Permanent TSB Group Holdings PLC

LSE:PTSB

Earnings Call Transcript 2023-Q2

[Eamonn Crowley, executive]

Good morning, and welcome to our 2023 Interim Results Presentation. I'm going to give a short presentation and significant progress that the bank has made to date in 2023. And then our CFO, Nicola O'Brien will provide a more detailed review of our financial performance. And then at the end, Nicola and I will be happy to take questions. So if we just turn to Slide 4. We've reached a conclusion of our transformational acquisition of approximately EUR 6.75 billion of the Ulster Bank Retail, SME, and Asset Finance business. And I'm proud of what the bank has achieved and how we've transformed to greater scale and business model diversification with an increased branch network and a growing customer base. We've achieved EUR 1.4 billion of new lending in the first half of the year, and that's an increase of 36% versus last year and EUR 1.3 billion of this related to our mortgage products. Our mortgage market share has grown by just under 7% to 23.1% as of June '23, and mortgages are a core product to our business, and I'm pleased to say that we continue to play a significant role in helping customers attain a new house. And indeed, we've financed 1 in 4 mortgages in the Irish economy in the first half of the year. So fantastic results and that was met. We continue to welcome new customers to our community with a loyal customer base now of over 1.2 million customers as of June '23, and that's 6% higher versus last year. The successful migration of what is now to be known as Permanent TSB Asset Finance is a really exciting opportunity for us to enter into a new market and to provide our customers with a more diversified product offering of asset finance and higher purchase. The bank achieved an underlying profit of EUR 86 million, and that's an increase of EUR 88 million year-on-year. And this is showing significant momentum in our business as we return to sustainable profitability. Our return on equity at the half year is 7%. Again, that is a significant number for us, given where we've come from over the last number of years. Net interest income of EUR 298 million has increased by 92% year-on-year, and that's benefited primarily from the changed interest rate environment and the migration of the Ulster Bank book. The net interest margin is 2.29% and that's 88 basis points higher year-on-year and indeed 75 basis points higher than the exit NIM at the end of 2022. Our increased customer base and strong transactional activity has also supported a 21% increase in fee and commissions versus last year. The bank maintains tight cost discipline and has achieved a cost-income ratio of 63%, which is 29 points lower than June of '22. Underlying operating expenses, excluding regulatory charges and exceptional items, are 24% higher year-on-year as we accelerate our investment in customer services, product offerings and indeed take on additional new business. Our performing loan book has grown by 7% to EUR 20.4 billion and too strong lending performance and the Ulster Bank migrations, we've also increased our book significantly. We've grown our customer deposits by 4% since December '22, and 71% of these deposits are insured under the Deposit Guarantee Scheme. The bank successfully issued 2 senior MREL debt bonds totaling EUR 1.15 billion in the first half of the year, marking the completion of our full year issuance plan, and both transactions were significantly oversubscribed. A real important point is that, in June 2023, both the Irish Government and NatWest sold a combined share of 10% of the bank's outstanding stock, and that was oversubscribed and indeed represents a positive catalyst for equity investors as we move forward. All capital ratios remain above the management and regulatory minimum with a strong common core equity Tier 1 ratio of 14.4%, and that is despite a EUR 900 billion -- EUR 0.9 billion or EUR 900 million increase to risk-weighted assets year-to-date, which is driven by strong new lending and indeed the Ulster Bank migrations. Our leverage ratio was 7%, which is 1.4% higher than the average of European banks. If you look at the macro outlook on Slide 5, you'll see that house prices are stabilizing, but it was a slight reduction or expect a slight reduction in Dublin prices. So you can see about a 1% move or expecting a 1% downward shift in 2023 and then modest growth in 2024. But really, what I would say there is a stabilization of house prices. Interest rate rises are beginning to have an impact on the pace of growth of consumer prices globally. And this is also feeding into Irish inflation, which is expected to decrease to 5% this year and indeed, expected to go lower next year forecast at 3%. And we believe that ECB rates should peak in the second half of 2023. The Irish labor market remains very strong, and the country is effectively at full employment. Employment growth of 3% continued supported by net inward migration into the labor market and the underlying strength of the economy. If we look at the mortgage market, and we've seen that the switcher segment of the market has reduced significantly, and that's after a surge in 2022 when home was left into fixed rates and rising interest rate environment. We expect the switcher segment to remain volatile in the market, which will otherwise grow. Mortgage approvals remained strong with the purchase and non-switcher mortgage market, with declines were concentrated in the switcher area. And overall, we see year-on-year growth in the non-switcher market. So I suggest the movement in switchers has reduced, and that's a positive for us because we have customers who are availing our existing rates that we're offering and indeed, staying with the bank given where our competitive position. I'll just move on to the market transactions. I mentioned this already, but we have 2 significant market transactions in the second quarter of this year, the reduction of the 10% -- sale of 10% of the bank by NatWest and the government. That has led to a 50% increase in the free float from 21% to 31%, and that's driven nearly a 100% increase in the average daily liquidity in the stock. So we can see that that increase in free float is going to drive liquidity volumes over time. The 10% sale was oversubscribed with lots of interest and indeed, has brought a number of new equity investors to the bank, which again is welcome, and that was [ felt ]. The second point to mention is, in April, we issued EUR 650 million of MREL debt, that was 3.5x oversubscribed. And in June, we issued another EUR 500 million, which was 2.8x oversubscribed. So we can see plenty of demand on the equity side with the equity investors and the deal with debt investors, which is a real sign that we're doing the right thing and the bank is moving in the right direction and indeed has a bright future in that regard. I'll just move on to our strategy. We have a purpose-led strategy, which we set out our ambition 3 years ago, which is around working hard to build trust with our customers. We see trust as being the core part of what a banking relationship be between ourselves and customers, indeed, our wider stakeholders and the wider society in that regard. And we mean when we say we work hard to achieve that trust and indeed build that bond with our customers, and I believe the numbers are speaking to that as we speak. We want to be seen as the Ireland's best personal and small business bank. Best doesn't mean the biggest. It doesn't mean that most profitable. But what it does mean is that, customers advocate to all their potential customers to say go do business with Permanent TSB, they are a good bank's dealer, and they will treat it fairly in that respect. The second line or the blue line there, which is just down from our ambition and purpose is really important. Because what we're doing is, we're building a business model that is bringing the best of our people together with improving and the best of technology. So combining those in a way that customers can choose to use different channels in a way that makes sense for them. And that in itself builds what we feel will be a sustainable bank for the future. We have 4 strategic priorities, which we laid out at the last results around having a connected customer experience with customers at the heart of their decision-making, having a cultural evolution, which is setting a new culture and reputation standard in the banking sector and indeed, celebrating diversity, equity and inclusion in that respect. And indeed, we are making significant strides in that area, which I'll touch on later on, to have secure and resilient foundations by investing and maintaining robust and resilient operating environment, which protects our customers and indeed, our colleagues in that respect and have a sustainable business model, which is, not only sustainably from a profit point of view, but also sustainable by way of how we can play our part in the transition to the green economy. And that's around how we utilize data and analytics, as well as external partnerships to enhance our propositions and indeed, strengthen our relationships in that regard. I'll just move to the next slide, which just mentions around the Ulster Bank transaction. We've mentioned this for the last 2 years really because it's been a 2-year program. The reality is, as a bank, we've delivered what we said we would. And indeed, we've landed the Ulster Bank acquisition based on the numbers in exactly where we expected them to land without any surprises in that regard. What have we got from it? Well, we've got greater scale and diversification, which will really help us compete and grow, particularly in business banking and business lending over now we have an extended product line, which I referred to already. We've also increased our branch footprint with greater geographical spread by adding 25 new branches to our existing base. We believe, again, that's important in local communities that we're visible. We're seeing, we're present, and we're available to customers. Even if they want to go through a digital channel, they can also have the option to engage in with our brand staff in that respect. We've also acquired over 330 new colleagues, experienced colleagues from Ulster Bank, primarily from facing by way of what they do, what the customer facing in that respect. So they will be generating business and indeed, the interaction and the incorporation of our new 330 colleagues has been seamless in that respect and very, very positive in that respect. It also brings a total of EUR 170 million of additional interest income. It's also, most importantly, from a stakeholder point of view, we've increased the value of the bank by nearly EUR 600 million since we announced the MOU. So that's good for our shareholders, and indeed, I must remind everyone, we didn't ask our shareholders for any additional capital in [ model ] through this transaction. Yes, we've got the EUR 600 million increase in value. And indeed, that value will continue to grow as we grow our business going forward. And lastly, we've got a larger and more active customer base, and I'll touch on activity later on in the slides in that respect. So overall, a very, very positive transaction for us. I think a win-win in that respect. So a win for us. I think in that Ulster Bank are happy in that respect, it was managed successfully and professionally. And indeed, a win for the Ulster Bank customers and staff who joined us, otherwise, would have maybe looked for -- have to look for a different provider in that respect. So overall, very, very, very happy with this transaction, and it's worked well. So if we just move on to commercial performance. We can see that our total new lending was EUR 1.4 billion in the first half. That compares to EUR 1 billion last year, so a 36% increase. And on mortgage lending, we've moved from 16.3% in the first half of last year to 23%, really, really important in that respect by way of our positioning in that market. 28% of our lending was in the green space to green mortgages. Again, we see that as a growing segment and a growing part of our book. SME lending, we lent EUR 60 million in SME lending. And while that's lower than the EUR 70 million we lent last year, it's actually at the end of July, that's EUR 80 million. So we see a [ damp ]. We have a very successful July by way of advances. And indeed, the pipeline of approved transactions is double what it was last year, and engagement with customers around potential loans, again, is double what it was last year. So our pipeline is very strong. We are competing in this market. And the addition of the asset finance business will really drive it on because we can now offer higher purchase and leasing to smaller customers in that respect. And lastly, on this slide, personal lending was EUR 60 million. That's an increase of 20% versus last year. It is performing very well. And you may have heard a campaign, a radio campaign in this respect. So again, it's performing well. 80% of that is through our digital channel. And indeed, we're seeing significant momentum in personal term lending by utilizing our direct channel in a much more efficient and proactive way. And so, if I just move to the next slide, which is around the customer base. The bit I like on the slide is actually the bottom left. So in last year with 1.1 million customers. By the end of this year, we'll have 1.3 million customers. We are acquiring more customers now than we would have on a weekly basis than we would have had before COVID, so pre-COVID in that respect. So, again, that's showing a ramp-up in activity. And if I move to the top of the slide, you can see that we also have a much more active base. So our active digital customers are up 10%. Year-on-year, our digital activity is up 20% year-on-year. And that's after a 20% increase last year the year before and the year before that. So a lot more activity, a lot more engagement with ourselves and our brand, and that can only be positive for how we think about the financial performance but also how we support our customers. And indeed, our NPS is up to 33%. So that's a 3-point increase or a 10% increase in that respect. We also have recognition from a number of external parties, Bonkers Ireland -- sorry, Bonkers.ie has named us to have the best current account in the market and indeed, the best mortgage for first-time buyers, and that's over a number of years. It's not as if it's just last year. We've actually won that for a couple of years against a lot of competition in that respect. We also won the Irish Loyalty and CX Awards. They've awarded us having the best financial services and loyalty program or initiative for the year, again, very important from us. And our customer experience Board and received from the market institute is also very precious to us as well. When we think about our bank, we are going to, not only nurture the existing relationships we have, we're going to grow them over the coming years around having strategic partnerships. If we take Credit Logic, which is our digital mortgage application process, which is really, really going down well with our customers and with our colleagues by way of simplifying the whole mortgage journey. There was EUR 130 million of drawdowns using the Credit Logic application in the first half of the year. The number of applications at this moment is a multiple of that because we're ramping up usage of that through our branch network and indeed, through our direct channel. But it's proving extremely popular and very, very good in that respect. And the proof is in that number. If you go back last year, that would be 3%. So now it's 10%, and we will see momentum there. And that's cutting out the friction that customers would experience in a more manual process. Indeed, from a green point of view, it's cutting out a lot of pages and making that engagement much easier. We've also a very important relationship with Strategic Banking Corporation of Ireland around the future growth and Brexit impact schemes, where -- those are a total of EUR 78 million of drawdowns. And also a growing part of the supply of housing and the support for first-time buyers with the First Home Scheme, which was launched in 2022, and we've had EUR 10 million of approvals, of which EUR 55 million have been drawn at this stage. So -- and then lastly, to mention at the very bottom of the page on the bottom right, we have partnered with the SBCI around a EUR 100 million fund to support customers who want to retrofit their home. And this will allow customers to bring that home to a B2 energy rating or above. So, again, these are all positive moves as we think about the transition. This is a fairly busy slide because we have been busy, and that's the reality. So when we look at about our 4 strategic priorities, we've increased host roles and branches again. It's been very welcomed by customers, helped us attract new business. And indeed, it has helped our NPS in that respect. We've introduced Webchat, which is getting busier and busier again. This will be a channel we will use more extensively. We also have a new banking app, which we only released in the last 2 weeks. It is a new platform -- a Finacle platform, which we developed with Infosys. And it will allow us to grow a significant amount of more journeys through our digital front end to our digital app. And again, help customers self-serve as they need to, with regard to day-to-day support and indeed, interact, not only through the app, but also with our branches for any more enhanced sales support that they need. So a lot of work going on in this area around customer experience, including the fact that we have a dedicated and enhanced customer experience team who are getting feedback with regard to areas of friction and indeed, then going and fixing those from a customer point of view. The cultural evolution, 69% of roles are now hybrid. It's working very well for us and indeed, very welcome amongst our staff. We have launched a diversity, equity and inclusion strategy. I'll touch on aspects of that later on. And indeed, we've provided some support for our colleagues around the cost of living support, and we will continue to do that as we move forward given the challenges that -- of the cost of living -- that cost is living and indeed, cost increases are having for the wider public. We move to secure and resilient foundations, we have a multiyear cyber investment, which is at an advanced stage, that will continue with regard to ensuring that we're investing in that space. And indeed, we get it externally benchmark with regard to where we are. And indeed, the fraud journey has also been invested and improved. The new app will help some of those aspects as well, where we will add some additional functionality around how our customers manage cards and indeed, report and uses of the card. And then lastly, around building a sustainable business, Ulster Bank I talked about. We now have a sustainable profitability the way where the bank is. Its scale, size and its positioning. Our green mortgage product will continue to grow, and it has grown. It was 20% of our book last year. Our renewal issuance, it's now 30%. And as I say, are expected to grow. And indeed, most importantly, from our point of view, we can clearly see the generation of organic capital as we move forward. So our priorities will continue to be in these 4 areas. I believe they're very challenging, but they also help us focus in a very clear manner in where we're delivering and where the things we need to do. If I just finish on this slide before I hand over to Nicola, it's around where we are on our ESG agenda. I mentioned the green mortgage. We also have a reduction in our Scope 1 and 2 carbon emissions by 83%. We will -- we are committed to setting Science Based Targets in 2024. So you'll hear more of that as we move into next year. And we also have a sustainable supplier charter, which we put in place. And indeed, we have 1.1 million customers have now availed of these statements, which is saving 11 million pages in that respect. So, again, all of these small initiatives are helping on the social side. A very important year coming up for us is around our sponsorship of the Irish Olympic and Paralympic Team for Paris 2024. And we are the first sponsor to support both the Irish Olympic Team and Paralympic Team, and we're very proud of that fact. And indeed, the Olympic Team and the Olympic spirit really connects with who we are and how we want to turn up to our customers, indeed, wider society. Just something we're very proud of is our Culture Index Score is at 80%. And that's just a number. But when you look at it, it's 10% above what the target would be and even ahead of where the wider sector would be by way of our cultural score and how we operate internally, how we work together and indeed, how we face off most importantly to our customers in that respect. Our Board gender composition is 55% female, 45% male. And indeed, when we look at our senior management, where we have more to do in this respect, what is 38% of our senior leadership are filled by females. Our gender pay gap is 16.5%, but we will be coming with a new updated report in the not-too-distant future. [ On the line of ] governance, we have a sustainability strategy. We've increased our objectives and indeed, our outlook when it comes to the execution of that strategy to an enhanced internal sustainability committee, which you'll see in our wider papers, if you want to have a look at those. At a CDP level, we're at a rating of C, and indeed, we've also got an ESG rating of low through Sustainalytics, and that's in line with our peers in that respect. So we are committed to this agenda that we're committing to making progress. And indeed, we're committed to being accountable to making products -- progress, I should say, as we move forward. So with that in mind, I'll switch over to Nicola, and I'll be back just at the end for a couple of slides. Thank you.

[Nicola O'Brien, executive]

Thank you, Eamonn, and good morning, everyone. I'm delighted to present the bank's 2023 interim financial results. The bank's performance in the first half of the year shows that there is significant momentum in our business as we return to sustainable profitability. Our reported profit before tax of EUR 26 million is EUR 62 million higher than the same period last year, largely driven by the earnings from the Ulster Bank assets and the rising interest rate environment. As Eamonn mentioned earlier, a key achievement for the bank in the first half of '23 has been the successful migration of the remaining Ulster Bank assets, including in round numbers, EUR 160 million of micro SME loans transferred in February, EUR 900 million of the remaining mortgages in May and most recently, in July, the migration of the EUR 500 million asset finance business. Our underlying profit has increased by EUR 88 million to EUR 86 million as a result of the higher total operating income, partially offset by higher operating expenses. Total operating income has increased by 81% to EUR 323 million. This increase is supported by a growing loan book through acquisitions and new business and the rising interest rate environment. We remain encouraged by the extent of the opportunity that we see in the Irish banking market. Total operating expenses have increased by 21% or EUR 39 million as we serve a growing customer base, operates new businesses and continue to invest in customer service and product offerings. We've recorded an expected credit loss of EUR 9 million, reflecting the latest macroeconomic projections, where we've seen a slight reduction in the House Price Index. Exceptional items show a cost of EUR 60 million, EUR 26 million higher than the prior year, driven by the costs associated with the Ulster Bank transaction and the day 1 expected credit loss that the bank has taken associated with the acquired assets. Looking at operating income. Our net interest income of EUR 298 million increased by 92% year-on-year. The increase was driven by EUR 43 million related to the higher interest-earning assets linked to the ECB rate, EUR 58 million related to the interest income on the migrated assets for Ulster Bank, EUR 28 million related to the net organic growth in the performing loan book and EUR 58 million related to higher interest earning assets from treasury and cash, partially offset by EUR 40 million in funding costs. The exit net interest margin of 2.29% increased 88 basis points from 1.41% in the prior year. And I think about 1.94% at quarter 4 last year, net interest margin, so growing consistently. Total yield on assets is 268 basis points, 117 basis points higher year-on-year. This increase in total asset yield is due to a higher yield on both the loan book and treasury assets in a higher interest rate environment. The bank remains leveraged to the interest rate environment. And at the 30th of June, assuming a starting ECB refinance rate of 4.25% and a deposit rate of 3.75%, a 50 basis point increase would result in higher net interest income of EUR 20 million and a 50 basis point decrease would result in lower net interest income of circa EUR 25 million. These sensitivities should not be considered as a forecast for future performance, but they do give an indication of how the bank interest income remains leveraged to the interest rate environment. We're also really pleased to report the positive performance in net fees and commissions, which has grown by 21% year-on-year as growing customer numbers increased transactional banking income. Our larger and more active customer base will ensure this momentum continues as we look forward over the medium term. Total gross loans of EUR 21.1 billion at June '23 are 7% higher compared to December '22, driven by a 6% growth in the mortgage book as additional performing assets migrated from Ulster Bank, plus strong new lending, where new business outpaced repayments and redemption. A 67% growth in the SME book as the micro SME book migrated from Ulster Bank and the bank continues to grow through new lending. Excluding the impact of the Ulster Bank acquisition, the gross loan book grew by EUR 300 million or 2% in 2023 as new lending volumes outpaced repayments and redemption. Looking at the total performing home loan mortgage book, this has grown by 55% or EUR 68 billion year-on-year. Tracker mortgages now make up EUR 3 billion of our total book. That's a reduction of 26% year-on-year, down from EUR 4.1 billion and now make up 16% of the bank's home loan book, 19% -- that was 19% at December '22 and 33% at June 2022. So a decrease there. Variable rate mortgages, smallest cohort of the performing home loan mortgage book has reduced by 3% year-on-year as customers consider the rising interest rate environment and move towards fixed rate for future rate [ certainty ]. Fixed rate mortgages have increased by 110% year-on-year from EUR 6.6 billion to EUR 14 billion. The bank's largest cohort of mortgages accounting for 73% of the total performing home loan book. At June '23, 75% of this fixed rate book does not roll over until 2025 or later, and 64% of the bank's performing home loan book has been written since 2015 under the new Macro Prudential Rules. In the last 12 months, the ECB has increased the refinance rate by 425 basis points. The bank has increased mortgage interest rates by an average of 215 basis points across its fixed rate products with variable rate products increasing between 5 and 40 basis points. The average yield on new mortgages has increased by 63 basis points year-on-year to 3.29%. Aided by the automatic pass-through of ECB rises to tracker mortgages, together with the inclusion of the Ulster Bank assets, the yield underperforming home loan book has increased by 72 basis points to 3.22%. The weighted average loan-to-value on the home loan mortgage book is at 53%, with the new mortgage weighted average loan-to-value at 71%. Looking at our SME portfolio. The SME performing book has increased by EUR 179 million to CHF 482 million at June 2023, comprised of the acquisition of circa EUR 160 million micro SME book from Ulster Bank plus the net organic growth. Most recently, in July, we successfully completed the EUR 500 million Lombard Asset Finance migration, marking the final migration in this transformative transaction. Of this EUR 500 million, 57% relate to the business and commercial sector, 35% are in the motor finance sector and 8% is in unit stocking. The Lombard Asset Finance business brings 18,000 new customers to the bank and would allow us to serve communities around the country in a new way. These migrations, along with our new lending ambitions, should [ feed ] the bank's SME loan book grow to an excess of EUR 1 billion this year as we deliver on our ambition to provide a meaningful alternative for business customers. Looking at operating expenses. Total operating expenses of EUR 228 million have increased by EUR 39 million or 21% year-on-year. The bank has maintained good cost discipline as we complete the planned acquisitions and invest in the business. The underlying cost-income ratio, when you exclude regulatory costs, has reduced to 63%, 29 percentage points lower year-on-year, as increases in total operating income offset a higher cost base. We can see from the cost [ WACC ] that the underlying operating expenses have increased from EUR 164 million a year ago to EUR 204 million in the first 6 months of 2023. This increase relates to higher average staff numbers of 355, of which 145 relates to our own business growth and 210 relates to colleagues who transferred from Ulster Bank. The bank also employed temporary staff to assist in customer servicing, while the new business migrations happened in order to maintain good service levels for customers. Therefore, higher staff numbers in the business coupled with higher pay has resulted in a EUR 13 million increase in staff costs year-on-year. Point-in-time staff numbers at 30th of June '23 were 2,939, an increase of 545 staff at 23% compared to the prior year. The bank also supported staff with the cost of living special interim payment in June '23 in the form of a 2% payment, which increased costs by EUR 3 million, and we've committed to a further support for our colleagues with an additional once-off payment in the form of a voucher payable in quarter 4 '23. Total depreciation has increased by EUR 8 million, EUR 5 million of which is coming through from prior year investments and additional EUR 3 million from the investment required in the acquisition of new businesses. We continue our focus on strategic investment, and this combined with the cost of operating our larger bank has resulted in a EUR 16 million increase year-on-year. These strategic investments include further rollouts in our digital banking program, maintaining our operational and cyber resilience and allowing us to enhance servicing of the existing and new customer everyday banking needs in a more direct and efficient way. The 2023 outlook for the bank's cost-income ratio is for it to remain less than 65 percentage points as total operating income growth and the bank maintains good cost discipline. The bank has recognized an expected credit loss of EUR 9 million for the half year, reflecting the latest macroeconomic projections, mainly the slight reduction in the House Price Index observed during the first half of the year. Underlying asset quality remains good, with customers demonstrating resilience despite the high inflation and rising interest rate environment. Subject to the prevailing macroeconomic environment, the bank expects a cost of risk of not more than 10 basis points in full year '23. Provision stock increased by EUR 37 million since year-end '22 with closing provision stock of EUR 558 million. This includes an appropriate EUR 118 million post-model adjustment, which will ensure the bank is adequately provided in the event of any deterioration in asset quality. The bank's gross performing loans, Stage 1 and 2 have increased to EUR 21.1 billion, growth of 6% from EUR 20.4 billion at December '22, while non-performing loans, Stage 3 remained low at EUR 700 million. The NPL ratio at 3.3% remains in line with December '22 and is 1.9% lower than the prior year. Provision coverage remains appropriate with a 1.6 PCR on performing loans, which is consistent with prior year and a 34% PCR on non-performing loans, which is an increase of 0.2 percentage points year-on-year. Overall, the bank has an ECL provision of EUR 558 million on EUR 21.1 billion of assets, keeping the overall PCR at 2.6%. Deposits and funding are both in very strong positions. At June '23, total funding reached EUR 25.8 billion, 17% growth year-on-year, 10% growth since December '22. Total customer deposits grew 13% year-on-year and 4% in the first half of '23, while wholesale funding grew through the MREL issuances of EUR 1.1 billion in the first half of this year. 88% of total funding comes from customer deposits. 71% of total customer deposits are covered by the Irish State Guarantee Scheme. The deposit franchise is performing really well, with current account balances increasing by EUR 0.5 billion or 6% since December '22, and retail deposits, excluding current accounts, increased by EUR 0.4 billion or 3% since December '22. The bank loan-to-deposit ratio has increased by 2 percentage points to 92%. Wholesale funding at EUR 3.2 billion is 78% higher than prior year and double the balance of December '22. As mentioned earlier, the bank successfully completed the 2 benchmark issuances in the first half of '23, with EUR 650 million MTN issuance in April and a further EUR 500 million in June. This completes the bank's issuance plan for 2023. These issuances contributed to the bank's EUR 2.1 billion MREL eligible funding at June '23, representing 8% of total funding. The bank's MREL ratio of 36.6% at June '23 is above both management and regulatory requirements. The MREL target for 1 January 2024 has been set for the bank at 28.15%. It's our intention to become an annual issuer of MREL eligible senior debt, given the projected risk-weighted asset growth from the enlarged balance sheet. Liquidity coverage ratio has increased to 186% since year-end, with net stable funding at 1.5 -- at 159%, broadly in line with December '22. The bank's key liquidity and funding ratios remain favorable to European bank averages. Our regulatory capital ratios remain comfortably above the regulatory minimum requirements. The CET1 ratio on a fully loaded basis is 14.4%, a reduction of 80 basis points from December '22. This movement is primarily driven by the migration of the Ulster Bank mortgage and SME assets, which utilized 80 basis points. Net loan book growth, which utilize 40 basis points, payment of the AT1 coupon at 20 basis points and is partially offset by operating profit, which generated an additional 90 basis points of CET1. On a pro forma basis, when we include the EUR 500 million asset finance and risk-weighted assets, which transferred in July of this year, together with day 1 ECL, the CET1 ratio on a pro forma fully loaded basis is 13.8%. This equates to a decrease of 140 basis points since year-end and utilizes 60 basis points of CET1. The bank continues to operate in excess of regulatory requirements, which are 9.44% CET1 transitional and 14.45% total capital, both having increased by 50 basis points as the countercyclical buffer phases back in. Management CET1 target on a fully loaded basis remains to be greater than 14%. To summarize, the bank has had a strong start to the year, with results showing a robust business and financial performance with a positive outlook. Underlying profit before tax of EUR 86 million shows the positive uplift from the acquired mortgage and SME businesses and the interest rate environment. Total new lending of EUR 1.4 billion, 36% higher year-on-year with a mortgage market share of 23%, up 7% year-on-year. Net interest income grew 92%, resulting in a net interest margin 2.29%, showing the momentum building in net interest income, while the bank remains positively exposed to rising interest rates. The bank has continued strength in its deposit base with new, current and deposit account balances having increased by almost EUR 1 billion in 2023 to date as we grow our loyal customer base and strengthen the franchise. Underlying cost-income ratio reduced to 63% as the operating income growth and the bank maintains cost discipline while continuing to invest. The bank has completed a lot of work to assure the balance sheet over the last number of years, resulting in an NPL ratio of 3.3%, which remains in line with December '22. Capital position remained strong with the CET1 on a fully loaded basis of 14.4%, ahead of management target of 14%. We actively manage our capital position and having assessed a range of scenarios, the CET1 ratio will remain well above the bank's minimum regulatory requirements. Looking forward, the bank's medium-term targets represent higher and more sustainable returns. I'll hand you back to Eamonn now to talk you through in more detail the outlook for 2023 and the medium term. Thank you.

[Eamonn Crowley, executive]

Thank you, Nicola. So we're nearly there, and over a couple of slides, and we can get into the Q&A. So if we just move to Slide 24. So we are upgrading our full year '23 guidance to reflect a more positive operating environment. But as we look ahead to the rest of the year, we're mindful of the challenging environment in which we operate, and that's not least the challenges posed by -- to our customers as their cost of living increases, which are ongoing and indeed, an environment of higher interest rates. And these challenges are not to be dismissed lightly, we want to reassure our customers that we will be there for them, and we will constructively work with them in the event if they fall into any difficulties. But I'm also confident that the strong momentum that exists in the bank, which has been spread on by the benefits that the Ulster Bank acquisition has brought will continue to drive the bank forward and make it an even greater competitive force. And in that sense, the bank is in an excellent position to drive a benefit -- for the benefit of our customers, competition and the wider Irish economy and indeed, for our shareholders in that regard. If you look at net interest income, it will continue to grow due to loan book growth and interest rate repricing on mortgages. And also from not having to carry excess liquidity at negative yields. So we see the number coming in around EUR 680 million, which is an upgrade of 5% on what we said previously. Our cost-to-income ratio is expected to accrue to around 65%. We previously guided 70% for the full year. And despite higher costs and from completing the Ulster Bank transaction and indeed, the transfer of employees and higher depreciation, we are maintaining cost discipline and indeed, we're also generating additional income in that respect as well. Asset quality remains robust. We're not seeing any material deterioration in our book at this moment, and we're keeping naturally a close eye in it, and we don't expect the chart to be more than 10 basis points. And indeed, that's what we guided previously. We're guiding an underlying profit of around EUR 180 million, which is itself equates to a return on equity of around 8%, which, as I say, for us, is a significant move forward from where we were over the last number of years by way of return on capital. And as Nicola has mentioned, our capital ratios are strong, and we continue to be well in excess of the minimum requirement in that regard. And indeed, as we move forward into future years, start to generate capital in that respect by way of organic generation. If you look at our medium-term targets, we've shown 2025 here. At the year-end, we will, obviously, look at these targets again and provide a more medium-term target. But I think 2025 is a good year to be looking at it, given where we are at this moment. So we're guiding a 2.5% net interest margin, total income in excess of EUR 800 million, in fact, EUR 825 million, cost-income rate of 55%, operating profit in excess of EUR 300 million and the cost of risk at 30 basis points. You might argue that that's conservative, but we need to see how the interest rate changes are reflected in the market over the next number of years, if there's any particular stress. We'd have to say that when you look at the economic position, indeed, when you look at the average loan-to-value on our book and the position of -- also Nicola mentioned that nearly 2/3 of our book is now originated on the Macro Prudential Rules, which in themselves included an interest rate stress and borrowers, I think. And we'll see how that cost of risk ends up, but we're -- that's what we're projecting at this moment. And in 2025, we're saying that that will deliver a return on equity of 11% or an EPS of EUR 0.40 a share in that respect. So, again, positive trajectory and a real indication of sustainable profit generation as we move around. And then lastly, why would anyone want to buy our shares? Well, I bought the shares, I'm a shareholder, so I've done it already. But really, it's about us now having a strong market position, which is improving in that respect. We're 1 of 3 banks in the market. We are now on customers' list by way of engaging with us, particularly I see growth in the business banking space due to the position as I mentioned, the addition of the Ulster Bank Asset Finance business, which we have great hopes for. We also have a larger and more active customer base. And indeed, we're attracting more customers now a multiple of more customers than we would have, say, pre-COVID in this environment. So, again, that's very positive in that regard. We also have a strong capital and funding position and indeed, a lower risk profile, whether it's by way of LTVs on our books, as I mentioned already, 2/3 of the book are being originated post the -- post-2015, which again reduces the pre-crisis risk that would have been in the book a number of years ago and also a lower NPL position, which is with very good coverage. The capital position will have organic capital generation, with all this leads to attractive medium-term targets of 11%, as I mentioned, the EPS. And lastly, what you have as a management team that delivers and has delivered over the last number of years. And we'll continue to deliver in that respect for -- not only for our customers, not only for our shareholders, but indeed, for our wider stakeholders in that respect, and that's something we're committed to. And we can only say that on the basis of delivery we have delivered. We have executed and the numbers have landed as they showed and indeed, the future looks bright in that respect. So thank you, and we'll take your questions at this stage. So thanks very much.

[Diarmaid Sheridan, analyst]

It's Diarmaid Sheridan from Davy. A couple, if I may. Firstly, maybe just touching on new business momentum and trajectory. If we could talk about, particularly maybe on the micro SME and the asset finance portfolio, now that they're on-board. In terms of the ambition, you talked about EUR 1 billion by the end of next year, but how should we think about that going forward? And maybe just the overall size of the lending balance sheet into '24, '25. Yes. And maybe secondly, around the cost line and the growth that you're seeing into the second half of the year. Maybe if you could just tease out some of the areas where you're seeing that growth coming through? And how we should think about that into a couple of years beyond that? And then maybe just finally for the moment, around risk-weighted asset growth, or efficiencies, maybe, I guess, in the next couple of years. So, obviously, a very, very high risk-weighted density, one of the highest in Europe for mortgages. So how should we think about how that can play out? And maybe a prospective time if there is initiatives that can be put into action here?

[Eamonn Crowley, executive]

Okay. I'll take the first and I'll touch on the third question, and Nicola will also touch on that and also Nicola pick up on costs, if that's all right. So on the business book, let me put it in a perspective, we'll take the asset finance book when we started off the -- this chart and engaged Ulster Bank, that book was about EUR 400 million. It's now EUR 500 million. We acquired a book of EUR 500 million. So that's been -- even though you could argue Ulster Bank itself was in a closure mode, the asset finance business continued to go from strength to strength. And when we've acquired is the systems, all the connections and all the staff that have been driving that business. And they have obviously traveled to us with that business. New activity in the asset finance business was about EUR 120 million -- EUR 120 million to EUR 140 million in the first 6 months. So there's lots of momentum in the business, and we'd expect to see it to continue to grow. But most importantly, Nicola mentioned the 18,000 customers we've taken on. We will be able to cross-sell and support those customers by way of other activities that they want to engage in. If I take out the existing SME book, we did lend EUR 60 million in the first 6 months. If we were cutting our numbers today, that will be EUR 80 million and that we advanced EUR 20 million in July alone. Our approved pipeline is double what it was last year. And then the applications are double that again. So we would expect ongoing growth in that book as we move forward. And we expect this year to be larger than last year and then momentum in the next year to be even greater again. Why? Because our name is getting out there, we are supporting customers. We are winning business as well in that regard, primarily by way of our delivery, we can give you a quicker yes and a quicker no than others and business customers like that. So service delivery is very important in that regard, and we've great ambition in that respect. So I'd expect, while we're saying EUR 1 billion at the end of the year, we could be in excess of that. That's the way we say it. And then we will continue to grow that book over time, but mortgages will continue to be -- to dominate naturally given as we build that business, but also given our own position in that. On order [ delays ], we still -- I suppose you could argue maybe this isn't the right word, but let me say it, suffer from the fact that we're carrying still the loss experience that came out of the crisis. That's primarily driven by the fact that we are the first Irish bank to complete TRIM. We completed TRIM in 2018. And indeed, a lot of our risk-weights are based on the information that was provided at that stage. And the information that drove that was '08 to '13, a way of loss experience. And we know that 2013 now in history was the worst year for collateral valuation. So we still carry a risk-weight that's associated with that period. And it's now about both gathering information on our model performance and indeed, our book performance and accumulating that and submitting them to the regulator for them to adjudicate on. But I won't -- I don't see movement in that over the next 12 months. I think it's something more in the '25 period that we may see some movement on. And then it's all about the history of impact, and indeed, ensuring that from a regulated point of view, we're meeting their requirements to reset our needs. But lastly on that, I'd just say, we're at peak RWA concentration in that regard, which, again, over the medium term, we should expect some relief with regard to RWA concentration, but it's a slow burn unfortunately in that regard. Nicola, do you want to pick up as well?

[Nicola O'Brien, executive]

Yes. So we'll be doing that piece of work on the risk-weighted assets. We've kicked off that piece of work already, as Eamonn has mentioned. And so, we're on that and actively working and engaging with Central Bank on that. And just on the operating cost question, the growth into the first half and then follow through into the second half. So the areas that we would actually look at that in the Ulster Bank business that we're running now, which is our business dictates that we actually have a higher cost base. That's actually in the round as we've always mentioned that that was a EUR 50 million cost in the full year, whereby we have staff costs, we have servicing costs, and we've had depreciation within that EUR 50 million. Indeed, the bank used to run our own business with an average staff base of about 2,400. And our staff base now will be about a 3,000 FTE bank. We've taken in 334 colleagues from Ulster Bank, and that is part of that 3,000 people bank that we are now. So we factor that into the second half of the year. We've just brought in the asset finance people, and we still have to recruit some roles. We're already at the 2,960, I think, FTE at the end of June. So -- or into July. So we're progressing there. Depreciation and we have spent a loss, we've invested a lot over the last number of years. We are coming to the end of, I suppose, that 3-year digital banking program that we were on, which started, I think in 2019, we were spending EUR 150 million on that program of work. We're almost there with that. I mean, we still have more to do with regards to operational resilience and cybersecurity, not to mention, other elements that we need to invest in. But depreciation is probably going to be slightly ahead of EUR 60 million this year, and it will actually grow as we look forward because we have made that investment. And then in terms of inflation, some inflation has impacted us when we think about and some of our third-party suppliers when we think about our technology costs. They are rising due to natural inflation. And so, really, the first half is a good indicative number in relation to where our costs are going -- being conscious that we will pay for higher FTE.

[Ronan Dunphy, analyst]

Ronan Dunphy from Goodbody. Firstly, on the raised income guidance for the full year, the EUR 680 million. Can I ask what assumptions are embedded within that number, whether, I guess, you want to disclose the deposit beta assumption or more qualitatively, given, I suppose, the enhanced deposit pricing that you've introduced in recent times? How you expect the positive funding cost to evolve from here? But also recognizing that, all the deposit growth in the first half was in current accounts and in demand deposits rather than term deposits. So maybe how that shift might or might not take place in the second half? Another one on cost of risk. So low impairment charges in the first half and low guidance reiterated for the full year. That's up to 10 basis points charge. But the 2025 target, I guess, is still the circa 30 basis points. So is the implication that that's a conservative target? Or are there some factors that are, I guess, behind that from 10 to 30 basis points over the next couple of years?

[Nicola O'Brien, executive]

And just on the income guidance, we look at the moment, our forecast is based on a 4.25% ECB refinance rate and a 3.75% deposit rate. And deposits are really important to us. And having said that, we also have additional MREL costs that we'll actually bring in. So funding costs do go up. But if I look at it in terms of NIM, and as Eamonn mentioned, we're at almost 2.30% today. We actually see that probably rising to about the 2.35% or just a little bit north of 2.35% maybe this year and to grow for that going forward, as we've mentioned previously. In total operating income, we'll have growth in our fees and commissions equally. So that will actually help that overall operating income base. From the deposit perspective, I mean, at the moment, like other banks, like we're probably in that single-digit deposit pass-through. We haven't behaviorally seen any move really yet from customers out of current account demand into term. But with the 2% rate that's out there in the marketplace and with the ECB probably becoming a little bit more slower to pass on rates or maybe at peak, then actually, I think you should expect to see some customers taking the opportunity to go in for an element of term. And for us at the moment with regards to that pricing, we are happy to price and give our customers a return for fixed. And if customers want to come in and actually give their money into those fixed term accounts, we're very happy to take those. And that's overall, we would see our funding cost will increase, but it will be certainly good in relation to driving that 2.35% net interest margin. On the cost of risk, yes, low guidance at 10 basis points this year, that's primarily where we are today with regards to growing the asset finance business when we're actually taking on our SME businesses, as Eamonn mentioned, cost of risk on mortgages is still low. And when we overall look at the 30 basis points looking out to 2025, we do anticipate growing that business banking business. So the SME business would drive some of that. I would say, that it's conservative as we know that there's still uncertainty out in the marketplace. There still is uncertainty out there for our mortgage customers as -- if inflation stays high and there's some [ pinch ] that come with the cost of living. So we'll see how that works. But actually, overall, we have EUR 118 million of a post management adjustments there to compensate for some of that uncertainty.

[Operator]

[Operator Instructions] Our first question comes from Borja Ramirez from Citigroup.

[Borja Ramirez Segura, analyst]

I have 2 quick questions. Firstly is on the NIM guidance for 2023 and also the 2025. I would like to ask if you could provide some additional details on deposit EBITDA? And also, did you expect this to increase in a gradual way over the next years? What could -- what do you expect the customer behavior? And my second question is, if you could kindly provide us on -- regarding your mortgage customers, what is the affordability rate for the floating rate and tracker rate mortgages?

[Eamonn Crowley, executive]

Could you answer the first one?

[Nicola O'Brien, executive]

Yes. So we're not -- I suppose today, we're not actually going to talk about deposit betas. And like we -- as I mentioned earlier, we are actually -- we are probably the best in the market in relation to our fixed deposits at 2% today. That's a really attractive rate for customers if they want to come in for fixed. On our NIM guidance, as we go forward, as mentioned, we're at a 4.25% ECB refinance rate, at 3.75% deposit rate. And actually, over time, we see that actually coming back to an average of about 3.30%. And I think if you look at the marketplace today, even 5-year money would actually be in that realm of 3.10% to 3.30%. So I think the market actually expects that those base rates to come down there. So we'll price accordingly from that for the future, and that helps us as we mentioned, to grow our net interest margin to 2.5%. Like we are very, very interested in our deposit customers. There's no doubt about. We're a deposit-led bank. And so, therefore, we will actually look at deposit pricing. We keep it under review all of the time. And we will actually assess that towards the end of this year and next year. But at the moment, I wouldn't be talking about the deposit beta.

[Eamonn Crowley, executive]

And just a question on affordability for tracker, and I think for fixed customers, is it?

[Borja Ramirez Segura, analyst]

It would be if you could please provide the affordability ratio for tracker mortgage customers and also for floating rate customers, at least?

[Eamonn Crowley, executive]

Yes. I'm not sure I don't have an affordability ratio for you. Naturally, if I just take them in the 2 groups. So our variable rate customers we've increased the rate by 35 basis points. That's a customer base that's quite mature. And variable rate products have not been really taken up by customers over recent years. So it's a relatively small population, as I say, quite mature. I suppose the tracker customers have seen a significant increase in the cost of their mortgages because they are directly related and connected to the ECB rate. What we've seen is, some customers have opted to go for fixed rate product instead. And that's something we offer to customers in that regard, and we see -- we've seen some movement there. I think if you think about the history of the bank, over recent years, we would have had an exposure to interest-only tracker mortgages, but would reduce that exposure over time. So, it is not a feature of our current exposure. So overall, we keep an eye on the performance of the tracker book. The variable rate book, as I say, hasn't experienced a significant increase. And then lastly, the vast majority of our customers have gone for fixed rates. It's in the region of 95% plus in recent years. And as Nicola mentioned, only 25% of that base is moving on to a higher fixed rate in the next 1.5 years. And maybe not, we'll see what ECB go, but we would expect over the next 1, 2, 3 years, as inflation rates start to return to a normalized level for interest rates, ECB interest rates to come down. So, again, that shows significant protection in our mortgage book, and we believe it's something that's quite manageable in that regard. So that's the way I would answer it.

[Nicola O'Brien, executive]

I might just add there also that if you mean by affordability ratio for our tracker or variable rate customers, like when they're underwritten -- when the bank credit assesses them, there is a 2% stress level for those customers. And that's based on the highest rates that they would be applying for are 2% above the highest rate that the bank has. So previously, we would have stressed our customers of probably almost a 6% rate. And so, the customers aren't necessarily there yet. And so, we're not seeing any stress coming through from our asset quality at this stage.

[Operator]

Our next question comes from Andrew Stimpson from Stifel (sic) [ KBW ].

[Andrew Stimpson, analyst]

I've got one on rate sensitivity and then a second one on capital, please. So firstly, on rate sensitivity. Slide 15 shows that the rate sensitivity has reduced very slightly this half, it looks like. Is that a sensitivity you're happy with? Or would you look to lock in the higher rates and some hedge more of that exposure going forward, especially if the deposits continue to grow? I guess, the larger fixed rate book is locking in a certain level of that rate already, but interested how you're thinking about that as we kind of get towards peak rates, please? And then secondly, on capital, just a small housekeeping one on where there's any further one-off items to expected in the second half other than the 70 basis points of asset finance or the other years into the future? And then a proper question on capital, if I may. I appreciate it may take a while for the supervisors to give approval for lowering the risk rates and internal models and things. But is there anything else you're exploring to reduce the risk weightings in the meantime, whether through some risk transfer trades or anything like that, please?

[Eamonn Crowley, executive]

Okay. If I take them backwards, if you don't mind. So the risk transfers for us are challenging because primarily, we have a mortgage book and under accounting rules, a risk transfer has to be for the life of the mortgage. It can't be for 2 years. It has to be, say, for 10 years remaining. So it does become a relative expense of approach to manage capital for us at this moment. And given that we're in organic generation, we'll let that work away itself. And as we build a business, we'll have more flexibility in that space, but with a predominantly mortgage book with less by way of the -- there's no expected one-off capital impacts. In fact, it's capped a positive because our profit for the second half of the year will be reflected at year-end. So we're generating profits through the next number of months, and then that's reflected when we report. So we'd expect it to be positive to the capital numbers. Nicola, do you want to take the first one on the hedging?

[Nicola O'Brien, executive]

Yes. On hedging, at the moment, like we take out some swaps, but we actually are naturally hedged really. And we're in control of our liabilities with regards to that pricing. So we keep it under close watch regular basis day-to-day, but we actually don't feel that we actually need to take out additional hedging in that regard. And we did this year, take out some swaps in relation to our fixed MTNs, one of our older ones and one of the new MREL issuances that we did earlier this year. But I'd say, at the moment, compared to our DB position is very good, and we manage it appropriately. We don't see the need to take out any macro style hedging.

[Operator]

Our next question comes from John Cronin from Goodbody.

[John Cronin, analyst]

Just a follow-up really to Diarmaid earlier one on the risk weight. Look, just a key point in terms of -- well, some people want to own the stuff. I mean, we've done a lot of work on this and you look at the DB, particularly positive to follow relative to the other areas and you're almost -- you're talking about you're more than twice [indiscernible]. Yes, look, you talked about 64% of your books written under Macro Prudential Rules. Certainly, I haven't -- unless I missing something, picked up anything greatly different in terms of underwriting taxes and [indiscernible] post CFP. So, I mean, like in terms of trying to size this in terms of perspective benefit down the line appreciate [indiscernible] mortgage 25% and 24% if something comes through, and there's never any certainty with these things. But could you -- would it be kind of gradually trickle down model by model over time potentially at the best case? Or could you see a wholesale change effect is across the entire mortgage stock in one [indiscernible] possibly when you [indiscernible] like that on the mortgage book close to [indiscernible]?

[Eamonn Crowley, executive]

Well, if you look at our book today, most of our book is on standardized at this moment. So that's how we've acquired it or reflected. It is a fully performing book. So I think that's in itself reasonable. So unfortunately, I don't have a crystal ball in that sense. We can't deny the past with regard to what happened to the crisis and origination at that stage, even if we are in Macro Prudential Rules. And indeed, as we think of our capital positioning, it is a EUR 120 million, and we take into account EUR 120 million impact. So I would suggest it's -- there's 2 aspects to it. One is, in an Irish context, the way in which the risk weight is calculated for all banks, there's a particular discount factor where -- and that is an extra 5% is added on to discounting and cash flows arising from a loan is [ forborne ]. I think there's an argument that actually removed. I know the BPFI are working to try and get that removed under Basel III. So that's one aspect. In general or in theory, that could equate to 5% of risk weights, but I think all banks would benefit from that, not just us. And then I think with regard to the remainder, it's really based on the evidence, John. But the evidence, as you've rightly said, it's very positive. Our pre-crisis book is continuing to reduce as Nicola has indicated, has actually moved out of a pace now, particularly with the addition of Ulster Bank. And we'll just wait and see. I think we -- in general, we can't deny our past. So therefore, we're likely to have maybe a slightly higher rate than others or equivalent to the top end of that, but it will be better. It should be better than where we are today, which in fairness is quite draconian and requires us to put away in what should be a level playing field against competitors, significantly more capital on a new originated loan. So I don't have a crystal ball in that regard and we're going to be working hard to try and achieve it. But naturally, it takes 2 to tango, and we need the regulators' approval of such a submission, and that's what we're focused on at this moment.

[Operator]

We currently have no further questions. I would like to hand back to the management team.

[Nicola O'Brien, executive]

Thank you very much. Thank you.

[Operator]

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.