Morning, everybody, and thank you for attending the OSB Group's 2023 Full-Year Results. Clearly, I appreciate there is some disappointment on our 2024 NIM guidance this morning. However, OSB remains a growing and strong ROE business with a healthy future ahead of it. I'll start by covering the key highlights in terms of performance for the year. April will then take you through more detail on the numbers. You'll then hear a little bit more from me on how our lending and savings franchises have performed, followed by the outlook, before we open up to Q and A. As we reported at the half-year, the group's 2023 results were significantly impacted by the adverse effective interest rate adjustment, which reduced our full-year underlying profit before tax by GBP 181.6 million.
However, I'm pleased that since then there has been no material change in borrower behavior and we continue to observe a trend consistent with our EIR assumptions for Precise customers. Our lending franchise performed strongly, delivering net loan book growth of 9% supported by GBP 4.7 billion of new organic lending despite the challenging interest rate environment and macroeconomic situation that significantly flow slowed the wider mortgage market. We've continued to focus Precise Mortgages on growth in the residential sector and Kent Reliance on really serving the professional landlords who still are making purchase decisions of course as well as having more complex refinancing needs. And that plays well to the Kent Reliance strengths and our proposition.
Our InterBay brand has also seen a 46% increase in new lending during the period and retention performance across the board has been strong with now 78% of borrowers in Kent taking a new product with the group within three months of their deal maturing and an already very encouraging 66% of Precise Mortgages customers as our Choices program there continues to gain traction enabling us to lock in long-term income for the future. We remain committed to doing the right thing for our customers and I'm pleased to confirm that we have embedded the new Consumer Duty rules within the required time scales and have signed up to the government's mortgage charter.
Looking at our strong credit and risk management performance, three-month-plus arrears were robust at 1.4% with a small increase on last year largely driven by the elevated cost of living and cost of borrowing and actually inside our modeled assumptions. ECL provisions have also increased due to changes in the risk profile of borrowers as they transition through modeled IRB. If I can never say that, can I? IFRS 9 impairment stages although the outlook has improved during H2. Our capital position remains strong with CET1 at 16.1%. Following the successful issuance of Tier 2 and MREL-qualifying debt securities we have met our MREL requirement comfortably in advance of the July deadline.
The board has recommended a final dividend per share of GBP 0.218 which together with the interim dividend results in a total dividend for the year of GBP 0.32 per share which is in line with our desired policy of delivering a progressive dividend per share. The board remains committed to returning excess capital and I'm pleased that we have announced today a new GBP 50 million share buyback program to be delivered over the next six months. I will cover more about our outlook and our guidance later but we remain excited by the opportunities on our core markets and I hope that my introduction has provided a useful reminder of the strong fundamentals that provide the backdrop for us to continue to deliver attractive and sustainable returns through the cycle.
This slide shows our statutory financial results but turning to our underlying results on the underlying slide we've also shown our KPIs excluding the total EIR adjustment. I think it's important to do this to understand the underlying strong performance of the business. For example excluding the adjustment our return on equity would have been 22%. April will cover each of these for you in her review but I hope this snapshot underlines the strong fundamentals of the group under normalized trading. I'll now hand over to April who'll take you through the numbers in a bit more depth.
Okay, thank you Andy and good morning everyone. Nice to see you in person. This slide presents the 2023 performance on an underlying basis before and after the EIR adjustment. Turning to the key drivers of underlying ROE of 16% or 22% excluding the impact of the EIR adjustment, the group delivered an underlying pre-tax profit of GBP 426 million for the year. However, it would have increased to GBP 608 million without that adjustment due primarily to higher net interest income off the back of strong net loan book growth and an improved net interest margin. This more than offset the impact of a net fair value loss from the group's hedging activities during the year compared to a large profit in 2022. I'll cover NIM in a lot more detail later.
Administrative expenses increased by 14% in 2023 reflecting balance sheet growth the anticipated impact of inflation and planned investments in people and operations. However the underlying management expense ratio the pure efficiency metric of 81 basis points remained broadly flat to the prior year demonstrating our continued focus on cost discipline and efficiency. The underlying cost to income ratio increased to 33% from 25% in 2022 largely due to the lower income. Excluding the EIR adjustment the underlying cost to income ratio increased by one percentage point to 26% due primarily to that fair value loss from hedging activities versus the large gain in the prior year. Looking ahead we expect the underlying cost to income ratio to be broadly flat to the 33% reported in 2023 commensurate with our broadly flat NIM guidance which we'll come onto later.
The management expense ratio may tick up slightly in a year of slower growth as we continue to sensibly invest in our digital journey. However, we will continue to maintain the cost discipline and efficiency which we're known for. We recognize an underlying expected credit loss to GBP 48.5 million in 2023 equivalent to a full-year ratio of 20 basis points. As you can see on the chart, this was concentrated in the first half of the year as previously outlined in our 2023 interims, but I will provide some more detail again on the key drivers a little bit later. Turning to the income statement, you can actually see that fair value loss on hedging activities I mentioned earlier of GBP 10.8 million versus a gain of GBP 48.5 million in the prior year.
A quick reminder, the key driver behind this loss or gain which will reverse over the life of the swaps continues to be fair value movements on our pipeline mortgage swaps due to movements in the SONIA forward curve before the mortgage is complete. The only other thing I'll just point out on this slide is the underlying earnings per share of GBP 0.75 for 2023 reduced commensurate with a reduction in profit. Underlying EPS would have increased to GBP 1.067 per share excluding the EIR adjustment. So I'll just turn to the balance sheet next. This summarizes our strong, secure balance sheet.
Our net loan book increased by 9% during the year to GBP 25.8 billion and that's supported by the GBP 4.7 billion of gross new lending in the year that Andy referenced earlier as well as strong retention. Retail deposits grew by 12% to just over GBP 22 billion during the year as savers continued to choose the group's consistently fair and attractively priced products. We remained predominantly retail funded with diversification provided by Bank of England funding schemes and securitizations. Andy will provide an update on the progress of our TFSME repayment plan and securitization activities a little bit later. I'm pleased with the credit performance of our loan book during a period of stress caused by the rising costs of living and borrowing.
The small year-on-year increase in three-month plus arrears to 1.4% was inside our modeled expectations and reflects the high quality of our secured loan book and lending policy and also demonstrates the resilience of our borrowers. Our loan book is secured at sensible loan to values. The weighted average book LTV at the group level increased to 64% at the end of the year from 60% at the prior year end reflecting negative house price inflation in the year. However, the new lending LTV reduced marginally to 68% from 71% demonstrating our continued focus on the risk assessment of new lending. Now onto the net interest margin. This slide shows our NIM waterfall where you can see the high-level drivers behind the movement in net interest margin during the year.
And moving from left to right I'll start with the cost of retail funds which benefited versus the prior year from initial delays in the market passing base rate rises onto savers in full and the cost of new retail funding also benefited from widening swap spreads. However this benefit was offset by the lower new lending and retention margins caused by delays in mortgage pricing fully reflecting the rate rises and the higher swap costs in a period of extreme volatility in the rates outlook. We nevertheless continued to honor our pipeline as we did throughout the pandemic.
The third bar shows the impact of the Tier 2 and MREL issuance in the year and other funding primarily related to the benefit of equity funding in a higher rate environment, which all results in a full-year NIM of 314 basis points excluding the EIR adjustment of 63 basis points or 251 basis points if you include it. So let me turn to the NIM outlook. I thought it would be helpful if I stepped you from the full-year underlying NIM for 2023 of 314 basis points excluding the EIR adjustment from the previous slide to the 2023 exit rate and then onto our guidance for 2024. 2023 was a year of two halves for NIM.
The second half NIM of 296 basis points significantly lower than the first half NIM of 333 basis points excluding the EIR adjustment as previously guided at interims. Moving from left to right again on this waterfall starting with the cost of retail funding this increased due to deposit spreads normalizing in the second half increasing the cost of new deposits but also retention as the fixed deposit backbook started to recycle onto the higher prevailing rates. At the same time lending margins continued to be impacted in the second half by delays in the market passing the rate rises and higher swap costs onto mortgage pricing in full. Tier 2 and MREL issuance and other funding resulted in an exit rate for NIM based on December 2023 annualized of 273 basis points.
The 2024 underlying NIM is expected to be lower than the December exit rate because the cost of retail funds reflects the impact of the fixed deposit book continuing to recycle onto those higher prevailing rates. However, this is expected to complete this year in 2024. On the positive note, new lending and retention margins are expected to be accretive to NIM in 2024 based on our current pricing swap spreads and plan mix of business, and Andy will talk about some further potential opportunities as the macro outlook stabilizes a bit later. You can also see the impact of Tier 2 and MREL eligible debt issuance in the next bar, including the full-year impact of 2023 issuance. The other funding drag reflects the impact of planned securitizations to help support the repayment of TFSME.
In summary, I hope this explains our full-year guidance of broadly flat to 2023 underlying net interest margin of 251 basis points. I'll turn to impairment provisions next, and this slide provides a waterfall of the movement in the statutory impairment provision over the year. As you can see in the chart, and moving again from left to right, we updated our forward-looking macroeconomic scenarios in our IFRS 9 models during the year, which accounted for a GBP 6.4 million increase in provisions. Enhancements to models and updates to post-model adjustments were a small release of GBP 1 million.
Provisions related to accounts with arrears of three months or more increased by GBP 14.1 million and there was a further increase of GBP 14.1 million related to changes in the credit profile of borrowers as they transitioned through modeled IFRS 9 impairment stages. This transition was primarily modeled movements from stage one to stage two with only a small percentage of loans in stage two actually being in arrears. Stage one provisions in respect of loan book growth totaled GBP 7.8 million and individually assessed provision increases in other items totaled GBP 8 million. As I mentioned earlier the vast majority of the charge was in the first half of the year with the loan book since then performing slightly better than expected and with a slight improvement in the outlook for house prices.
As of 31st of December 2023, the group's balance sheet provisions were further reduced by write-offs of GBP 33.6 million. These did not form part of the impairment charge for the year as they were expensed to the profit and loss in the periods when the provisions were raised. The amount was elevated in 2023 due to the write-off of the funding line receivable associated with a 2024 fraud case following the successful sale of the remaining security in line with our write-off policy. You can see that our total coverage ratio remained broadly flat at 56 basis points for the year. However, it remains more than twice the level it was pre-pandemic at the end of 2019. Our year-end forward-looking economic scenarios, which are a key driver of our modeled expected credit losses, are included in the appendices.
I think it's the last page. Since the year-end the outlook for house price declines has moderated and we will continue to actively review these scenarios as we progress through the year. I'll turn next to capital. So turning to our capital position you can see that the group's CET1 ratio remained strong at 16.1% at the end of December. Going from left to right again in the waterfall which explains the movement in the CET1 ratio in the year you can see the impact of the adverse EIR adjustment taken in the first half. The next few bars demonstrate our very strong capital generation capability which excluding the EIR adjustment was more than sufficient to support strong net book net loan book growth of 9% and a full-year progressive dividend per share of GBP 0.32.
This full-year dividend represents a payout ratio of 29% of underlying earnings excluding the after-tax impact of the EIR adjustment and includes a recommended final dividend of GBP 0.218 per share. On the right-hand side of the waterfall you can see the full impact of a £150 million share repurchase program completed in the year as we continue to return excess capital to shareholders as we optimize the capital stack. Today the board has announced a new £50 million share buyback over the next six months. We will consider the potential for further capital returns later in the year subject to further MREL issuance to support growth and the final Basel 3.1 requirements when known.
Looking forward, we continue to target a CET1 ratio of 14% but expect to operate above this target as we wait for clarity on the final Basel 3.1 rules, which are expected to be published in Q2 this year. Quick reminder on the next slide of the components of the group capital, both the group's minimum capital requirements but also our MREL or TLAC requirements, and also our capital resources both at the 2023 year-end and the prior year-end. Total capital resources at the end of the year of 22% includes the benefit of our successful MREL qualifying Tier 2 and senior debt issuance during the year.
We expect to issue further MREL qualifying debt to meet the future requirements of Basel 3.1 which has an expected implementation date of July next year and to support balance sheet growth as well as meeting the end state MREL requirements by July 2026. I'll now pass back to Andy who will give an update on our lending and funding franchises and then further detail on the outlook.
Thank you. Our lending franchises have continued to deliver through more than 30,000 qualified mortgage intermediaries. The Legal & General Mortgage Club is the U.K.'s largest so to win their award as the best specialist lender is one that's particularly pleasing to me. Our focus on professional buy-to-let landlords has continued helping fund into the critical private rented sector which provides access to more than 4 million homes.
Our Landlord Leaders community continues to grow with over 400,000 interactions through social media. It was set up as a source of knowledge and best practice aimed at ensuring a fair sector for landlords and tenants alike. In 2023 we increased our market share despite a significantly softer overall buy-to-let market from 5.8% to 6.2% of stock and from 6.8% to 8.9% of flow. In our residential segment we have managed and maintained our focus on underserved borrowers leaning into self-employed and minor adverse credit customers as well as our continued focus on the shared ownership market supporting in particular key workers. We've grown our InterBay business both in commercial and asset finance and doubled our bridging completions to GBP 437 million.
We evaluate options to extend our risk appetite in these markets as the macroeconomic outlook improves. Our funding platform continues to deliver savings to our strategy of attract retain and satisfy. We grew our retail deposit book by 12% in the year and we opened more than 210,000 new savings accounts despite the increasing competition. We successfully retained maturing customers into fixed rate products at a rate of 91% and 85% in OSB and CCFS respectively. Our Net Promoter Scores also remained high at over +62 in Charter Savings Bank and +71 in Kent Reliance. We complement retail deposit funding with our expertise in wholesale markets and in June we completed a GBP 330 million secured securitization of owner-occupied mortgages with a further GBP 509 million of buy-to-let mortgages securitized at the start of the year.
We saw exceptional demand from our growing investor base and this allowed us to achieve very attractive pricing on this deal. We'll continue to access the wholesale markets when conditions are favorable and benefit from the diversification of funding to support a smooth transition as we repay drawings under the TFSME. At the end of the year the group's drawings under the Bank of England facility were GBP 3.3 billion following the repayment of GBP 900 million in the year and we've repaid a further GBP 600 million so far in 2024 and we'll continue with our structured repayment program through to October 2025.
The group is recognized for its efficiency and excellent customer service. In 2023 we continue to invest in our digitalization journey which will enable us to meet the future needs of our customers, brokers and wider stakeholders while delivering further operational efficiencies. This investment will be a key focus going forward as we deliver digital solutions to enhance our customer propositions. Investment in 2023 has so far delivered an online broker registration process which enables an intermediary to register for business once for Precise, Kent Reliance and InterBay being business ready across the group in a single step. A new advanced digital front end to Precise Mortgages which has new API functionality stripping back what's not necessary to deliver on our promise of creating precisely the right product at precisely the right time.
In the first half of 2024, the group will also launch an app for intermediaries enabling them to work with us and get updates on the move. OSB Group has always been a market leader in cost-efficient delivery and our investment in technology will enable us to maintain this reputation while also removing friction from our customer experience and enabling a deeper, more personal relationship to be built through the focus on their specialist needs. So in summary a strong operational performance and the fundamentals of the business still good. Clearly I am disappointed that the first half was impacted by the adverse EIR adjustment.
Our specialist market subsegments continue to perform well despite the subdued overall mortgage market and the group's target professional landlords demonstrate resilience and provide much-needed housing to the private rented sector and our specialist residential and commercial brands have good levels of demand and customer confidence shows signs of improvement. Our savers remain loyal to the group as we offer them good value with improving Net Promoter Score results and we're confident we'll continue to deliver proposition-enhancing digital solutions as they're developed. Based on current application volumes and against a backdrop of a continuing subdued mortgage market the group expects to deliver underlying net loan book growth of circa 5% for 2024.
The underlying net interest margin is expected to be broadly flat to 2023 reflecting the impact of higher cost of funds and the full-year impact of some lower margin lending in 2023 while honoring our pipeline during a period of market volatility. As I mentioned earlier, we'll continue to evaluate opportunities for NIM enhancement as the macroeconomic environment allows us to broaden risk appetite in our more cyclical business lines. The underlying cost to income ratio is expected to be broadly flat to 2023 commensurate with the guidance on their interest margin transition that April described earlier and the group remains well capitalized with strong liquidity and a high quality secured loan book. We've demonstrated the strength of our customer franchise and intermediary relationships and continue to focus on good outcomes for our customers our stakeholders and strong returns for our shareholders.
Finally, before turning to Q and A, I would just like to take a moment to thank April for her dedication and hard work over the years. As you know, she'll be retiring at the AGM. April has been an excellent trusted advisor and support to me over the last 11+ years helping to build one of the U.K.'s best specialist lenders. Thank you, and I really do wish you all the best in your retirement. Finally, I'd like to briefly introduce Victoria Hyde who is here today and will be taking over as our interim CFO pending the completion of our formal competitive process. Victoria joined 18 months ago as deputy CFO specifically as part of our senior leadership succession planning and has already made a huge impact on the group.
We will now open up to Q and A. I think we'll have the room first as there's already hands flying up and then we'll move on to any questions on the phone. First one was.
Our host.
Good morning. Thank you very much for taking my questions. It's Ben Toms, RBC. If we take a step back, you printed an underlying ROE of 16% and given the share price move this morning and the EIR adjustment last year which causes some noise, maybe it could be helpful if you could just provide some assurance that through the cycle this bank should be expected to deliver at least a mid to high-teens ROE. Then secondly, your latest guidance on Basel was less than 200 basis points. I guess the key here is the regulatory announcement that's coming up in May and the key thing to look for there is probably whether they phase in the impact from standardized. I think 150-200 basis points represents something like GBP 200 million of capital.
Is the right way to think about a softening of that standard in terms of it being phased in kind of 80% of GBP 200 million of potential capital that's freed up for later in the year? Thank you.
They sound like them.
Do you want me to do all of them?
I think they sound like your questions.
Okay, that's no problem. I mean on ROE you know look we do we haven't given medium term guidance but I I think I hopefully what comes through on the sort of NIM progression slides is that we are facing some short term headwinds particularly as our retail savings book you know recycles onto more normalized deposit spreads but there is some upside coming from our lending mix and as Andy said once supported by the macro outlook in particular house prices we you should expect us to go back into some of our higher yielding businesses in a little bit more ang anger. But I guess if you look at our you know guidance you know we are I guess implicitly guiding at sort of high teens ROE. The other thing perhaps to point out would be the sort of what to expect on the ECL line.
You know we don't specifically guide on expected credit losses but you know most of our provision is modeled and if we start to see improvements in the macro particularly further moderation in the peak to trough of house prices you know that would be positive. So you know as we sit here today let's hope what we see as macro improvements as opposed to any worsening who knows which should support a relatively benign loan loss ratio going forward. You know the nature of the beast IFRS 9 is you're meant to have perfect foresight you make all your provisions and then you either utilize them you reverse them or you increase them for further worsening in the outlook. So I hope that helps without kind of giving you medium term guidance which we haven't published.
And then turning to Basel 3.1, we did when the consultation paper was first published. You're right, we guided to an impact of up to two percentage points on our capital requirement, and since then that has reduced somewhat. But because we are in a slightly stressful situation and therefore we've modeled more defaults, and if you have defaults then there isn't really an increase in the risk-weighted assets as a result of Basel 3.1, and therefore actually you know because of the macro situation that difference has reduced. I hope that that makes sense, slightly counterintuitive perhaps. Look, I think a lot of the lobbying has been around commercial semi, you know, SME lending, so any kind of rollback from the platinum plating versus the actual Basel rules themselves would be helpful I think for our business.
Residential risk weights are coming down for us because of our very sensible loan to value for residential lending. The real driver of the increase for us is larger portfolio buy-to-let and you know that that is the key thing to watch for but as you referenced as well you know Basel have bent over backwards to ensure that IRB firms get a nice smooth transition and transitional relief but had not originally put that in for standardized firms. Clearly there is going to be significant impact if it's put in close to what they consulted on for standardized firms and I hope they do the right thing and they offer transitional relief. And then I guess the thing we have to balance is that glide path of transitional relief versus IRB accreditation.
You know, unfortunately, I have to say there is no change to our IRB journey. We await resources from the PRA to formally engage with an application. Before someone asked me, I thought I'd just volunteer that.
I think the next one was here at the front.
Hello, it's Perlie from KBW. Can I just take you back to NIM? I guess the share price reaction today is reflective of the maybe the surprise that the guidance is so much lower than market expectations. I guess we are you know a quarter of the way through the year so I guess what are you seeing at the front end? Are you is there any surprises at all because obviously I guess going from I guess consensus of 280- 250-ish that's an there might be an element of a surprise in your thinking so just have those play out as you expected or you know would we expect any more revisions to that guidance late in the year?
Not that you can tell us now, but just sort of what you're seeing on the front end would be helpful. And then the second question is on volumes. So 5% is a little bit lower than your level of growth historically and you know even last year you did 9% and I guess in a falling rate environment with house price stabilizing I guess we would be a little bit surprised not to see a higher level of loan growth just what are you seeing there to give that guidance?
Shall I do NIM?
Yeah, I'll talk about that.
Do you want to talk about it?
Yeah.
So I think you know I hope what came across in that sort of outlook slide is that the drags on NIM really happened in the second half of last year commensurate with the guidance we'd given at interims for the second half. The continuation of the retail savings book recycling onto the, you know, higher prevailing costs is sort of a continuation of that and then we said we expect accretive lending margins and actually what we've seen so far this year are totally in line with that expectation. But as Andy mentioned earlier if we start to see the improvement in the macro if we continue to see moderation in the HPI peak to trough then that would suggest the mortgage market would start to recover.
That would certainly give more opportunity for further growth in our core businesses but would also give us the confidence to you know relax the risk appetite again and start going back into the kind of levels of lending we used to do and what we consider to be the more cyclical but of course higher lending businesses asset finance development finance more commercial. Now of bridging of course we're doing all of this but we're not doing it at quite the same volume as we would have done pre-pandemic and then pre the cost of living and borrowing rises.
Thanks, and then I mean on volume, I mean we always try and be realistic about the guidance we give on loan book growth. I think you know you have to come into 2024 being cognizant of the fact that the buy-to-let market, for example, was kind of 49% down last year on the previous year in terms of its overall volume. And even against that backdrop you know clearly we managed to increase our market share of both stock and flow.
You know the issue for us is one about rather than chasing volume at any cost, keeping a focus on NIM and keeping that focus on looking for opportunities for accretive NIM as we go through the year. So don't overgrow just for the sake of it. Making sure that we've got capital to deal with issues like Basel 3.1 and continuing to look after shareholders in terms of evaluating our opportunities for capital return. So I think we're being realistic about growth based on where the market is at the moment.
I think if the macro does what the perhaps early signs are that the macro might be doing and confidence starts to return and we get a bit of a pickup in purchase activity and that'll be both residential and buy-to-let then you know there is potential for more . But also if that macroeconomic environment improves as I said in the presentation we have ways in which we can pivot into some of our more cyclical business lines . If the macro is supportive of those and we want to reserve some capability to divert capital into those markets because they long term are NIM accretive. Yep that was sorry I'll I've got that one and I'll come back to you Greg.
Hi, good morning. It's James Invine here from Société Générale. I've got two on the margin, please. The first is I wonder if you could just help us, please, with the shape of the margin as we go through the year. You've kind of talked about an exit margin from last year of around 270. You're signaling 250 for the full year this year. Does that mean that, you know, when we get to December 2024, your exit margin is going to be, you know, around the 230 level? And then the second question is on just wondering, April, if you could be a little clearer on exactly what you're assuming for the deposit costs. So you've previously talked about them moving back to SONIA. Is that basically the expectation that you have baked into this, please? Thanks.
Okay, let me do the second one first 'cause that's easier. So yes, at the interims we'd said we're assuming around SONIA. At Q3 trading update we said it's gone up a bit so we're sort of assuming round about the SONIA 10 . So a more normalized rate I think for us at times you know the end of 2022 and the first half of 2023 I think I've said before we were raising you know our sort of retail deposits at sort of SONIA minus 40 , SONIA minus 45 at times and that did lead to an increase in net interest margin that we didn't expect to be sustained. You know the retail savings markets did eventually catch up and price in those rate rises. So that's what we assumed. We're continuing to assume about that level SONIA plus 10.
Clearly, we are conducting more securitization as part of our blend of funding. It gets you more duration. It also really helps replace the TFSME so we're not relying completely on retail savings market. Our repayment strategy is a mixture of retail and debt issuance and clearly securitizations. I mean we restarted I think the buy-to-let securitization market earlier this year and managed to break through just under the Sonia + 100. But clearly that's more expensive than retail savings. I think at the moment sort of residential STS type securitizations are probably about 45 basis points cheaper so that's kind of where we're focusing. So and of course we will have you know requirements we expect for further debt issuance as well not just for Basel but for our just planned growth in the balance sheet too.
So that hopefully that answers your second one. The shape of net interest margin , I mean we do expect the drag of that backbook of retail deposits one and two-year with a weighting towards the one-year as that was the most popular product over the last 18 months or so. We are expecting that to sort of complete in the second half so if you like that drag will be done. We will continue obviously to have some drag from MREL as, you know, the full year impact of what we've already raised but but also potential to raise some more later on in the year.
But then you've got that offsetting accretion from new lending and I think where we land at the end of the year will probably depend somewhat on what we see as the opportunities for growth. We will continue to look , as Andy just said, for further growth opportunities not just in our core markets , as they start to recover particularly on the purchase side but also in those more cyclical businesses.
Grace.
Hi, Grace Dargan from Barclays. Maybe sorry, just again coming back on the guidance, maybe particularly on the 2024 guidance in NIM. Do you think you're being conservative in that, or maybe put another way, could you see upside and where might that come from? I guess in particular, thinking about the asset spread widening given the improving rates backdrop, and maybe linked to that, within that asset spread widening, how are you thinking about that of kind of mix shift kind of coming to your points around the cyclicality versus kind of widening of core products? And then maybe looking further out, appreciate you haven't done medium-term guidance, so I won't comment on ROE, but maybe just how you're thinking about a normalized NIM. To ask in another way, in a normalized interest rate backdrop. Thank you.
Okay, sorry, Andy.
That's fine.
It seems to be the April show.
I'm actually happy to answer this one, but
Well, I mean, I think I would say, you know, you started with, are we being conservative on NIM? We always guide on NIM on what we're seeing today, so you know, we look at what's coming through the pipe and we look at what the funding cost is of the book and we use that as a, you know, a solid proxy to give us the guidance. I mean, in terms of mix, which you touched on, clearly when we think the macroeconomic environment is right, you know, we have the ability to pivot the mix. We did a little bit of that towards the second half of last year with some increased completions in bridging and through our InterBay business.
But we are quite a conservative board in terms of risk appetite. I think you know we want to make sure that it isn't a one swallow does not a summer make situation, and actually the ongoing trends of the macro environment are supportive . Because once you've lent it you're in it for a while so you want to make sure it's a credible business in the right point of the market. And then in terms of the widening piece, I mean you know OSB has always made good money in a low interest rate environment. I think you know banks have a tendency to widen margins when rates move in either direction. Static interest rates are never that helpful and it would certainly be the plan for us . You know we've never been the cheapest buy-to-let lender on the block.
It would be the plan for us to obviously treat borrowers fairly and make sure the products are appropriately priced as interest rates change. But equally, you know, the competitive nature of the funding dynamic means that as rates fall the current account benefit for the big providers is less beneficial. Therefore you get some less intensity of competition on the retail funding market. But we're not speculative in the way that we put our plans together. So as situations evolve we will look to jump on opportunities but you know we can't sit here and say this will happen 'cause we've got to see that economic data wash under the bridge. Did I miss anything or do I want to add to that?
No, no, no, that's fine. You did that very well.
Thank you.
Normalized NIM?
Well, I mean, look back in history. I mean, you know, in the more sort of benign steady low rate environment we were around about the sort of you know anywhere from sort of 260-280, weren't we? I mean you know clearly we have you know a bit of a drag from MREL issuance but you know those bars weren't too deep, were they? And you know we have tools and levers we can put at the right time . I can assure you the board is very focused on at the right time making those decisions on the more cyclical lending . But not wanting to trade up the risk return too soon , the risk curve you know just to flatten NIM because that wouldn't be the right decision for us to make. But there are opportunities there for sure.
And yeah, I think I probably agree with Andy. I think there should be some opportunity, but bearing in mind that, you know, the lending margins that the market, you know, ended up at last year when we had those expectations of, you know, rates going up further than I think we now believe. You know, didn't pass all that on to borrowers. So I think there'll be a natural inclination for the banks to try and take a little bit of that back. So I think I echo Andy's views on that.
Gary.
Hi, it's Gary Greenwood from Shore Capital. I've just got two sort of bigger picture questions really . So the first one is on M&A activity. Obviously we've seen a couple of potential deals or one gone through one potential in the sector recently with Tesco Bank and Virgin Money. So just your thoughts generally on consolidation in the sector and your positioning therein. And then the second one is more of a political one obviously it looks like we might get a change of government in the next 12 months. I think historically , a Labour government that's been viewed as being a little bit more cautious around landlords and buy-to-let than maybe a Conservative government, although the Conservative governments clamp down quite a bit. So just in terms of your thoughts on how that might change the environment for your business.
Yeah, sure. I mean the M&A activity, of course, the, you know, co-op in play with another building society as well, so there has been a bit of a flurry of activity. I'm not sure any of us saw the Virgin Nationwide one coming until the announcement was there. But you know, even so, I mean, you know, we continue to scour the market for opportunities. We think about defense clearly, you know, particularly at times when your share price is under pressure. We clearly make sure that we're well versed in how we would respond. The board is very clear on what we believe the intrinsic value of the business to be, you know, so that we can fight the corner on behalf of our shareholders if that's appropriate.
I mean I think I would say on us and M&A right now the story is the same as it was at the half year numbers. Our job of work is to you know get total confidence back in the underlying fundamental business that says we write decent volumes , we churn out a decent return on equity, and shareholders benefit from that . You know along with all the other aspects of running a good quality customer franchise. We will continue to evaluate opportunities in the market. Do I think there's going to be a mass flurry of consolidation? I mean I think maybe the regulator might like that 'cause it's easier to regulate fewer entities. I don't know I think there are some challenging deals.
I think we've still got the sort of issues of fair value adjustments on mortgage portfolios that still exist from a time when the interest rate dynamic was different . That makes some of the deals difficult to do. I think you've got you know some providers that have got heavy you know kind of FinTech investment . And therefore believe they're valued as a FinTech not as a bank, and that you know makes that sort of deal difficult . But other than that I can't say too much on that. I don't think there's going to be massive consolidation but there'll always be deals to be done if the price is right and the sort of economic flow is there.
The change of government one I mean that historically that's always been something that we've worried about because you know we think the private rented sector for example is very important and you need a supportive environment for that. Actually myself and a number of other mid-tier CEOs have spent time with the current economic secretary to the Treasury but also time with the shadow economic secretary to the Treasury. Actually the mood music we're hearing from the Labour government is much more supportive of actually you know making the U.K. an investable platform. Making the U.K. easier to do business in . And actually understanding that the lending industry and the banking industry is an important and intrinsic part of putting growth and economic value real economic value into the U.K. economy.
I think you know when we were talking about Jeremy Corbyn and some of the rhetoric and that sort of thing I would have been super nervous. Actually I'm less so now on that. I think the change of government will be looking for stability and growth and the banking sector can help with that.
Yeah.
Hello, it's Aman from Barclays. I had two questions, one on capital and one on cost income. So like, if you must be frustrated with the regulator. I mean, you, there's an uncertainty around risk weights that's really not helpful. I hope Sam Woods and the PRA are listening to this call, but you know your shareholders are actually bearing the brunt of the cost of this right in terms of the uncertainty on a capital position but also potentially MREL issuance. So I just wanted to double check the MREL. You know you're NIM bridging to 2024 next year. There's some incremental issuance that you'll be into. That does that factor in you know what assumption on risk density are you kind of embedding in that? Are you assuming you know that risk weights go up as per Basel?
Okay, I could go with that.
If that is the case, then kind of what happens if and when we, fingers crossed, get some relief down the line? Presumably we retire that funding in the fullness of time. The second question is around cost-income ratio. So is this a new kind of run rate cost-income ratio on a go-forward basis for your business? There's a very convoluted way of saying it, but you know you've done in the 20s, mid-20s. Is this 30%-33% the new kind of level that we should expect for your business going forward? And as part of that, I mean I've understood that India's been a really important support, you know, for the business or you know important part of the operations of OSB.
Still is. Still is exactly. But I do wonder how sustainable that is as a low cost center of running a business. I wonder if you've got a view. I mean everyone tells me that you know economic growth is set to accelerate and wealth creation and affluence and wages and what have you. I don't know if you've got a view there in terms of that medium term.
Should I start with capital?
Yeah.
Yeah, obviously we're extremely frustrated at the continued uncertainty as Basel 3.1 implementation has been delayed, frustrated at the consultation paper and the PRA not wanting to use their U.K. loss data and instead adopt calibrations which are international for buy-to-let which just aren't supported by the loss data in the U.K. where buy-to-let performs very similarly to residential and very frustrated there was no transitional relief. But I think the regulatory regime is quite fragmented in the U.K., it has with a tendency to platinum plate and that fragmentation manifests itself in a very low threshold for MREL as well as you know continuing to I think actually widen the uneven playing field between the larger banks and smaller banks and mid-tier banks. So yes obviously deeply frustrating and can clearly empathize with the frustration amongst the shareholders as well who just want clarity.
Nothing worse than uncertainty, is there? But we have assumed the consultation paper , and that there are no drawbacks, no no rollbacks from there. I think it's the sensible thing to do, that's all we have to really base our modeling on. So our capital requirements going forward are based on it just comes in as written. But also that, you know, the macro outlook is, you know, as we've published, is going to come to pass. So clearly we are forecasting small WA inflation through defaults as well. So those are kind of two of the main sort of assumptions going forward . That includes obviously the impact of, you know, higher LTVs as well, you know, from the HPI drops that are at the, certainly at the end of the year we were forecasting.
So, I guess to answer your question of what would we do if the rules are different. I really think we have to wait and see what the final rules are. We don't have to wait very long, I hope. They have said May, so let's fingers crossed it is in May, and let's hope they have listened to industry and Treasury , when it comes to some of the flaws we think in their previous consultation paper. Actually, you know, the longer it's delayed, also is it really fair to give industry only a year to get ready? So let's wait and see what the implementation date is as well, although I do know they're trying to align that to Europe and the U.S.
Interesting, the U.S. have decided not to just adopt the international calibrations . I think they're also looking to perhaps say it's the, I'm afraid you have to hold the higher standardized or your internal models as well so let's wait and see what the U.K. regulator does when it comes to models . Because clearly it's been difficult for them to find resources to get the larger incumbents to update but also to help aspirant firms get through. So yeah a very fragmented regulation framework delays, you know, in implementation and clarity and and quite clearly yes very frustrated. But we're not shy about telling the regulator that and we are very active on the lobbying side both with Treasury and with the PRA . Also potential future government as well when it comes to the regulatory regime.
Cost to income. I mean, do you want me to?
Yeah, you talk about that. I'll talk about India.
To take that, I mean, to be honest, I mean, if you're looking for an efficiency metric, you know, I really would love the industry to start kind of looking more at management expense ratio, you know. I always talk about the management expense ratio, which is about efficiency, and that does represent still the sustainable benefit we get from India. Yes, there is inflation in India, but it's not just about people, you know. It's still cheaper to hire people in India significantly.
It's a longer working day and actually the talent pool there is, is you know astonishing . The more and more we're finding deep pools of talent there with just a slightly different mindset . You know real mindset of improving digitalization robotizing and therefore we find actually the employee base there a real sort of asset to our business. It's not just about the cost benefit but there is still a cost benefit there as well of course.
And so from a sort of a run rate perspective that management expense ratio is the one that I personally focus on and I know Victoria does as well. We’ve managed to keep that broadly flat and although you may see a tick up this year , if we continue to invest very sensibly in our digital journey for the future you know that would be what I would want to draw your attention to. Unfortunately you know cost to income is so influenced by the income line. It’s very income influenced by fair value gains and losses on hedging activities as well. I know some of our competitors exclude that from their underlying results but it's such a close part of our business . We’re hedging our business we're not comfortable doing so but I think that's the line to watch.
I'll just add a couple of lines on the sustainability of India and then, conscious of time, we'll open up to people who are dialed in to see if we have questions from the phone. But I mean, what you get is kind of what you input in things like the in theory, and for us we have never treated our staff like they're an outsourced operation, they're our staff. You know, whereas the office premises could be in Brentwood, it happens to be in Bangalore or Hyderabad, they're very much part of the group, very much part of the corporate culture. And as a function of that , our level of attrition in India, where the market norm is 30% +, is much more akin to standard U.K. attrition.
If I said to you that the sort of average cost of a graduate or master's qualified member of staff all in in India is still about GBP 9,000 per head a year. The significant delta of that cost benefit versus the U.K. and we're not churning over a 1/3 of our workforce every year through attrition is actually superb.
April's already mentioned the talent pool and the availability of resources there. But it continues to be a real kind of jewel in the crown of OSB. It really does support the group in a way which is incredible and has done. You know, since we got it really working properly in about 2013 with the right management structure and the right way in which we'd organized it. Actually, despite some inflation in the Indian environment and despite clearly a fair bit of growth in the economy in India. It has continued to serve the group really really well both in customer service terms but also efficiency and cost terms. Operator, do we have questions on the telephone?
People have been waiting very patiently if they do.
Yeah.
I was wondering to ask a question. That's star one, and it doesn't make any sense. [inaudible] Sensitivity, we get to see as your front book grows, and then secondly, I noticed that there's a decline in your coverage levels. Is this what's driving? What's driving that? Thank you.
Was that the stage three coverage ratios on expected credit losses? Your second question?
Yes that's right.
Yeah, it was really the write-offs in the period which I mentioned earlier, so you know, including that large fraud case where we have successfully sold all the security. Now we provided for that in 2020, but the provision and the loans stayed on the balance sheet until we had sold all the underlying security in line with our write-off policy. So that dropped the coverage ratio on Stage 3, but overall obviously Stage 3 a small part of the overall balance sheet. The coverage ratios overall were broadly flat year-on-year.
On EIR, I'm not sure I fully understood your question. I mean, I think if you're asking about the liability that resulted from the adjustment we made in the first half . When we changed our forward-looking assumptions for how long Precise customers would stay on the reversion rate, that liability will reverse over the life of those loans. It’s balance sheet movement, not an income statement movement.
And any impact on our new business pricing as a result of assuming or new business NIM , as a result of assuming only five months on reversion , is really second or third order to the other drivers of how we price, such as swap spreads, market competition, et cetera. So you know, any ongoing impact of that is very hard for me to really quantify for you, but of course is incorporated into the NIM guidance I outlined earlier . That overall expectation of an accretive lending margin for the new business we're writing.
I mean, I can't sit here today and say one and done. I mean, I guess what I'm trying to get is we made a behavioral adjustment in the first half. Kind of the P&L impact of that behavioral change was done in the first half. Any small impact that had, I think at the time we said, you know, all else being equal, it would reduce front book margin if we assume new business spends five months on reversion as well. It would be about an 11 basis point impact on the net interest margin. I also said, of course, we'll take account of that as we price new business going forward, and I think that's perhaps the message I'm trying to reinforce. It's in there; it's in that NIM accretive lending margin.
Mm-hmm. Okay.
Understood, so if we just think forward to next year, obviously you've taken that one point of impact this year, but let's fast forward to next year. Should I be still seeing a sort of material adjustment next year or every year going forward till that book grows off, or is it just a one-time thing indeed for this year?
Well, what all I can say is that, you know, since we made that adjustment, we have not seen any significant or material behavioral changes from the assumptions we put in place at the half year. So we assumed on average five months across the precise book, and that's what we've seen since then, and that's what we continue to see. I think if we do see rates start to fall and if they fall in anger, you might actually expect people to spend a bit longer on it, but you know that would be crystal ball gazing. And right now all I can say is that I think we were pretty spot on, and the behavioral data we've collected since then and observed has supported that change we made in the first half.
Okay further questions?
Okay, understood. Thank you.
Thank you. Further questions from the phone?
Thank you. Our next question comes from John Cronin of Goodbody. The lines are open, please go ahead.
Hi, Andy. Hi, brother.
Hi there.
Hi John.
You've got in there just in time.
Can you hear me?
Yes, go ahead, John.
Yeah go on John.
Okay, thanks. Just one follow-up, if I could, on NIM, please. In terms of just disaggregating the 24 guidance, would it be possible for you, April, to isolate the negative drag associated with the change in the cost of retail fees specifically? That is embedded in your guidance. And at what point, specifically or roughly, during FY 2024 does that stabilize or, dare I say it, begin to inflect for you?
Well, well, I hope—listen, I mean, all I can say is, I think if you want it disaggregated, sort of look at the sort of relative size of the bars. Look, we haven't put specific numbers on it, but I think we've tried to make the size of the bars kind of broadly reflective of how each of the components contribute. I can tell you certainly, year-on-year, we expect the impact of the debt issuance to be around 12 basis points, but I'm sure you could probably do that maths as well. And you know, I think it will—it's not gonna be over in the first half. I think it's gonna be over the retail savings recycling. It's gonna be over, you know, in the fourth quarter if that helps.
Sorry.
Just looking at the duration of the fixed deposit book.
Yeah yeah.
Thanks John.
Thank you.
Anything further on the phone?
Thank you. We have no further questions from the telephone lines.
Okay, we are at 10:31. If there's any final remaining burning question in the room, happy to take it as long as it's not too tricky. Then I'll hand it to April. Otherwise, thank you very much for your time and nice to see you all as always. Thank you very much.