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Edited Transcript of BIRG.I earnings conference call or presentation 29-Jul-19 7:30am GMT

Half Year 2019 Bank of Ireland Group PLC Earnings Call

DUBLIN Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Bank of Ireland Group plc earnings conference call or presentation Monday, July 29, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Keating

Bank Of Ireland Group plc - Group CFO & Executive Director

* Francesca Jane McDonagh

Bank Of Ireland Group plc

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Conference Call Participants

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* Alastair William Ryan

BofA Merrill Lynch, Research Division - Co-Head of European Banks Equity Research

* Alicia Marianne Chung

Exane BNP Paribas, Research Division - Analyst on the Pan-European Banks Sector

* Amandeep Singh Rakkar

Barclays Bank PLC, Research Division - European Banks Analyst

* Andrew Philip Coombs

Citigroup Inc, Research Division - Director

* Charmsol Yoon

UBS Investment Bank, Research Division - Equity Research Analyst of UK and European Banks

* Christopher Cant

Autonomous Research LLP - Partner, United Kingdom and Irish Banks

* Diarmaid Sheridan

Davy, Research Division - Financials Analyst

* Eamonn Hughes

Goodbody Stockbrokers, Research Division - Financials Analyst

* Martin Leitgeb

Goldman Sachs Group Inc., Research Division - Analyst

* Owen Callan

Investec Bank plc, Research Division - Head of Financials Research & Banking Analyst

* Pierce Byrne

Cantor Fitzgerald Ireland Ltd., Research Division - Investment Analyst

* Stephen Lyons

Davy, Research Division - Financials Analyst

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Presentation

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Francesca Jane McDonagh, Bank Of Ireland Group plc [1]

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Okay. Good morning, everyone, and welcome to Bank of Ireland's 2019 Interim Results. I'll share a number of highlights from our first half performance, and then Andrew will provide a more detailed update on the financials. I'll also set out our view of the external environment and 1 year on from the publication of our strategy, our outlook and actions from now until 2021.

I'm pleased to report a solid financial performance, with an underlying profit of EUR 376 million and a 9% increase in our pre-provision operating profit. There are a number of highlights that have contributed to this performance. The first is net lending growth. For the sixth year in a row, Bank of Ireland is the largest lender to the Irish economy, with total new lending of EUR 7.7 billion and net lending growth of EUR 1.2 billion.

We've seen a strong performance in corporate banking, and we are the largest lender to Irish SMEs and the agriculture sector.

The second highlight is asset quality improvement. Bank of Ireland already has the lowest nonperforming exposure, NPE ratio, of any bank in Ireland, but we're very clear on our ambition to drive and piece down further. That's good for our bank and good for the health of the wider Irish economy.

In the first half, we have delivered a third reduction in our NPE ratio to 5.3%, down EUR 800 million. We are now within touching distance of our near-term target of NPEs below 5% by the end of this year.

The third highlight is business transformation. This means transforming our culture, our systems and our business model. We're investing in our transformation at the pace we set out previously. We're delivering key milestones, and we're demonstrating cost reduction and other benefits. I look at each component part within our transformation program. Culture is a commercial imperative. Good culture attracts and retains the talent we need to develop our businesses and good culture reduces risk and costs and builds customer loyalty. We are making good progress, and our culture is strengthening.

On systems transformation, we've delivered a number of key milestones. We have completed the largest customer migration in the history of the bank. We have moved 2.1 million customers to a new first data platform for debit card and ATM transactions. This gives us and our customers more stable systems for hundreds of millions of transactions each year.

We've also modernized our payments infrastructure and automated over 100 processes to improve customer experience.

On business model transformation. We are creating a leaner, simpler and more agile organization. We are removing management layers, reducing headcount by 4% year-on-year and making changes to our U.K. business model. We have sold our U.K. cards business and exited nonprofitable current accounts and ATM operations.

The fourth highlight is cost reduction. We've set a clear cost target as part of our strategy, and we are delivering. We have reduced our cost by 3% compared with the first half of 2018. That's after absorbing costs linked to IT investment, various regulatory requirements and wage inflation.

Excluding IT investment, we have reduced our day-to-day operating cost by close to 5%. With revenue up and cost down, we have achieved positive jaws of 4%.

Combined, these actions have contributed to strong capital generation. In the first half, we generated organic capital of 90 basis points. Our CET1 ratio increased by 40 basis points and now stands at a robust 13.6%.

And we have made an accrual of EUR 100 million in respect of a dividend in 2019 in line with our policy.

We've delivered a strong performance in the first half, and we are, of course, influenced by the external environment. In Ireland, the economy is strong. GDP growth is well above the Euro area average. The labor market is growing, and unemployment is at a historically low rate.

While in the U.K., we see more moderate growth, we still see a growing labor market with low unemployment.

Nonetheless, aspects of the external environment are more challenging than when we set out our strategy a year ago. In particular, the interest rate outlook has moved significantly and lower for longer rates are impacting margins.

As an illustration since the start of the year, there has been a 100 basis point reduction in market expectations for 5-year swap rates in 2021.

In addition, Brexit uncertainty has still not been resolved. This remains a concern, especially to businesses in Ireland and the U.K., which is impacting sentiment and also credit demand.

Mindful of these challenges, I will shortly deep dive into our Ireland and U.K. businesses and our transformation program, and I will set out the actions that we are taking to offset the uncertainties and to guide our business between now and 2021.

I'll first hand over to Andrew to go through the financials. But before I do, you will know we recently announced that Andrew will be moving on from Bank of Ireland towards the end of the year. So I would like to take this public opportunity to personally thank him for his exceptional commitment to the bank especially since taking on the role of CFO in 2012. Andrew has played key role in the Bank of Ireland story since that time. And on a more personal level, since I've been in the role, has provided excellent support to me. Thank you.

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Andrew Keating, Bank Of Ireland Group plc - Group CFO & Executive Director [2]

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Okay. Well, thank you, Francesca, for those very kind words and as well as for your support to me since you joined.

It's been an enormous privilege for me to have been the CFO and Director of this great bank for the past 7.5 years. I'll certainly miss everyone and wish you all well.

So onto the financial results for the -- my 16th and final time.

So we have had a good start to 2019. We have grown our loan book, we have reduced our costs and we have reduced our NPEs, while improving our strong capital position.

Over the last 6 months, we generated an underlying profit of EUR 376 million. Total income increased by 1%, and we reduced our costs by 3%. And as a result, we have grown our pre-provision operating profit by 9% to EUR 435 million. Our impairment charge was EUR 79 million, or 21 basis points.

Included in our noncore items was customer redress charges relating to the conclusion of the Tracker Mortgage Examination. The associated amount of EUR 55 million covers 3 things: compensation payments, additional cost associated with the program, together with an increase in the provision for a potential fine.

Turning now to lending volumes. We grew our loan book by EUR 1.2 billion in the first half of the year. All geographies of Ireland, the U.K. and international contributed to this growth.

In Ireland, we lent EUR 3.8 billion to Irish customers and businesses. And as Francesca has already said, that makes us the largest lender to the Irish economy.

In our mortgage business, we lent EUR 1 billion, and our market share was 23%. We have maintained our track record of commercial discipline on risk and pricing.

In addition, we are investing in developing our product propositions, expanding our distribution network and progressing our reentry into the broker channel.

The SME market is a very strong element of our franchise. By some distance, we're the leading bank for SMEs in Ireland. At EUR 1.5 billion of new lending in the last 6 months, despite Brexit uncertainties, we have grown our market share, and we are well positioned to support and benefit from expanding credit demand in this sector.

We're the #1 corporate bank in Ireland. Our business has performed strongly, contributing EUR 400 million of lending growth in the last 6 months.

In the U.K., we're broadening our distribution network, and we have selectively been investing our capital in those sectors that are generating more attractive returns. And that's enabled us to prudently grow our loan books by EUR 600 million in higher-return sectors, such as consumer, bespoke mortgages and corporate portfolios.

Finally, our international corporate business grew by EUR 400 million. We have continued our conservative approach to asset selection. Typically, we only underwrite the 1 in 5 loans that meet our strict credit criteria.

Moving to our net interest margin, which was 216 basis points for H1. We continue to maintain our strong commercial discipline on pricing. Over the last 6 months, the yields on our liquid assets have been lower, at 17 basis points negative. However, we've seen total loan book spreads stable, at 284 basis points. We have grown the loan book at front book spreads that continue to be higher than the back book, and there has been a stabilization in the level of competition in U.K. mortgages.

When I spoke to you in February, I expected that the tailwinds to our NIM would support its growth into the 220s over the next couple of years. As you all know, since then, there has been a very significant and a material reduction in the interest rate environment. And that's a headwind for all retail and commercial banks, including Bank of Ireland.

As a result of that lower for longer interest rate environment, I now expect our NIM for full year 2019 will be slightly lower than the 216 basis points for the first half.

Looking to 2020 and 2021, the trend will be for a net reduction in our NIM of mid- to high- single-digit basis points from that 216 level. Francesca will set out shortly the actions that have been taken to mitigate these financial impacts, so that our RoTE will continue to grow to target levels.

Onto fees and other income. As you know, we're exiting U.K. cards and ATMs, and they contributed EUR 21 million of fee income last year. So on a like-for-like basis, our business income of EUR 311 million was EUR 9 million or 3% higher than last year. Retail Ireland was broadly stable, while our wealth and insurance business benefited from the investments we are making, increased activity and economic growth. Valuation and other items give rise to a net gain of EUR 28 million in the first half.

Onto costs. We continue to make good progress on our commitment to reduce our costs with a net 3% reduction in the period. Staff costs reduced by almost 5%, reflecting a decrease in FTEs and a change in mix with fewer management layers.

Taking other costs and depreciation together, they reduced by a net EUR 14 million, half and half. And this net reduction reflects the benefits from the ongoing transformation of our processes and from strategic sourcing and partly offset by higher depreciation associated with technology investments.

Exiting the U.K. cards and ATMs reduced our costs by EUR 26 million. All of the efficiencies that we are generating are enabling us to absorb wage inflation, regulatory costs and the ongoing investment in our transformation program. We're on track to deliver our commitment to reduce cost every year to EUR 1.7 billion in 2021.

Turning now to asset quality. In the first half of the year, we reduced our NPE ratio by 100 basis points to 5.3%. This is the lowest NPE ratio of any Irish bank.

The securitization of an Irish Buy to Let mortgage portfolio unlocked 30 basis points of capital. We expect further reductions in NPEs, and we are keeping all of our strategies under review. Our impairment charge was 21 basis points in the first half, and absent the change in economic environment or outlook, we expect that our net impairment charge will be between 20 and 30 basis points in the next couple of years.

On funding and capital, we have strong liquidity and leverage ratios. Our customer deposits are primarily sourced through our retail distribution network, and while our loan-to-deposit ratio is below 100%, it gives us the funding and capital to support our growth and strategic objectives.

We have our MREL targets, which are very manageable. We'll be issuing EUR 1 billion to EUR 2 billion of holdco securities this year and next.

Moving now to capital. Our position and outlook is very strong, and our guidance is unchanged. We increased our capital ratio by 40 basis points since January, and it's now 13.6% on a fully loaded basis. We continue to generate strong capital organically, 90 basis points in the first half. And in addition, the NPE securitization unlocked a further 30 basis points.

In terms of our guidance, we continue to expect to maintain a CET1 ratio in excess of 13%. It's on a regulatory basis and on a fully loaded basis by the end of the O-SII phase-in period.

Over the last 12 months, I have set out clearly how we invest and allocate that capital. In the first half of this year, we invested 30 basis points of capital in supporting the growth in our loan book, and we invested 25 basis points in our transformation program.

In terms of future regulatory capital demands, the 80 basis points I guided you to in February is unchanged.

Finally, on dividends and distributions. At the half year, we accrued for a dividend of EUR 100 million, and that's equivalent to an annualized dividend of EUR 0.18 cents per share, an increase from EUR 0.16 last year. There's no change to our dividend guidance. We continue to expect that dividends will build on a prudent and progressive basis towards a payout ratio of 50% of sustainable earnings.

So in summary, we have made good progress with our strategic objectives and targets, and we expect that to continue in the second half. As we look to the full year outturn, we'll grow our loan book further. Our total costs will be lower than last year, and we'll reduce our NPEs below 5%, while strengthening our capital position.

We are committed to increasing our return on tangible equity to the target level of in excess of 10%, and thereby delivering on our commitments to our shareholders.

I'll now pass you back to Francesca. Thank you all very much.

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Francesca Jane McDonagh, Bank Of Ireland Group plc [3]

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Thank you, Andrew. Earlier, I set out our view of the evolving external environment. Much of that is outside our direct control, but what we can control are the actions that we take to grow and transform Bank of Ireland and to deliver on the strategic ambition that we set out 1 year ago. These actions are especially important for our Irish and U.K. businesses and for our systems transformation.

Ireland is one of the fastest-growing economies in Europe, with increasing population, employment, wealth and construction. We are Ireland's leading retail and commercial bank, with over 2 million customers and strong market shares. This gives us a strong position from which to capitalize on Ireland's development and grow our business. Our multiyear's strategy leans into this. We are the leading supporter of homebuilding and buying and are financing the construction of more than 6,000 new homes in Ireland. We see more potential here and have a development fund of EUR 750 million to further grow our homebuilding business.

We also see upside potential in an expanding mortgage market. We are accelerating the on-boarding of new mortgage brokers in what is a growing section of the market, and we are innovating. We recently launched EUR 1 billion sustainable finance fund, with a range of home and business loan offerings, including a green mortgage discount.

In business lending, domestic demand still lags European peers. But as the leading business bank in Ireland, we are well placed to benefit from growth in credit formation.

And Ireland's growing population and increasing disposable income brings demand for wealth management. We are Ireland's only bancassurer and are uniquely positioned to benefit from this.

When we set out our strategy in June 2018, we spoke about investing, improving and repositioning our U.K. business to increase returns. In terms of investment, we have launched higher margin bespoke mortgages in the U.K. This pivots us away from mainstream and more into niche. Within 100 days, we have GBP 100 million worth of bespoke mortgage offers.

We have also increased new lending and higher margin personal loans and grown our profitable Northridge car finance business. These actions are shifting our product mix and increasing returns.

In terms of improvement, we have reduced operating cost in the U.K. by 19% in the first half. This has delivered a cost income ratio of 60%, down from 66% year-on-year.

We completed a transaction to diversify our funding base, which also reduced our cost of funding. Our focus is on further reducing our costs and optimizing margins in lending and deposits.

And in terms of repositioning, we have exited our U.K. cards business as well as nonprofitable ATMs and current account operations.

Combined, these actions are improving the returns of our U.K. business.

On systems transformation, we are making progress, achieving several key milestones and all within the budget we set out last year. This includes migrating customers to a new platform for ATM and debit card transactions and modernizing our payments infrastructure. Our focus is on translating our work and investment to-date into tangible customer and efficiency improvements. That includes the release of our new mobile app later this year, with customer migration continuing into 2020. This app will expand the services available to our customers on mobile, but it would also give us the platform from which we can enhance services on a rolling basis into the future.

And in wealth and insurance, where we are already generating income growth, we are launching new digital platforms this year. These will transform how our customers access advice, get a quote and purchase a product.

So we've set out our progress in the first half and delved into our Irish and U.K. businesses and our systems transformation. And we've also clearly called out the evolving external environment, which is more challenging than when we set out our strategy a year ago.

RoTE, in excess of 10%, is the key financial target for Bank of Ireland. We are committed to this. And while it will be more difficult to achieve, there are a number of actions we are taking to hit the target.

We're keeping a relentless focus on costs. This is not new. Cost reduction has been a top priority at Bank of Ireland for the past 18 months, and it's clearly working. Costs will continue to reduce every year from now until 2021, and we are confident in achieving our cost base targets. We are now looking at other efficiencies to reduce operating expenses further.

We're targeting selective growth in key areas. This means growing where we see high quality and attractive returns. For example, in capital light wealth and insurance and by building on our unrivaled SME franchise in Ireland. We will maintain our pricing discipline across all segments and stay focused on simplifying our business and delivering our systems transformation. These actions will create revenue capacity, reduce risk, improve customer experience and support growth, as well as deliver further efficiencies. And we will continue to manage our capital efficiently. We keep all options on the table to optimize capital, and we will allocate it prudently to support our growth. We'll provide updates on key actions in our next reporting cycle.

I am pleased with our performance for the first half and the highlights that we have shared this morning. We see further opportunity in our Irish business in homebuilding and buying, business lending and in wealth and insurance. The actions we are taking in the U.K. are improving returns, and our transformation is delivering, with more to come.

Looking ahead, our actions respond to the external environment, and they set out how we will develop our business to 2021 to achieve our strategic ambition.

Thank you for your attention. And we very much look forward to answering your questions.

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Questions and Answers

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Francesca Jane McDonagh, Bank Of Ireland Group plc [1]

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Okay. So we'll take questions in the rooms first. If you -- and then go on to the line. (Operator Instructions).

We'll go with Diarmaid first.

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Diarmaid Sheridan, Davy, Research Division - Financials Analyst [2]

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It's Diarmaid Sheridan from Davy. Firstly, Francesca, maybe starting where you finished off, around return on tangible equity and meeting your 10% plus target. It very much feels like that will be a cost-based lever that you will look to pull. So I just wonder, if you could comment a little bit further around when we might get some visibility on when that might be achievable, and what specific areas you might be looking at? Secondly, maybe Andrew would be remiss on one final time not to ask about margin. So your outlook, obviously, is lower on the rate impact. I wonder if you could maybe just detail that a little bit further for us, please. And then finally on the capital intensity of your loan book growth. Obviously, you have set out targets of 200 to 250 basis points of overall capital intensity to reach the EUR 90 billion target, 30 basis points this year, followed by 40 basis points last year. It feels like it's still quite heavily capital intense. When should we expect that to be maybe a little bit lower in terms of that? And are you still comfortable with your guidance around the capital intensity of the growth?

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Francesca Jane McDonagh, Bank Of Ireland Group plc [3]

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Diarmaid, so I'll start on RoTE and then pass to Andrew. So we are committed to the target of over 10% RoTE by 2021. We acknowledge it will be more difficult because of lower for longer interest rates and some of the uncertainties around Brexit impacting credit formation. But we have options, and we have choices and things that we absolutely can control, and I outlined that the 6 of them at the end of the presentation. Cost is one of them, it's not the only one. And -- but we have demonstrated over the past 18 months our capability and the opportunity to take out costs strategically. And we talked about 3% down. But if you exclude our core banking investment, that's closer to 5%, and that's the same time as investing in our business. So the actual gross savings are EUR 60 million in the first half. So we feel confident about that, and there is potential to do more. And obviously, the interest rate environment has changed relatively recently, and we are not providing a new guidance or targets on cost reductions today and if we -- when we do -- if we do that, it will be on the basis of a really well thought through and grounded plan. But there are other areas that we also see opportunity in to further contribute to RoTE. So we talked about the growth in the key areas. Wealth insurance, we are well positioned, capital light. We are unrivaled in our SME proposition. And it's a separate question, but even though we've seen more of the net loan book growth coming through from corporate banking, I mean, the first 6 months, we would expect more of the growth to be coming from our retail operations in Ireland in the second half and beyond.

And I am not going to go through each of those levers. But I would say on the prudent price management, our loan asset spread is slightly up. We have been consistently disciplined commercially in how we price. And our front-book margin is around 300 basis points across the entire bank, and that's higher than our back book, and the discipline that we have around growth is always about risk then pricing then volume, and that philosophy hasn't changed.

Just a simplification, we gave a lot of examples about the U.K., and what we have done successfully in the first half to simplify and make our U.K. business model more profitable. When we look to the future, we also see across -- and I'll define as well, from an end-to-end process perspective, there are opportunities to improve the efficiency of our processes and not all of that is dependent on core banking and technology. Some of that are just better processes and changing our approach to reengineering.

So if you like that sort of buildup, stairway to RoTE, and we feel that we have those levers in our control, and we'll be providing an update on the combination of those levers that we are pulling to achieve RoTE in our future reporting cycles.

I'll pass to Andrew. The other point I would just add on the third around Corporate Banking is we see more -- proportionally more growth in Corporate Banking and in terms of the first 6 months. But that is high-quality RoTE-accretive and good-risk quality business. And as the National Champion Bank, we have an ambition to be National Champion Bank in Ireland, supporting corporate Ireland and investing in infrastructure has a knock-on impact to SME, credit formation and household incomes, which is, obviously, part of our strategy. Andrew?

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Andrew Keating, Bank Of Ireland Group plc - Group CFO & Executive Director [4]

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Great. Okay. So thank you, Francesca. So Diarmaid, on the NIM, maybe a couple of comments in relation to that. As Francesca has said, the commercial discipline that we have in terms of risk and in terms of pricing has long been a feature and hallmark of Bank of Ireland, and as you've heard Francesca say, that philosophy is completely unchanged and is going to continue.

In terms of the first half, we achieved our NIM of 216. Liquid assets were off a little bit, but as we pointed out in the presentation this morning, the loan asset spread increased by 1 basis point or so.

There has been though this very significant change in -- material downgrade in terms of the interest rate environment, and interest rates across the piece are -- have been lower. And so in addition to the normal sort of 1% sensitivity that we give them, we thought it was important to set out how we think our net interest margin is going to perform over the next couple of years in our presentation this morning.

So as I think about the -- through the full year 2019, while we have done 216 in the first half, I think the average for the year is likely to be slightly lower, thinking like maybe 1 basis point, maybe 2, that sort of space.

As we go out into 2020 and 2021, the trend, because of the interest rate environment, that trend is going to be for a lower NIM. It's going to be somewhere in the sort of mid- to high- single-digits basis points from the 216 level. Okay? And it's -- it will be a trend down to that level, rather than sort of -- if I use Francesca's stairway comment, it won't be in that space. It will be more of a trend in that direction. The growth of the loan book plus the commercial discipline point act as some mitigant to that, but we still think the NIM will be lower because of the 100 basis points decline in the interest rate environment in the last couple of months.

Switching then to capital. So when we set out the Investor Day in June of last year, and as you say, we allocated between 200 and 250 basis points of capital to support the growth in our loan book. And that 200 and 250 basis points was to cover a 20% growth in Retail Ireland, a 10% net growth in our Retail U.K. business and a EUR 4 billion growth in our corporate business.

And so what's happened in the last kind of 18 months has been that the corporate businesses that Tom leads has been at the front of the peloton. We always would have expected that. They have generated about EUR 3 billion of balance sheet growth over the last 18 months, so very much within our expectation of about EUR 4 billion of balance sheet growth for our corporate. And so, of course, that business is more capital-intensive than, for example, mortgages that are in Ireland or in the U.K. But that's fully accommodated within the 200 to 250 basis points that we set out.

In terms of going forward from here, while corporate has been a very important part of the growth, and as Francesca said, I mean it's very high-quality business from a risk perspective and from a return, arrears- up perspective, but as we think about the next 2.5 years, the proportion of the balance sheet growth is going to come more from the less capital-intensive area, so more from mortgages, more from SME, more from consumer. And so that would mean that over the next couple of years, the capital allocation of between 200 and 250 basis points, it continues to be the appropriate amount of capital to support the growth that we have. We're not going to continue to grow our balance sheet in the same pace or with the same mix of capital-intensive lending as has been the case over the first 18 months.

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Francesca Jane McDonagh, Bank Of Ireland Group plc [5]

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Let me go to Owen next, and I'll come to Eamonn afterwards.

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Owen Callan, Investec Bank plc, Research Division - Head of Financials Research & Banking Analyst [6]

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Owen Callan from Investec. Just 3 quick questions, if I may. On the U.K., you have obviously made 3 kind of strategic moves or decisions around how to refocus that business this year in terms of the cards business, the ATM network and the current account proposition. Do you feel you have the right kind of model or the business mix there now going forward? Or are there are kind of business lines or operations that you are maybe still looking at whether they should be part of us? On costs, you've had a very consistent kind of 3% annualized reduction over the last couple of years, which is very impressive. Is there still the ability to go with that kind of run rates into the second half of the year and into 2020? Or does it get a bit stickier and bit more difficult to find that level of cost savings going forward still? And then just on the wealth investment, it's one of the standout areas in terms of amid that weak volume and weak margin environment, you've been talking about the wealth and insurance rather division has been able to kind of really show some strong growth. Is there other opportunities you are looking at within that broader space as regards M&A? And obviously, I'm sure you are always willing to look at something, but is that let's say a relatively active consideration? Or is it very much organically focused at the moment?

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Francesca Jane McDonagh, Bank Of Ireland Group plc [7]

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Okay. We'll both do a little bit of all of those 3. So just in the U.K., you are right, we've been very clear. I think we've made good progress in the first half in terms of the invest, improve, reposition and I -- we've made quite a deliberate shift in the product mix of new origination. So within mortgages, taking a step back, not entirely, but reducing our emphasis and our weighting on the lower low to value remortgage space, which is very tight margin, focusing more on the pivot to niche. We are seeing high quality in an underserved segment that isn't necessarily well served or desires to be well served by some of the larger banks, and I'm very pleased with the initial progress we have made. I mean it's 100 days. So it's early, but high-quality, good profile and well received by the broker network that we distribute through.

And in terms of the product mix, we are originating more from our personal lending in Northbridge business. And that isn't because we've loosened credit criteria or changed our risk appetite. That is very much a reflection of deepening our distribution. So personal loans will be predominantly from the AA, but also the Post Office and some from our Northern Ireland franchise, and we have improved the processes there. And we've actually improved our margins, while we have been growing. So we are not just priced for volume. We are priced for risk in the appropriate way. And our Northridge, this is a business that we've had many years of experience in. We've broadened the number of partners that we work with and also covered more of the U.K. geography.

So the business mix we are -- we are happy with the changes we are making and always looking for new opportunities to create more value. But the -- I think the model we are creating now is providing better returns than we had previously.

On costs. I wouldn't read too much into the 3% every half. We've talked about year-on-year reductions, but we've not given guidance on half and half. And you asked whether it gets more sticky? I think we have made some sticky and difficult decisions already to get to the numbers we've achieved. So it's not about low-hanging fruit. We have made difficult decisions around reducing our senior management by 7%. We've closed 30-odd service centers and we've exited some businesses that we've been active in, in the U.K. for a while. So those were tough decisions, and we'll continue to make the right decisions to improve the efficiency of our business in the U.K., but also across the group.

And in terms of wealth and insurance, the backdrop of the Irish economy and the demographic change really supports us. So households are becoming wealthier, job security has increased. We've got good demographic trends around aging population that's probably under-protected or under pensions, and then you've got more younger people, well-educated entering the workforce who need wealth-management need and protection, and we also have the advantage of a large Retail Customer base. So the penetration of our customer base, last time we presented our results, we would have talked about a 26% penetration, which was up from 23%. We now saw, in the first half, a 29% penetration. So the backdrop is helping us, but our positioning in our customer base is there's fantastic opportunity for us to do more from a digital perspective, and that's one of the key milestones that we have set ourselves as well. But I'll pause there, and Andrew, you may want to cover some of the details also on cost.

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Andrew Keating, Bank Of Ireland Group plc - Group CFO & Executive Director [8]

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Yes, so just on the costs, Owen, I think we set out a year ago, a very clear target to take our cost down every year and to hit EUR 1.7 billion in 2021. And clearly, we've evidenced the reduction in that cost as we've gone through each of the periods. So that continues to be our focus right now. Of course, we said that the external environment has changed in terms of the interest rates, and that's going to be a headwind to the top-line revenue, so you would expect us to see what levers, what self-help options we have, to pull in cost is a very obvious one of those. So we are looking at what further opportunity is there for greater efficiencies to bring us below a figure of EUR 1.7 billion. We are not announcing a different number today, but we are going to work, as you would expect, and as we are doing, but work at what opportunities are there to be more efficient, even than that EUR 1.7 billion. But I'd also say is that when we set out that plan to EUR 1.7 billion, we fully accommodated the inflation around wages, for example, for our colleagues, but also around the higher depreciation charges associated with the investments that we are making in technology. And of course, the higher cost of complying with some of the expectations and regulations of our regulator.

And so we have gone beyond, we have absorbed all of those costs, and I think that's important, and still brought our overall cost level down 3% as you saw in the presentation this morning, and that continues to be our focus. This is about reducing the absolute level of costs as we go through to 2021, and in that this was a mechanic, really, to help support our overall strategic ambition to increase our RoTE up to that target level of 10%.

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Francesca Jane McDonagh, Bank Of Ireland Group plc [9]

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Thank you. Eamonn?

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Eamonn Hughes, Goodbody Stockbrokers, Research Division - Financials Analyst [10]

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Eamonn Hughes from Goodbody. Can I just -- can I come back to the NIM just in terms of your first question, I wanted to ask about capital and NPEs as well. But just in terms of NIM, you mentioned, kind of, Andrew, in terms of capital consumption over the next couple of years. So can we take that, that NIM guides over the medium-term is still kind of premised on hitting the EUR 90 billion loan target? It's obviously important in terms of recycling, and you were talking earlier about the new business being at higher than the stock. So just to get a bit of comfort around that. Secondly, this was the first time we have been able to chat to you publicly since the SRB discussions that were out there. So maybe thoughts around kind of future capital targets, whether is there any kind of offsets around P2R and things like that. How are you feeling about that? And finally maybe in terms of NPEs. You've kind of stuck to that, we are hitting the 5% number by the end of the year, that's great, you're making progress there, obviously, which is fantastic. Just maybe your thoughts over the next year or 2 in terms of future targets around that because it will be important in relation to the capital number.

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Francesca Jane McDonagh, Bank Of Ireland Group plc [11]

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Okay, Eamonn. Let me just talk a little bit more broadly about the EUR 90 billion total loan book target because it's something that's -- guidance that we were quite explicit about a year ago. We are pleased with the progress and the EUR 1.2 billion net increase and continuing as the largest lender in Ireland. But we recognize that lending growth reflect -- it depends on the external environment, and it's lesser to now than it was a year ago, mainly because of Brexit, I think, a year ago we all would have assumed that Brexit would have been resolved, and the Brexit uncertainty is creating some reticence, particularly in Irish SME growth. So the issue isn't -- if EUR 90 billion is the right number, it's when, and I am keen to get through another 6 months of trading and hopefully, in the next 6 months, the other side of Brexit, so just to have a better idea of that credit formation and some of those external events will inform our journey to EUR 90 billion.

Regardless, we've never chased volume at the price of commercial discipline or risk. So our philosophy around when we look at lending opportunities, looking at risk, then price, and then volume is unchanged in that context. And I'll leave Andrew to talk about NIM and capital in a bit more detail.

Just in terms of NPEs, just sort of key message there is we are 5.3%. We talked about being in touching distance of being sub-5%. We are about EUR 300 million, EUR 350 million of being 5%, based on loan book -- loan growth outlook for the end of this year. That would be important. We are not just doing that as a result of the inorganic actions we have taken. So of the EUR 800 million reduction we have seen so far this year, a little bit more than half of that is working out solutions with customers and the rest would have been the securitization that we have done. Even just through organic working through with customers, we feel comfortable about the 5%, but we've said it before, and we'll reiterate it, all options to reduce NPEs are on the table and that can include other securitization or loan book sales.

The trajectory in the go-forward pace of reduction beyond 5% does depend on other factors, such as the rollout and introduction of definition of default, which we expect in 2020. But when we look at the normalized level of NPE ratios amongst European peers, you'd expect that to continue to go beyond 5% over time. Andrew?

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Andrew Keating, Bank Of Ireland Group plc - Group CFO & Executive Director [12]

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Okay. So excuse me, if I speak to the capital piece, Eamonn, so I mean the systemic risk buffer, clearly the Central Bank have looked for the authority to look at that. But I suppose as we sit here this morning, we don't know if or when it's going to be introduced, or whether it applies to Bank of Ireland, and what the offsets might be in terms of whether it's the O-SII buffer or whether it's a P2R, et cetera. I mean there are some developments at the European legislative space as well, which might influence both the timing and the potential quantum of what might come in.

I think your point is right in terms of P2R, Eamonn, we have the same P2R today as we had 5 years ago. And Obviously, in that last 5 years the risk profile of the bank has changed and strengthened very significantly from the investments that we have made in reducing NPEs, sustainable profits, volatility and capital ratios, et cetera. The regulator is never going to adjust the P2R ahead of a Brexit-type scenario. I mean that's not -- that's very understandable, but certainly, as we think about the progress

that the bank has made over that time period and the improved resilience of the balance sheet and the derisking of the balance sheet, we'd be very optimistic about the opportunity for P2R, but we have to get beyond the Brexit piece.

I think unlocking capital in the balance sheet is something that is important. We've emphasized the RoTE, it's been the very major target. You've seen the stakes on the actions in the first half of the year in terms of unlocking 30 basis points of capital to do with the buy-to-let securitization and we are looking after doing further transactions to unlock capital. Clearly, the decision to exit out of U.K. cards also unlocks some capital in the second half of the year and that's something we're going to continue to do over the next number of years, Eamonn, to make sure that our capital is optimized and appropriately allocated and supportive of our overall targets.

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Francesca Jane McDonagh, Bank Of Ireland Group plc [13]

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Thank you. We'll take one more question in the room. We'll go to the call and come back to the room. Gentlemen?

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Pierce Byrne, Cantor Fitzgerald Ireland Ltd., Research Division - Investment Analyst [14]

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Pierce Byrne, Cantor Fitzgerald. Just 2 questions from me. Just on mortgage pricing and market share. Just, I suppose, how you feel about that moves you made earlier in the year on mortgage pricing and the impact that might have had on a share and where you see that going forward? And then just on the credit impairment. What's a kind of a -- are you happy with that level of credit impairment? Is that a normalized rate we can look at going forward?

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Francesca Jane McDonagh, Bank Of Ireland Group plc [15]

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Thank you. I'll do -- I'll answer mortgages, and Andrew on credit impairment. So our market share in Irish mortgages for the first half of this year was 23%. We don't chase volumes and we've never set a specific market share target. Again, it's risk then price then volume. But we have -- I've previously said that the -- we feel most comfortable with the market share range of 25% to 30% in Irish mortgages. So during the first half of this year, we would have stepped slightly outside of that. And 2 key drivers from our perspective. One is the rise in the broker channel. So brokers are now 25%, 1 in 4 mortgages in Ireland are originated through a broker channel through a broker. And we have reentered that channel less than 1 year ago. So it's still a relatively new channel, which we are growing. We've expedited our growth within but in a sensible way. So we would have previously mentioned that we were looking to have 50 broker partners by the end of 2019 and we have that this week.

So we've got -- we've developed more relationships to more brokers more quickly, but in an appropriate way. So as well as the -- that market share reflecting our relative newness in the broker channel, there's also a pricing factor. So we would have increased some of our prices in January, which we believe was the right thing to do at the time, given the interest rate environment and the outlook. And since then, the interest rate environment has changed quite significantly. And we've reflected that in some of the propositional and pricing changes we've made recently. So we would've changed some of our 5- and 10-year fixed rates to ensure we remain competitive and we are not leaving good business on the table. But we also did some innovation. We tested that for some higher-value mortgages, some customers prefer a lower rate than the cash back offer. Many of our customers, strictly the first-time buyers, really like the cash back offer, but we found that some actually just wants a better rate. So for mortgages over EUR 400,000, we're offering a rate of 2.5% at the moment. And we also offer a 20 basis points discount for people buying a new home that is sort of PRA-rated energy efficient. So those are some of the examples of innovation.

As we look into the second half, feeling comfortable with our pipeline. Excited about the opportunity to originate more through the broker channel and I feel confident about our trading, but we're the largest lender in Ireland, don't -- I don't overly exercise myself on day -- week to week or month to month market share numbers on mortgages.

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Andrew Keating, Bank Of Ireland Group plc - Group CFO & Executive Director [16]

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So Pierce, you asked about the impairment, and yes, I mean 20 to 30 basis points is the kind of the guidance that we have set out a year ago, and we stated it this morning, and we think that's certainly -- we're getting more into that sort of normalized level, clearly, with the NPEs coming down, now up to 5.3% touching distance, as Francesca has said, and, obviously, we go beyond that as we go forward.

One of the things that -- if we think about the first half charge, Pierce, there are probably a very small number, 2 or 3 discrete cases in Corporate Banking where we had a particular provision that we set up for those cases. And then we also took an opportunity to increase the coverage ratio in our Irish mortgage portfolio. So you'll see that the coverage ratio has increased from, directionally, 20%, 21% to, directionally, 25%. And the reason we're doing that is really as part of preparation to get ahead of or in advance of the NPE counter provisioning issue that is upcoming -- starting at the back end of next year and for various technical reasons, it's much more capital efficient to take some of those charges through the P&L, rather than to do it as a sort of capital deduction, and, therefore, you'll see us looking to increase our coverage ratio within the context of 20 to 30 basis points guidance that we've set out, Pierce.

And also if we happen to get some collections, post write-off or something like that, you'll see us taking the opportunity to actually up our coverage in advance of and in preparation for the NPE counter provision because of the capital efficiency that comes with that. So yes, comfortable with 20 to 30.

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Francesca Jane McDonagh, Bank Of Ireland Group plc [17]

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Thank you, Pierce. And why don't we take a few questions on the conference call?

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Operator [18]

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The first question we have today of -- on the line comes from Alastair Ryan of Bank of America.

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Alastair William Ryan, BofA Merrill Lynch, Research Division - Co-Head of European Banks Equity Research [19]

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One specific and one more general, please. So the EUR 0.185 given that you've accrued for the first half, how good an indication should we think that is, the way you ended for the full year? Is that a floor now? Or that's where you're expecting the board to land? Obviously, it's quite early, I appreciate, but that's -- it's quite important. The second more general. Just a few more pointers on how you're getting on with the Core Banking Platform, the implementation of the new IT structure? You sound pretty confident, but it's just very hard on the outside for us to see where you've got to. What are the best pointers for us to look at?

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Francesca Jane McDonagh, Bank Of Ireland Group plc [20]

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Alastair, we'll go first on Andrew on the dividend.

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Andrew Keating, Bank Of Ireland Group plc - Group CFO & Executive Director [21]

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Okay, Alastair. So yes, we've -- I suppose -- the board -- first thing I'd say is the Board has made no decision about dividend for this year yet. Quite obviously, the timing of that decision will be in sort of the -- as part of the year-end preparation in sort of December, January, February time. The board's policy on dividend is very, very clear, which is that it's going to increase this year over last year. It'll increase, of course, prudently and progressively towards our longer-term target of 50% of sustainable earnings.

At this half-year point, we must make an approval for the dividend in line with the capital rules and the Board has gone for -- around some number of EUR 100 million. That happens to equate to EUR 0.185, which is, obviously, an increase on the EUR 0.16. But I don't think you could -- should take it as being particular guidance either way in relation to that. It is an accrual, it is consistent with the policy. But all the decision around dividend will be one that the board will take at a later stage. You've seen over the past couple of years when we restarted the dividend 2 years ago that we've been -- we've always had a track record of inconsistency, if you like, in terms of -- the half year accrual versus the year-end piece. It is a half-year accrual piece and the decision for the board, the board has not taken that decision. The board will take that decision in December-January time.

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Francesca Jane McDonagh, Bank Of Ireland Group plc [22]

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If I answer the question about core banking in 2 ways. So one is about progress in regards to spend and another one is progress in terms of milestone achievement.

So you'll remember, Alastair, a year ago where we talked about our broader transformation strategy, which include systems change but also business model change, and we broadened and deepened that to the EUR 1.4 billion between that point and 2021, and we guided, that would be equal to 50 to 60 basis points of capital or an average spend of EUR 275 million per annum. And obviously, that will help us improve efficiency, competitiveness and reduce expenses over time.

Core banking is an important component of it. But when we look at the overall transformation spend, what we've shared today is the first half, we spent EUR 138 million and 25 basis points. So we're not a GBP 0.01 or a basis point over where we said we would be. So that spend is exactly where we indicated. And in terms of milestones, so we've talked more broadly, but these are key aspects of our core banking delivery. So the change in our payments infrastructure, the change in our ATM and debit cards infrastructure, being the single largest migration of customers in the history of the bank, are big milestone deliveries in the first half. We've also done -- made some progress in some of the cyber and security deliverables in the first half and improving our insurance underwriting process.

The second half, the big focus for us is on the mobile banking app. We have the technical functionality now and we are going to be rolling that out to customers during the second half of this year, although the rollout will continue into the new year. I don't want to rush rollout. We want to make sure that we're doing it in a very sensible and appropriate way for our customers. There's other areas, operationalizing the single view of customer. I've talked about having that functionality, rolling it out so that we are using it to -- engage with our customers would be important, and I've mentioned the wealth insurance investments, and how we would change our origination to give competitive advantage there. So the spend is as we said it would, and I think, it'd be more explicit on milestones that we've delivered, again, so that we will deliver to -- over the coming months. Let's stay on the conference call.

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Operator [23]

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The next question comes from the line of Andrew Coombs from Citi.

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Andrew Philip Coombs, Citigroup Inc, Research Division - Director [24]

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If I could have some follow-up questions on the interest margin guidance. You talked about mid- to high-single-digit down over 2020 to '21. I mean could I firstly ask, is that a cumulative impact rather than a per annum guidance? Secondly, could you just provide the trajectory, is it front-loaded? Is it spread on a linear basis in your view? And the third question relating to that NIM guidance would be, how does that split out between the U.K. versus Republic of Ireland? And switching my NIM question to my broader question just to finish out, you've reiterated the greater than 10% return target, despite a lower NIM guidance. Is the same true with your less than 50% cost income target as well?

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Francesca Jane McDonagh, Bank Of Ireland Group plc [25]

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Do you want to...

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Andrew Keating, Bank Of Ireland Group plc - Group CFO & Executive Director [26]

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Yes. Let me talk about the NIM, Andrew, first. So just to clarify, yes, the mid- to high single-digits is cumulative and is not per annum, okay. So by the end of 2021, my expectation is that the NIM in 2021 will be mid- to high single-digits lower than 216 not per annum. Okay, so just be very clear on that piece.

And I think, the trend is for it to trend down to that level. Is it going to be precisely linear or kind of slightly in that space? I mean I think it's -- the expectation is that it is going to trend in that sort of space. I can't confirm it's exactly going to be a dead straight line in relation to that. But it will be trending down to that point. And yes, I think in terms of U.K. and ROI, clearly, our Irish NIM and our U.K. NIM are very different. There are different drivers behind those. But the interest rate environment in both geographies has been pretty equal. In U.K., probably it has come down on a similar measure by sort of 75 basis points, the Euro by about 100 basis points. So there's some impact from those. Both interest rates environment updates have been factored into the NIM guidance that I've shared with you this morning. So if we just keep it up with the RoTE and cost income.

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Francesca Jane McDonagh, Bank Of Ireland Group plc [27]

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Yes, I'll talk -- I mean the cost income, obviously, so when we talked about cost, we gave 3 very clear pieces of guidance. One, EUR 1.7 billion cost base by 2021. We're saying today that we're confident about that, and looking at -- if there are opportunities to go beyond. We talked about the reduction year-over-year, we're achieving that. That still stands. Then we talked about cost income ratio. So you'll see the cost side of that is progressing well. The cost income ratio does depend on revenue. But if you look at our cost income ratio in the group, it's gone down from 66% to 65%. So there'll be still more to go. You look at parts of our business, where we've really focused on profitability, such as the U.K., the cost income ratio there has gone from 66% to 60%. So it just shows you the opportunity for us to cost takeout while growing, as we have in the U.K.

We've talked about positive jaws today and that's not a substitute for our cost income ratio target, but it does show you the positive trajectory that we are -- we're on with revenue up 1% and cost down 3%. And it is challenging but it is still a part of our cost guidance. When we just take a step back and look beyond ourselves, and we look at our U.K. or European years, banks like us are getting closer to the 50%. So it feels like, absolutely, the right thing to do to be driving our efficiency over the coming strategic period.

We'll take another couple on the line and then come back to the room.

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Operator [28]

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The next question on the phone today comes from the line of Chris Cant from Autonomous.

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Christopher Cant, Autonomous Research LLP - Partner, United Kingdom and Irish Banks [29]

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I just wanted to come back on NIM, and understand exactly what's driving that pressure here. You referenced the front book NIM of around 300 bps, that hasn't changed, and you sited lower swap rate expectations in your presentation. So is it the structural hedge that is weighing on your NIM guidance? And could you provide some detail on your structural hedge program for us, so we could understand this? What's the current contribution to NII? How big is the hedge in terms of the notional? What's the tenor of the swaps you're using there? And just as one further minor point of detail, you referenced capital efficiency with regards to taking provisions in the P&L, rather than waiting for a capital deduction. Is that just the tax that you're referring to there that you get a tax shield on the provisioning charge?

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Andrew Keating, Bank Of Ireland Group plc - Group CFO & Executive Director [30]

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Okay, Chris. Maybe I'll take those questions. Let me start on the capital side. So no, obviously, from a -- the tax isn't what I'm thinking about, while, of course, we get a tax deduction, you'll be familiar with the fact, we have a large deferred tax asset. And so from that perspective, it's not in that space. Really, I suppose from a technical perspective, Chris, I'm thinking about the interplay between provisions and the regulatory expected losses. And so we have a -- if you like, our capital ratio of 13.6% today, this morning, it's after taking the deduction for the IFRS 9 provisions. But in addition, it's after taking a further EUR 400 million or 80 basis points deduction for the higher level of regulatory expected losses. And so as the IFRS 9 provisions were to increase, the level of regulatory expected losses wouldn't automatically increase by similar level, and so there's an opportunity there, in terms of that EUR 400 million, to deal with that from a capital efficiency perspective.

Just on the net interest margin. I mean, again, we've given -- in terms of the sensitivity, you will have seen the kind of instantaneous impact of the 100 basis points up or down. We've given that usual disclosure that others give on sort of Slide 39. But I think like the -- that's, obviously, a kind of instantaneous static balance sheet, no changes, et cetera. But so what we have factored into the guidance of the mid- to high- single-digit reduction in margin over the next couple of years, cumulatively, to Andrew's point earlier, is the fact that we have the benefits from the tailwinds from the higher front book spreads and a growing balance sheet. But certainly, in terms of the yield you've seen on our liquid assets, of course is coming down because that very much reflects the interest rate environment. In terms of our structural hedge, we have continued with our usual approach there, which is effectively, we hedged the free funds at an average of 3.5 years. So we, essentially, have a portfolio of swaps that get rolled over. So every year, in broad terms, 15% of the swaps mature and then we reinvest in a new swap and, effectively, the new 7-year swap.

And so as that caterpillar hedge, sometimes people refer to it as, as that caterpillar hedge continues to progress, you'll see that's where you get the impact from the 100 basis points reduction in the, for example, the markets' expectation for 5-year, that we highlighted this morning.

So they're the dynamics that are happening, Chris, in relation to the net interest margin. So the tailwinds that we've seen in the first half that were continuing, which are driven by our commercial discipline in pricing, which are driven by growing the balance sheets, which are driven by growing the balance sheets with better front book spreads than the back book, for factors like mulling off of trackers, et cetera, are positives but they are being impacted then by the impact of the interest rate environment on liquid assets and on that caterpillar hedge.

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Christopher Cant, Autonomous Research LLP - Partner, United Kingdom and Irish Banks [31]

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In terms of the hedge, are you able to share a number on the contribution? If I think about some of the large U.K. banks, it's about 10% to 12% of NII, is generated from the structural hedge. Is that about the right level? Higher or lower? Any guidance there will be useful.

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Andrew Keating, Bank Of Ireland Group plc - Group CFO & Executive Director [32]

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I'm sure -- I'm sorry, Chris, I don't have that number with me this morning, if I -- if we decided to disclose that, I'll come back and tell everybody, in relation to that. We'll look at that, certainly, between now and the year-end, in terms of disclosure, but if there's an opportunity to disclose it in advance of that, we'll look to do that.

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Francesca Jane McDonagh, Bank Of Ireland Group plc [33]

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Another question on the line?

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Operator [34]

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The next question today comes from the line of Charmsol Yoon from UBS.

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Charmsol Yoon, UBS Investment Bank, Research Division - Equity Research Analyst of UK and European Banks [35]

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I've got 2 questions. One on NIM and one on RoTE again. So can I please follow-up the Andrew's question regarding the split between euro and sterling, in a slightly different way? Can you split the rate sensitivity you're disclosing to Slide 39 into sterling and euro, if that's possible, please? And secondly, on RoTE. So when I see consensus 2021 number, it has RoTE of 9% -- 9.1% for underlying PBT of EUR 1.1 billion -- slightly below EUR 1.1 billion, suggesting that you will need probably EUR 1.2 billion at the underlying PBT to hit 10% RoTE target. But given the time line pressure you flagged it, it looks like reasonable to me that EUR 1.1 billion consensus would probably come down a touch below EUR 1 billion. So effectively, you require about EUR 200 million of cost savings plus fee income growth to hit 10% RoTE. So firstly, can I please check if this math is broadly reasonable? And if not, where you see consensus is wrong? Maybe loan book growth or fee income or even capital base, please?

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Andrew Keating, Bank Of Ireland Group plc - Group CFO & Executive Director [36]

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Charmsol, I probably won't get into kind of the -- order to your spreadsheet this morning, Charmsol, if that's all right. And in terms of the euro and sterling interest rate sensitivity, I mean, we don't give that disclosure. So that's not something that I can help you with, in relation to that.

And in terms of the RoTE, I mean, I think, certainly, there is topline revenue pressure as we've called out this morning. We are, as Francesca has said, looking at self-help options. Francesca set out on the slide and in her presentation, 6 levers that we're looking at. Cost, clearly, is a -- you'd have noticed, was the first one of those 6. That's not an accident, as you'd expect, and we are looking at opportunities to be more efficient than is implied by the EUR 1.7 billion, but not announcing an update on that number this morning, but we're continuing to look, as you'd expect, and as we are doing, looking at further opportunities there. But there are other levers in terms of -- that will help bridge the gap caused by that revenue headwind across the various 6 levers, self-help options, so whether it's capital efficiency or capital light, wealth insurance, et cetera. So there is a range of things we can look at there, not exclusively on the cost side. Okay, Charmsol.

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Francesca Jane McDonagh, Bank Of Ireland Group plc [37]

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I just want to check how many questions there are in the room still. Any more questions from the room? Yes, please, Stephen?

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Stephen Lyons, Davy, Research Division - Financials Analyst [38]

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It's Stephen Lyons from Davy. Just if I could probe 2 areas of particular book growth in the period and your comfort around risk appetite, which you've already commented on, but maybe just to get a little bit more. The first is just on Leveraged Acquisition Finance, we've seen -- particularly, the Central Bank flagged that as an area of possible concern for the 2 Irish banks, and I noticed in the period, in additions to growth, you're -- opened a further office in Madrid. So maybe if you can just highlight the added comfort through historic loss experience, maybe, diversification of particular sectors. And secondly, just in the U.K., you -- I think it mentions in the deck that part of the personal loan volume growth was improved credit risk process in the period driving increased applications. Could you elaborate a bit more on that? And then that comment around Northridge below industry arrears and losses, et cetera, could you maybe just elaborate a bit more? Give us more comfort around those numbers?

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Francesca Jane McDonagh, Bank Of Ireland Group plc [39]

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Yes, Stephen. So on our Leveraged Acquisition Finance business, this is a profitable part of the Bank of Ireland franchise, EUR 170 million of PBT last year. We've been doing this since 1997. We've had a low loan loss track record during that period, so an average of 70 basis points per annum from 20 -- from 2002 to 2018, and this is a high-margin business that is appropriately risk priced. So high-margin of around 4.3%, plus fee income, and it's also relatively low cost or not high dependent on the infrastructure of the rest of the organization. So the cost income ratio in that part of our business would be in the sort of sub-20% space.

It does provide material diversification, in terms of product, but also geography for us, which we feel comfortable about. We've also got a diversified client base. So we've actually broadened our client base by 9% in the first half of this year but we continue to work with repeat business and in partnerships with well-established and large sponsors, who got a good track record. And our average deal size would be around EUR 20 million. So -- and again that diversification, within a diversified portfolio, is important. So the top 10 deals would represent about 8%. So we feel comfortable in -- obviously, we're very cognizant of risk. 80%, 85% of deals we reject. We're nearly 80% covenanted on the total book. So it's something that we keep close to, but it does provide profitable diversification for us.

And in terms of the U.K. So we would've been quite explicit in our strategy a year ago about the investing part of our strategy to grow and diversify. And we talked about targeting growth in our personal lending and Northridge businesses, and we're doing exactly what we said. These are prime mass lending only. So in personal lending, we do that predominantly, not exclusively through the AA. It's about half -- a bit more than half of the business, but also the Post Office. So 2 very trusted brands, and plus our Northern Ireland franchise. We've got -- we've demonstrated very good growth, half on half or year-over-year. But just in terms of market share, we're 2.6% of the market and we operate, exclusively, in the prime area. So even if -- as we grow, we would still be in the up to sort of 3% market share range that we feel comfortable with.

Net lending credit quality is up. Margin is up. We have invested in prescreening tools. We've also invested in our processes. So we are getting customers quicker than we did in the past. We would rank very positively compared to other prime players in the U.K. We don't want to be the slowest process because you get adverse selection. We're the opposite of that.

And we've also, to give ourselves assurance, we've done some external benchmarking on the quality of our origination versus peers. We would see that we are more conservative than many of our peers. Our high -- our minimum income is higher and the minimum age of applications is higher, and we have higher bureau score.

So we feel comfortable in terms of that origination. And on Northridge, again, it isn't about loosening credit scores or risk appetite. It is about broadening distribution. So we have about 2% market share and we have broadened our dealer relationship, all 99-plus percent of our new business is dealer or broker-led. And the dealership in particular, in the Southeast of U.K., and we've broadened. We've been conservative in terms of sort of residual value assumptions as well. We're very cost conscious as we broaden the distribution of that consumer lending portfolio. Yes, yes. We've got 3 callers on the line. So let's go through those pending questions.

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Operator [40]

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The next question today comes from the line of Alicia Chung from Exane.

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Alicia Marianne Chung, Exane BNP Paribas, Research Division - Analyst on the Pan-European Banks Sector [41]

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Just wanted to turn back to NPEs, and some of the future regulatory headwinds, if that's okay, as my first question. So obviously, you previously guided to 80 bps negative impact from TRIM, definition of default and NPE coverage ratio. It is very useful to get that forward-looking view. I understand now that TRIM is, broadly, complete and you're not expecting a material impact on the corporate loan portfolio. So that said, is there any reason that we couldn't expect you to lower the guidance of negative 80 bps impact? And secondly, as you increase your coverage ratios, can we expect that capital impact to fall even further from there? So that's the first question. And then the second one is just looking at the -- your corporate loan spreads, which you give on Slide -- it's on Slide 40, what is driving the increase in corporate loan spreads over the last half year, despite the fact that swap rates have fallen. Is this reflective of market trend or is this specific to Bank of Ireland? And has your change in the mix of corporate lending -- has the mix in corporate lending changed for Bank of Ireland?

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Francesca Jane McDonagh, Bank Of Ireland Group plc [42]

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Okay. I'll pass to Andrew on both. Just on the capital guidance, we've been very clear in previous reporting cycles about our view of regulatory capital requirements, and we've been explicit. It reflects our desire to be prudent and transparent in our approach to capital guidance. The only changes, just in terms of timing of the 80 basis points headwinds that we would've communicated before, we would've been conservative in thinking that was more 2019, 2020. Realistically, that's, probably, more likely to be 2020, 2021. But Andrew, can expand a bit more.

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Andrew Keating, Bank Of Ireland Group plc - Group CFO & Executive Director [43]

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Sure. Yes. Alicia, so look the 80 basis points was, obviously, the net impact of a range of different regulatory programs that are underway. You mentioned TRIM, the definition of defaults, NPE, also things like RV repair, et cetera. And so what we thought was useful in February, and again, we stated in the number today, is to basically put all that together and you don't need us to break it down kind of program by program, and I'd say look, the net impact from those programs is a headwind to our capital of 80 basis points.

And clearly, you've seen this morning, there were effectively prefunding for some of those headwinds by unlocking, for example, the 30 basis points out of the NPE securitization that we did. TRIM is done for mortgages, Ireland and U.K. at this stage, and so that's in the balance sheet this morning. Definition of default, that's something that's more likely to come in, in 2020. And obviously, that'll impact on the amount of capital we need to put against the regulatory defaulted assets and will impact the pace of NPE reduction next year.

On the NPE provisioning. That, obviously, kicks in at the back-end of 2020, Alicia. And as I was explaining to Chris earlier, it is capital efficient for us to -- where that's possible, between the 20 and 30 basis points guidance, to start doing some preparatory work, in relation to that because we were able to get some advantage and offset in relation to the level of regulatory provisions that are already set up and that are already a deduction from our capital ratio.

And we think 80 basis points continues to be the right level. Clearly, that's not a -- we're not targeting to use 80 basis points, but we think that's a reasonable estimate of what the net impact of those various regulatory programs are. And clearly, as we go through those until -- to the extent we see some upside associated with that, of course, we'll keep you up-to-date. And then the key thing for us is that when we look at our capital position -- I mean our capital position is very strong and the outlook is clear, certain and positive. I mean ultimately, we've done -- our operations have generated 90 basis points of organic capital in the first half. We unlocked the 30 basis points by doing the first transaction on NPEs. We're looking at a second transaction at this stage, very much trying to pre-fund the impact of that. So we're at 13.6% to-date. That's an increase of 40 basis points since January. And obviously, continuing to generate capital on a daily basis and that's above our long-term guidance of excess 13%.

Sorry, on the corporate loans spreads. You had a question there. That's really just a mix issue, Alicia, within the corporate portfolio. There's, clearly -- the way we think about it is that there are 4 portfolios between corporate Ireland, corporate U.K., property and LAF, and you'd have seen the numbers that were disclosed in the deck this morning. And so, the couple of basis points increase in the corporate and treasury spread -- well it's not even a spread, it's the gross rates that the customers paid us. So it's before taking out the cost of money. That's increased by high single-digit basis points and that really reflects, I suppose, our commercial discipline, in terms of the pricing that we're doing for our new origination in that sector, together with just the evolving mix in relation to that.

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Francesca Jane McDonagh, Bank Of Ireland Group plc [44]

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Let's stay on the lines.

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Operator [45]

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The next question today comes from the line of Aman Rakkar from Barclays.

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Amandeep Singh Rakkar, Barclays Bank PLC, Research Division - European Banks Analyst [46]

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Yes, it's Aman Rakkar from Barclays. First of call, Andrew, congratulations on your time with Bank of Ireland. I just have 3 quick questions. First of all, regarding your NIM guidance. So it looks like it reflects the movement of longer-term interest rate environment in Europe. I was wondering, does that factor any movement in policy rates? So if we had a cut in the depo rate or any movement in the refi rates, I mean, on the depo rate, it looks like you've quite significantly reduced your balances at the Central Bank, so presumably, not a big impact there? But any kind of color you could give me would be helpful. Secondly, on mortgage pricing. Andrew, I was wondering if I could kind of just invite you to update your comments that you gave at full year regarding mortgage pricing. You suggested that perhaps mortgage pricing could rise in Ireland. Wonder if you still kind of thought that was a relevant comment, particularly, in light of fairly substantial mortgage risk-weight increase to AIB, as they signaled on Friday, it's a bit bigger than perhaps the market is expecting. And then the, I guess, the third one on cost, perhaps for Francesca, is I think you've indicated a few times now, the potential cost levers that you got to pull, I was wondering, kind of what exactly would cause you to kind of reappraise your cost target? Is it a significant deterioration in the operating environment from here? So is that the interest rate environment softening even further than the forward curve implies? Is that bigger moves on policy rates? Is that pricing pressure in Ireland, the U.K.? Or is it actually a matter of timing and it's just -- you kind of really want to fully prepare that cost plan that is, probably, quite inevitably, going to come back to the market.

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Francesca Jane McDonagh, Bank Of Ireland Group plc [47]

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We'll take them in that order.

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Andrew Keating, Bank Of Ireland Group plc - Group CFO & Executive Director [48]

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Okay, great. Well, Aman, thank you very much for your kind comments. In terms of the NIM, I mean, certainly, if I think about the ECB rates, certainly, we factor that into our thinking. Obviously, the ECB are considering what their policy is around the depo rates, et cetera. I think, we're really not expecting a change in our -- in the refi rates from the ECB, and there are reasons that you do not understand where that feels less likely to us. But we have factored in adjustments to the depo rate that the ECB are currently reflecting on.

In terms of pricing, generally, clearly, we -- my comments earlier about maintaining our very commercial approach to risk and to pricing, are the kind of the appropriate comments and that's something that we keep under review at all stages. Francesca?

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Francesca Jane McDonagh, Bank Of Ireland Group plc [49]

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Sure. Yes, on cost, so it reflects the opportunity we see to be more efficient. It's -- I've said this before, it's very easy to take cost out badly. So we, obviously, you don't want to do that and we haven't been doing it. We've been very strategic in what we've done, which is why I'm not giving more guidance or targets today because we want to make sure that any plans, if we were to go beyond the guidance that we set, are well thought through. You may recall, we talked about our cost reduction. There were sort of 5 areas. One was simplifying our organization, and that's where we've seen a lot of cost reduction so far. So in the EUR 60 million gross saves that we achieved in the first 6 months of this year, about EUR 24 million of that would've been from simplifying our organization from some headcount reduction year-on-year, but also the changes we've made in the structures and the spans and layers within the bank.

Another area is sourcing strategically. So this is about how we use externals and suppliers, key strategic contracts. And about EUR 10 million of the EUR 60 million, so far this year, is from strategic sourcing, and we would see an opportunity to do more there.

And a third area is delivering the digital bank, and that isn't an area that, necessarily, some of the costs that we've shared so far reflects, and a big enabler of that will be as we roll out our new mobile banking app and other digital innovation. And that will enable us to be more efficient. So we see potential there and also in terms of enabling brilliant customer journeys. I touched on our sort of end-to-end journeys and some of the opportunities just to be slicker and that doesn't require heavy tech investments. Some of that can be done as a precursor to some of our core banking milestones and it takes out costs that often trips up our customers, in terms of callbacks or some paper based or manual processes. And the last point is actually a really good cost to be taking out, and that is by enabling more agile way of working because in a competitive labor market in Ireland, the demand for more agility is an incredibly high and we've reduced our physical Dublin office space. So it's not just about branches, but our head office space by about 24% over the last 18 months, and that isn't because we've reduced, necessarily, headcount, it's because we've allowed more agility. We have more agile-enabled desks.

So those opportunities tells us that there is scope to be more efficient. But also we need to right size our cost base to revenue, and the interest rate environment is impacting many European banks and it's impacting margin. So it's a natural place to look at but it isn't the only lever or option that is open to us.

We have one more caller on the line with a question. Then we'll finish up in the room.

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Operator [50]

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The last caller the phone at the moment is from the line of Martin Leitgeb from Goldman Sachs.

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Martin Leitgeb, Goldman Sachs Group Inc., Research Division - Analyst [51]

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Just 2 questions from my side. And the first one is a follow-up on earlier comments on mortgages in Ireland. And I just wanted to understand whether you expect to increase your market share in Ireland from here. And this just follows some comments by one of your competitor who decreased pricing, and as a consequence, expects its share to increase from here. So I'm just wondering whether you still expect your share here in a broker channel and so forth, overall to increase in Ireland. And the second question is just broader on ECB monetary policy and the impact. I'm just trying to understand, just looking at where your deposit costs in the Ireland are at the moment, I think around 7 basis points, do you expect to be able to pass on some of the address pressure or headwinds, which are coming from monetary policy, to customers? So would you expect to pass on something to Retail Customer, so that, that's current account pricing interest rates? Or if you're thinking here -- that given the pricing here, there's little you can do on the liability side to offset.

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Francesca Jane McDonagh, Bank Of Ireland Group plc [52]

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Okay, I'll answer the first one on mortgage market share. So at 23%, we've previously talked about a range of 25% to 30%. I feel our proposition and our distribution and our pricing is more competitive as we go into the second half and -- than where we were in the first half, but we don't chase market share. I don't have -- when we look at our internal targets and scorecards, market share isn't top of the list. We will price appropriately. We won't trade shareholder value for pure volumetric achievement. And I think -- I believe we are competitive. I know our pipeline for the second half has some seasonality in there. We're looking forward to a good trading next period.

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Andrew Keating, Bank Of Ireland Group plc - Group CFO & Executive Director [53]

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Great, Martin. Your second question was just in relation to ECB policy, and, I suppose, really I think you are interested here in terms of kind of negative rates. So we already do apply negative interest rates to our institutional large corporates and top-end of SME customers, so with certain various thresholds around volume of deposits and negative rates that are -- that vary between sort of minus 40 basis points and minus 100 basis points, depending on the size and nature of the counter-party. Your particular question was around whether we would start looking to apply negative rates to personal customers. That's not something we've done to-date. And some -- the other feature, I suppose, that's in that space is around Central Bank regulation around fees, et cetera, for personal customers and for small business customers, so that's -- that would be an issue that we'll have to reflect on, as well. So I suppose, in simple terms, I think, currently our position is that we haven't yet or we haven't to-date charged negative rates. That's not something we're planning to do, but I can't give a guarantee that, that won't be something we have to revisit at some moment. But it's not a focus for now, Martin, okay?

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Francesca Jane McDonagh, Bank Of Ireland Group plc [54]

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We finished all calls on the line. Anything else in the room? If not I'd say just a few words just to thank you for your time this morning and for some really good questions, both in the room and on the line.

Just to recap. We've reported a solid performance for the first half. We've reported good progress versus the strategy we set out a year ago. We're cognizant of the evolution and the external environment, particularly around interest rates and Brexit uncertainty, but we've reiterated this morning, our commitment to the 10% RoTE. It's very much our financial North Star, and we have options open to us and within our control to achieve that target.

Thank you very much for your attention. Thank you.