Earnings Call: H1 2019

Jul 25, 2019

Good 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, Evan Crowley, will provide a more detailed review of our financial performance. And then I will be happy to take your questions after that. Perhaps I could now ask you to turn to Slide 4. I'm pleased to say that business performance so far in 'nineteen has been strong, in particular in mortgage lending. We outperformed the market, grew total new lending by over 22 percent to £713,000,000 therefore maintaining our market share of circa 15% from the end of 'eighteen. The bank is reporting a profit before tax of 28,000,000 euros and an underlying profit of €42,000,000 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 long term 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 twenty nineteen is 182 basis points, showing an increase of 5 basis points on half one twenty eighteen. We report a pro form a 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 1400 properties sold over the last 18 months with 4 34 sold and or sale agreed in half one twenty nineteen. NPLs remain at €1,700,000,000 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 2 notches to investment grade and maintain their outlook as positive. Indeed, the bank has now received upgrades from Moody's, Standard and Poor's and DBRS following the announcements of both projects, Gloss and Glen Bay and the bank's 2018 results. So turning to Slide 5 on financial performance. We have recorded an underlying profit of €42,000,000 down €31,000,000 or 42% from half one twenty eighteen, primarily due to deleveraging of NPLs and the associated loss of income and the absence of one off gains from treasury activities reported in 20 18. We saw the net interest margin increase by 5 basis points year on year from 1.77% to 1.82 driven by active balance sheet management. Operating expenses, excluding regulatory charges, of £145,000,000 remained 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 €5,000,000 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 €100,000,000 Indeed, current account balances are the highest they have been in more than 10 years. The performing loan book, which stood at €15,200,000,000 shows a modest decrease from €15,300,000,000 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 twenty nineteen. 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. And of course, it would be remiss of me not to reference the truck and mortgage examination or TME. The TME and enforcement process of PHSB has concluded. 99% of impacted customers have received redress and compensation. We paid a fine of €21,000,000 and have concluded the work. We repeat our apology for what happened. Turning to Slide 6, 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 2019. Mortgage lending, which represented almost 86% of total new lending, increased by 18% compared to H1 2018, where the mortgage market grew only by 11%. This is an impressive performance and shows the strength of the brand, the quality of the bank's propositions, the value of the multichannel 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 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 twenty eighteen, which we've seen across the market. The mortgage market is expected to grow to circa 10% and at $10,000,000,000 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 on year. The majority of our personal loan applications now originate through digital and voice channels. We have fully automated our personal term lending journey since the 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 $31,000,000 for the first half of the year. SME lending has now grown by 63% over the last 2 years, albeit from a low pace. 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 7. 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 their mobile app. Net Promoter Score, the degree to which our existing customers recommend us to potential customers, consistently remains within the top 2 in the market Customer commitment, tracking the preferred choice for a customer's main banking relationship, remains within the top 2 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 location for customers to come and discuss our most important banking needs with us. Indeed, we find many customer journeys start and maybe finish online, but 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 1st Auto Cash 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 today. So for example, 100% of cash transactions have been automated, All service requests have been completed by the most efficient channel. For example, the processing of swift payments via the Open 24 sales and service center or customer updates via the same center or in app facilitation such as through online end to end term loans. And we're open 50 hours versus the standard 35 hours over a 6 day 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 for us digitally to do so, and we're making significant progress in that regard. And then finally, we've also improved our offering to intermediates, which remains a very important part of the market. In the first half of twenty nineteen, Phase 1 of the mortgage broker portal was launched, which allows intermediates to track various mortgage applications to pay out milestones. This is a differentiating factor and one that strengthens further our relationship with Intermedius. So looking forward, permanent Chesapeake has a long banking history, stemming 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. Tata experience over 2 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 5 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 will 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. And 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 resale 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. But most importantly, we have proven expertise to deliver transformation. For example, restructuring plan commitments, re IPO, Network 2020, Projects Gloss and Glen Bay and Tichel Transformation to Namebrook Field. So we have a clear management model. We undertake an annual rolling full year 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 equal transformation, to grow quality earnings, to focus relentlessly on efficiency and effectiveness as this is the key battleground in the low fit, 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. But 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. That's an example of the agenda and the strategic performance priority. And 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 our in house and external subject matter experts. The work has been tested against external benchmarks and the bank's decision rules. We're now firmly in execution mode and we'll provide progress updates at future reporting cycles. The digital transformation program is built around 4 delivery pillars: customer journey experience, technological infrastructure, ways of working and FinTech partnerships. Each delivery pillar has an outcome for its execution plan, has 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 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. So please turn to Slide 11. Page 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 'nineteen with 27,000,000 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 based and automated web chat service customer responses were provided. We've 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 'nineteen. So 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 branch. 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 focused on cost management by delivering cost saving initiatives required in order to invest in the business. We have a capital raise that is comfortably above both management and regulatory minimum requirement. With an organizational culture that is focused on rebuilding trust with customers and delivering profitable growth We have a digital transformation program that's grounded in fact, clearly governed and ambitious in its delivery aspiration. And we have a clear plan to compete for talent by providing a modern working environment. So all in all, it's been a productive first half of twenty nineteen. We're in a good place, recognizing the headwinds we have and the challenges that dynamic change will always bring. As we say, we will overcome. I will now hand you over to Aime. Thank you, Jeremy, and good morning, everyone. I will discuss the financial performance in detail, but first, we will just turn to Slide 14. The Irish economy is forecast to grow 5 percent 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. And the labor market has also shown very positive signs with it. Employment growing by 3%, leading to a reduction or an expected reduction in the unemployment rate of 4.7% in 2019, and this is the lowest level we've seen since 2,005. When you look at the housing market, the picture is also very positive in that the mortgage market, having grown to €8,700,000,000 last year, is expected to increase by 13% to over €9,800,000,000 And while the housing market has continued to grow the pace of growth, it has been somewhat subdued, particularly in housing supply, for both new and secondhand properties. It still remains that mortgage drawdowns in Ireland will reach around £10,000,000,000 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. So 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 details now by Jeremy. I'd like you to focus on the profit before exceptional items for tax of GBP 42,000,000 which has decreased by 42% or GBP 31,000,000 dollars year on year. However, any comparison with the first half of twenty eighteen should take into account that we have a smaller balance sheet post MCL deleveraging, and we have the benefit of some material one off treasury income in the first half of twenty eighteen. Net interest income has reduced by 6%, and this was driven by lower income on NPLs of 26,000,000, lower income from treasury assets of about 6,000,000,000 and due to the natural maturity of some high yielding treasury assets on our balance sheet. So this has been offset by significant progress on lowering our funding costs, where we lowered the funding costs by £18,000,000 year on year, and we've also increased interest income from our performing loan book by £5,000,000 in the same period. If we look at net other income, it's £12,000,000 and 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 £22,000,000 was influenced by £25,000,000 of gains related to the sale of treasury assets and the closure of a derivative position in the first half of twenty eighteen. Operating expenses were broadly flat, and we'll outline a makeup of operating expenses in a later slide. There's a modest impairment charge of £5,000,000 and 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 related to restructuring and other costs of $12,000,000 $3,000,000 relating to the tracker mortgage examination fine. The bank paid a fine of €21,000,000 during the first half, but we have provided for this in prior years, and this led to a net charge of 3,000,000 dollars 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 on year. Income from the performing loan book increased by 3%, and as I mentioned, this equates to GBP 5,000,000 And while this amount is small, it does show that we continue to grow good quality interest income in our P and L. The net interest margin was 182 basis points, and that's a 5 basis points increase versus the reported number in 20 18 and was in line with our expectations. The asset yield is at 205 basis points. This is a 7 basis points reduction when compared to last year, but 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 'eighteen. This was achieved through a range of funding actions, including retail, corporate and institutional deposit rate management, and we should expect to see some further reductions in the second half of the year. So overall, we expect the net interest margin to remain stable through the second half of 'nineteen. Let's now turn to the loan book slide, which is Slide 17. Our performing loan book was €15,200,000,000 at the end of June, and this is broadly in line with the loan book at the end of 'eighteen. The performing loan book is broken into home loans, which represents $11,400,000,000 which is 75 percent of our loan book, buy to let loans of $3,300,000,000 which is 22 percent and another portfolio is making up around 500,000,000 which is 3% of our loan book. The performing mortgage book totals £14,700,000,000 and the average yield on this loan book of 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 'nineteen, 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 had approximately €700,000,000 in the first half and this represented a 22% increase year on year. As mentioned by Jeremy, we have maintained our mortgage market share around 15% with positive trends, and 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 that's the €16,900,000,000 and obviously includes NPLs, €9,600,000,000 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 'eighteen. So you can see it, we're starting to change the proportion of tracker motors in our book, and it's on a downward trajectory. We have €4,200,000,000 of variable rate loans and a yield of 4.16%. We have 2,700,000,000 of fixed rate loans yielding 3.28 percent. And then we've around 400,000,000 of other loans and they yield around 10%. 80% of the mortgage loan book is paying interest, capital interest. Let's now turn to the operating expenses slide on 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 registry charges, was €145,000,000 and this increased slightly by €2,000,000 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 $2,000,000 and the impact of ongoing investment in business and technology programs, and that equated to over $6,000,000 of an investment in the first half. But we actually funded this by way of payroll and other savings of $6,000,000 to come in relatively flat versus last year. The impact of the introduction of IFRS 16 reduced other costs by $4,000,000 with an equal and offset increase in depreciation and amortization. As mentioned, we will continue to focus on cost management, and 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 excluding regulatory costs, was 69%. This is 8% higher than the prior year, but as mentioned earlier, that was last year was heavily influenced by one off income on the top line. Let's now turn to our nonperforming loan book. As you know, very significant progress was made here in 2018 as we reduced the nonperforming loan book from 5,300,000,000 dollars down to its current level of $1,700,000,000 That's the lowest among the 5 banks that are looking at NPLs by a distance actually. As you know, we've achieved this balance sheet transformation by executing 2 portfolio sales during the second half of last year. We also ran a voluntary ceramic campaign for BioSelect customers, and 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 $300,000,000 of NPLs in the current snack 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 and social solutions such as mortgage rent. And our aim is to reduce our NPL position, while at the same time protecting our capital position. As you'll 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 €1,100,000,000 and €16,900,000,000 of assets, we have an overall 6 percentage 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. And 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 'eighteen, we had just over 1,000 or nearly 1200 properties. We, in the 1st 6 months, we took possession of 123 properties. We've actually reached, we've either sold or sale agreed 434, leaving a stock of 882 at the end of June. And alone in July to date, we sold 153 of those and there's another circa 200 of those properties 200 properties for sale as well, and we can see in the next month, 2, 3 months, those properties will sell as well. So we plan to exit the majority of these properties over the next 6 to 12 months. The numbers themselves speak the way of the progress we're making and the impact we're having also on our P and L. If we move now to Slide 21, our funding position remains strong. Our strategy, as outlined in previous presentations, continues to fund is about funding our balance sheet for customer deposits while also keeping other funding lines open and accessible, and 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 under the highest level in 10 years. And 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 €1,000,000,000 which we have to issue before the 1st January 2021. We will start the process in September, and October, and that depends on market conditions, and we intend then to come to the market next year with 2 further issuances. Our registry 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 'eighteen level. Our core equity Tier 1 ratio on a transitional basis is 16.8%, which represents a slight reduction versus December, but this is based on transitional rules. So nothing to do. The reduction is a normal part of the journey towards the fully loaded ratio. If you look at our correctly Tier 1 minimum regulatory transitional requirement, it is now at 11.45 percent, and that's increased in 2019, a result 62.5 basis points from the capital conservation buffer and the introduction that also includes the introduction of the countercyclical capital buffer of 1%, which was introduced on the 5th July, only 3 weeks ago on our fixed rate. And so 11.45 represents the minimum, and you can compare that against 16.8%. So 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. I'll just turn to Slide 22, and this is just to sum up in effect and to echo what Jeremy has said. We continue to show both commercial and financial progress in our in the bank and in our numbers. We increased the total lending volumes well over 22% or 700,000,000 dollars leading to a share, 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. And as a result, we're making cost savings to pay for digital transformation as well as a core platform and a core piece of our strategy, the way of how we move forward is 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 digit. And as I mentioned, we will do that on the basis of protecting our capital position. And we continue to make progress with our franchise, which is supported by the growing Irish economy. But 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, but we believe over the next 6 to 12 months, we will make further significant progress in closing those as demonstrated by the closure of the tracker mobile contamination issue in the first half. So in that regard, I thank you for your attention, and Jeremy and I will now take some questions. And we will take them from the floor first and then move to the telephone. So thank you. So I'll just pick up on the net interest margin. Jeremy, you can make comments on the mortgage market, please. So 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 ECB on interest rates. And based on interest rates, we'll stay as they are. And one of the impacts we will have is MRED issuance. And like all other banks, we have to reach our MRED target by early January 2021. We purposely delayed our movement into the market by way of an issuance because we have 2 things. We wanted to demonstrate by way of NPL reduction and obviously, it's 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 funds by way of our banking business and that's a key measurement for anyone who buy paper. And we also wanted the other banks to set benchmark pricing in the market, the 2 larger banks in that regard. So hence, we're coming to the market. We only have about 1,200,000,000 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. And we will see that level for probably the next 2 years given the way interest rates are moving or not moving, seriously. And in that regard, we would be looking at some recovery in that number in a finance book with the natural reduction of your tracker proportion. So reducing low yielding tracker mortgages with higher yielding new mortgage business. So there's a couple of moving parts there. But you would 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. But 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. With regards to mortgage pricing, Chairman, do you want to? The market is expected then. 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 certain sort of cohort. I think customers will like. And you'd expect me to say this, but we don't only compete on price, of course. I mean, we I try not to be a 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. I mean, that's what the feedback tells us. And therefore, it's not just about completing on price. We also still believe in the cash back model. So for me, it's a combination of particular factors that make up the operating 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. But 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 things that we've always pricing is capital intensity. I mean, that's not getting any better. So I would be surprised if mortgage if the mortgage pricing market haven't stabilized, of course, there'll be changes in different cohorts at a marginal level. But 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. He says, hoping that's true. And then thirdly, on Brexit, We believe that we would be in the 2nd wave. Obviously, we have no direct exposure in terms of UK 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 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, really knows. As I'm sure my peers have done, we've made our best efforts to do that, and we think we're okay. Operationally, I think we're prepared. Contracts, negotiations are in a good place. So I think we've been professional in the way that we have thought about it. Now we just have to just wait and see. I mean, as we know, there are some important dates coming up over the next next number of days. So but I think we're okay. Good morning. O'Callaghan from Investec. Just on NPLs, obviously, there's a huge amount of progress made last year on a very good terms or outcomes from your perspective. But in the first half of the year, relatively static of the NPLs. I know it's standing the €300,000,000 that you've noted are trending towards organic cure. What sort of challenge is it to then deal with the 1.4% potentially and left other than simply going by another disposal route and 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 in several format that is versus previously? Or 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? And then just on costs, I know you've got a stable cost outlook, operating cost outlook. You have a costincome ratio target that you feel is achievable and that you would disclose or target in the medium term? Okay. So with regard to the cost income target, no, we don't at this moment. Yes, the as we're demonstrating and by the way, this is consistent here, we demonstrated last year, we're able to actually invest in our bank and invest in infrastructure and invest in what's required. So first of all, PSG2, we all know that the market wants to go live on PSD2 on 15 September. We have been investing in PSD2 by way of that capability in those areas. And we're doing it in place of the same cost envelope. So there's a and last year, if you look at it, we took £20,000,000 of cost out and invested £20,000,000 in various different things. So we have an ability and a size and a flexibility and an approach with regard to cost management. So what we should expect in due course and the question obviously is when as we get through this investment period and we should see cost reduction in time, but at this moment we're transferring from the bank and the outline of the branch that was the new branch we have in Omni described as well how we are thinking about our distribution channels and where we see them going. And 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. So that's just so I'm confident in the cost base, but we have to invest as we move around And I promise that we'll do it in the same cost envelope. Coming back to NPLs, we have the lowest number of NPLs versus the other 4 banks, the 2 KBC and Ulster, AIB and Bank of Ireland and slight distance. The next one up to about 2,500,000,000. So I'm not concerned with regard to our ability to reduce our MPLs further. We have because we have a smaller amount too, There are already transactions that have been announced, those are, as we know, announced a non contracted transaction. I assume they would not have announced unless they felt was interest. And so on that basis, the what the environment, I don't believe, has changed to any great extent. And if it has, it has. I mean, 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. But as an organization, we've moved from 28%, which was quite on the other edges of European NPL percentage down to a level where we are in the middle and indeed in an Irish context, we have the lowest nominal amount of NPL. So I don't see any challenge in that regard. Stephen Lyons from Davy. Just firstly, a couple of questions. Firstly, just on the CET1 target, appreciate the upward move to 13% given the phase in, particularly of the currency co buffer. I've seen a lot recently from the central bank out on the systemic risk buffer. I appreciate it's not in yet. But I could be opposed as a greater risk to yourselves given with the other 2 banks. There's a debate over whether there might be an interchange with the OSI buffer that you don't have. So I'm just trying to get a sense from yourselves that is the 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's still there's ample capacity to absorb that within the 13%, for instance, thinking of P2R? And then secondly, just on costs. I appreciate that investment doesn't end and you're self funding it for the moment and your guidance on costs being pretty flat for this year relative to last year. But it looks like the investment in H1 seems to be maybe at the lower end of that €100,000,000 3 year digital program that you previously articulated, and you seem to be generating underlying efficiencies sort of mid single digit per annum. So 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 3.30 to drop off? And within that, if you could just remind us what is the ANU cost within that as well? Thanks. Okay. So you're right in that the investment we're making is a capital investment. We estimate that if you take the €100,000,000 that we have mentioned at the last presentation, about 80% of that is that is CapEx and that investment has not come into operation yet. So we are still in investment mode in that regard. But when it does, it starts getting reflected in the depreciation line. We would see savings in other lines of our P and L in order to offset that. And 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 for across the whole bank. And so if you take £100,000,000 and put a 5 year depreciation on that and it's been introduced over a period of a number of years, it gives you a feeling for something in the region of €15,000,000 increase in our depreciation cost, right? That $15,000,000 in that level means you have to make that $15,000,000 saving elsewhere, which we will. That's the way it works. But we're not in the 100 and 100 of 1,000,000 of investment that other players are in. We're actually in quite a manageable level of investment and manageable within our envelope. And as that comes into play, you would expect them to be generating income because you're able to do business with your customer base in a much more streamlined manner. So we expect to get some headline growth there. And secondly, a more efficient cost piece or cost of operating. So that's that. Does that answer your question? With regard to the target, in that regard, we own the target because we want to start generating top line growth. And in an environment where interest rates are we're not sure exactly where interest rates will go and hopefully the next couple of months will give us more clarity in that regard. And 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 1st 6 months that we're making progress in consumer lending. We're making progress from a low base on SME, but it is progress and we believe that based on what we can see that there's opportunity for PGSB to play in that market in a much more important way. It's an area we haven't played before in before. It's higher margin and it suits our community based banking approach regarding growth for customers. So these are areas where we see upside. But 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. But there's no we don't have a target cost information at this moment, so we can say. And on the capital target? Sorry, the capital target. Okay. So we are not deemed to be a systemic institution. The indication is that buffer was declined in order to be possibly attracted to larger banks. We our 13% represents the buffers that exist today, not buffers that exist that possibly in the future. And we would have to consider how we would think about that 13% in line with the regulatory requirements with regard to an additional buffer. So there is not a there's an expectation that buffers will continue to increase within that 13%. And we'll just have to wait and see what happens. The only thing I would add would be sorry, the proof of things are. Firstly, obviously, the stack 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 we'll continue to exhibit makes the problem 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. So that, within the staff, there is some relief for the quality of earnings on a stronger balance sheet. And then secondly, forgive me, Stephen, I really you'll never be getting targets of me, right? I might give you some guidance and I'll never be targets. Why? Because the world changes, right? Facts change. Competition changes. So where I am now at the moment is, we think I'd say it wouldn't like, but we think the team has done a reasonable job bringing it back from the bank and getting it to a better place for Aimers leadership. The balance sheet is much stronger and safer. But 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. So we're in a bit of a holding pattern, I recognize I recognize that it is incumbent on us to provide perhaps the next version of the value story. So I just need to be clear on what that story is first. Okay. Thanks. Shall we open up questions from the Your first question comes from the line of Andrew Good morning and thank you for the presentation. If I could just come back to the point on interest rate sensitivity You've obviously the ECB coming out later today. Even today, it's possible we might get a cut in September. Can you talk us through your sensitivity to ECB rates? And in particular, I'm interested in how the various different loan portfolios are linked. So if you could just remind us the links to MRO versus the deposit rate versus Euribor across the portfolio? Okay. So we have limited, if no, link to Eriber at all in our book. With regard to the deposit rate, naturally, we if we have excess funds with the Central Bank, it attaches to the deposit rate and there has been a feature in the Irish market for retail customers there, we don't go below 0. 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. And that's 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, it's been about typically within 1 month delay with regard to track a book rate. So 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 rates in the rate reduction, the reference rate reduction with regard to our deposit book. So 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. So it's a case of then applying by way of sensitivity the reference rate cut to the backlog. So just to clarify, if you were to see a deposit rate cut and not a cut on base rates, that would have far less impact on your overall net interest income. Is that correct? It would be yes, it would be there would be some impact, but primarily it's with regards to excess cash that we have, and 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 $2,000,000,000 of excess cash from the sale of 2 portfolios, which we managed accordingly and still drove down our cost of funds by 10 basis points on average. So yes, it would be around the hedges and would not be material for the purposes of our performance. Okay. I mean, euro counts naturally, it wouldn't put a hole in the total search for where it's at. Your next question comes from the line of Alastair Ryan. Your line is open. You may ask your question. Thank you. Good morning. Yes, just to follow-up on the capital question really on 2 fronts, which 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 there are any 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 clearly systemic, although you're small in absolute terms. So do you have any visibility or that's just general sense at present? And the second thing, your Pillar 2 requirement, as you said, 345, I think it's the highest in Europe. I mean, it's higher even the bumpy task in. Given that mechanically, the drivers of that have gone, do you get any visibility that that itself can come down in the next strip or the regulation is not transparent enough and you know it's going to come down, but it could take ages? Thank you. So the second question first, Malastra, we don't have we have to still engage with the regulator with regards to the threat process. It typically happens late summer, very often due to fixing the position for next year. We would concur with your view that it is one of the highest in Europe. But I think across Europe, we haven't seen much reduction in these levels over recent years. But however, I would suggest that our performance as an organization where we're derisking the bank has moved significantly on. And typically, the regulator is working in the rearview mirror, I. E, they're not projecting forward what the risk position will be. They're looking for 12 months. And last year and into this year, by way of closing out the 2 transactions and successfully for the purpose of how we think from a regulatory perspective, moving those NPLs off of balance sheet, I think, will show it and we would expect to have some bearing in the discussions we have with the regulator. But the rate that you quoted that there, we have 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 this with the Department of Finance with regard to their view and with regard to how they may or may not introduce this by way of legislative change. And then the question would be how we fit within that. But as I mentioned, the 13% that we're quoting now would exclude any future buffers that may or may not come to pass. So we just have to wait and see at this moment. And we do have some headroom in our numbers. We are operating in a 14.4% fully loaded level at this moment. But naturally, we would like as an organization to demonstrate to shareholders that we, 1st of all, can remove what's called a different 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 the shareholders by way of how we think about returning some capital. But that is something that we have to work on over the next number of years. Do you have the comments, gentlemen? Alastair, I would be very disappointed if C2R didn't have some positive momentum in this year's trip. I would have to say that. I absolutely respect the regulator's position in terms of challenging asset since 2012. But I think the progress we made last year, I generally hope it is rewarding because I think it should be. Of course, I would say that winter. But I do think the facts demonstrate that. And in terms of future buffers, I just confirm what Eamon says, I have no line of sight to how those will be applied. So therefore, in the round, I don't think that 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 specifics on that, Alex. No, 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? It's Jeremy 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. You 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 in the view of your impairment coverage in the statement this morning. Is that 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, parts that are maybe making a little bit more of excitement around buyback. 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. And there are naturally a couple of moving parts that operate within any both of that sea. The provisioning, the collateral, for instance, by the way, Blossom Glen Bay, we clearly could demonstrate the collateral. In a general sense, how does that confuse collateral values probably 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 provision values on collateral in possession. And indeed, what I'd say to us is that our provisioning, and this is demonstrated by the sales as well, our provisioning is on the slightly on the conservative side. And on that regard, we believe we're well provisioned. So there's a number of moving parts here, but we think we will be able to navigate our way in a positive sense. The 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. And 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. But as we get into the following number of years, needs to be requirement to provision is currently within our SREP requirement. And as we understand, it applies to all banks across Europe. So that is a note. That's something in the background that we have to consider. It's not for this results. If we were looking in a year's time, it would be something that we would be discussing in a more thoughtful way. So in that regard, all these points by way of Doss, Glen Bay, properties and possession being released at values, all these have given 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 then the moving NPL position. Okay. Thank you for listening to us both. We'll call out. Thank you.