Good morning and welcome to our 2025 interim results presentation. I'm going to give you an overview of the performance of the bank during the first half of 2025 and say a little about the progress that we've made through the first six months of our new three-year strategy. In a few moments, our CFO, Barry D'Arcy, will provide a more detailed review of our financial performance. I'll come back just at the end to discuss our progress towards our medium-term financial targets, and then we'll take some questions. If we just turn to slide five, we've delivered a strong performance in the first half of 2025, supporting customers and communities around the country. Our customer deposits rose by EUR 1.1 billion in the first half to EUR 25.2 billion, and are 7% or EUR 1.6 billion higher than a year ago.
To put that in perspective, we attracted the same amount of deposits during the first six months of this year as we did during all of 2024. After many years where our loan book was shrinking, I'm pleased to say that our mortgage book grew nearly 1.5% in the first six months and is up 3% year- on- year. We signaled during our quarter one update that as the year progressed, the growth rate in our loan book would accelerate, and this is now happening. I will take you through the latest trends in the mortgage market and our market share shortly. We also continue to diversify our loan book during the first half, with our business banking book up 14% year- on- year to EUR 1.2 billion.
Looking at our key financials, due to the fall in interest rates, our total income reduced by 4% in the first half, but our operating expenses also reduced by 1%. In terms of profitability, our profit before exceptional items was EUR 51 million. As we recorded a nil impairment charge for the period, this was also our operating profit figure, which was 17% lower year- on- year. Moving to capital, our CET1 ratio was 15.5% at the end of June, putting us in a very healthy position relative to our regulatory requirement. This has increased by 80 basis points since the end of last year. CRR3 or Basel IV contributed 1.2% to capital during the period, which is larger than the 70 basis points we previously estimated.
Another highlight of the first half was the submission of our new IRB mortgage model to our regulator, the Central Bank of Ireland, seeking their approval. This is a major project for us that we've been working on for quite some time, and Barry will say more about this later. I'd also like to highlight our loan-to-deposit ratio, which is at 86%, which is three points lower than where it was at the end of 2024. This leaves us well positioned to fund future lending. If we just turn to the next slide, PTSB operates exclusively in the Republic of Ireland, and we are fortunate that we have a very healthy economic backdrop to our business.
The labor market in Ireland has been extremely strong in recent years, and while there are signs that businesses have become more cautious about hiring, this has not impacted our business in any way, though we do remain vigilant. The deal between the U.S. and the EU on tariffs earlier this week, while not exactly what Ireland and Europe wanted, at least provides some sort of level of certainty so that businesses can plan and adjust to the new environment. From our perspective, we've conservatively modeled a scenario slightly worse than this in how we thought about our provision cover, and again, Barry will cover that later in the presentation. Irish consumers in aggregate have a healthy balance sheet. Household debt has been reducing for many years and is only now showing signs of growing again.
Deposits, meanwhile, continue to rise to record levels, and I've mentioned our bank continues to benefit as a result. Meanwhile, the mortgage market is growing as we expected, with new lending forecasts to increase to EUR 14 billion this year and expected to be EUR 15.2 billion next year as we tackle our large housing deficit. House price growth in Ireland has slowed this year, but by year-end, it's still expected to be at least 5% higher year- on- year. If we just turn to slide seven. Given all the news around tariffs and the fact that Ireland is a small open economy, investors are naturally very interested in our resilience on foreign direct investment, our reliance, I should say, on foreign direct investment and its linkages with the domestic Irish economy and the risk to this investment flow in the future.
In slide seven, I just want to spend a moment commenting on some of the trends that have created the modern successful Irish economy that we see today. Ireland has been a huge beneficiary of trade and globalization, but the growth and development we've seen over decades was no accident. A big emphasis on education and supportive government policy, as evident in some of the statistics we show here, helped create a virtuous cycle of growth, rising living standards, and inward migration. As a bank, we are naturally keeping a close eye on any warning signs that this supportive environment may be changing, but so far, there is little to report. In the event the Irish economy deteriorates, it's encouraging that the government is running budget surpluses and our debt as a percentage of GNI* is forecast to be down at 65% at the end of this year.
We just turn to slide eight. Turning to our lending performance in the first half, we had our strongest first half period in recent years. In fact, it's the best performance we've had since before the global financial crisis. Our total new lending was EUR 1.6 billion, and that's up 66% year- on- year, with 18% of our new lending coming from higher yielding business and personal lending. In mortgages, we lent EUR 1.3 billion in the first half, and that's nearly twice what we lent in the first half last year, and our market share has landed at over 20% when you compare it to the 13.5% we recorded in the first half of 2024.
New lending in business banking, which includes SME lending and asset finance, was EUR 221 million, and that's an increase of 23% year- on- year , which we're particularly pleased about as this is a new area of lending that we've been playing or participating in competing in over the last four years. Consumer term lending payouts were lower year- on- year , but we have a strong ambition in this space to increase our market share, and we'll come back to that when we get to the year-end results. If we just turn to slide nine, this outlines our business strategy for 2025 - 2027. It's a three-year strategy. In March, I took you through this strategy, and our ambition continues to be the best personal business bank through exceptional customer experience. The overarching goal of our strategy is to deepen customer relationships, diversify our income, and differentiate ourselves through customer experience.
In parallel, the bank will drive greater operational efficiency so that we continue to grow and generate sustainable returns for our shareholders. To show our strategy in action, we turn to slide ten. Here are some examples of this strategy working. As I've said, we want to deepen our relationships with our customers. Our core relationship NPS score was 22 points, and this is up 2 points year- on- year . We're working hard every day to drive that higher as happy customers are more likely to consider us for their next financial need. Indeed, on that front, our latest survey suggests that 71% of all consumers would give serious and first-choice consideration to PTSB to meet their next financial need. You can see evidence of this in the number of new accounts we've opened. It is also our ambition to diversify our income.
Our business banking book is growing at double-digit pace. We're performing well in green mortgages, while in areas where we have work to do, like fee income, we have plans in place that will up our game. For instance, we are meeting more customers each month for financial health checks, and in due course, that should bring more business and more activity. We want the customer experience of PTSB to be different from that of our competitors or altogether more human, as we like to say. We're striving to offer great technology with a human touch. Customers give us a nine out of ten score for our current home buying journey, so they clearly like what we're doing today. However, we know we still need to get better, and I will touch on that in a moment.
On the technology front, we've made more progress in recent months with a lot of new features introduced into our app, such as the faster login times, biometrics, card management, and a digital gambling block. We have a very ambitious delivery plan over the next 12 months, and we're only starting by way of increasing and improving the activity on our app. Finally, our strategic business transformation program, or the SBT, is underway, and you can see from our performance in the first half that we're starting to make progress on our cost base. If we just turn to slide 11, I spoke to you in March about the strategic banking transformation program. The initiatives under SBT are focused on simplifying our business, digitizing processes, improving agility, and enhancing cost efficiency, all to improve both customer and colleague experience.
Since mortgages make up 90% of our loan book, a key initiative in this program is re-engineering our mortgage sales and service journeys. We are developing a new and improved mortgage sales service portal to enhance the customer experience and streamline back-office processing. Currently, over 90% of customers who apply for a mortgage with PTSB start a journey on our online mortgage portal, developed in conjunction with CreditLogic and Irish FinTech. This portal allows you to submit documentation like bank statements, track your application, and interact with our staff via chat or phone. You can manage your mortgage application from start to finish through this portal, and customers really love this process, as we can see and as I mentioned in our survey results. We are enhancing this by integrating FinTech-led services like open banking and categorization to improve the experience.
We will also be better able to target cross-sales, particularly our insurance protection, and indeed our current account offerings as part of the mortgage process. Managing your mortgage throughout its lifetime is currently a manual process for both customers and PTSB. In the near term, we will launch app functionality that allows customers to easily change payment dates, to manage rates, to request statements, and access other services directly through the PTSB app. This will significantly reduce time and effort for both customers and colleagues while eliminating unnecessary paperwork. Over time, we will add more mortgage features to this self-service portal, enabling our customers to meet their banking needs on the go at a time that suits them best. To better help customers when they do need more human support, we've invested in a new AI-enabled system for our call center.
This system will reduce call times and after-call wrap-up times, enabling our colleagues to support our customers more efficiently and deliver a better consumer or customer experience overall. If we just turn to slide 12, I want to just put a spotlight on our business lending and business activity. This is another important element of our strategy, which is to diversify our income by growing our business banking portfolio. On slide 12, we provide more of a deep dive into both the SME and asset finance businesses, which make up our value stream, which is grow and run my business. We start from a position where our loan book is a combined EUR 1.2 billion with market share percentages in the single-digit area.
We think we can grow this book by 15% - 20% per annum over the next few years as we take back some of the share which was vacated by the exit of Ulster Bank. Growth in the 12 months to June was 14%. We believe there's an open door for us in this market if we offer superior customer service with fast underwriting. We intend to build our offering in business banking as we go forward. You can see from the charts here that our loan book is well diversified across sectors, and there are better yields to be gained in this market, which helps our net interest margin. Asset finance, by its nature, involves security, while on the SME side, 70% of our lending is to facilitate a business or business owners purchasing a property for business use, and the building itself acts as the security.
Our investment in the near term is focused on making this business scalable. Once we've done that, we will then look to broaden the offering by developing a bespoke business credit account and savings offering for customers. If I just turn to slide 13, in May, we announced our new three-year sustainability strategy, which is focused on channeling investment and directing impact towards areas that enhance societal well-being. Not only is this the right time to do this from a societal perspective, but our recent reflecting business research found that 78% of Irish businesses see that the sustainability market has a major growth opportunity to win more customers and increase revenue. This shows that there's a commercial benefit to sustainability, and we want to support customers in that respect. We're making strong progress in delivering this strategy with 43% of all new mortgage lending so far being green.
This year alone, we've lent EUR 26 million in impact lending. Our science-based targets and carbon reduction plan have been developed and submitted to the science-based target initiative for validation. Thank you, and I'll 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, everyone. Slide 15 sets out our financial performance during H1 2025. Total operating income reduced 4% in the first half, as while our balance sheet has grown, our margins reduced, reflecting lower ECB and mortgage rates and higher deposits. Total operating expenses were EUR 271 million, or 1% lower. Within regulatory charges, it came in at EUR 25 million, with the reduction related to the deposit guarantee scheme. Given the gap between income and cost growth, our cost-to-income ratio rose 3 points to 76%. We've recorded a nil impairment charge in H1, reflecting a very positive macroeconomic environment and the underlying health of our loan book. Exceptional items were EUR 32 million, which is slightly higher than the EUR 25 million we guided. This includes EUR 29 million for our voluntary severance scheme and EUR 3 million for non-core items.
After these exceptionals, our reported profit before tax was EUR 19 million for the period. Stripping out exceptionals and the movement in impairment line to give that better view, operating profit was 17% lower at EUR 51 million. EPS adjusted for exceptionals came in at circa EUR 0.04 for H1, while return on tangible equity on the same basis was 2.9%. Finally, our TNAV per share, our TNAV was EUR 3.53 at the end of June, which is up 2% year- on- year . On slide 16, we show our net interest income performance. NII was EUR 288 million for H1, or 7% lower as the effects of falling interest rates on our margin offset higher average interest earning assets. You can see from the chart here that the main negative driver behind NII was higher deposit costs.
This was a function of higher average volumes relative to last year, particularly in term products and higher average rates. This was partially offset by lower wholesale funding costs from reduced repo volumes, as well as a gain on our hedge position on our MPNs and Tier 2 instrument. Here we have swapped a fixed interest cost into a variable, and this variable cost reduced during H1 as rates came down. Our asset yield reduced 21 basis points year- on- year as income on our tracker mortgages and cash balances repriced. I'll talk about that in our lending income in a bit more detail in a minute. Meanwhile, our average cost of funds rose 3 basis points year- on- year , though this was after the hedging gain.
Our average cost of deposits rose about a quarter of a percent to 76 basis points, but the increase relative to H2 was near 10 basis points. Our net interest margin, or NIM, was 202 basis points for the half year, down 8 basis points from our Q4 exit margin of 210 basis points. This was slightly lower than budget, but this was due to stronger deposit inflows, so it's purely the effect of the denominator being a little larger in the calculation. The extra cash we took in during H1 raised our central bank deposits, and the average ECB deposit rate during the half was circa 2.4%. This extra cash will support our lending in the second half, and we still expect a margin of greater than 2% for the full year. As before, this is based off the current ECB deposit rate of 2% persisting to year-end.
The bank still remains sensitive to the interest rate environment, though this has reduced materially. At the end of June 2025, using a static balance sheet, every 100 basis points decrease in interest rates resulted in a EUR 9 million reduction in our income. This sensitivity has been reducing as our tracker mortgages and central bank balances have declined. For comparative, if you went back to our H1 2024 results, we said that figure was EUR 25 million for every 1%, quite a change. On slide 17, we give some detail on our lending income and our mortgage book in particular. Our performing mortgage book rose 3% in H1 2025 to EUR 19.9 billion. We've shown this chart for a number of years, but it's worth noting that our NPLs are very small now. If we included those to show you the total mortgage book, the growth rate will be similar.
Falling rates outweighed the benefit from volume growth when we compare the two halves, and you can see the effect of falling rates on the chart in the bottom left. Our flow yield, which captures new-to-bank customers, was 3.69% as of June 2025, down 65 basis points year- on- year , but still higher than that for the stock, which was 3.5% measured in the month of June. The other side of our lending story is what's happening with our fixed-rate maturities. Here we have mortgages written when rates were much lower, such as in 2022, maturing onto higher rates today, and that is providing support to NIM as we go forward and at least out until 2027.
We show you here the latest split of the mortgage book, and as before, fixed-rate mortgages make up the majority of our book at 71% of the total, the variable component of the book is now 17%, and the trackers are down to 12% of the book. On net fees and commissions, net fees and commissions make up almost all our non-interest income each year and are derived from our current accounts product, commissions from home life insurance sales, as well as from the operation of our card services. During H1 2025, we saw net fees and commissions increase 35% to EUR 31 million. This reflects modest growth in underlying activity, with income boosted by the full six months of impact to changes in current account pricing that we introduced in April 2024. Also, in favorable timing of receipts in the payment area.
The latter added EUR 4 million of income, which normally comes in in the second half of the year, and we've shown this in the shaded box in the chart. In modeling the full year outcome, you just need to bear that in mind. Aside from fees and commissions, we also recorded EUR 3 million in other income during the half, compared with EUR 2 million last year, and this line tends to be predominantly FX gains. Just on slide 19, moving to operating expenses, total operating expenses were EUR 271 million for H1, down 1%. Regulatory charges came in at EUR 25 million, and excluding these charges, underlying costs were flat, but in line with our expectations. Meanwhile, the bank's cost-to-income ratio was 76%, and we remain very committed to reducing this ratio in the coming years.
Our strategic business transformation program will play a big role in delivering the objective which Eamonn Crowley spoke to earlier. One of the initiatives in this program is a voluntary severance scheme, which was extended to all employees last December and is now at an advanced stage. When combined with management actions and natural attrition, we continue to expect a reduction in staff numbers to circa 300 in 2025. Staff numbers at the end of June were 3,085, down 162 or 5% compared with 3,247 at the end of the year. The scheme will generate annualized cost savings of circa EUR 19 million, and an exceptional charge of EUR 29 million associated with this was recognized in the first half. Other exceptional charges of EUR 3 million were recorded in the period. For the full year for 2025, we remain on track to meet our cost target of EUR 525 million.
Moving to slide 20, asset quality continues to remain very robust, and as a result, the bank has recognized a zero figure for P&L impairment in H1. That's cost of risk of zero. Our total provision coverage was 1.8% of loans at the end of June, which is unchanged versus the position at year-end. Our provision stock of EUR 389 million includes EUR 43 million of in-model adjustments and EUR 101 million of model overlay, which involves management judgment. As part of the review of our IFRS 9 models, we continue to challenge these overlays internally with a view to better incorporating them into our existing model parameters. We are working hard to complete these model updates for later this year, and it is a challenging piece of work, but we're working hard to deliver that.
The weighted average loan to value on the 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 are very well provided currently, and while uncertainty persists, we maintain guidance of a zero charge for the year. With regard to that uncertainty, just some updates on our conservative macroeconomic assumptions. Obviously, given all the developments in relation to tariffs and Ireland being such an open economy, it's natural that we've received quite a few questions on potential impacts. On this slide, we detail our economic forecasts that are behind our provisioning assumptions, and we believe these are conservative. We came into this year with base case projections that were more cautious than consensus, as we'd built a 15% - 20% tariff shock.
These numbers here are very similar to the ones in our annual report. As Eamonn mentioned earlier, the trade deal that was announced with the U.S. is slightly better than we had modeled. At this point, we don't see any negative read across for impairment numbers. Uncertainty has increased since year-end, but the weightings on our upside and downside scenarios remain unchanged, as they are designed to represent a one in 20 probability relative to the base case. If we were only to use the base case scenario to model ECLs for mortgages, excluding management's adjustment to model outcomes, the ECL impairment allowance would be EUR 91 million less than what we show at the end of June.
On slide 22, just to talk to funding and liquidity, if I pick out key points here, customer deposits grew 7% year- on- year , which is a really strong performance and one that was ahead of market. As Eamonn said earlier, the growth of EUR 1.1 billion in H1 was the same as what we achieved throughout all of 2024. We are well funded, and I would expect the growth rate to slow as the year progresses. Around three quarters of this growth was in retail, term deposits, and corporate. Our current account balances are also up nearly 3% since year-end. You can see that our average cost of interest-bearing deposits was up 35 basis points year- on- year. As I alluded to earlier, measured against H2 last year, the increase will be less. Indeed, our deposit costs are plateauing and should start to fall from here.
Meanwhile, our MREL ratio remains very strong at 37%, which is ahead of our 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 holding at investment grade. Indeed, Fitch recently upgraded PTSB Group Holdings another notch to triple B. This will benefit us in the future when we come to future issuance and refinancings. On slide 23, looking at capital, our CET1 on new CRR3 basis was 15.5% at the end of June, up 0.8% from December 2024. In the chart on slide 23, we show the various moving parts in our CET1 over the last six months. The single biggest move obviously related to CRR3, which came into effect on the 1st of January. We previously conservatively estimated that the impact was a reduction in our RWAs of EUR 0.5 billion.
That equated to an increase in our CET1 of circa 0.7%. We can now confirm that the actual impact for CRR3 was a reduction in RWAs of EUR 0.9 billion, which is the effect of boosting CET1 by 1.2%. At this level, our CET1 is well in excess of a regulatory requirement with our 2025 SREP requirement at 10.83%. Management's CET1 long-term target remains at circa 14%, and we're committed to optimizing our capital structure over the coming years. The bank has capital instruments with first call dates in Q4 2025 and Q2 2026, and we are considering options in respect of these. Finally, just a brief update on our IRB model program. Our new mortgage model was submitted to our regulator, the Central Bank of Ireland, on the 30th of May, and engagement with relevant teams has started.
This is a strategically important project for the bank, and we are working hard to ensure that we deliver a positive outcome. As you know, the bank's current model was submitted in 2017 when non-performing loans were extremely high within the bank. The profile of the portfolio has substantially improved since then. For instance, over 73% of the bank's mortgage book has been written since 2015 under both new credit policy and the Central Bank's macroprudential rules. On the provisions slide, I mentioned that our risk-weighted assets moved down by circa EUR 0.9 billion because of CRR3. You should be aware that some of this benefit came through on our standardized book, which is essentially the loans we acquired from Ulster Bank, and some came through on the IRB book through the removal of the scaler.
In aggregate, the risk density on our mortgage book reduced from 39.6% at year-end to 36.4% at the end of June 2025. We will continue to positively and constructively engage with the Central Bank of Ireland in line with how we engage in all matters with regard to the Central Bank of Ireland engagement, and we'll update the market on the application when it is appropriate. To summarize, the bank has had a very strong performance in the first half of 2025 across our business, and particular highlights were the growth in deposits, the acceleration in lending growth, and our strong capital position. With the revenue environment more challenging this year, we're working hard to transform the way we operate and improve effectiveness and efficiency, and you can see this in our 1% year-on-year decline in our cost base.
We've had a very good start to the year and this is the second half, and we're confident about our prospects for our business going forward. I'll hand you back to Eamonn now, and I'll take you through guidance for the medium term. Thank you.
Thank you, Barry. We're on to the last slide. I just want to finish by reminding you about our guidance for the year 2025 and indeed our medium-term guidance out to 2027. As Barry has indicated, our business is performing really well, and we are reiterating our guidance that we gave you in the full year back in March. We're standing by that guidance. There will be a small change in the exceptional charge number where we said it would be around EUR 25 million. It'll actually be around EUR 32 million. That's what we recorded in the first half of the year. Once again, just to mention and to say that the medium-term targets do not assume any changes to our risk rate densities as part of our IRB mortgage model review.
When that model review comes through, we will have to amend the medium-term targets to reflect the impact that will have. We have to wait until we go through that process. As regards to distributions, as I said back in March, we plan to restart dividend payments in 2026, but that is subject to our financial position. We have to go through an approval process with our regulator in order to make those dividends, but we're still standing by our ambition to pay a dividend. Our current policy is to grow that dividend payout to 40% over time. To put that in context, that will be the first dividend we will pay in 18 years as a bank. It's a clear sign of normalization of where we've come from and where we want to go from a shareholder point of view.
To summarize, we believe we're playing a critical role in the Irish market, providing much-needed competition, particularly in the business lending space. We believe there's great potential for us to grow our business and improve our cost efficiency while meeting customers' evolving needs. The first six months of 2025 can really demonstrate that by way of the growth across the different lines. Finally, it would be remiss of me not to mention the successful disposal by NatWest of the remaining 11.7% share in PTSB. This marks another important step towards normalizing the composition of our shareholder base and creates further liquidity in bank shares and was extremely welcome to us and the market when that deal was successfully executed.
It also demonstrates that there's a strong market appetite to invest in PTSB and gives us confidence that our strategic direction to deliver real and sustainable value for our shareholders is recognized and supported. I'd like to thank you very much today for joining us, and we will now take questions on the results. Thank you.
Diarmaid?
Good morning. Diarmaid Sheridan from Davy. Thank you for the presentation and taking my questions. Maybe firstly, the really strong momentum you saw in the first half of the year in both deposits and lending. What are you thinking about for the second half of the year and into 2026 on those? Secondly, on the RWA, Barry, you mentioned the differing components of that benefit that you've received. Maybe if you could update us on what a 1% sensitivity on the IRB mortgage portfolio would do. On the Ulster Bank portfolio, is that going to stay unstandardized, or would there be an intention to move that to IRB at any point in the future? Finally, maybe on the costs, obviously front-loading the non-core costs and the voluntary severance plan.
Over what timeframe should we expect to see that EUR 19 million benefit kind of come true and accrue into the cost line? Thank you.
Let's go on your first question. We've momentum in our mortgage pipeline, and mortgage is strong. You can see that we've recovered very successfully our market position to above 20%. That's an area where we're comfortable by way of that share of the market. We can also see the market is growing, and it's not as if we're not chasing the market. Our average LTV on new mortgage lending in 2025 is around 70%. Again, we're not at the risk curve by way of attracting customers at higher LTVs. We have a competitive product offering in mortgages, so we're quite comfortable that that momentum will continue. On business lending, we are a new player in the market. We're growing faster than the other two operators, other two banks in the space, and we're providing optionality in that regard. Again, the pipeline is strong.
July has actually been quite a good month for lending and business lending, and we'll even show more positive growth. On the consumer finance story, we are behind the line. We understand that, and we will be, from a strategic point of view, dealing with that in the second half of the year and being more competitive in that space. We'll let our story tell for itself as and when that comes. On current accounts, we're attracting new business. We're growing our current account base, and indeed, most importantly, we're growing our deposits, and we're attracting new customers to the bank as well. Through the use of data and the use of our own DNA around how we think about being all together more human, we see the value in not only our backbook, but the interaction of those customers.
Overall, the first half of the year, which typically is a game of two halves, you have a slightly less growth in the first half and a strong second half. We're seeing the signs of a clear second half of strength.
Just on the capital front on the Ulster Bank portfolio, it is unstandardized now. It has come down from the 35%. It is something that we are looking at in terms of bringing it into an IRB context, but it'll probably take another two to three years for us to build up history on that portfolio. It's something that we will look at closely. It's something that we will have to continue to constructively engage with the Central Bank of Ireland upon. That's something that ideally, once we conclude the IRB program, that's where the attention will move toward next.
On the non-core element, the forecast savings on an annualized basis up to EUR 19 million, we should start to see that come through in the second half of this year, with probably a key element of that being realized in 2026 and the full EUR 19 million recognized in 2027 and beyond. It has started, obviously, with the 5% reduction in headcount so far this year. The journey has begun.
Great. The 1% sensitivity on the IRB.
Sorry, the 1% sensitivity on IRB. It has come down from EUR 30 million. At most recent look, it's probably less than EUR 20 million now, given the changes that have occurred with regard to the CRR3, because in effect, we've seen a benefit of that now come into the capital stack already.
Great. Thank you very much.
If there's any questions on the phone lines.
Thank you very much. We will now take questions from the telephone lines. Our first question comes from Denise McGoldrick with Goodbody. Your line is now open. Please go ahead.
Good morning, Eamonn and Barry, and thank you for taking my questions. Two, please, if I may. Just one on capital and CRR3 (Basel IV). Could you talk us through what's changed between January and June, which has provided the additional 50 bps uplift in CET1? Secondly, I know that your balance sheet is virtually at the EUR 30 billion threshold now, which would trigger a move back to the SSM. Can I just ask if that process has begun and what is your understanding around the timelines for that change to take effect? Thank you.
I'll take the second question first, then Barry, you might take the first. First of all, it's extremely welcome that our balance sheet is at EUR 30 billion. It's only five years ago it was around the EUR 20 billion mark. It shows significant progress in our balance sheet. Indeed, if you look at our NPL position at 1.8%, which is the lowest in the market, and our coverage of that NPL book is well over 100% by way of our provision coverage alone on that measurement. These are all very positive signs of growth. By way of the EUR 30 billion itself, it is a trigger for reentry to the SSM. We were in the SSM before and we were in part of the SSM regulatory environment until 2019. Through deleveraging, we moved out of the SSM. This is a decision for our regulator to make and how the bank progresses.
We'd expect over the next 18 months or so to be moving back under the SSM regulatory environment. As I say, that's a welcome sign of growth in the bank and growth in the balance sheet. It's something we're prepared for and have no issue with in the sense of that transition. We were there before, so it's not an issue.
On CRR3, there are three elements to that. As I mentioned, the Ulster Bank piece unstandardized. There's also the IRB element that I mentioned a moment ago. The key element that changed was our interpretation around the pipeline. We've taken a, we'd probably a very conservative approach to how we view pipeline, and that has had a positive impact, which is kind of the key driver of the change from what we'd guided previously. We're pretty confident that that work is now fully concluded and job's done there.
Thanks, Dennis.
Great. Thank you very much.
Thank you very much. Just as a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad now. Please ensure your device is unmuted locally. If you change your mind and your question has already been answered, please press star followed by two. Our next question comes from Grace Dargan with Barclays. Grace, your line is now open. Please go ahead.
Hi, good morning. Thank you for taking my question. Maybe one on costs and then one on deposits, please. I guess on the costs, you've called out the work you're doing on technology. Obviously, we talked about the growth savings coming through. Maybe more specifically, how should we be thinking about the shape of underlying costs and exceptional charges into 2026? That would be very helpful. Secondly, on deposits and kind of funding, how do you expect competition to evolve in H2 and beyond? I know you said you expect deposit costs to come down, but are you seeing any increased pressure in the market from competitors who are now taking deposits in Ireland, for example? Thank you.
Thank you. Thank you, Grace. Again, I'll take the second question first and then Barry will answer the first. On deposits, we're still seeing positive growth in the Irish market on deposits. Indeed, if you look across Europe, there's significant growth in deposits across the European banking system. Our deposit book has grown strongly. If you put it over a five-year period, we've grown significantly by way of our deposit base in an environment where we've come from and we still compete in the market, but we've been able to grow our deposit base in that sense. New players in the market do not phase us in any way. It's clearly about our strategy of supporting customers and providing additional features for them to use and operate with the bank.
To name one of them, last August, we implemented an ability for customers to put their money in deposit through the app. We're collecting EUR 60 million a month just through that channel alone. We'll see that channel developing over time, even to higher volumes. Competition is fine, and the numbers speak for themselves by way of our ability to grow. That is linked to our strategy and our brand positioning in the market, which is also growing and is strong. Overall, we have no concerns in that sense. We expect our deposits to grow over the medium term as well. That's part of our balance sheet growth to fund lending.
Barry, over to you.
Morning, Grace. Just on the cost side, for 2025, we've reiterated our guidance to the EUR 505 million. The exceptional costs have come in higher. We don't anticipate and do not expect anything equivalent in 2026. We would expect a more normalized year. A key element of our focus is to bring down our cost-to-income ratio. Our 2027 guidance is to bring it down towards 60%. We want to continue the good work that we've started in 2025 and at the end of 2024, to be honest, so that we actually continue with strong momentum as we build forward. A key element, as Eamonn mentioned, is on the mortgage side, where a key element of our volumes have been.
With the mortgage market increasing, we want to make sure that we create a very effective platform on which we can operate so that we can grow our volume but not increase our cost. We want to improve both the cost position but also try and drive that income into a better space. It's trying to work on both sides. Ideally, 2026 will cut the line between where we plan to be at the end of 2027. Continue to build on the momentum through 2025 into 2026. At its core, what we're trying to achieve is to engineer cost out of the bank and have it sustainable and strategic and long-term. That's our ambition.
I guess maybe just following up on that. Are you thinking of 2026 as a kind of a linear progression on costs into 2027? Is that a fair way maybe we should think about it?
That's the approach we're working to internally, yes.
Perfect. Thank you very much.
Our next question comes from Borja Ramirez with Citi Group. Your line is now open. Please go ahead.
Hello. Good morning. Thank you very much for taking my questions. I have two. Firstly, on the revenue targets that I have implied based on your cost-to-income ratio and the cost targets, I think there is quite a bit of upside to consensus for 2027. I guess there's maybe also upside for 2026. I would like to ask if you could please provide a bit more details on the moving parts in the net interest income into 2026 and 2027, because I think that maybe consensus is not fully factoring in the benefit, for example, from the expected renewal of mortgages at a higher interest rate, particularly for the fixed-rate mortgages. That would be my first question. My second question would be, could you kindly remind me of the potential timeline for the IRB mortgage model? When would you expect the approval to come from the regulator?
Would that be before you would announce your distribution for the full year?
I'll just hit the second question first, and then Barry, you might come back on that. On the IRB mortgage model, we submitted our model at the end of May. That is a very formal process. There's a lot of engagement with the regulator by way of that model submission. It has taken an extended period of time to prepare it and to submit it. At this moment, as I said, there's high engagement. We have to go through a process with the regulator with regard to our model. There are no particular dates that are set in which we have to complete that program. I would expect that the annual results that we report at the end of February or early March next year, we'll be able to update the market. Saying that, we'll have to wait and see. At the moment, we're in a good place. They're submitted.
There's high engagement. We have to work through that engagement. We'll keep the market posted. The next key mark or next key engagement, obviously, will be the annual results. We'll see where we are then. So far, so good. We're confident of an outcome with regard to the engagement we're having so far. There isn't a set deadline. Unfortunately, I can't give you fixed dates in that regard.
On your first question, Borja, I think when we look at our NIM, we look at both the asset and deposit side. On the asset side, yes, as you call out, we should see a continued improvement on the asset pricing as loans refix. We're trying to make that more straightforward for our customers as well with some updates in the second half of the year. In addition to that, what we're seeing is actually broadly some of the economic forecasts are actually supporting maybe higher volumes in the mortgage market, which we've called out today as well. There is some positive momentum on the NIM from an asset perspective and from a volume perspective. On the deposit side, we believe our cost of deposits were plateauing at this moment in time. We had a very strong first half of 2025.
We don't expect the same volume of growth in the second half. If we do see volume growth greater than expected, we will consider what pricing potentially looks at then. We keep both aspects of asset and the liability side under very close review. In effect, one key element that we have to keep an eye on also is how the ECB deposit rates move. Currently, we forecast 2%. September will be interesting to see what way the ECB makes a move in that regard. We're well balanced on both sides and also with the broader macro environment that is helping.
To go back to just one item I didn't answer, one of your questions, which was around the link between the IRB mortgage model and a dividend payment. It would be our ambition and desire that the IRB mortgage model would be complete before we make a dividend payment. You can see from our capital numbers today that we have capacity, the capital capacity, and indeed distribution capacity at current CET1 levels at 15.5%. It would be an absolute desire that we would have clarity with regard to our ongoing capital requirement to the IRB mortgage models as part of that distribution. They are linked in that respect. That is why I mentioned that our year-end update in quarter one 2026 will be key by way of providing clarity in all of these areas.
We're on the road and we're in good shape at this moment with respect to a 2026 distribution. They are connected. Thank you.
Thank you very much. Our next question comes from Andrew Stimpson with Keefe, Bruyette & Woods . Your line is now open. Please go ahead, Andrew.
Thank you very much. Morning, everyone. One on capital and one on provisions for me, please. On capital, some of the banks that have had the bigger benefits from Basel IV have just warned that some of that benefit may come back or they'll give up some of that benefit in future periods. I don't think that's going to apply to you, but I just wanted to check that you believe that's a permanent boost and that other things going on elsewhere across the bank aren't going to mean that some of that benefit is given up in future periods, putting the mortgage model review to one side on that. On the stock of provisions, slide 20 says that a review of the IFRS 9 models is underway and that could lead to an unwind of those overlays, which is good to hear. What's the timing on that?
Is that something, is that a process that needs to be linked to the risk-weight model reviews or are those separate models or can that process go quickly? Is that one that needs to be approved or how does that work, please? Thank you.
Yep, I'll take both of those. Andrew, good morning. I am on capital and CRR3. We believe that we've, again, we're conservatively forecast in this space and we take a conservative approach in our interpretation. We don't believe that we'll be walking that back at any time in the future. I think ideally this is once and done. I don't expect any change in that context. On the provision front, obviously the same team of people involved in the IRB program are now involved in our IFRS 9 program. The first model that we're looking at is the mortgage model. There's quite a bit of work to be done on that. We're on track to what we want to do at this moment in time, but it's still quite a challenging piece of work to try and conclude that for year-end.
That's something that we have an ambition toward, but there's still a lot of work to be done in that space. The timing is not absolutely connected to IRB, but in effect, the knowledge that we've built from the whole IRB program will feed into how we consider the provision piece. I think a key element on this is, while the model overlays may reduce, how we actually factor in uncertainty. There's still quite a bit of uncertainty out there. Obviously, with the agreement with Trump and EU in recent days, we still need to see the specificity of the detail and how that will transpire. Also, cost of living has increased quite substantially in Ireland. How do we balance all those pieces together? We look forward to updating that in more detail toward the end of the year.
We have a strong team involved in this and we're working hard to deliver it. It's just trying to balance everything together.
Just to add in the sense of the uncertainty, we're not seeing any of that uncertainty coming through by way of any delinquency or any late payment. You know, the average LTV on our mortgage book, which is over 90% of our lending, is below 50% and is performing extremely well. The real activity in the book is quite strong. It's then about how do we think about that uncertainty in the current global uncertainty and how that's reflected. The level of model adjustment, including any overlay, is quite significant when you take it as a proportion of our provision charge at this moment. We'll wait and see as we get through that program. The inputs that we have are quite strong in that sense.
Great. Thank you.
Thanks.
Our next question comes from John Cronin with SeaPoint Insights. John, your line is now open. Please go ahead.
Hi, Eamonn. Hi, Barry. Thanks for taking my questions. Just two, please. On the target CET1 ratio at 14%, that's very high relative to peer banks around Europe. What is the scope for that to come down in time? Secondly, just to pick up on one of your earlier points on the way you're writing mortgages, look, average LTV on flow, I think you mentioned, was 70%. Just trying to get a sense, given the macroprudential regulations in Ireland and how they compare, they're more stringent than the U.K., for example. What would be your risk appetite? Trying to take everything into consideration here. Like we're in an environment of uncertainty at the moment, I guess, as you've spoken about in the context of the EU-U.S. trade deal. You know, more through the cycle, I mean, is your risk appetite higher than that?
Is it the macroprudential regulations that are kind of suppressing your LTV appetite? You've had very benign impairments for a very long time. Thank you.
Maybe you can ask them to the second one, Barry, which is connected to our IRB mortgage model. Of course, yeah. On the first one, our capital requirement has evolved over time, and we can see that the capital requirement of the three Irish banks is somewhat consistent. I take your point that our model is different to the other two players in the market. The question is, why do we have a higher capital requirement? I think we've proven, John, over recent years that we've significantly reduced the risk profile of the bank, and we are now making a return. Indeed, when you look at our medium-term returns out to 2027, including the balance sheet growth we have in the first six months, you can see that we're the bank that will start making higher profits.
If you put the IRB mortgage model on top of that, it should strengthen those numbers. This is something that will evolve over time. Our position is that we have a safer business model that should be reflected in a lower capital requirement. We'll continue to make that argument. I can hear that you're supportive of it as well. It does have an impact on our ability to make a return on CET1. The IRB mortgage models are currently the area that will have an impact in due course, subject to getting them approved. It's something we will continue to highlight that the level of risk in our model has reduced significantly. Therefore, our CET1 requirement should move in time. At this moment, the guidance is 14%.
On the second question on LTV, it kind of ties into the capital weighting on our portfolio today for new business. Our average risk rates are circa 55%, which is quite heavy. Our backbook is obviously lower. For those loans that have got a higher LTV, which are typically the first-time buyer market, the risk rates associated with that are actually even higher. In effect, the return on that business is not great for us at this moment in time because of that capital weighting. It is something that we, as we look forward with our IRB, is how do we adjust that into the future? Ideally, once we have our model approved, that will give us more opportunity to play more positively into that first-time buyer market. Today, it's very heavy from a capital perspective.
We are priced very well in the sub-60% LTV space, and that works very well for us. We do, I think, at a broader level, want to play across all segments. That is something that we are looking at and very conscious of. It is not that we have a risk appetite issue. It is more that the capital weighting is very heavy.
Thank you very much. Our next question comes from Seamus Murphy with Carraighil l. Your line is now open. Please go ahead.
Hi. Two questions, please. I was just looking at the provisioning. I know you've mentioned this already. Can you just give an idea of what the level of the provision stock that's held against your mortgage book again? Just because you haven't had a loss when I look back in your mortgage book for, I mean, for nearly a decade, it seems, or certainly that's been very, very low. Second question, just under deposits. Total deposits grew from EUR 28.7 billion in December to EUR 30 billion this year. We've seen growth in current accounts and in overall retail deposits. I know you said that the growth is going to slow in the second half, but have you been more aggressive in this half in terms of pricing deposits, in terms of the strategy there? Obviously, we've seen deposit growth.
The two big banks basically have guided up their deposit growth for this year. They're kind of growing at + 3%, I think. Can you just talk a little bit about your deposit franchise in that context? Also, could you give us an indication of how much of your NII you think comes from the deposit side of your balance sheet? Thank you.
Okay. Thanks, Seamus. Thanks for your questions. I'll just take the middle one on deposits. We do see deposits as an important part of our product offering and attracting customers, particularly away from the two main banks, and then using deposits as a way to broaden that relationship. That's a long-term aim, and we're making progress in that regard. We also have to take into account where we've come from as a bank and our ability to attract deposits in the broader market. We're really showing that that is now not a question mark that we would have. In a way, I connect that to the level of wholesale funding the bank had coming through the crisis, which was at an enormous level. I think it was the highest in Europe at that moment at nearly above 250%. The deposit franchise is really important to us.
We want to be competitive. We want to fund our balance sheet. We want to fund growth. There is a reversionary aspect to it that we have. We have fixed-rate deposits on some higher rates that will revert downwards over the next couple of years, and that'll support NIM generation in due course. We will continue to compete, and we want to match the market growth, but indeed balance it in the sense that we compare the marginal cost of collecting those deposits versus what the return we're making on our balance sheet. Overall, we will be active in deposits, and we will continue to grow. Barry, on the other aspects.
Just on provisions, what we're seeing is the NPL ratio at 1.8% is the lowest in the market. We have seen broadly that balance sheets of households are very, very strong in terms of the mortgage customers within our book. We have, in effect, released provisions over the last four years. It's something that we look at very carefully. The key challenge with that is what is the uncertainty factor in the broader market, as I mentioned earlier. You're correct in saying we have about EUR 100 million, EUR 101 million in model adjustment at this moment in time. We have built in quite conservative assumptions in terms of the impact of that uncertainty and tariff shock. It's something that we will look forward to if the market continues to improve and that macro continues to be strong. That w e look at toward year end. For now, we believe we are conservatively provided, and we're in a good position in that context.
Our provision coverage across our book is 1.8%. For a bank of our setup, that is significantly high coverage. We've released provision over the last four years, as Barry has indicated. We are very well positioned by way of our provision coverage and based on the risk parameters of the bank as well. We let that play out over time as we consider the uncertainties in the market. We're not in provision-raising mode at this moment. It's actually about how we think about the level of provision we have on our balance sheet and deal with that uncertainty. We're in a good place in that regard. There's no stress in our book at this moment, nor do we see it coming through. Thanks, Seamus. Thank you.
Thank you very much. We currently have no more questions. Thank you to our speakers on today's conference call. We appreciate everyone for joining. You may now disconnect your lines.
Great. Thank you very much, everyone. Thank you.
Thank you.