Good morning and welcome to the 2024 annual results presentation. I'm going to give you an overview of the performance of the bank during 2024, and in a few minutes, our new CFO, Barry D'Arcy, will provide a more detailed review of our financial performance. I'll then take you through our refreshed strategy and financial targets, and we'll be happy then to take questions that may arise. If we turn to slide four, we delivered a strong performance in 2024 across our business, supporting customers and communities across the country. Our customer deposits rose 5% to EUR 24.1 billion and have grown by over 25% in the last three years. Our mortgage market share was 16.4% for the year, and while this was lower than the previous year, with a tail of two halves, as by quarter four, our market share had recovered strongly to a more normal share of 20.2%.
We have had a very strong start by way of our pipeline of business in the first two months as well. We continued to diversify our loan book during 2024, with our business banking book up 11% to EUR 1.1 billion. It is not so long ago that was just EUR 100 million, so we can see it now at EUR 1.1 billion. Within this, our asset finance book grew by 4%, and our SME book grew by 16%. Our total income was up 1% for the year, and underlying profit before tax and exceptionals rose by 8% to EUR 180 million. This equates to an underlying return on tangible equity of 7.5%, which is the highest we have recorded in many, many years. Our CET1 capital level ended the year at 14.7%, and that was up 0.7% for the year.
Stripping out the 0.4% gain for the last three MPL transactions, we generated underlying capital of 0.3% during the year. Rolling forward to the 1st of January and the implementation of Basel IV, our CET1 would rise to 15.3% due to a drop in our risk-weighted assets. This puts us in a very strong position as we face into 2025. Finally, our loan deposit ratio was 89%. That's four points lower than what it was at the end of 2023. If we just turn now to slide five, we're fortunate to operate in a very attractive economy. The labor market in Ireland has remained strong, and while there are many risks on the horizon, such as what is happening with U.S. trade policy, we start the year in a good place. Irish consumers, in aggregate, have a healthy balance sheet.
Household debt has been reducing for many years and is only now showing signs of growth again. Deposits, meanwhile, continue to rise to record levels. The mortgage market showed signs of life in 2024, with new lending increasing by EUR 0.5 of a billion to EUR 12.6 billion, and the market is expected to grow strongly in the coming years, which will be very good for our business. House prices continue to rise, and after increasing by 9% last year, they're expected to rise at a more modest pace from here on. If we turn to slide six, looking at our new business in more detail, our total new lending was EUR 2.6 billion for the year. While this figure was slightly down versus last year, if we look at the second half, we were up 19% year on year, which highlights significant momentum.
In addition, our mix continued to improve, with roughly 22% of new lending coming from higher-yielding business and personal lending. You will see that mix of higher-yielding lending growing over the coming years as we maintain and grow our mortgage position as well. Mortgages remain a core element of our business, and as I said, in 2024, it was a story of two halves. Our mortgage market share at the end of the first half was 13.5%, and by the fourth quarter, it reached 20.2%, which is a more normal level for PTSB. Our pricing remains competitive across our mortgage products, and customers are responding to this, and we are in a good position to maintain our recent momentum. New consumer term lending payouts of EUR 132 million increased by 13%. Customers continue to opt for our digital channel, which represents 84% of this business volume.
If we turn to business banking, new lending, which includes SME and asset finance, was EUR 434 million in 2024. Just to say, in 2021, that was less than EUR 100 million, so again, significant growth. We're particularly pleased with the 28% jump in new SME lending. Our asset finance business did well on the business side, but the consumer side had a more subdued year as new vehicle sales in Ireland were flat in 2024. If we just turn to slide seven, it's important to recognize that PTSB is now in a much stronger position than it was a few years ago. After a period of significant investment and growth, the financial performance of the bank has dramatically improved, and the core franchise has been revitalized.
Our capital expenditure has been around EUR 400 million in the past five years, and this has delivered a new digital front end for our app and desktop service, a new online mortgage portal. Our data center has been transformed, and we've invested in our brand and distribution channels, repositioning PTSB as a modern and contemporary bank. These investments are now starting to bear fruit. We have 1.3 million customers, and they want the ability to interact with us in a way that works for them. The popularity of our digital channels is growing all of the time. For instance, we had an almost 90% increase in mortgage drawdowns last year via our online portal. We also brought in over EUR 400 million in new deposits through digital channels, and that was only launched; that digital deposit channel was only launched in August of this year, and we collected EUR 400 million.
To complement the rise in digital channel usage, we're also adding value for customers in arrears like fraud in areas such as fraud prevention. This is due to customers opting for our PTSB Protect feature in our app, which has seen a 64% reduction in customer account exposure year on year. Our relationship net promoter score, which measures the willingness of our customers to recommend our products and our services to others, is high and improving, and last year it increased by 10%. Our brand equity is also at an all-time high, and our customer consideration is also evident as a result, with 62% of consumers in the Irish market giving first choice consideration to PTSB for their next financial need.
That in itself highlights the significant positive future we have in front of us by way of that level of increase in being considered for first choice financial need. Finally, through our sustainability strategy, which we will refresh later this year, we are committed to further integrating sustainability into our business and maximizing the opportunity to drive impact lending across social and environmental areas. We are delighted that green mortgages represented 43% of all mortgages last year, and that is up from 39% the year before. We have seen great appetite from customers for our SBCI Home Energy Upgrade Loan Scheme, which we were first to market on. From a social perspective, we have entered into a multi-year partnership with As I Am, and we became the first bank in Ireland to receive Autism Friendly Branch accreditation.
We are committed to continuing to deliver for our customers, our communities, and for the wider society in this space. I would like to thank you, and I will now hand over to our CFO, Barry D'Arcy, who will take you through our financial performance in more detail.
Thank you, Eamonn, and good morning, everybody. I'll just jump to slide nine, which sets out our strong financial performance for 2024. Our reported profit before tax was EUR 159 million for the year, double what it was in 2023. Stripping out exceptionals gave a better view. Underlying PBT was EUR 180 million, up 8% for the year. Total operating income was up 1% for 2024. As while our balance sheet grew, our margins have reduced, reflecting falling ECB rates and higher deposit costs. Total operating expenses were EUR 531 million, up 5%, and in line with our guidance. Given the gap between income and cost growth, our cost-to-income ratio has deteriorated 8 percentage points to 74%. We have recorded an impairment release of EUR 39 million, reflecting a positive macro environment and the underlying health of our loan book.
Exceptional items above the line were EUR 21 million, which included EUR 8 million for restructuring costs, which is essentially our Class III MPL disposal, and EUR 9 million in accelerated depreciation related to intangible assets. EPS adjusted for these exceptionals, and a one-off gain on our tax line came in at circa EUR 0.22 for 2024, which is up 19%, while return on tangible equity on the same basis was 7.5%, the highest we have recorded in many years. Finally, our tangible net asset value per share, our TNAV, was EUR 3.58 at end 2024, which is up 5% year on year. Moving to slide 10 on net interest income, our performance here NI was EUR 612 million for 2024, down 1%. This headline outcome is the net effect of large increases in both interest income and interest expense during the year, which you can view in more detail through our average balance sheet.
Positive drivers included higher income from new lending, together with interest rate repricing of fixed-rate mortgages, and increased income on treasury assets, both from a larger book and what we see as better yields. These gains, however, were offset by a rise in deposit costs, which came through both higher volume and higher average rate for term deposits, as well as higher wholesale funding costs, reflecting the impact of MREL issuance in both 2023 and 2024. Our net interest margin was our NIM was 220 basis points for the year, down 12 basis points and in line with what we guided, and we exited Q4 with a margin of 210 basis points. On slide 11, it gives you more detail on our lending income and our mortgage book in particular. Our performing mortgage book rose 1% in 2024 to EUR 19.7 billion.
As you know, fixed-rate mortgages make up the majority of our performing mortgage book, and they represented 85% of our new lending in 2024. The variable component of the book did increase during the year to 18%, as some customers cheering from fixed rates choose to wait and retain the option to fix at a time of their choosing. Meanwhile, tracker mortgages continued to fall and are now down to around EUR 2.5 billion, or 13% of our performing book. We managed our fixed-rate maturities well during 2024, retaining circa 90% of this business, and the recent price reductions we made across our product suite will enable us to do that again this year.
Another EUR 2.5 billion of fixed-rate book will mature in 2025, and these loans will reprice from an average rate in the mid to high twos onto higher rates, and that will support our income and margin in this year. You can see this effect in the chart on the bottom left-hand side, which shows that our flow yield for 2024 at 4%, which is higher than that for the stock at 3.56%. Moving on to slide 12, given the falling interest rate environment, we expect net interest income and margins to decline somewhat this year before increasing again in 2026. Positive NII drivers include new lending, fixed-rate mortgages refinancing onto higher rates, and interest rate swaps on our wholesale funding portfolio and our tier two instrument.
Negative drivers are the higher term deposit balances, lower income from cash at central banks, and our tracker mortgages due to the fall in ECB rates. The bank still remains sensitive to the interest rate environment. At the end of 2024, using a static balance, every 100 basis points decrease in interest rates results in a EUR 14 million reduction in our income. This sensitivity has been reducing as our tracker mortgages and central bank balances have declined, and our Q4 exit NIM for 2024 was 210 basis points. We expect NIM to bottom out in the early first half of this year before recovering later in the year, and we are guiding to a margin of greater than 2% for the full year. This is based off an ECB deposit rate that bottoms out at 2% by July.
On slide 13, net fees and commissions make up almost all our non-interest income each year and are derived from our current account product, commissions for home and life insurance sales, as well as from the operation of our car services. During 2024, we saw net fees and commissions increase 31%. We signaled that changes to our current account fee structure from last April would come through in the second half, and you can see that, bear that in mind when thinking through the outcome for the full year. These were the first increases in our current account fees applied by the bank since 2019, and in that time, the bank has invested, as Eamonn mentioned earlier, significantly in its current account offering.
We continue to be the only bank in Ireland that offers rewards to our current account customers through our Explore Current Account, and PTSB, along with other banks, now provide instant inbound payments through the SEPA system. We will introduce the same functionality for outbound payments later this year, which will level the playing field relative to fintechs, our fintech competitors. We currently generate a small fee income stream from our business customers, but we think this will be an area for growth as we build that business over the medium term. On slide 14, moving to operating expenses, total operating expenses were EUR 531 million for the year, which is up 5% and in line with our mid-single-digit guidance. Regulatory charges came in a bit lower than we expected as we incurred a smaller charge for the deposit guarantee scheme, which was the opposite of what we had in 2023.
Excluding regulatory charges, underlying operating costs rose 12% during 2024, although I would highlight that they were up closer to 5% in the second half of the year on a year-on-year basis. As income was unchanged for the year, this meant our cost-to-income ratio increased to 74%. While our headcount is up year-on-year, it is noteworthy that the number of employees remained broadly flat to the half-year point and is now heading in a downward direction. We continue to invest in important areas such as payments, data analytics and digital, customer and change capability, and cyber and fraud protection. This investment has been a key enabler for the bank to operate safely and meet customers' increasing needs and expectations. It has impacted the cost line, however, and this investment through depreciation charge rose 22% during the year to EUR 82 million.
As our investment spend will ease off over the coming years, depreciation should start to flatten out from here on. In terms of the outlook for cost, we are very conscious that the bank's cost base needs to be right-sized for the current environment in which we operate, so we are pursuing a number of strategic change initiatives to bring this about. As previously mentioned, our ambition is to reduce the overall operating expense of the bank to near EUR 500 million, and in terms of guidance for this year, we had point to a figure of circa EUR 525 million. Eamonn will discuss outlook for costs in more detail in a few moments. On slide 15, asset quality continues to remain very strong, and as a result, the bank has recognized a P&L impairment release of EUR 39 million for the year, which is cost of risk minus 18 basis points.
This is better than the minus 10 basis points we had guided for. Our provision stock fell to EUR 178 million during the year, primarily as a result of our Class III NPL sale. This stock still includes a EUR 90 million overlay, model overlay, which involves management judgment. As part of a review of our IFRS 9 models, we continue to challenge these overlays internally with the view to better incorporate them into existing model parameters. Our total provision coverage ratio was 1.8% at year-end compared with 2.6% at end 2023, with most of the difference down to the Class III NPL sale. Meanwhile, our NPL ratio remains at circa 1.8%, similar to the level at half-year and down from 3.3% at end 2023.
Obviously, with the U.S. introducing tariffs on its trading partners, the Irish economy could be impacted given its export focus and open nature and exposure to U.S. multinationals, so we're keeping a very close eye on that. The weighted average loan-to-value on a home loan mortgage book is at 48%, with the new mortgage weighted average loan-to-value at 68%. In terms of guidance for 2025, we believe we're well provided for currently and will guide towards a zero charge for 2025. On slide 16, on our funding profile, you can see as a deposit-led bank, 84% of our funding is sourced from customer deposits. If I pick out the key points here, customer deposits grew 5% year-on-year, which was a good performance relative to the market. All of this growth was in term deposits.
Notwithstanding changing preferences amongst our customers, we had noted that our current account balance remained broadly unchanged during the year. Following a busy period of issuance, our MREL ratio remains very strong at 35.2%, which is well ahead of our regulatory requirement, and we have no further plans to issue senior debt this year. The bank now has two rating agencies, Fitch and Moody's, who are our holding company at investment grade, and this will benefit us in the future when we come to future issuance and refinancings. On slide 17, looking at capital, our CET1 was 14.7% year-end, up 0.7% from December 2023. Stripping out the benefit of Class III transactions, CET1 was up 0.3%, and you can see the different moving parts in the chart there.
If we apply Basel IV on the 1st of January, our CET1 was 15.3% on a pro forma basis due to a EUR 500,000,000 decline in our risk weight. This is well in excess of our regulatory requirement, with our 2025 SREP requirement now at 10.83%, up 50 basis points due to the inclusion of the new OSII buffer. Management's CET1 long-term target remains circa 14%, and we are committed to optimizing our capital structure in the coming years. Finally, just on slide 18, just a brief update on our IRB model program. As you know, the bank's mortgage credit risk model was submitted in 2017 when non-performing loans were at a peak. The portfolio and profile has substantially improved since that time. For instance, over 70% of the bank's mortgage book has been written since 2015 under the Central Bank of Ireland's macro-potential rules and our revised credit policies.
Our new model will be submitted to our regulator in the second quarter, and this is a strategically important project for the bank. We are working hard to ensure that we deliver on a positive outcome. On the previous slide, I mentioned that our risk weights moved by half a billion , moved down on the 1st of January because of Basel IV. Some of this benefit came through in our standardized book, which is essentially our loans which we had acquired from Ulster Bank, and some of it came through the IRB book through the removal of a scaler. Just to summarize, the bank had a strong performance in 2024 across our business lines, and a particular highlight was the recovery in our mortgage market share in the second half to more normal levels.
2025 has also started well, and while a less favorable interest rate environment means we have to continue to work hard on costs, we are confident about the prospects for our business. I'll hand you back to Eamonn now and take you through the refreshed three-year strategy and our plans for costs and financial targets. Thank you.
Thank you, Barry. Before I take you through our refreshed strategy, I want to summarize the investment opportunity that PTSB represents. PTSB is a very simple equity story. We are a challenger bank in arguably Europe's best economy. Ireland has a young population with a strong savings culture and is emerging from a long period of deleveraging. Our government finances are in excellent shape, and while we have challenges to resolve, such as our housing deficit, there's no shortage of money or commitment to solve these issues. That is our market.
What about PTSB? We're the third largest bank in the country with 1.3 million customers. Our franchise has been revitalized and is ready to benefit. Our customers are also telling us that there's a huge demand for an alternative in the business banking market, and we are in prime position to capitalize on that. Our business has been heavily de-risked in recent years, and we believe there's an opportunity now to remove some of the remaining legacy costs that have held our business back over the past decade, and these include capital models that don't truly reflect the underwriting environment over the past decade, and a wholesale funding cost that has yet to be fully reflected based on our investment-grade status which we received in 2024. If I turn to page slide 21, today the bank is announcing a refreshed three-year business strategy.
Building on the investments made in recent years, the bank is now in prime position to challenge the two dominant banks in Ireland and compete with the wider market. This strategy has been developed with our customers at its heart and in consideration of all stakeholders, that is, our colleagues, our investors, our regulator, and the broader Irish society. Our ambition is to become Ireland's best personal and business bank through exceptional customer experiences. To achieve this ambition, we will execute our strategy and maximize our value proposition, which has been digital-first, that's complemented by a physical presence, by offering our customers innovative propositions that reward loyalty while remaining competitive in price, and leveraging our modern and contemporary brand to deliver on our promise of being altogether more human. The overarching goal of our strategy is to deepen customer relationships, diversify our income, and to differentiate through customer experience.
In parallel, the bank will drive greater operating efficiency so we can continue to grow and generate sustainable returns for our shareholders. How will we deliver this? We will organize ourselves around five value streams, the first one being Own My Home, and that's our mortgage and term lending business. The Manage My Money value stream, that's our deposit business, our current account offering, overdrafts, and credit cards. The Grow and Run My Business value stream, that's our SME and our asset finance business. These three value streams are underpinned by two more value streams which cut across the three business areas, which is around transformation and transforming the bank and indeed strengthening our foundations. These two value streams relate to the core workings and systems of the bank, how we organize ourselves, what we invest in, where we embed resilience.
On slide 22, I give you a couple of examples that hopefully will bring these value streams to life. The Own My Home value stream will deliver a new mortgage self-service portal which will enhance the customer experience and remove admin-heavy back office processing. We will also introduce a new customer offering in the retrofit finance as an example, but there will be new offerings as well, other offerings I should say. In Manage My Money stream, we'll be focused on maximizing the engagement with 1.3 million customers to increase our average product holding. We're developing new customer service journeys on our app which will also deepen that relationship, the relationship with customers. As I mentioned earlier, customer consideration to do more business is already there.
Our recent current account campaign to our existing customers is evidence of that action as we extended our Explore Current Account offer to tens of thousands of mortgage customers who do not currently hold a current account with us. There is the Grow and Run My Business value stream. Here we believe we can offer superior service with fast underwriting, and we intend to build on our offering in SME and asset finance as we go forward. We will develop a digital credit proposition for small and micro SMEs. In the transformation space, we will elevate sustainability with a stream focus on the social agenda where we believe there is an opportunity for us to play. If I move to slide 23, in this slide we focus on our strategic business transformation. As we implement this refreshed strategy, we are going to right-size the bank's cost base.
With interest rates on the way back down, our revenue environment will not be as favorable, and in order to stay competitive and meet customer needs, we need to respond. However, we will do this in a safe manner and in a manner that protects our growth opportunities. For instance, as you can see from the chart on slide 23, we have described our addressable cost base of EUR 416 million, which includes an element of investment spend. While we see our profit and loss investment spend starting to reduce, it would not make sense to reduce this dramatically at this moment. The bank has established a strategic business transformation program to meet this challenge, and I have listed a few of the key cost initiatives here. We can generate savings and synergies from redesigning the organization now that the Ulster Bank business has been bedded down.
We're looking at product and process simplification and automation. We'll be rolling out customer self-service journeys to maximize digital adoption and straight-through processing, and we'll move to eliminate remaining paper correspondence to the extent that we can. We're also going to rationalize software and IT suppliers, and there's an opportunity for us to utilize digital and AI to streamline customer engagement and to reduce manual effort across our distribution channels. Lastly, there's the contact center. We're going to introduce a new contact center platform later this year, which will significantly improve how we support our customers, as well as providing colleagues with a much better system to support them in the work and reduce costs at the same time. In all, we're progressing over 20 initiatives, and more are likely to come into scope as we get deeper into the process.
If I move to slide 24, when we put all these initiatives together, what will our revenue and cost trajectory look like? If you take the revenue side first, the mortgage market looks set to grow by 25-30% over the next three years. That should translate into double-digit growth in the national book. We aim to hold our share of this growing market. In business banking, we think our book can grow between 15-20% as we take back some of the share vacated by the exit of Ulster Bank. Combined, that will translate to growth in our total loans between 4-5% per annum. On the other side of the balance sheet, deposits in Ireland should grow between 3-4%, and we believe we can grow a little bit faster than that, particularly in current accounts.
In summary, we aim to deepen our relationship with our customers, which should lead to a rise in the number of products they have, and this will be good for interest income and fees and commissions. If I turn to the right-hand side of the page and talk about costs, we see our costs reducing each year out to 2027 with an objective to getting down to around EUR 500 million and a cost income of 60%, a cost income ratio, apologies, of 16%, 60%. Our voluntary severance scheme is one of the initiatives that will help us do this, and we saw our headcount falling by around 300 this year. While there will be a one-off cost to enable this, which is likely to be around EUR 25 million, the reduction in the wage bill will put us well on the road to reaching our EUR 500 million target.
If we turn to our guidance, as you can see, our guidance set out for 2025 across the various line items, including total income, which will reduce by a low to mid-single digit %, and costs of around EUR 525 million and a risk charge of zero. As regards dividends, as I said at the half-year stage, we hope to be in a position to return to distributions next year, and we'll be mindful of shareholder preferences as to the form of any return. Our return to growth in the mortgage market will be very good for our business, but this growth has been slower to materialize than we originally expected.
This together with a lower interest rate environment has prompted us to refresh our medium-term targets, and they are as follows: a return on tangible equity of around 9%, a net interest margin of above 220 basis points, a cost base of around EUR 500 million, a cost-to-income ratio of 60%, and a cost of risk between 20 and 25 basis points. Just to mention that these medium-term targets do not assume changes to risk-weight densities as part of our IRB model review. They are modeled on the basis of our current capital requirements, and we will have to reflect new targets once we get a revision of our densities in due course. To summarize, the management team of PTSB are committed to delivering for our shareholders in the coming years.
We believe there is a critical role for us to play in the Irish marketplace in offering much-needed choice to personal and business customers, and that we can grow our business, improve our cost efficiency while meeting our customers' evolving needs. Thank you very much for joining us for our presentation, and we are more than happy to take questions. Thank you. We will take questions on the phone if there are any across the line.
Thank you. To ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. Our first question is by Diarmaid Sheridan from Davy. Your line is now open. Please go ahead.
Good morning, Eamonn. Good morning, Barry, and thank you for the presentation and taking my question. Three questions, if I may. Firstly, maybe just around income growth out to 2027. Maybe you could talk through what your thoughts are around the mix of your balance sheet, liquid assets versus loans, and then within loans, what your view around mortgages and SME consumer lending might look like out to 2027, given the growth that you've talked to. Secondly, just around capital and distributions, Amy, I appreciate it's a little early given it can be this time next year. Hopefully, we start to see those. Maybe just around the trajectory of how you feel that those could start.
Do they need to start and build up gradually, or do you feel that there is capability, given the very significant amount of capital there, to kind of more go to a normalized point faster than we have seen elsewhere? Finally, on capital efficiencies, and maybe looking beyond the risk-weighted assets points that you have talked to, Barry, just thoughts on AT1 level, just mindful of the call later this year and given the various movements in OWA, whether that is a required instrument beyond this year or not. Thank you.
Okay. Thanks, Diarmaid. I'll answer the second question first, and then Barry, you might pick up on the two. Just on capital distributions, it's our ambition to start next year. Obviously, we believe we have capacity today, sorry, when we look into next year, capacity to pay a dividend, but we also have to think about where the IRB models will go and how they will land by way of a capital release for us. Therefore, it's a challenge to model distributions out in the long term. We believe we have the capacity to make distributions every year, but they obviously are highly dependent on where IRB models land. In that sense, that will give us much more clarity with regard to levels of dividend payment.
If we were on the current models for an extended period, we'd be starting with a lower dividend and then building up over time. The IRB models will really come into play then because it'll actually educate us clearly as regards what's the capital consumption required in our business and therefore what's left by way of distribution to shareholders. We believe there will be amounts left over for distribution to shareholders on a continuing basis. I think I'll leave the level for the half year or next year, Diarmaid, in the sense of how we think about it. That's okay. Barry, back to you.
Yeah. Just on income growth, where we see a mix is we assume loan growth of 4-5% this year. There's a mix of both the mortgage portfolio of 3-4%, and then with our growing business banking, SME, asset finance growing at a greater rate than that, we see steady growth in our consumer finance piece. It is a mix of those three elements will combine to the 4-5% this year and beyond. Regarding the MREL level, very good question. That is something that we are looking at very closely. We are very cognizant of our capital requirements. We are looking to see if that could be something that we may not need to utilize in 2025. We have an MREL ratio of about 35.2%. The requirement is probably 28-29%, but we would probably keep a level toward 32%.
It is something that we are looking at very closely. Obviously, the timing of IRB model outcomes is important there, but what we are trying to look at is all our kind of key decisions will be taken on the assumption that we are working on our current state. We are not considering the IRB discussion in that regard right now. So 81, something that we are looking at.
Great. Thank you very much.
Our next question is from Denis McGoldrick from Goodbody. Denis, your line is now open. Please go ahead.
Good morning, Eamonn and Barry, and thank you for the presentation and for taking my questions. Just two, please, if I may. Can you please confirm what interest rate assumptions you're applying for the medium-term guidance out to 2027? Then secondly, on the EUR 500 million cost target, do you foresee additional FTE reduction beyond the 300, which will act as part of the current redundancy scheme? Thanks.
Okay. You might pick the first one.
Yeah. Just on the first one, Denis, what we're assuming is that deposit rates will fall to 2% by July, and we expect that that will continue out through to 2027, so flat line thereafter. That is the basis for our forecast for interest rates.
On headcount, Denis, and thank you for the two questions. Our headcount has increased by 1,000 people in the last three years. What we are seeing is a significant bedding down of the business, less legacy issues that we have to deal with, more investment in digital technology and in transformation, and indeed the establishment of our business lending business, our asset finance business, and indeed a real settling down of our current account and our offer in that sense by way of our wider offer, our mortgage offer. We are also seeing customers move more onto digital channels. We have seen the significant increase in the usage of our mortgage portal. We have also, as I mentioned earlier, gathered EUR 400 million in deposits digitally since August, so we are seeing a ramp up there. We are also implementing changes by way of strategic business transformation, which will bring more digital activities into play.
That will allow us, over time, to look at how we process, look at where people are allocated, and what people are doing within the organization. It will allow for more internal movement within the organization, and it will indeed allow us, over time, through attrition, through normal attrition, to look at where jobs are, where roles are, and indeed how we think about employment levels in the overall organization. While we have a voluntary scheme in place at this moment, which has been executed, I do not envisage another one, but I do envisage more efficiency by way of how we do our internal work, and in time, that will reduce by way of the level of recruitment we make as an organization.
I should also mention, within our current headcount numbers, we have nearly 100 graduates we've taken on over the last three years, and they're growing and performing well within the organization and give us great source of talent for the future. We will take on another 40-50 graduates this year. We also have up to 200 fixed-term contract colleagues within that number as well. There is flexibility already in our model, and there is also growth by way of attracting talent to the bank. It's a mixture of those things, Dennis, that will lead us to that cost base. In real terms, our headcount will be lower.
Great. Thank you very much.
Our next question is from Andrew Stimpson of Keefe, Bruyette, and Woods. Andrew, your line is now open. Please go ahead.
Morning, everyone, and congrats to Barry on making CSO. One question for me on capital and one on net interest margins. On capital, just back to Derman's question, assuming you get a decent answer on the risk models and the risk-weighted assets do come down, could you just talk us through how you're thinking through allocating the booster between dividends, buybacks, and organic growth? Just an order of priorities there would be helpful. Secondly, on net interest margins, could you just talk through what you think the reason is for the continued slide in the medium-term NIM outlook? I know it's a bit unfair to look back at old targets, but it used to be 2.5, then it was 2.3, and now today, 2.2.
I remember there was some hope that the more expensive time deposits you added in 2023 would roll off, and you mentioned again the wholesale funding costs would come down, but obviously, that's then leading to less of a meaningful pickup in the medium term, even once those things have rolled through. Is it fiercer competition, or what's driving down that medium-term target reduction too, please? Thank you.
I'll pick up on the thank you for the questions. I'll pick up on the first question, and Barry, you might answer the second. On the capital, there's a well-trodden path amongst both AIB and Bank of Ireland with regard to how they've looked at excess capital by way of dividend-directed buyback and indeed proportional buybacks, and also retaining capital for growth as well. We will look at all of those options by way of how we think of the excess capital we will have on board once the IRB models come through. We will look at dividends, we will look at directed or proportional buyback, and we have to engage indeed with our main shareholder with respect to the directed buyback aspect. That's something we will be doing through this year in preparation for when the capital levels do land at a normalized level.
It's difficult to talk about the level of proportion between business growth and return for shareholders because the capital usage that we will have is not known yet. We need to get those IRB models sorted and get them through the system and get out the other side in that sense. We will have to retain something for growth. We expect to grow our loan book at a faster pace than others. That's because of our positioning in the mortgage market and a strong position there, very good traditional position. It's also where we are in term lending and indeed other aspects of personal lending, whether it's retrofit, etc. When we look at the business side, we will grow faster than others because we're coming from a different place.
We will have to retain some capital, but I would suggest a significant portion will be going back to shareholders.
Thanks, Eamonn. Just on NIM, what we've seen in NIM, our guidance for 2025 is greater than 2%, and we're seeing greater than 2%, so it's not necessarily down to the 2% level. As we step out, we see NIM target out to 2027 growing to 2.2%. In the short term, the rate changes that we have made, which has continued the momentum to build our lending in 2025, has provided some downward pressure. What we see coming through this year is mortgage repricing on the EUR 2.5 billion of fixed loans mature in 2025, and then further maturities in both 2026 and 2027. That will support NIM improvement toward that target of 2.2%. What we're seeing in those repricings is that loans are moving from the mid to high twos to the mid to high threes. We are seeing that change, which will be supportive.
We have not changed our deposit pricing since mid-2024. Rates are absolutely kept under review, and that could provide further support to NIM in time if the bank were to make changes there.
Thank you.
Our next question is from Grace Dargan of Barclays. Your line is now open. Please go ahead.
Good morning. Thank you for taking my question. I guess maybe just building on that answer a little bit. In terms of that NIM guidance for year 2025, what do you see as the bigger drivers that take you down nearer to the 2%? What do you see as a more bullish upper end? I appreciate it's a greater than 2%, but realistically, what would be a good outcome there? Maybe included in that, what are you assuming around term deposit growth? Secondly, I appreciate the commentary around submitting the kind of IRB models for review in Q2. I know it's very difficult to say, but I guess you've guided historically. You think you might have some clarity on that towards the end of 2025. Is that fair, or has that changed in any way? Thank you.
Barry, you might.
Yep. Just on both. On the NIM element, just an element that's taking place there is what we see is, as I mentioned, the low point will come in the first half of the year. What we have seen also is that the general pressure on trackers and balances with ECB, we've got EUR 4.6 billion of balances at the end of 2024. We have that element coming into play. As we reprice those loans, we should expect to come up towards the 210 and going out toward the 220 level in 2027. We should see a stronger second half of the year in that regard.
Regarding IRB models, I think a key element of our focus right now is to conclude the very extensive work that we have been working on for about 18 months now to actually conclude our submission to the Central Bank of Ireland in the second quarter. It's a very comprehensive piece of work. That's an element that's within our control. We have been having very good constructive engagement with the Central Bank of Ireland in terms of timing and when the submission will be made and just to align on certain expectations they may have. It is over to them, and we're not in control of their timeframe. It is something that we will watch very closely. We'll have good engagement, and when we have news, we will share it with you. We'll look forward to that outcome in due course.
Okay. Thank you very much.
Our next question is from Benjamin Toms of RBC. Your line is now open. Please go ahead.
Good morning, and thank you both for taking my questions. Just to follow up on the cost efficiency question, I appreciate you do not expect another voluntary redundancy scheme, but do you expect to take further material exceptional costs post 2025 to achieve the further efficiency measures that you highlighted? Secondly, in 2027, your cost of risk guidance is now 20-25 basis points. Previously, I think that was less than 30 basis points. Is the new guidance a new normalized level, or should we expect the cost of risk to continue to build post 2027, i.e., it would represent a headwind to your 2028 ROT versus 2027? Thank you.
Thank you, Benjamin, for your two questions. On the first one, we do not envisage any additional exceptional costs at this moment. For the purpose of modeling, there is not a requirement to put those in. With regard to your question, in fact, if we were showing you the 2028 out numbers, they would be much stronger. Just to say that the four-year numbers are stronger by way of the returns, etc. As Barry had indicated earlier, we are going through not only an IRB model review, we are also updating our IFRS 9 models. You can see in our PMA, our management adjustment in that sense, we have over EUR 90 million in that particular category at the end of this year.
We've also seen that our impairment charges over the last four years have been released as not charges, and we still have a fair amount of conservatism in our book. Our cost of risk is a guide, and I think it's a reasonable level to reflect into the following year as well because really what we're reflecting is the fact that our book is currently primarily a mortgage book with a 48% loan-to-value ratio and performing extremely well. We're building up our business book. We're not carrying any commercial real estate. We're not carrying any legacy-type business exposure. We're right in the middle of the transition to a low-carbon economy when it comes to financing. We're in a good position there to build a book. Therefore, we don't believe there's a significant increase in risk profile.
As I said, if I showed you the 2028 numbers, they'd be much stronger than 2027, but we're showing a three-year view at this moment. Barry, do you want to add to that?
I think one of the experience on the cost of risk, as we've built our experience on the SME and business banking, that was an element that was captured in 30 basis points. As that experience has grown, and also as Amy said, we're creating and building a very strong mortgage portfolio. Our non-performing loans are at 1.8%, one of the lowest in the market here in Ireland. We're quite happy with our underlying credit approach. The cost of risk is coming down on that basis.
Thank you both.
As a reminder, to ask a question, please press star followed by one on your telephone keypad now. We have a question from Rob Noble of Deutsche Bank. Rob, your line is now open. Please go ahead.
Morning. Thanks for taking my question. Just a near-term question on cost of risk for 2025, which you've guided to zero. I presume that you've got, you're pointing to growth. So you've got stage one provisions. I presume that you've got some assumption of losses as well in terms of new lending and stage three movement. How do I square it off to zero? Does that mean you're assuming model releases? I guess help me understand kind of the IFRS 9 models. If you're expecting releases, do you not have to release them now?
Okay. Barry.
Yep. Thanks, Rob. What we're looking at right now is with our IFRS 9 models, we're looking to rebuild in advance of, as we grow our balance sheet towards EUR 30 billion, the likelihood of moving back toward the SSM increases. We're building our models now to future-proof our re-entry into that broader approach with a higher focus on our underlying model approach and how we actually weight the various movements into those models. We're building that as we speak. We have conservative PMAs in place. We are looking at in-model adjustments as well. What we believe is that those changes that we're going to make in time will give us room to maneuver in terms of how we look at that level of PMA through time.
It should give us maneuverability, but we want to see how that actually builds out as we progress with that work. In effect, the zero should actually allow some element of release offsetting some charges coming through as well. As we have seen over the last three to four years, we have been releasing impairment coming from quite high positions now to a more normalized level. It is all part of the bank normalizing into a good way of working both from a cost and income and an impairment perspective.
Thanks. I guess from an accounting perspective, if you expect releases, does IFRS 9 not force you to take the release now? Are you allowed to say cost of risk is zero expecting releases, but we're looking at whether there are releases or not?
I think a key element in that is the underlying performance in our portfolio. If the benign environment that we've seen over the last two to three to four years continues, that will allow us to actually see that kind of come through in our portfolio. We haven't reached that moment yet. We are looking ahead at this time. From an accounting viewpoint, we're pretty comfortable that the accounting at year-end is in the right place. We are taking a conservative approach, but again, this is toward our guidance for the full year and looking at our experience over the last two to three years in that context.
All right. Thanks very much.
We currently have no further questions, so I'll hand back to Eamonn for closing remarks.
Great. Thank you very much. Thanks, everyone, for your questions. We look forward to delivering for everyone in 2025. Thank you. Bye-bye.