Paragon Banking Group PLC

LSE:PAG

Earnings Call Analysis

Earnings Call Transcript 2019-Q2

[Nigel S. Terrington, Chief Executive & Director]

Okay. Good morning, everyone. Welcome to Paragon's Interim Results Presentation. We'll do our usual presentational format. I'll give you a quick overview. Richard will take you through the financials in a bit of detail. I'll pick back with some more color around the performance, but also trying to look forward a little bit and also to leave enough time -- plenty of time for your questions afterwards.Okay. We are absolutely delighted with these results. I think that they are the product of the strategic transformation that kicked off really about 5 years ago when we set the bank up and commenced a series of diversification programs. But what you're able to see delivered here is a very strong lending performance, up over 30%. Most of that was organic. There was a bit of a supplemented by the Titlestone acquisition. But the improvements also seen on the retention side means that not only are you originating a good flow of new business, but you're also retaining that business.And that diversification point is also very evident because we're also somewhat uniquely within the U.K. able to see strong NIM progression, up 8 basis points in a world that is considered to be where margins are under pressure. And that's partly the disciplines that we apply within the business. But it's also partly the dynamics of the way the old book runs off, the new book comes on and the diversification strategy into the commercial world. And we'll cover a lot of that in more detail later on.But the financial performance for the period is also equally very strong. Operating profit is up almost 9%, EPS [ still ] 11%, and dividends per share has been moved towards that new dividend cover ratio, up 27%. We've been able to achieve all of that, whilst also maintaining a very strong risk focus that discipline towards our capital strengths and also the exemplary credit record that we have displayed continuously over time and through cycles.The return on equity target, return on tangible equity of 15% is now in sight, and we're very confident of being able to reach that. One of the other things we're going to spend a bit of time talking to you about apart from the focus towards specialist lending and how that's also contributing towards the increase in NIM is also the ability to recycle capital as well. And we'll take you through that because that's very evident part of what has been happening and we believe will be a significant part of what will happen into the future.So I'll leave it on the introduction, and I'll pass over to Richard, and I'll pick up later.

[Richard J. Woodman, CFO & Director]

Thank you, Nigel. Good morning. My first chart here shows how the main P&L items have developed over the last 6 years. If we start with total income, we've seen a growth of nearly 14% in the period. As Nigel mentioned, loan book is up over 10%. We've also seen improvement in our net interest margin to 2.24%, so that's driving that top line growth. Operating costs are higher, at 15.3% up year-on-year. The bulk of that increase is just the full period costs for Titlestone and Iceberg that were acquisitions that we completed in December and -- December '17 and then in the summer of 2018. There's a little bit of additional inflation. We're spending more money on IT. We tend to expense all of that. We're not one -- a firm that capitalizes a lot of our spending. We've gotten less than a couple of million pounds of capitalized software at the moment. So our approach on IT is to -- as far as possible is to expense as we're going through that development. And that's been a theme over the last few years.We've also -- they've got some more project costs, and I'll come on to those in a bit, but the biggest one has been IRB process, which has caused quite a variance in this period. Bad debts, being a little bit higher, but, they're as expected, we're now operating under the IFRS 9 approach. And again, I'll give you a little bit color about those in a little while. Overall, operating profits, as Nigel said, up just under 9% to a shade under GBP 80 million. If you look at the actual results, you'll see the statutory profits are actually a little lower. We've got a couple of below the line items, and, again, I'll come onto those a little bit later.Moving on to the loan book. If you look at the right-hand side of the chart, you can see all the activity that's going on within the group. Our new business flows are very strong, and you'll see particularly that change in product mix between the mortgage business and the commercial lending business, which has driven that growth in the post 2010 balance sheet assets to a very strong level. We're over GBP 6.2 billion now compared to just GBP 2 billion in 2015.So there is a lot of activity in the group, which sort of is belied when you look at the consolidated balance sheet position, which only shows that steady increase because we've got such a big pre-financial crisis legacy portfolio, which is amortizing very steadily. Redemption rate ticked up a tiny bit there, but it was less than a percent of an increase in the period year-on-year. So a very stable underlying cash flow from that portfolio. But [ let's say '], the balance sheet headings and the underlying earnings seem to be accreting slowly, but there's a lot of activity in terms of keeping that progress going.In terms of our funding, all of our new funding came from deposits in the period. The book is now just under GBP 6 billion. We've started 5 years ago. And so that's a good rate of progress. You'll see in the maturity profiles, in the top chart, we are very underweight in terms of our use of easy access. That's the cheapest form of deposit taking that is available to us. We've gradually increased that, but we're still only at 24% of the book. As we've gradually got more experience around the stickiness of those deposits and outflow rates, et cetera, we've gradually added to that level.Probably one of the most important elements is our net interest income. So within this chart, I've got a bridge from last year to this period in terms of the segmental levels. You'll see growth in both mortgages and commercial lending and absolute contribution. A small increase in the central area. This is effectively the way that we do our funding allocations. It's a bit of a profit center. So to the extent that we have benefits like TFS, that benefit has held in central, and the actual operating divisions will pay if you like our transfer price to cost of funds.So there's a bit of a benefit there. And because we got full period of TFS benefit this time, there's a slight uplift in terms of the benefit. If you people look at your models, in a couple of years' time, that will gradually unwind. So you'd have more of a cost in your central area as it's not getting that tick up from the recharge across the cost to the divisions.If you look at the chart underneath there, this shows the 2 core divisions, both improvements in margins and also volumes on mortgages and commercial. So for the mortgage business, if you remember this time last year when I spoke to you, we'd only seen a very small improvement in mortgage NIM, despite the back book, front book mix that Nigel was talking about because we'd seen a much higher level of redemptions in H1 2018. That's come back to a more normal level. And so we haven't had that drag in this period. And as a consequence, we're back to our underlying improvement in net interest margin on the mortgage book.In terms of commercial lending, altogether our NIM is up just over a percent. Around 80 basis points -- 83 basis points of that has come from the portfolio that we bought with Titlestone. The rest of it is an underlying improvement. Again, at the yearend, I spoke about the movements we'd seen in our asset finance business. So since acquisition, we've gradually been moving that from a Tier 3 to a Tier 2 player. As a consequence, margins have been reducing. This is the first period over the whole time we've had our asset finance business where front book margins are actually wider period-on-period. So that's been a very good movement in this half year.Idem Capital, income is down. We haven't written any new portfolios during this period. The underlying cash flow runs off at 20%, 25% per annum, depending on the portfolios. That was accelerated again, as we mentioned at the year-end, by that sale of a portfolio in September, which took around 7 basis points out of this full year's NIM and has been reflected in these numbers. The other thing we talked about as well at the year end was that very strong level of settlement income that we'd seen in 2018. We're back to more normal levels this time. So we haven't had that same fill up coming through to our P&L from that strong cash flow.Operating expenses. As I mentioned earlier, we've got the full cost now of the acquisitions in there. More monies going in on IT that's being expensed rather than capitalized. The cost is associated with the deposit book because we outsource the servicing there. Those grow with the size of the deposit book rather than inflation. So that's, again, something that pushes back a little bit on that initial development, but we have spent a lot more money on projects. So just on our IRB process, we spent over GBP 1 million more than we'd expected to in this first period as we pushed through to get the applications done.We'll expect to see some more of that. So -- and I'll be able talk a little bit about our process when it comes to capital. But we're looking at buy-to-let at the moment. We've got other portfolios that we'd be rolling out over the next year or 2. So whilst I wouldn't expect as high a variance, there will be ongoing professional costs to support that process.Credit performance remains very strong. As I said, we are now operating under IFRS 9. If you recall, we put our transition document out a couple months ago. That showed there was quite a big adjustment in terms of the buy-to-let business and, as a consequence, the future provision should be lower, and that's come through in the period. So in the mortgage business, you've got a lower bad debt charge H1 this year than we had last year.In terms of the Commercial Lending areas, they carry a bigger Stage 1 provision. There's a greater average loss expected over the lives of those portfolios. You take more in Stage 1. Given that growth rate, you will have seen a higher provisioning level. Overall, though provisions are in line with our expectations.Now we've got a couple of below-the-line items. One is a P&L and one is a balance sheet point. So in terms of the first one, we hold a lot of swaps and hedging against our buy-to-let pipeline. So until those loans actually complete, we don't have the effectiveness that we really need, and therefore the swaps that we hold against that pipeline, we have to fair value on a regular basis. If you look at the movement in swap rates that happened during March, that had a very material impact. There's been some general downward volatility over the period, which has contributed to that point, but we saw a particular issue there. And of the GBP 7.8 million of charge in the period, over GBP 5 million of that actually arose in the final month of the half year. Already in April, we've had around 1/3 of that adjustment has come back. So it's a timing difference. It's a noncash item and goes to 0 over the life of the instruments.The other point, though, is on pension deficits. I don't know if you recall what happens to gilt rates back in late 2016, but post the referendum, there was a big reduction there. Discount rates were reduced and pension deficits were elevated as a consequence. That gradually came back. We also had a similar increase in the position in terms of our pension deficit at the end of March. And again, we've had a recovery already of that back during April. So unfortunately, it's a feature of having a period end at what was quite a febrile position in terms of the markets in terms of March. We'll be expecting that to recover and reverse.In terms of our capital position, the position remains strong. We are at 13.7% CET1. That's with the IFRS 9 adjustment done on a transition basis, fully loaded 13.4%. Just under 0.3% of the [ cent ] of that has come from these below-the-line items that I mentioned that ought to be reversing. So overall, we see our capital accretion as being strong in the period. We operate on a standardized approach. The Board during the period did a full review of our risk weights, and we're very happy and comfortable with the approach we take, most notably on the buy-to-let portfolio.So that was an internal -- internally driven exercise and say gave us all further comfort in terms of the levels we're operating at. The addition of Titlestone has added to our risk-weighted density. When you -- my next slide shows the bridge between our opening and closing capital. We've applied a lot more in the way of risk-weighted assets to the business because of that high risk-weight density. The development finance loans operate with 150% risk weighting. So with that strong growth, we've seen that does use capital.I mentioned IRB. Our original plan would have been to -- getting our IRB application in around that. We've updated all of our models. We've got, what we call, our second generation, and we're just going through the final governance for that model verification and some of our NIM betting on that before we end up putting the application through. So the approach -- we had good -- very good dialogue with the PRA. It's very, very clear that what they would rather have is a absolutely complete and locked down application rather than one where there are adjustments going on as you're going through the process with them.They'd much rather be able to deliver their side of the application piece in short order rather than needing to come back to the companies which they say will end up the other approach would push out the overall lapse time from the -- for the application. So all things are looking good there. We're starting with buy-to-let. We'll then be moving onto some of the other portfolios as we have a rollout to hit all of the levels that the regulators expect on IRB balance sheet over the next few years.In terms of the bridge, you'll see underlying income added around a 1% to our CET1. As I mentioned, increases in lending have taken 0.6% off that -- that's a net position. So one of the -- if you look back to this time next year, it was a 0.3% change. Some of that was driven because we have quite a lot of redemptions in H1 2018 that haven't been repeated this time. But also we have that greater mix of the Commercial Lending business, so that's had that impact, distributions of the interim dividend and/or other movements of the below-the-line items. So all in all, we end up with 13.7%, 16% total capital ratio, so a very, very strong position.We're really pleased with the margin progression. We think that's -- it's demonstrated the delivery, if you like, of our strategic change, including growing net interest margins, growing the book and having a strong capital base we think leaves us very, very strong financially.Hand you back to Nigel.

[Nigel S. Terrington, Chief Executive & Director]

Okay. Thank you, Richard. So what have we been doing for the last 5 years? What we have done is transform this business from a monoline lender to a more diversified or broadly funded specialist bank. Now that's because what we believe is the areas of our capabilities, our skills, the competitive advantages that we have are the areas where we can make a difference. And so those are the things we are leaning on and we are exploiting.And that deeper understanding of those markets, the customers, the products we offer, the services we provide and, importantly, the risks that are attendant with that service, actually something that is a clear differentiator. And that 25, 30 years' worth of experience is definitely being applied. The other thing that's very important is the optimization of capital and the way in which we can recycle capital, a way from low margin, low growth sectors to better margin, better growth sectors. All of that has been evident over these period, and that's the strategy we'll adopt going forward.Now the important part of that for us was that we wanted to achieve this, and bear in mind what we've achieved. We formed the bank. We then restructured it, basically turned it on its head. We launched a whole range of organic startups. We undertook 4 separate acquisitions and then integrated that. But the important bit for us was we wanted to achieve that whilst maintaining the momentum of the business and the profitability all the way through. And bear in mind, that comes with a lot of effort and costs to achieve that. So therefore, the maintenance of that earnings momentum has been particularly important.So just a couple of metrics. A near 11% compound growth rate in our underlying EPS, dividends per share up over 18%, and the return on tangible equity up from just over 10% to 14.4% across that period. So the importance of -- though, a lot has been achieved, but the momentum of the operational performances and the financial performances have also been maintained as well.So I said the importance about being a specialist bank. One of the key things is it leans on our skills and capabilities. The other thing is it avoids commoditized markets. We're all very familiar what's happening in those markets, the oversupply of credit into that space, the margin compressions that are very evident now. You can see that chart on the right-hand side in the last 3 years shows just how significant that transformation has been.The increase in the complex business at the bottom, the professional landlord going up from 34% to 54%. You can see the fact that the Commercial Lending up from 8% to sort of a 400% increase in its share of new business flow. And also, the decline, a 75% decline in the more narrow margin, more commoditized amateur end of the market. So that transformation is very evident in just that graph alone.Turning to some of the product lines individually. So first, looking at buy-to-let. Now I'm actually quite -- maybe a little bit surprised, but also very impressed with the way the resilience of the buy-to-let market has been. People have been describing or anticipating its demise from day 1. But what you can see there is the absolute volumes have been quite stable throughout that period. You've seen a decline in the purchase activity that's been supplemented by increase and improvements on the remortgage activity. But the professional landlord is taking an increasing share of the purchase end of that market. Again, that is beneficial to our strategy.Our overall new lending in buy-to-let to about just over GBP 750 million, up over 17%. In just the professional component, that absolute level of lending is up 44%. Within that, 51% of all of the flow is to the portfolio landlords who are using corporate structures. Importantly, you can see -- we'll talk about more about margins later on. But what you can see is actually within the market, the margins within the professional complex end of that market have been robust. They have been very stable throughout the period.Our pipeline at GBP 711 million, that's a little bit down on the year end. That's just because the runoff of the amateur part. The professional is a bigger share of the pipeline than it was before. But that yield in that pipeline is 10 basis points wider than it was a year ago. So our view is that we believe that the professional component of the overall buy-to-let market is expected to continue for some time to come.Now getting business in through the front door is fine, but if you're leaking it all out the back door that's not a particularly successful enterprise. So there's been a big focus on improving our activities on customer retention and also the extension of longer duration products. And there you can see the output. We've seen a decline in the redemption levels across the buy-to-let portfolio quite significantly. And that has fed through to the improvements in the loan book. It's not just about the new originations. It's also about keeping customers for longer.Turning to Commercial Lending. Firstly, on the development finance side, clearly, that was a big step up absorbed following the acquisition of Titlestone. That business is now fully integrated, probably the quickest integration that we've done on any of the 4 acquisitions. It's made good progress. We're delighted with the performance. We're delighted with the progress that they've seen. We've got a good flow of business through the pipeline. We've got over 200 -- over GBP 250 million of undrawn facilities ready to come on as and when customers wish to draw. There's probably a bit of slowness with the customers in terms of the timing and phasing of when they wish to draw on that, which we assume is Brexit-related. However, it's not that material, and we don't think is going to be significant in the overall scheme of things.Turning to the asset finance side of the business. I mean, we have a tiny share in a very big market, and there's still a lot to go for. Lending in this period was up around 29% compared to last year. There was a bit of enhancement from Titlestone where we had a full period compared to the previous period. But the underlying business actually had made big strides in improving some of its distribution, improving the technology within the business, improving the processes, delivering better service to customers. And we've seen the fruits of that with strong flows. Not just that, but, again, the disciplines that we have applied have ensured that the margins are improving in this space rather than going backwards.On the deposit side of our business, again, a business we started 5 years ago. We now have just approaching GBP 6 billion of deposits that we used to fund our business. During this phase, I think, as Richard highlighted, there's been a big emphasis on term funding, which in relative terms is more expensive the further you go along the yield curve. But we believe that we're only just beginning to tap the opportunities available on the deposit side. In the short term, there are other product offerings we can make whether it'd be the SME market or better use of easy access or we're also now working with the platforms. We're on the Hargreaves Lansdown platform. There is many others that are due to come on over the coming months and years.We believe that emergence of platforms is quite significant, almost like potentially a precursor to what Open Banking could do for the deposit market. There is astonishing amount of inert money that is within the system. About 25% of all new accounts opened are being opened at a rate of less than 25 basis points. That is a huge sum of money, and we don't need a material amount of that in order to make significant gains into the future. It's not an overnight event. It's a medium- to long-term change and we believe in the way deposits might be managed in the U.K.Turning to the interest -- the net interest margin. There you can see that chart clearly displays a long-term trend. Over 5 years, we've seen our business move with improvements in the NIM by about 30 basis points. Part of that period when was just mortgage related. Some of it has now become because of the diversification program pretty much from 2015 onwards. Now what you are seeing is 2 effects. One is the structural shift between the old book running off -- the old legacy buy-to-let portfolio, fantastic credit profile, but very low margin, and it's amortizing. The new business that's coming on is coming on with a fantastic credit profile and at better margins. That naturally drives NIM.Secondly, the Commercial Lending book is at wider margins on the way through. So as we deploy capital and recycle it away from the old book into new book, you see a structural shift in the NIM position over a period of time. This is perhaps quite starkly set out here. They're on the left-hand side. What you've got is the legacy book with a yield of 2.5%, the new mortgage book with a yield of 4%, the group average just over 4%, but the commercial book where we believe that will be the engine for growth in terms of the progression going forward is at 7.4%. And when you then compare that to the right-hand side, 44% of our loan book is in legacy assets. So you can still see what a significant effect that legacy book has on the overall level of NIM within the business.That clearly will change, and therefore, we believe that NIM progression is not for this first half. It's not for the second half. It's for many years to come. The credit profile of our business has been a long held sort of almost like a dogma to us. We are very disciplined in our approach. Richard clearly displayed on his charts the level of credit performance that we've seen over a sustained period of time and through cycles.Importantly, if you look at our loan book today, our buy-to-let book has got lower LTVs than the legacy book. The credit performance of the commercial book is excellent. And one of the things that we do is we don't just trust the judgment of our underwriting. We're also constantly testing that and reassessing it. So over the years, we have built a very dynamic behavioral scoring model where we draw down information on our customers, real-life information on the stresses and strains that might be happening in their lives.It's fed through into behavioral scoring models, and we therefore monitor it. Every month, we download 500 million pieces of data on our customers. And there you can see indexing that to a year ago, the portfolios within our business are performing exactly the way we had anticipated them to be. Clearly it's a benign environment, but that credit performance is outstanding, and we see no stresses within the portfolio overall.Again, Open Banking has a good and interesting medium term opportunity. We think the ability to draw data -- huge amounts of data, access to customers' bank account information and wider sources of data will enable us to make better -- even better lending decisions. We think it's going to broaden our customer reach. We think we will have the opportunity to create bespoke products to our customers based on the information that we will be able to deliver, and it should also with better technology drive down improvements in the processing and efficiency of the organization.Capital optimization. We have a track record in this over some considerable period of time. We've returned either in the form of dividends or buybacks close to GBP 400 million. That represents somewhere between 33% and 40% of today's market cap or shareholders' funds. That track record is partly -- it's there because we see capital optimization and the disciplines around capital as one of our core principles and one of our strategic levers. When we did the bank restructuring, we flipped the organization effectively on its head, and we were able to therefore mobilize capital and move it around the organization far more efficiently than we'd ever been able to do before.The Idem sale of one of its portfolios done in the same quarter as the acquisition of Titlestone was effectively recycling capital from low growth to a high growth and sustainable business opportunity. Richard has highlighted the IRB progress. That has got some important changes to the way in which we undertake risk management within the organization. It has an important ability to enable us to differentiate between certain products, certain customer types and therefore try to better targeting and, importantly, as well better use of our capital.And therefore, we believe we cannot prove this until the PRA have completed their processes, but we believe it will create some interesting capital efficiency on the way through. So as I said at the beginning, capital optimization is a fundamentally important principle to us. The ability to move our capital from low growth, low margin to higher growth, higher margin is an important ingredient, and we'll be part of that progress, which we will hope to deliver on an ongoing basis.So to conclude, you understand why I feel particularly strong about this set of results. The progress that we've achieved both operationally and financially has been very strong in this period. We've delivered strong lending volumes. We've done that whilst achieving NIM progression. We've done that whilst achieving loan book growth. We've done that whilst maintaining the exemplary credit track record. We've seen further progress in that shift towards specialization on the way through.The franchise is moving significantly on the deposit side. GBP 6 billion in 5 years is no mean achievement. And we've been able to demonstrate that along with all the other underlying metrics of earnings, dividend and return on tangible equity. Over the medium term, we believe that there is significant opportunity for us across the range of markets in which we participate. That focus -- that single-minded focus on specialization means we're going to keep away from commoditized end of markets. With that ability to recycle capital, we can move that capital from where it is and where it needs to be to support that.The operational leverage that we've created through the effort and cost in recent years to get our business to where it is today, as that level of business the positive jaws that will naturally emerge in the years to come will drive down that cost:income ratio from the 40% down comfortably through into the 30% and down to where we believe we will be able to achieve a particularly efficient cost:income ratio into the future. Now that is all going to be maintained with that very prudent risk appetite that we have always held true. We are a through-the-cycle business.We are not here just to have success in the short term. So, therefore, when we do things, we do them over a long period of time on a sustained basis. So we are now at 14.4% return on tangible equity. We're very close to our 15% target. But that target is a through-the-cycle target. And therefore, we're in a benign environment. Could it go above 15%? Yes, of course, it could go above 15%. However, for us, the importance is, is making sure it's all in balance with the risk appetite that we run. And therefore, what we're absolutely delighted with is this delivery of these sets of results in this first half of the year is completely reflective of the strategy that we undertook 5 years ago as we continue to deliver that performance and in the years ahead.On which note, I will stop and give you an opportunity for questions.

[Nigel S. Terrington, Chief Executive & Director]

I think, from memory, you need to pull a microphone up and...so, Ian, why don't you go ahead? I think you have to hold a button, from memory.

[Ian David Gordon, Head of Banks Research]

Ian Gordon, Investec. Can I have 2, please? Firstly, I'm not surprised to say you're confident of getting to 15% RoTE because I think if I normalize for the project-related costs this half year, they're already. I know you touched on this in your concluding comments, but can you just talk a little bit more about your expectations on cost:income? As in, do we see a step down as soon as the IRB project-related costs drop out and has your medium-term expectation into the low 30s evolved at all? And then, secondly, on interest expense, you've told us many times how you're underweight on cheaper sources of funding, easy access, SME, et cetera. Two points. Firstly, given that you're a light user of TFS, should I simply assume that you'll maintain it to the contractual maturity? It seems sensible to me to do so. And then, secondly, how quickly do you intend to evolve your funding mix in terms of those lower cost opportunities?

[Nigel S. Terrington, Chief Executive & Director]

Okay. So in terms of the cost:income ratio, so the thing that I said there was if you look, the cost:income ratio clearly rose. It was like mid-30s. We commenced the bank, of which you naturally get more compliance, more governance, more overhead. Alongside that, you also get the acquisition process where we absorbed businesses that had a higher cost:income ratio than us. Some of them are service-based businesses. So we have some brokers within the business. Their cost:income ratio is never going to be below 30%. It's always operates on a higher level. And also the -- some of the acquisitions have needed some attendance as it were to improve their cost:income ratio over a period of time.As we have progressed, there have been additional things like IRB has come on. That has been probably more cost than we had originally expected. But what -- you're getting to a point of inflection where those -- the level of income that we're generating will then feed through the positive jaws observation. That medium-term target may be pushed out a year or so from where it was. But we still hold true to that medium-term target. But a few bps clearly -- you can see it's gone up to 40%. It's sort of hovered around that sort of level, but we do expect that to start moving down, maybe not this year, but in the years to come. So the principal is absolutely still held true. In terms of the savings side, clearly, if you look at what we have done to-date, it's been -- in one sense, we've added product like [ ICES ] and we've moved across the maturity range. But it hasn't been any material step outside of that sort of core sort of term-focused end of that market. So we will evolve this gradually, rather than it being all done in the second half of the year. There are things to do both in terms of open banking, there's things to do both in terms of the platform, there are things to do that requires effort to get it done. So I don't think you should book it, all of that movement inside the second half of this year, but more phase it in over a period of time. Any observations on phase-in and timing?

[Richard J. Woodman, CFO & Director]

No, we don't [ carry an issue ]. It won't let us do it any faster than that.

[Nigel S. Terrington, Chief Executive & Director]

Okay. Next question? Portia.

[Portia Anjuli Patel, Analyst]

Portia Patel from Canaccord. Nigel, I was just interested in your comment that new business margins in buy-to-let remain robust, which, I think, is probably slightly surprising given the number of your competitors talk about pressure on front but margins and obviously see that new book margins coming down as a result. So just wondering if you could comment on how Paragon's products are priced versus competitors, and I guess, why you see margins robust when others don't.

[Nigel S. Terrington, Chief Executive & Director]

Sure. So I mean, within the professional buy-to-let market, there's a range of competitors. You have perhaps one in the Nationwide who are a player in the professional end of the market. They have a particular focus in that space. As you move out, you get some of the nonbank lenders and some of the peers, which you know very well, the RSBs and [indiscernible] and [indiscernible] of this world. I think you'll find us typically more competitive, as in price-competitive than most, probably not as price-competitive as the Nationwide but we're in that ballpark within there. Now I think the range of products that we offer and the complexity of the types of landlords that we are prepared to deal with and the complexity of the product -- property proposition is also, I think, at this point about specialization, I think, is really important because it can be a statement easily thrown away. It's like, "Oh, we do specialist products," which, for some, that might be just synonymous with sub-prime or another phrase that you might use for that. This is not we have customers, you can see half the book is to customers who use the complex property structures -- sorry, complex properties booked within them. Things like HMOs, student blocks and the like. But within that, they'll throw it into a corporate wrapper and utilize that. This whole range of differentiation, one of the factors, which separates us from everyone in the market is we have our own in-house team of surveyors who engage on behalf of us to protect us, but also work with our customers. And therefore, they're out there looking at properties that they may be considering. It's a service-based proposition, dealing particularly with the professional end of that market. We'll tell landlords whether they should buy that particular property or not, whether it's this side of the street or that, and it can be as narrowly important as that. So I think, the reason why it's been so robust is we're, a, we're disciplined about it. Could we have written more business by reducing the pricing? Probably. But actually, maintaining that discipline is important to us, but employing and utilizing that specialist skill is what we're here to do.Take the one on the left, one the right and one in front. So we'll do in that order.

[Nicholas Herman, Assistant Vice President and Analyst]

It's Nicholas Herman from Citigroup. I just want on the -- first on the buy-to-let mortgage question. I noticed that your rates had held up, but I also noticed well that your first mortgage LTVs had also ticked up as well, from about 66% to 68%. Has that also played an impact on that by helping you to keep your rates level, your margins steady? And then on the commercial side, could you just elaborate on the scale of the asset finance margin widening? And then in terms of the overall commercial margin widening, how much of that is mix versus repricing? And again, is that also because the curve is curved again? Because on the development finance, you can see again the LTV bank has again increased from 60%, I think it is 64%. So that will be helpful.

[Nigel S. Terrington, Chief Executive & Director]

Okay. Do you want to do it?

[Richard J. Woodman, CFO & Director]

The main impact on the -- on the buy-to-let average LTVs is just that that's an indexed figure, and you will see the nationwide index come down by nearly a point over the period from the year-end, so that's all driven by that indexation as opposed to new business flow. So the average LTV of our new lending is virtually flat and has been for the last 2 or 3 years. But as Nigel said, the embedded yield within that business is stronger than it was a year ago, stronger than it was at September, but also we've got a pickup as well in -- it's what [ operates ] today compared to 12 months ago. So that net position in terms of the profitability of those new buy-to-let flows is stronger than it was this time last year. In terms of commercial, the main impact on the development finance piece was the purchase of Titlestone. It operates at higher LTVs than we had in our organic book previously, and that's the only reason for the increase. There's been no change in either -- in Titlestone's or the combined businesses' LTV profile since that acquisition. So that was all, if you like, a slab change in terms of the mix at that point. In terms of the asset finance, we've probably seen something just over 25 bps as margin improvement as we've refocused the business in this 6 months compared to the same period last year. So that's been quite a nice move. But it's all down to that refinement in terms of the proposition, particularly in terms of the broker proposition we have on our business.

[Nicholas Herman, Assistant Vice President and Analyst]

That's very helpful. One last one up as well on the deposit class side -- or deposit side. Growth rate was actually a lot stronger than I expected, at least. How much of that is just pre-funding growth for the second half and how much of that is just ongoing? I guess it's kind of both, but also just an ongoing mix shift as you rebalance the funding mix of the...

[Nigel S. Terrington, Chief Executive & Director]

Do you mean -- sorry, the growth in all deposit book?

[Nicholas Herman, Assistant Vice President and Analyst]

Yes.

[Nigel S. Terrington, Chief Executive & Director]

Well, I mean, the deposit book is growing because the loan book is growing. So the only other bit is that we were holding quite a bit of extra liquidity just as a contingency for -- because of Brexit, which has had an impact on cost of that actual liquidity is probably, what, a couple of million pounds?

[Richard J. Woodman, CFO & Director]

Yes, around that figure.

[Nigel S. Terrington, Chief Executive & Director]

Yes. So there is a cost to extra liquidity and that, that does have an impact through that period. But it's nothing other than just financing the business. And sorry Ian I didn't answer your question about TFS, sorry. And yes, so, we're, as you say, a relatively modest user of TFS, and we'll repay it when we have to repay it, so. Yes?

[John Cronin, Financials Analyst]

It's John Cronin from Goodbody. And 2 questions, firstly, on the -- if I come back to the pipeline on buy-to-let. So it's 711, down a little bit from 729, but clearly very healthy still. Professional has been growing as a proportion for a long time now and pipeline had been growing quite strongly too. So I'm just trying to get a little more underneath that in terms of the outlook for volume growth. I suppose the second part of that question is, again, look, it's not the first time we've heard the message around the Commercial Lending book and it being a key pillar for growth going forward, but it does feel like the message is even stronger today and I'm wondering there, are you -- given your commentary that you're almost surprised to continue to see the resilience of the buy-to-let volumes. And are you just a little bit more cautious looking forward in terms of how those will hold up? So anything you could say in terms of volume expectations in broad terms would be welcome. My second question then is on IRB. So in relation to -- again, going back -- look, you've pushed it out a little bit in terms of the submissions. But I'm wondering with that very good dialogue with the PRA that you described, would that be potentially constructive in the context of the 18-month guided timetable? And then, secondly, can you give us any sense of the other loan portfolios and how should we think about timing in terms of application submissions?

[Nigel S. Terrington, Chief Executive & Director]

You do the IRB and I'll do the [indiscernible] .

[Richard J. Woodman, CFO & Director]

You want me to do IRB?

[Nigel S. Terrington, Chief Executive & Director]

Yes, do IRB.

[Richard J. Woodman, CFO & Director]

Sorry. We'll start with IRB. Yes, so let's say we've had a very good and constructive conversation with them. I don't think there's any great likelihood that the 18-month figure is going to crash into a 12-month level. I think they have a process that they will go through and when they get the application. The important thing for us is to be as strong as possible that actually you're not going to be putting something in and an 18-month process turns into 2 years, 3 years, et cetera. So this is all about the quality of that application to underpin that modular approach that they're now taking. In terms of the other portfolios, eventually you want to make sure that at least a 85% of your risk weighted assets fall under the IRB element of your balance sheet. So buy-to-let, clearly, is very important. Development finance will be an important as well. You won't to do that on a modeled basis. They call it a slotting approach in terms of the approach you would take to doing that. So it's a little different, but still needs a lot of data, a lot of analysis, but also, very importantly, for the regulators, a use test to demonstrate how you're using that information, how you're making the decisions, how you're monitoring it, and how you're making sure the slots you're putting these portfolios into at the different times are actually representative of their performance. So you'll be going over that period. My guess is that we'll be putting in a range of models. So buy-to-let, second half of this year; development finance, probably, I guess, maybe first quarter next; and a rollout after that. So it's probably altogether from soup-to-nuts to have the whole portfolio on IRB, maybe another 3 and a bit years to run through, as you gradually put those portfolio on. But we're doing the big ones first.

[Nigel S. Terrington, Chief Executive & Director]

Okay. So let me help you on volumes. Last November, when we gave our full year results, we gave you some guidance on where we thought the lending volumes for the year would sort of pan out quarterly. And at quarter 1, we reinforced that guidance since we funded that. We can repeat that now. So we are happy with the guidance we gave on buy-to-let, specifically because you asked that. The guidance we gave was flat to a modest increase. And that's just because, I think, 2 things, we already have a very mature and established position with that market. So the opportunities to have significant step-ups in market share gains are -- is harder in buy-to-let than it is in the commercial areas. The buy-to-let market, I think, as I said, has been very robust. It's performed perhaps remarkably well by comparison. I think underpinning that is, actually, demand for rented property is unsustainable -- it would be sustainably strong. The 20% of all houses in the U.K. are in the private rented sector. That's not changing anytime soon. So it's got to get some form of support. There's been calls for the -- there's been calls for the way in which some of those dynamics could change, whether it'd be through the regulatory changes that have happened, how much a landlord's selling [ in their droves ]. This is not happening. Okay. We just don't see it happening. There's always going to be some. Some of the amateurs are just simply not buying now. I don't see any wholesale selling taking place. There's always going to be some that will be selling, but it's not been evident, certainly, so far. The professional, these are guys that are SMEs in all but name, and the way they operate and the way they run is on a sustainable basis. This is their business. Some of the tax impacts have been mitigated by using corporate structures. And actually, the constant supply of tenants versus maybe a limited universe of landlords is actually seeing some very decent upward pressure on rents on the way through, enhancing their -- enhancing their yields. So we are firm. I do think there will be a reduction in gross mortgage lending over the coming years. I don't think that will -- at the gross level, it won't be still maintaining itself at the GBP 35 billion or so. It probably will come down, particularly as there's more 5-year fixes and for a couple of years, you'll see reduced premortgage activity available in the market. But the professional is a stronger player in the purchase market, so at least we're overweight purchase buy-to-let relative to the market as a whole. So we're very happy with the guidance we gave on that. In terms of guidance on the rest of the book on the commercial side, I think your observation about the strength of that, we agree. We do believe we have a tiny market share in pretty much all the markets in we operate. So we are a threat to the incumbents within that space. We think some of those sectors like asset finance are archaic, frankly. Some of the way in which some of that business gets done, it's very -- maybe where the mortgage market may have been like 10 years ago or so. And so things like improvements of technology, things like open banking, we think could be quite revolutionary in the way in which business can be delivered within the SME and commercial ends of those markets. But that's not an overnight thing, that's a longer-term thing and on a sustained basis as well.

[James Frederick Alexander Invine, Equity Analyst]

It's James Invine here from SocGen. I've got 2, please. The first is I was wondering if you could share with us, please, some of the feedback from investors when you're thinking about securitization in a SONIA environment. Are we going to see maybe at least the first few securitizations be quite a lot more expensive just as the market bends in? Or is it not going to make a difference? And then the second one is your chart on Slide 23, you gave us the yields by product. I was just wondering if you could give us the relative yield -- sorry, the relative ROEs you think that you're getting on the new mortgage business and on the commercial business at the moment?

[Richard J. Woodman, CFO & Director]

Okay. Deal with the securitization one?

[Nigel S. Terrington, Chief Executive & Director]

Yes, sure. So we've started to see some SONIA enrichments. There are couple of people in the market at the moment, I saw Nationwide, a little while ago. Bear in mind the -- when you're looking at the coupons that apply, SONIA's typically around 15 bps inside 3-month LIBOR. So where people may have been talking about LIBOR plus 70 a couple of years ago, the like-for-like would be 85. We've certainly seen pricing as being wider over the last period. We haven't done a deal. And -- but we are likely to do one in the -- relatively near future. It would be a SONIA basis. And we'll see as more benchmarks are in the market, we would expect that pricing to come in. But a lot of the pricing is down to probably the more macro effect, rather than the SONIA/LIBOR point.

[Richard J. Woodman, CFO & Director]

I think if the market is right, we'll do one. If it's not, we won't. We don't have to. So the important thing is what I put on the slide, on the funding slide, was -- it is the little box there, describes about securitization is an option for the business. Our fundamental funding strategy is directed toward the retail deposit market and we will use securitization when it suits us. Turning to the relative -- the ROEs, now we have internal pricing models that are driven by the regulatory capital requirements that we hold, which also clearly includes a component of equity within it. All of those are fit for minimal return on equity of 15%. Now we don't do business below that level. We do business above that level. So -- and that's on a regulated basis. So that would lead you to a better return on equity, as opposed to a return on regulatory capital. And therefore, I'm not going to give you each individual component, but what I can say is they're all set for a threshold of 15%.I think there is a supplementary coming in.

[James Frederick Alexander Invine, Equity Analyst]

No, sir, just a quick one. Could you -- do you have an idea of what the risk weight might be on the development finance book on an IRB basis? I mean, I know we're not there yet.

[Richard J. Woodman, CFO & Director]

Not yet. It's too early. We're not 150% there.

[Nigel S. Terrington, Chief Executive & Director]

Yes, go ahead.

[Anthony Da-Costa]

It's Anthony Da-Costa at Peel Hunt. It's actually a follow-up to the risk density question. I, actually, have 2 questions. The first one, the risk density. Obviously, [ fostered ] buy-to-let, the [indiscernible] weightings are much lower and you're still going into the IRB sort of program whereby that's going to be potentially reduced. And then that's going to be followed up the various other sort of products. Isn't -- so part 2, once the buy-to-let sort of comes through, is that not more tricky? What -- how -- what is the process? Do you have enough data to sort of go, say, development finance? Can you get that on an IRB approach? That's the first question.

[Richard J. Woodman, CFO & Director]

So in terms of that approach, we -- I said we use a slotting approach as opposed to a modeled approach. So you don't need as much data. Clearly, there's a lot of data within the Titlestone business that's been operating since, well, 2012, at least. So more than we've got from our organic piece. But it is a different profile and a different approach to the modeling. You're quite right to do a fully modeled approach. With all your PD, LGD approach, you do need more data.

[Anthony Da-Costa]

And I assume since this is the larger mix of your lending going forward that there would be some high priority sort of feature of your IRB application?

[Richard J. Woodman, CFO & Director]

Indeed.

[Nigel S. Terrington, Chief Executive & Director]

So the -- I mean, if you look, it's actually last year's figures but I can remember that from a question last year was that if you look to the volume of lending done by the buy-to-let side is mortgage generally is GBP 1.6 billion. And the lending on an annualized basis within development finance was GBP 321 million. They broadly attributed the same amount of capital to achieve that. So clearly, buy-to-let is #1 priority because it's the biggest part of our balance sheet. The second on the list will be development finance.

[Anthony Da-Costa]

And then, looking sort at the loan book, and it's sort of approaching levels in which I assume that's going towards the MREL requirement. How should we think about that?

[Nigel S. Terrington, Chief Executive & Director]

Okay. So let me deal with that. The statement of principles from the Bank of England are actually quite clear. There are 2 key thresholds: GBP 15 billion to GBP 25 billion and GBP 40,000 to GBP 80,000 in current accounts. The second one doesn't apply because we don't have any. In terms of the thresholds, there are also the principles around what they -- so they are indicative figures, rather than absolute figures. And they depend on a range of factors, including the importance of your business, the complexity of your business, the ease that you can be resolved, and also the dependence of things like the size of the deposit book as well. So we understand those. We have spent a lot of time doing a lot of work understanding those principles. We have also engaged with the Bank of England to understand the general approach to the principles that are applied. Our view is that for the duration of your forecast, this won't apply.Sorry eventually we'll get to you.

[Edward Hugo Anson Firth, Analyst]

It's Ed Firth here from KBW. Yes, I just had a couple of questions, and apologies if this is in the documents, I may have missed it. But could you just give us a figure of your average cost of funding in this period, say, compared with what it was last year, either first or second half? That was one question. Secondly, on the IRB, have you told us what you expect the risk weighted asset impact to be of the buy-to-let getting approved? Just some idea again would be helpful. We can look at other people, but I guess every portfolio is different. And then a final question was if I look at the -- your impairment coverage or your nonperforming, or Stage 3, I think we call it now, coverage, but that's come down a bit. Is that -- was there something driving that, some write-off of nonperforming loans or something? Or is that just a more benign outlook in the way you look at things?

[Nigel S. Terrington, Chief Executive & Director]

Okay. Yours, I think.

[Richard J. Woodman, CFO & Director]

Sorry.

[Nigel S. Terrington, Chief Executive & Director]

Can you remember all 3?

[Richard J. Woodman, CFO & Director]

I haven't got the melded cost of funds, but deposits were 6 basis points higher at the end of the period than it was this time last year. So that clearly has absorbed one base rate increase and dealt with the additional competition we've seen in the market with [ people like Marcus ] on that slide. In terms of the IRB Pillar 1 number, we are expecting an improvement from the standardized figure, but until we've been through that process with the regulator and agreed that we won't be sharing that level. But you will have seen where the benchmarks sit. I think the thing to bear in mind is that our portfolio on average will have been -- the back book would have been originated around an 85% LTV and the new loans are being originated in the low 70s. That gives you some idea of where our portfolio would be in that against those benchmarks.

[Nigel S. Terrington, Chief Executive & Director]

So the implication being the risk weight density for the new book will be lower than the old book.

[Richard J. Woodman, CFO & Director]

And in terms of the Stage 3 accounts, I [ cotton ] with sort of our transition document. We've originally put our receiver rent accounts into Stage 2. This is where -- these are effectively long-dated management of accounts that went into receivership where they're all now less than 30 -- sorry, less than 3 months in arrears. Most of them are fully up-to-date. To align with our regulatory reporting, we've put those into Stage 3 as well so it's diluted that coverage ratio. So essentially, you've got a bigger balance, but a lot of those you're not expecting to actually incur a credit loss on.

[Nigel S. Terrington, Chief Executive & Director]

Do we have -- okay.

[Shailesh Mansukhlal Raikundlia, Analyst]

It's Shailesh Raikundlia from Panmure Gordon. Two questions, if I may. Thanks for the slide on the capital optimization. I was just wondering with your strong capital position, obviously now at 13.7% and obviously the IRB coming through in the next 18 months or so, whether there is any sort of short-term expectation of increase reinstating your share buybacks anytime soon. And the second question is just on Idem. I mean, you talked about 25% sort of runoff coming through. Have you seen any changes in there in terms of potential opportunities coming through? It is still a very competitive market.

[Richard J. Woodman, CFO & Director]

So, yes, Idem is a very competitive market, has remained competitive. We do look at opportunities as they come through. Some we have bid on, some we chose not to bid on. We'll continue to keep our hand in that market, but it has remained competitive. But I think, this -- you can see the -- well, it's always been a lumpy business. I think it has become probably less lumpy by virtue of -- or was that lack of new business that's been in there. The important thing is about the discipline because we have other options or alternatives for our capital or we see some of these portfolios mispriced, quite seriously mispriced. I guess that's one of the things that led us to selling part of the book last year where we think if we wouldn't be prepared to buy at that price, maybe we'd be prepared to sell. So I think, that's the position on that. Sorry, what was your first question?

[Shailesh Mansukhlal Raikundlia, Analyst]

On the capital to manage the share buyback.

[Richard J. Woodman, CFO & Director]

Yes, yes, sorry the share buybacks. I mean, what you heard from us today is the capital optimization is an important tool, an important driver of value within the business of how we shift our capital from sort of low margin, low growth areas to higher margin, higher growth areas to boost the overall return on capital over a period of time. We have a track record as I highlighted, GBP 400 million. So that's part of over the last 5 years. Buybacks will always remain a core principle, a tool that we can use where we believe we can employ it. Clearly, if we're going to do it, we would have announced it today. But if things change, you'll be the first to know. Well, alongside everyone, of course. It's not that special. Sorry about that.

[Robert Ian Sage, Research Analyst]

Yes. It's Robert Sage from Macquarie. Just a couple quick points, actually. The first one of which is that I was wondering if you could make a comment in terms of the sort of mortgage business you're writing at the moment in terms of its interest rate raise, expectations having been pushed back, whether there is slightly less new business coming through in the 5-year fixed, and whether that's sort of changing at all. And the second question was just on Titlestone, looking at clearly what is quite an exciting sort of growth opportunity ahead of you. I was just wondering in terms of sort of how -- sort of how exactly you create that growth. Is it a question of sort of having more relationship managers? Are you actually sort of sitting on a whole bunch of sort of unsatisfied demand at the moment? I sort of appreciate there's probably a market share gain. Or is there a sort of a pricing element to that? Or sort of what's the actual business driver of that growth on the ground?

[Nigel S. Terrington, Chief Executive & Director]

Yes. So on the buy-to-let side, I don't think there is no change in the profile of the 5-year fixed-rate business that's out there. I mean, it's -- if you look at it, it's not just buy-to-let. If you look across the resi market as well, lots of the lenders, whether they'd be high street or specialist banks, are using the longer duration. I think, they are much better products for customers as well. If you can lock in your cost of funding for longer, then that's got to be sensible way around it. I think, when you look at Titlestone, let's stop calling that, we have a fine system in place because we rebranded it and our brand police will tell me off for this now. But the -- but when you look at that business, it is very much in a relationship-driven business. I think 70% of their flow is direct to the customers. And that's built up. If you look at the management team there, you look at the team they created underneath them, these are really experienced, dyed in the wool, property development financiers, and they have extensive relationships across the business. I like that. I like that model personally, and we believe that you're dealing with customers who've actually seen cycles as well. So rather than Johnny-come-lately, you'll think this is a great new idea and they jump on the next bandwagon and they find it's all rather difficult. So that's very much part of it. That relationships can clearly be built and extended by adding people on the ground, and we have been doing since we bought the business. I think, they've added probably about a quarter to their headcount, so 25% of their headcount is new people that have come in with other relationships. So those will all develop. I mean, I did say, and just to make sure you sort of got it, that Brexit does have an effect within this market just because landlord -- property investors, so you get these facilities, they made commitments to do something, they've spend money on their surveys, on their plans, on their development, not cheap, I might add, and then it's like, I'm just going to wait and see, just going to pause and just check the timing of it. So that clearly again certain to the environment does cause a delay. But the fundamentals are unchanged, we're just talking timing differences there.

[Unknown Analyst]

It's [ Vivek Roger ] from Shore Capital. I just wanted to ask you a question about inorganic opportunities. So clearly, I mean, there's a lot of capital on the balance sheet. You've done a lot of inorganic activity in the last few years. You've diversified the assets on the balance sheet quite significantly. Are there any areas that you're still interested in entering inorganically in any segments within commercial banking? And I'm just interested in what's happening in the pricing environment, where you see those opportunities might arise, where prices are becoming, say, more conducive to you doing that business?

[Nigel S. Terrington, Chief Executive & Director]

Yes. So I think, within -- let's just deal with the mortgage market to start with on the inorganic side. So we've looked and shaken a few things, we've looked at the resi market, not the prime high street -- dominated by the high street. But things like they're lending into retirement, lending to the individuals in the self-employed market. You may remember, we'd spoke about this at the full year. We ran a pilot and we got to the end of the pilot, and actually found that that market did not have sufficient attraction to us in terms of the risk/reward. The -- I think, the high street had moved down into that space, compressed margins, and actually we didn't think you could a get a good enough risk/reward from it. So interesting pilot, you popped it. I think, there are more and more varied opportunities on the commercial side, a, because it's a far more segmented and fragmented series of markets. I mean, commercial is a very broad range. So within asset finance, we should look at that chart with asset finance, you can see references to construction and technology and a whole range of other products of that nature. Now there's many things that we do and there's many things that we don't, all of which represent opportunities. The other bit, though, is that there's a quite a broad base now already in there and we have tiny market shares in each of them. So the opportunity to sort of harvest that by further development within the segments we already are is probably an easier growth path than starting up something completely afresh. So there are opportunities for new products, new subsectors across that commercial piece, but also that market share opportunity is definitely -- is there and available to us at our doorstep and it's more about our effort and what do we need, what technology we need to add, what focus do we need, what resources do we need to put in to extend that is the key there.Is there any more -- yes, okay. How we are doing for time? Just -- what's that?

[Unknown Attendee]

[indiscernible]

[Nigel S. Terrington, Chief Executive & Director]

Okay. Sorry, go ahead.

[Nicholas Herman, Assistant Vice President and Analyst]

It's Nicholas Herman from Citi. Just one quick follow-up. Sorry if I missed this before. With regard to the MREL requirement, I think, you just said that you're not -- you don't think you're eligible for it and clearly [indiscernible] appears emerging and I think their balance sheet is about GBP 17 billion, GBP 18 billion I'm not too far off your sales at about GBP 14 billion to GBP 15 billion. So just I'm trying to understand why don't you think that you're eligible for it?

[Nigel S. Terrington, Chief Executive & Director]

Well, I mean, I can't speak for them, but I can speak from the basis of our understanding of the eligibility requirements. Just don't forget we're very different to a number of other people in this space. We might have a balance sheet of GBP 14 billion approaching GBP 15 billion. We have a deposit book of only GBP 6 billion. So that's one factor I would draw out. The other factor I would draw out is just a share dynamics of the way in which you expect that to play itself out over the years to come. And so I just think when you understand, and we spend a lot of time getting to understand the components, the individual components, which has included conversations with the bank. And our view is that, as I said, clear guidance. We do not think this applies for the duration of your forecast that are out there, unless you go out and come up with like 15-year forecast or something.

[Nicholas Herman, Assistant Vice President and Analyst]

All right, I take your point on -- yes, I take your point on deposits side, but I mean, I guess, could you not -- could one argue that bad debt just growing your peers, like obviously you don't have to comment on, but they are just not -- they're largely mortgage lenders where you are in growing rapidly on the commercial side which could argued to be higher risk.

[Nigel S. Terrington, Chief Executive & Director]

So it's not a risk-based measurement that's dealt with. So the risk-based stuff is dealt with through capital adequacy requirements. The MREL requirements is that, basically, it's the Bank of England saying, "We don't want anyone to get into trouble here," not necessarily because of risk-based lending, but it could be a liquidity problem, it could be any manner of operational problem that could come through. We don't want anyone dealing with this and they end up becoming a problem with the taxpayer.I think we're done? Okay. So great. Thank you very much. Richard is around all day tomorrow. He has not attended any investor meetings, all day tomorrow, and he is at your service. It's important to us and to you that you try and get to understand the dynamics of the models as much as possible. So call him, pester him, use him to try and understand to make sure those information is right and correct and we can help you wherever we possibly can. So thank you very much. We'll see you around.