortgages with higher-yielding new mortgage business.
There's a couple of moving parts there, but you'll probably note that in our presentation, we haven't referred to the fact that we are highly geared to interest rate increases because of the interest rate environment. That is the case. It still remains that we, as a bank, are very highly geared to interest rates if they were ever to move up again. Would it go to mortgage pricing, Jeremy, do you want to take it?
The market remains competitive. I mean, we know that. We always keep our rates under review. As I said in my remarks, nothing new to announce today. Something we have been looking at, we hope to make an announcement shortly through a certain set of cohort I think customers will like. You'd expect me to say this, we don't only compete on price, of course.
I try not to be the market leader on price. I'd rather be a fast follower because I believe that we have really, really good people and a really, really excellent service proposition. That's what the feedback tells us, therefore, it's not just about competing on price. We also still believe in a cashback model. For me, it's a combination of different factors that make up the offering position to our customers.
In terms of the hardcore mortgage price, let's think about it. This morning on the radio, obviously, as Eamonn says, there's a very important interest rate meeting this morning. I do think, and indeed, thanks to people in this room, the narrative has changed slightly in terms of understanding that one of the biggest victims of mortgage pricing is capital intensity.
It's not getting any better. I would be surprised if the mortgage pricing market hasn't stabilized. Of course, there'll be changes in different cohorts at a marginal level. I just think the level of capital intensity and the level of costs that are required to transform digitally, when you put all those into the model, I would imagine that mortgage pricing is relatively stable. Here's hoping that's true.
Thirdly, on Brexit, we believe that we would be in the second wave. Obviously, we have no direct exposure in terms of a U.K. business. That is not to say that we are not thinking about it seriously. Our capital and liquidity stress positions appear to me to be satisfactory, that we believe that the bank is sufficiently capitalized and has sufficient liquidity to manage a Brexit scenario.
I think the challenge for all of us is, what exactly is a Brexit scenario? I'm not sure anyone really knows. As I'm sure my peers have done, we've made our best efforts to do it, and we think we're okay. Operationally, I think we're prepared. Contracts, negotiations are in a good place. I think we've been professional in the way that we have thought about it. Now we have to just wait and see. As we know, there are some important dates coming up over the next X number of days. I think we're okay.
Hi, good morning. Owen Callan from Investec. Just on NPLs, obviously, there's a huge amount of progress made last year on very good terms or outcomes from your perspective. In the first half of the year, relatively static NPLs and notwithstanding the EUR 300 million that you've noted are trending towards organic cure. What sort of challenges to then deal with the EUR 1.4 presumably, are left, other than simply going via another disposal route?
Given the political backdrop to that is less helpful again. Over recent months, there's been suggestions of new legislation. Do you see a greater challenge with the next portion of disposal in whatever format it is versus previously? Do you still think that the buyer market out there is still very solid, and ultimately, there is no legislation in place yet, and therefore it should still be something which you can achieve. Just on costs, I know you've noted a stable cost outlook, operating cost outlook. Do you have a cost-income ratio target that you feel is achievable and that you would disclose or target in the medium term?
Okay. With regard to the cost-income target, no, we don't at this moment. As we're demonstrating, and by the way, this is consistent to what we demonstrated last year, we're able to actually invest in our bank and invest in our infrastructure and invest in what's required. For purpose PSD2, we all know that the market wants to go live on PSD2 on the 15th of September.
We have been investing in PSD2 by way of our capability in those areas, and we're doing it on the basis of the same cost envelope. Last year, if you look, we took EUR 20 million of costs out and invested EUR 20 million in various different things. We have an ability and a size and a flexibility and an approach with regard to cost management.
What we should expect in due course, and the question, obviously, is when, as we get through this investment period. We should see cost reduction in time. At this moment, we're transferring and forming the bank, and the outline of the new branch we have at Omni describes as well how we are thinking about our distribution channels and where we see them going.
We, given our size and approach, are much more nimble and faster with regard to doing these things, and we have the transformation expertise and ability to get things done. I'm confident in the cost base, but we have to invest as we move around, and I promise as we do it in the same cost envelope.
Coming back to NPLs, we have the lowest number of NPLs versus the other four banks, if you take AIB, KBC, and Ulster, AIB, and Bank of Ireland, and by a distance. The next one up about EUR two and a half billion. I'm not concerned with regard to our ability to reduce our NPLs further because we have a smaller amount to do.
There are already transactions that have been announced. Ulster, as we know, announced a EUR 900 million transaction. I assume they would not have announced unless they felt there was interest. On that basis, the environment, I don't believe, has changed to any great extent. If it has, it has. That's the reality. We should see further progress in our NPL reduction over the next 12 to 18 months. That's kind of the key thing.
As an organization, we've moved from 28%, which was on the outer edges of European NPL percentages, down to a level where we are in the middle, and indeed, in an Irish context, we have the lowest nominal amount of NPL. I don't see any challenge in that regard.
Morning. Stephen Lyons from Davy. Just firstly, a couple of questions. First one, on the CET1 target, appreciate the upward move to 13% given the phase-in, particularly of the countercyclical buffer. Seen a lot recently from the central bank out on the systemic risk buffer. I appreciate it's not in yet, but arguably poses a greater risk to yourselves given with the other two banks, there's the debate over whether there might be an interchange with the O-SII buffer that you don't have.
I'm just trying to get a sense from yourselves that is a 13% sufficiently prudent that if the systemic risk buffer does come in at a future point at a more modest level that you think that still there's ample capacity to absorb that within the 13%, for instance, thinking of P2R. Secondly, just on costs, I appreciate that investment doesn't end, and you're self-funding it for the moment, and your guidance on the costs being pretty flat for this year relative to last year.
It looks like the investment in H1 seems to be maybe the lower end of that EUR 100 million, three-year digital program that you previously articulated, and you seem to be generating underlying efficiencies, mid-single digit per annum. As we look a few years ahead, I appreciate you don't want to give a cost income target given the uncertainty of the top line, but on the cost nominal base itself, would you expect that EUR 330 to drop off? Within that, if you could just remind us what is the ANU cost within that as well. Thanks.
You're right in that the investment we're making is a capital investment. We estimate that if you take the EUR 100 million that we had mentioned at the last presentation, about 80% of that is CapEx. That investment has not come into operation yet. We are still in investment mode in that regard. When it does, it'll start getting reflected in the depreciation line.
We would see savings on other lines of our P&L in order to offset that. That will be by way of either the normal headcount efficiency or lower operating costs because we have a more streamlined end-to-end process with our customers that requires less paper, less handoff, less involvement, across the whole bank.
If you take EUR 100 million and you put a five-year depreciation on that, and it has been introduced over a period of a number of years, it gives you a feeling for something in the region of a EUR 15 million increase in our depreciation cost. Right? That EUR 15 million, in that level, means you have to make that EUR 15 million saving elsewhere, which we will.
That's the way it works. We are not in the hundreds and hundreds of millions of investment that other players are in. We are actually in quite a manageable level of investment, and manageable within our envelope. As that comes into play, you would expect them to be both generating income because you are able to do business with your customer base in a much more streamlined manner. We expect to get some headline growth there.
Secondly, a more efficient cost piece, or cost of operating. That's that. Did that answer your question? Did that answer it, yeah. With regard to the target, in that regard, we don't have a target because we want to start generating top-line growth. In an environment where interest rates, we're not sure exactly where interest rates will go, and hopefully the next couple of months will give us some more clarity in that regard.
As we know, we have to remove some legacy issues from our top line, such as further NPL reduction. We will end up with a baseline of core income that we will then grow. We know, and you can see from the first six months that we're making progress on consumer lending. We're making progress from a low base on SME, but it is progress.
We believe that based on what we can see, that there's opportunity for PTSB to play in that market in a much more fulsome way. It's an area we haven't played in before. It's higher margin, and it suits our community-based banking approach with regard to being close to our customers. These are areas where we see upside. In order to get there, we have to reinvest, transform, and then, over the next number of years, take a hard look at our cost base, i.e., to drive it on. We don't have a target cost increase at this moment that we can say.
On the capital target
Sorry, capital target. Okay. We are not deemed to be a systemic institution. The indication is that buffer was designed in order to possibly attract the larger banks. Our 13% represents the buffer that exists today, not buffers that exist possibly in the future. We would have to consider how we would think of that 13% in line with the regulatory requirements, with regard to an additional buffer. There is not a clarity and expectation that buffers will continue to increase within that 13%, and we just have to wait and see what happens.
The only thing I would add. Three things are. Firstly, obviously, the SACC itself reflects an organization that was distressed. The components thereof are predominantly done on a rear view mirror. I hope that the transformational delivery that we've exhibited and will continue to exhibit makes it harder with the regulator easier for them in terms of having to see through to the business model,
see through to the risk of capital, risk of liquidity, the clarity around the business model, and the better way we're governing the organization. That I hope within the staff, there is some relief for the better quality of earnings and a stronger balance sheet. For them, I mean, for them, also as part of that calculation.
Yeah.
Secondly, forgive me, Stephen. You'll never be getting targets off me, right. I might give you some guidance, but I'll never be targets Why? Because the world changes, right? Facts change, competition changes. Where AIB are at the moment is, I'd say this wouldn't I, but we think the team has done a reasonable job bringing the bank from the brink and getting it to a better place. For AIB's leadership, the balance sheet is much stronger and safer.
Now we recognize we need to give the market a bit clearer view of where we're going. We just need to take a deep breath through the second half and just be really clear what our agenda for growth is, and then find a way to communicate to the market effectively. We're in a bit of a holding pattern, I recognize that. I recognize that it is incumbent on us to provide perhaps the next version of the value story. We just need to be clear on what that story is for us.
Very clear. Thanks.
Shall we open up questions from the phone, then?
Thank you, ladies and gentlemen. We will now begin the question-and-answer session. As a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Once again, please press star one if you wish to ask a question. Your first question comes from the line of Andrew Coombs. Your line is open.
Good morning. Thank you for the presentation. If I could just come back to the point on interest rate sensitivity. We've obviously got ECB coming out later today. Even if they don't do anything there, it's possible we might get a cut in September. Can you talk us through your sensitivity to ECB rates? In particular, I'm interested in how the various different loan portfolios are linked. Can you just remind us the links to MRO versus the deposit rate versus EURIBOR across the portfolio? Thank you.
We have limited, if no links to EURIBOR at all in our book. With regard to the deposit rate, naturally, if we have excess funds, with the central bank, it attaches to the deposit rate. There has been a feature in the Irish market that for retail customers there, we don't go below zero. Some of our competitors for corporate deposit business are charging negative rates.
We are not doing that at this moment, but our corporate book is not a material part of our funding. The area where there would be the most focus would be on the tracker book, which is exactly linked to the ECB rate, and reprices more or less immediately. In fact, in about typically within one month delay, with regard to tracker book rates.
That's where the key sensitivity is with regard to our book both positive and negative. I wouldn't see any further benefit-- Sorry, any benefit in the rate reduction, the reference rate reduction with regard to our deposit book. Primarily then you look at the tracker book. Within the presentation, we clearly highlight what our exposure is to trackers, both performing and including non-performing loans. It's a case of then applying, by way of sensitivity, the reference rate cut to that book.
Just to clarify, if you were to see a deposit rate cut but not a cut on the base rate, that would have far less impact on your overall net interest income. Is that correct?
There would be some impact, but primarily it's with regard to excess cash that we have. You would see that. We have demonstrated, particularly in the last year, our ability to manage excess cash. We got in something in the region of EUR 2 billion of excess cash from the sale of two portfolios, which we managed accordingly, and those drove down our cost of funds by 10 basis points on average. Yes, it would be around the edges and would not be material for the purposes of our performance.
Very clear.
Every euro counts, naturally, but it wouldn't put a hole in the boat as such by way of impact.
Your next question comes from the line of Alastair Ryan. Your line is open. You may ask your question.
Thank you. Good morning. Yeah, just to follow up on the capital question really on two fronts. This is one of the hardest things for us to work out what your requirement is going to be. On the systemic risk buffer, do you have any visibility from the central bank as to what they're thinking? Your answer is quite useful that maybe they're only aimed at the big banks, but systemic risk buffers, very few people have them so far, and as 15% of the mortgage market, in some ways you're pretty systemic, although you're small in absolute terms.
Do you have any visibility or that's just a general sense at present? The second thing, your Pillar 2 requirement, as you said, the 345, I think it's the highest in Europe. I mean, is it higher even than Monte Paschi in? Given that mechanically the drivers of that have gone, do you get any visibility that that itself can come down in the next SREP? The regulation's not transparent enough and you know it's going to come down, but it could take ages. Thank you.
To take the second question first, Alastair, we have to still engage with the regulator with regards to the SREP process. It typically happens late summer, early autumn. We're due to fix in the position for next year. We would concur with your view that it is one of the highest in Europe. I think across Europe, we haven't seen much reduction in these levels over recent years.
However, I would suggest that our performance as an organization, by way of de-risking the bank, has moved significantly on. Typically, the regulators are working the rearview mirror, i.e., they're not projecting forward what the risk position will be.
They're looking back 12 months and last year, and into this year by way of closing out a few transactions and successfully, for the purposes of how we think from a regulatory perspective, moving those NPLs off of our sheet, I think should, and we would expect, have some bearing in the discussions we'd have with the regulator. The rate that you quote is out there. We can only influence by action, and I think we've actually done that.
With regards to the position with regards to the additional buffer, we have no visibility at this stage. We understand it's with the Department of Finance with regards to their view and with regards to how they may or may not introduce this by way of legislative change. The question would be how we fit within that.
As I mentioned, the 13% that we're quoting now would exclude any future buffers that may or may not come to pass. We'll just have to wait and see at this moment. We do have some headroom in our numbers. We are operating at a 14.4% fully loaded level at this moment.
Naturally, we would like, as an organization, to demonstrate to shareholders that we, first of all, can remove what's called the dividend blocker from our current interaction with the regulator, and then move into a situation that over a period of time, that we would normalize that relationship with shareholders by way of how we think about returning some capital. That is something that we have to work on over the next number of years. Do you have any comments, Jeremy?
Alastair, I would be very disappointed if we too didn't have some positive momentum in this year's SREP. I would have to say that. I absolutely respect the regulator's position in terms of challenge data since 2012. I think that the progress we made last year, I genuinely hope it is rewarded because I think it should be. Of course, I would say that, wouldn't I?
I do think the facts demonstrate that. In terms of future buffers, I'd just confirm what Eamonn says. I have no line of sight to how those will be applied. Therefore, in the round, I don't think that the internal target of 13% seems unreasonable to me. Perhaps on a net basis, I don't think it seems unreasonable. I'm sorry I can't get any more specific than that, Alastair.
No, it's driving us up the wall. I'm sure it's been driving you up the wall more. Thank you.
There are no further questions at this time. Please continue.
Okay. Thank you. Are there any further questions from the floor? If one more then and then we'll take a break.
Thank you. Good morning. It's Diarmaid Sheridan from Davy. Just one question, if I may. If I look at the impairment line, and obviously your coverage on your mortgage book is much higher than your peers who have experienced some write-backs over the last few years. Just wondering what your thinking on that is.
We note the dropping of the reference to the view of your impairment coverage in the statement this morning. Is it a case that you've seen good collateral uplift over the last few years, but you're mindful of maybe further NPL disposals and further the forthcoming introduction of the provision changes from the ECB, are parts of it that are making you a little bit more reticent around write-backs?
As you rightly said, our book appears to be higher provision than our competitors. In that regard, we did start with a slightly weaker book by way of LTVs and the nature of the book. There are naturally a couple of moving parts that operate within any book. That's the provision in the collateral, for instance, by way of Glas and Glenbeigh, we clearly could demonstrate the collateral, in a general sense, how the mark of few collateral values by way of work out.
We're also seeing by way of further work out, by way of, for instance, the sale of our properties in possession and what prices we're realizing versus where we see it by way of provision values on collateral in possession. Indeed, I would say to us is that our provisioning, and this is demonstrated by the sales as well, that provisioning is on the conservative side. In that regard, we believe we're well-provisioned. There's a number of moving parts here, but we think we will be able to navigate our way in a positive sense.
You also mentioned with regard to the ECB requirement for all banks to look at long-term secured NPLs and the provisioning levels on that. There's a requirement for us by the end of 2020 to have a 40% provision level on our NPL stack. You can clearly see that we're there already. As we get into the following number of years, ECB requirement to provision up is currently within our SREP requirement, and as we understand, applies to all banks across Europe. That is a note.
That's something in the background that we have to consider. It's not for this result. If we were looking in a year's time, it'd be something that we would be discussing in a more fulsome way. In that regard, all these points by way of Glas, Glenbeigh, property and possession being released at values, all these are giving us confidence that the level of provision we currently have in the book is at an adequate level and is fit for purpose in that regard, and probably slightly on the conservative side, but that is in order to take account of moving parts and the moving NPL position. Thank you.
Okay. Thank you for listening to us both. We'll call that a day. Thank you.
That concludes our conference call today. Thank you for participating all this way.