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Edited Transcript of IL0A.I earnings conference call or presentation 25-Jul-19 8:00am GMT

Half Year 2019 Permanent TSB Group Holdings PLC Earnings Call

Dublin 2 Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Permanent TSB Group Holdings PLC earnings conference call or presentation Thursday, July 25, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Eamonn Crowley

Permanent TSB Group Holdings plc - Group CFO & Executive Director

* Jeremy John Masding

Permanent TSB Group Holdings plc - Group CEO & Executive Director

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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

* Andrew Philip Coombs

Citigroup Inc, Research Division - Director

* Diarmaid Sheridan

Davy, Research Division - Financials Analyst

* Owen Callan

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

* Stephen Lyons

Davy, Research Division - Financials Analyst

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Presentation

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Jeremy John Masding, Permanent TSB Group Holdings plc - Group CEO & Executive Director [1]

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Good morning. Welcome to our 2019 half year results presentation. I'm going to give a short presentation on the progress made so far in 2019. After which, our CFO, Eamonn Crowley, will provide a more detailed review of our financial performance. And then I will be happy to take your questions after that.

Perhaps I could now ask you to turn to Slide 4. I'm pleased to say that business performance so far in '19 has been strong, in particular in mortgage lending. We outperformed the market, grew total new lending by over 22% to EUR 730 million, thereby maintaining our market share of circa 15% from the end of '18.

The bank is reporting a profit before tax of EUR 28 million and an underlying profit of EUR 42 million. This represents a better quality of earnings, the ongoing strength of the franchise and our ability to compete. Indeed, with most of the legacy issues behind us, management now has a strong foundation on which to deliver profitable growth for shareholders. We have a clear management agenda, a stretching but realistic financial plan, and the emerging capabilities to compete strongly in the Irish retail and SME market in spite of the significant headwinds, notably low-for-longer interest rates, a P&L capital regime and a lack of balance sheet scale. We are confident that we can deliver sustainable profitable growth and increase the intrinsic value of the franchise materially.

Let's look at some of the numbers. The bank's net interest margin for the first half of '19 is 182 basis points, showing an increase of 5 basis points on half 1, '18. We report a pro forma CET 1 capital ratio of 14.4% on a fully loaded basis, which remains well above both regulatory requirements and the revised management target of circa 13%.

Progress on the sale of properties in possession has been strong with a total of 1,400 properties sold over the last 18 months with 434 sold and/or sale agreed in half 1, '19. NPLs remain at EUR 1.7 billion, equating to an NPL ratio of 10%. We remain committed to and confident in meeting the mid-single-digit target in the medium term.

We are happy to report that Moody's have upgraded the bank's credit rating by 2 notches to investment grade and maintain their outlook as positive. Indeed, the bank has now received upgrades from Moody's, Standard & Poor's and DBRS, following the announcements of both projects Glas and Glenbeigh and the bank's 2018 results.

So turning to Slide 5 on financial performance. We have recorded an underlying profit of EUR 42 million, down EUR 31 million or 42% from Half 1, '18 primarily due to deleveraging of NPLs and the associated loss of income, and the absence of one-off gains from treasury activities reported in '18.

We saw the net interest margin increased by 5 basis points year-on-year from 1.77% to 1.82%, driven by active balance sheet management. Operating expenses, excluding regulatory charges of EUR 145 million remained broadly in line year-on-year. However, this performance masks the underlying reduction in operational costs, which were reinvested in the future of the business, including in areas such as digital transformation and the new and redesigned branches. Self-funding investment is the bank's default philosophy.

A modest impairment charge of EUR 5 million in H1 2019 compared to no charge at June '18. The underlying loan book is performing well, reflecting stability of the portfolio and the current macroeconomic environment.

In terms of the balance sheet, retail deposits, including current accounts, increased by EUR 100 million. Indeed, current account balances are the highest they have been in more than 10 years. The performing loan book, which stood at EUR 15.2 billion, shows a modest decrease from EUR 15.3 billion at 31 December '18, where both heightened activity in the mortgage switcher market and the pace of repayments slightly exceeded the flow of new business in the first half of '19.

We are not making any announcements on mortgage pricing to-date. But as this is an area that we have been looking at, we plan to make an announcement in this regard shortly, which we think our customers will like.

And of course, it would be remiss of me not to reference the tracker mortgage examination or TME. The TME and enforcement process of PTSB has completed. 99% of impacted customers have received redress and compensation. We paid a fine of EUR 21 million and have completed the work. We repeat our apology for what happened.

Turning to Slide 6. We are a really important part of the Irish retail and SME banking landscape and have proven this by continuing to grow new business across all customer lending segments. Total new lending grew by 22% in H1 '19. Mortgage lending, which represented almost 86% of total new lending, increased by 18% compared to H1 '18, while the mortgage market grew only by 11%. This is an impressive performance and shows the strength of the brand, the quality of the bank's propositions, the value of the multichannel approach and the passion and commitment of my colleagues to deliver fair customer outcomes.

Growth has not been achieved at the expense of credit quality. Since 2012, we have focused much more on affordability as the key credit risk test as against asset value. For the vintages written since 2012, we have had de minimis defaults and more than acceptable LTV. We have not changed our underwriting criteria and keep a watchful eye on our performance. Whilst one cannot always legislate for a macroeconomic impact such as Brexit or a global financial crisis, we remain diligent and true to old-fashioned banking principles. The data would suggest we have gained advantage through proposition and service.

Today, our mortgage application levels continue to grow despite a slight plateau in the second half of '18, which is seen across the market. The mortgage market is expected to grow to circa 10% or EUR 10 billion even, which provides a positive backdrop for our business. While the market remains competitive, efficient distribution and disciplined pricing coupled with a strong intermediary proposition position us well for the future.

Personal term lending grew by 16% year-on-year. The majority of our personal loan applications now originate through digital and voice channels. We have fully automated the personal term lending journey since the realtime decisions, document upload and payouts can all be fulfilled digitally, thereby eliminating the need for (inaudible) Intervention. Our objective is to roll all or some of this automated customer journey across the product range.

SME lending was EUR 31 million for the first half of the year. SME lending has now grown by 63% over the last 2 years, albeit from a low base. We're confident we can build a real market presence in the segments we choose to serve: micro, small and (inaudible).

Turning to Slide 7. You can see from this slide that we're seeing positive trends in terms of both customer base and customer activity metrics. Customer satisfaction, measuring the experience customers have for online branch and mobile app transactions, is at #2 in the market. 80% of customers are very satisfied with their experience on the mobile app.

Net Promoter Score, the degree to which our existing customers recommend us to potential customers, consistently remains within the top 2 in the market. Customer commitment, tracking the preferred choice for our customers' main banking relationship, remains within the top 2 in the market. These are all important measures of performance as we work to deliver our vision of being the bank of choice.

In '18 and so far in '19, we continue to invest in all our channels, including the branch network. We want our branches to be economically profitable, attractive, state-of-the-art location for customers to come and discuss the most important banking needs with us. Indeed, we find many customer journeys start and maybe finish online but that the face-to-face element remains an integral part of the banking relationship.

What is changing is the role of the branch, not the need for the branch. In simple terms, we will continue to invest in the branch network as long as the economics of doing so remain vital.

By way of example, in February '19, we opened the first auto cash location in Omni Shopping Centre. This tested the so-called Connect phone with enhanced digital capabilities and an operating model that educates our customers on all channel options.

This format has proven really successful to-date. So for example, 100% of cash transactions have been automated. All service requests have been completed by the most efficient channel.

For example, the processing of swift payments via the Open24 sales and service center or customer updates via the same center or in-app facilitation such as through online end-to-end term loans. And we're open 50 hours versus the standard 35 hours over a 6-day period, Monday through Saturday. The same continuous improvement mindset has been applied to the bank's direct banking offer, where we've improved the efficiency and effectiveness for those who, for example, are required to complete the personal loan process in person.

In this regard, customers can now complete and fulfill their loan requirements by phone. We've continued to improve our digital offer to allow customers who want to do more business with us digitally to do so, and we're making significant progress in that regard. And then finally, we've also improved our offering through intermediaries, which remains a very important part of the market.

In the first half of '19, Phase 1 of our mortgage broker portal was launched, which allows intermediaries to track various mortgage applications to pay-out milestones. This is a differentiating factor, and we're always strengthening further our relationship with intermediaries.

So looking forward, Permanent TSB has a long banking history spanning over 200 years, making us one of Ireland's longest-serving financial services institutions. Throughout this time, the focus has been on delivering exceptional customer experience and connecting with local communities. Vast experience over 2 centuries shapes our culture and influences how we will grow the bank profitably over time.

We have a really clear view of the future. Our governing objective is to maximize sustainable shareholder value. Our vision is to be the Bank of Choice. Indeed, we are crystal clear what that means for each of our key stakeholder groups, namely: capital or shareholders, customers, colleagues, communities, and compliance or regulators. Collectively, we refer to the stakeholder group as the 5 Cs.

Our ambitions are described in a focused and succinct manner: the Bank of Choice for our capital base. We provide sustainable growth and predictable economic profit for our shareholders. The Bank of Choice for our customer base. We deliver personal customer experiences, in fact, customer outcomes that quite simply set us apart. The Bank of Choice for our colleagues. We give everyone the opportunity to be the very best they can be. The Bank of Choice for our compliance obligations with regulators. We embrace, commit to and deliver our regulatory obligations. And the Bank of Choice for our community. We support the community by having a positive and meaningful impact.

We believe that the Bank of Choice vision can be delivered by leveraging the structural advantage, core competencies and strategic assets we hold, namely, we have a focused resale and SME bank in the public environment. We have a straightforward operating model. We have a dedicated and professional management team. We have technology infrastructure that is smaller and less complicated than our peers with renovation and enhancement that can be delivered in a modular fashion rather than through a total rebuild.

But most importantly, we have proven expertise to deliver transformation. For example, restructuring plan commitments, re-IPO, network 2020, projects Glas and Glenbeigh, and digital transformation to name a few.

So we have a clear management model. We undertake an annual rolling full year, fact-based and alternatives driven, strategic and financial planning process. We know that this process delivers the right agenda, the right financial plan and the right performance for us. We'll complete the annual cycle shortly, but it's a reasonable hypothesis to say the priorities will be to drive digital transformation, to grow quality earnings, to focus relentlessly on efficiency and effectiveness as this is the key battleground in the lower-for-longer interest rate environment, to deliver fair customer outcomes, and to input a high-performance culture. As I said, the performance priorities are dynamic and will continue to evolve as the Irish retail and SME banking environment continues to change. But the great news as far as the management team is that we're moving further away from the work of repairing the bank and spending more and more of our time and effort in growing the organization profitably.

As an example of the agenda and the strategic performance priority, if we turn to Slide 10, I'll give you some more detail on progress being made in relation to driving digital transformation. We spent the last 12 months developing the bank's strategy for digital transformation. The work has been led by the Chief Technology Officer with support from both in-house and external subject matter experts. The work has been tested against external benchmarks, and the bank's decision rules. We're now firmly in execution mode, and we'll provide progress updates at future reporting cycles.

The digital transformation program is built around 4 delivery pillars: customer journey and experience, technological infrastructure, ways of working and fintech partnerships. Each delivery pillar has an outcome-focused execution plan that's tracked rigorously for both milestone and financial commitments whilst retaining the right to pivot as new facts or learnings are uncovered.

We seem to be in a really good place. Of course, the corona of the work is to transform the way we serve our customers. We'll do that by delivering a better service at a lower cost, transforming technology platforms to deliver digital-first omnichannel customer experience, understanding customer needs more effectively by having a single view of each customer across all our systems, and by having a safer, more secure infrastructure as the need for cybersecurity continues to increase. Whilst all of this may seem a noble aspiration, we'd like to give you confidence that the work has started and that we are building digital momentum.

So please turn to Slide 11. I think 11 gives a pretty good snapshot of the digital momentum we have built so far this year. 310,000 active customers used our mobile app, up 23% on full year '18 with over 16,000 personal loans being applied for through our app. More than 600,000 customers used the app and/or the desktop in H1 '19 with 27 million successful customer account logins to the app in the first half of the year. 45,000 app travel notes were added to customer accounts, thereby reducing inbound and outbound core volumes in Open24. 100,000 knowledge-based and automated web chat service customer responses were provided. And we will further enhance this in the pipeline this year. For example, we are planning to launch both credit card and overdraft end-to-end application in-app in H2 '19. So to complete. I'd like to summarize the satisfactory progress that we're making against our performance priorities. We are delivering on our promises, recognizing that we must overcome significant headwinds to build a sustainable bank. However, I can say with confidence that the foundations are strong. We've grown our total new lending wave at 22%.

We've maintained mortgage market share at circa 15%. We focused on cost management by delivering cost-saving initiatives required in order to invest in a business. With a capital base that is comfortably above both management and regulatory minimum requirement, we've an organizational culture that is focused on rebuilding trust with customers and delivering profitable growth. We have a digital transformation program that's grounded in fact, clearly governed and ambitious in its delivery aspiration. And we have a clear plan to compete for talent by providing a modern working environment. So all in all, it's been a productive first half to '19. We're in a good place, recognizing the headwinds we have and the challenges that dynamic change will always bring.

As they say, we will overcome. I will now hand you over to Eamonn.

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Eamonn Crowley, Permanent TSB Group Holdings plc - Group CFO & Executive Director [2]

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Thank you, Jeremy, and good morning, everyone. I will discuss the financial performance in detail. But first, we will just turn to Slide 14. The Irish economy is forecast to grow 5% in 2019, and continues to be one of the fastest-growing economies in Europe. The economic fundamentals underpinning the growth are very strong with consumer spending continuing to grow around 3%, which is a key positive. And the labor market is also showing very positive signs with its volume growing by 3%, leading to a reduction or an expected reduction in the unemployment rate to 4.7% in 2019. And this is the lowest level we've seen since 2005.

When you look at the housing market, the picture is also very positive. And at the mortgage market, having grown to EUR 8.7 billion last year, it expects to increase by 13% to over EUR 9.8 billion. And while the housing market has continued to grow, the pace of growth has been somewhat subdued, particularly in housing supply for both new and second-hand properties. It still remains that mortgage drawdowns in Ireland will reach around EUR 10 billion in 2019. While Brexit uncertainty continues to remain, our business is not directly impacted. However, no-deal Brexit would likely have a negative impact on the Irish economy and would in time impact the bank's business.

So let me just turn to the income statement on Slide 15. The key message I want to convey today is that we continue to rebuild the bank's underlying profitability, and this has been outlined in some detail as well by Jeremy. I'd like you to focus on the profit before exceptional items, the tax of EUR 42 million, which has decreased by 42% to EUR 31 million year-on-year. However, any comparison with the first half of 2018 should take into account that we have a smaller balance sheet post NPL deleveraging, and we had the benefit of some material one-off treasury income in the first half of 2018.

Net interest income has reduced by 6%, and this was driven by lower income on NPLs of EUR 26 million, lower income from treasury assets of about EUR 6 billion, and that's reduced the natural maturity of some high-yielding treasury assets off our balance sheet. But this has been offset by significant progress on lowering our funding costs, where we lowered our funding costs by EUR 18 million year-on-year, and we've also increased interest income from our performing loan book by EUR 5 million in the same period.

If we look at net other income, it's EUR 12 million, and this primarily relates to gain from disposal of properties and possessions together with some movement on treasury instruments. The prior year amount, as I mentioned, which was EUR 22 million, was influenced by EUR 25 million of gains related to the sale of treasury assets and the closure of a derivative position in the first half of '18. Operating expenses were broadly flat. I will outline the makeup of operating expenses in a later slide.

There's a modest impairment charge of EUR 5 million. And this reflects the fact that the underlying loan book is performing well, and it is reflecting the stability of both the portfolio and the current macroeconomic environment.

Exceptional items in the first half related to restructuring and other costs of EUR 12 million (sic) [EUR 14 million] and EUR 3 million related to the Tracker Mortgage Examination fine, the bank paid a fine of EUR 21 million during the first half, but we have provided for this in prior years, and this led to a net charge of EUR 3 million in the current period.

If we now turn to Slide 16, we can look at the net interest margin and net interest income in more detail. Net lending income, which is performing loan income less deposit costs, grew by 8% year-on-year. Income from the performing loan book increased by 3%. And as I mentioned, this is placed at EUR 5 million. And while this amount is small, it does show that we continue to grow good quality interest income in our P&L. The net interest margin was 182 basis points (sic) [1.82%], and that's a 5 basis points increase versus the reported number in 2018 and was in line with our expectations.

The asset yield is up 205 basis points. And this is a 7 basis points reduction when compared to last year, but this is primarily as a result of lower yields on legacy treasury assets, i.e., the maturity of high-yielding treasury bonds, and also the provision of reduced fixed rates for mortgage customers as we compete in the market.

We continue to actively manage the cost of funds with the half year costs coming in at 27 basis points, and this is a 10 basis points reduction versus the same period of '18. This was achieved to a range of funding actions, including retail, corporate and institutional deposit rate management, and we should expect to see some further reductions in the second half of the year. So overall, we expect the net interest margin to remain stable through the second half of '19.

Let's now turn to the loan book slide, which is Slide 17. Our performing loan book was EUR 15.2 billion at the end of June. And this is broadly in line with the loan book at the end of '18. The performing loan book is broken into home loans, which represents EUR 11.4 billion, which is 75% of our loan book, buy-to-let loans of EUR 3.3 billion, which is 22%. And other portfolios making up around EUR 0.5 billion, which is 3% of our loan book.

The performing mortgage book totals EUR 14.7 billion, and the average yield on this loan book is 2.33%, which has been relatively stable over the past number of years. You can see from the top right hand side of the slide that in the first half of '19, the average yield in new mortgage lending was over 3% at 3.02%, which is a reduction of 19 basis points versus the first half. This reduction is in line with market trends and continues to be in line with our desire to remain competitive but also maintaining price discipline on this book.

We hit approximately EUR 700 million in the first half, and this represented a 22% increase year-on-year. As mentioned by Jeremy, we have maintained our mortgage market share around 15% with positive trends, and this is a level that we expect to continue throughout the remainder of the year.

If we take a look -- a closer look at the total loan book and that's EUR 16.9 billion and obviously includes NPLs. EUR 9.6 billion of this is Tracker mortgages, and they yield 1.28%. The Tracker book is now 57% of the total loan book, and this has reduced from 62% versus the same at the end of June '18. So you can see that we're starting to change the proportion of Tracker mortgages in our book, and it's on a downward trajectory with EUR 4.2 billion of variable rate loans and a yield of 4.16%. We have EUR 2.7 billion of fixed-rate loans, yielding 3.28%. And then we have around EUR 400 million of other loans, and they yield around 10%. 80% of the mortgage loan book is paying interest -- capital and interest.

Let's now turn to the operating expenses slide in Slide 18. Our operating expenses remained broadly flat year-on-year. And as mentioned by Jeremy, our desire here is that we will invest in the business while keeping our operations costs flat. Total operating expenses -- and this is before regulatory charges, was EUR 145 million, and this increased slightly by EUR 2 million year-on-year, which was in line with expectations. However, for the remainder of the year, we expect operating costs to come in flat versus 2018.

The operating cost increase was due to wage inflation of just over EUR 2 million and the impact of ongoing investment in the business and technology programs. And that equated to over EUR 6 million of an investment in the first half, but we actually funded this by way of payroll and other savings of EUR 6 million to come in relatively flat versus last year.

The impact of the introduction of IFRS 16 reduced other costs by EUR 4 million with an equal and opposite increase in depreciation and amortization. As mentioned, we will continue to focus on cost management, and we expect our operating costs to remain flat as we further invest over the coming years with no periods of reporting, I should say.

On a like-for-like basis, our cost income ratio, when you exclude regulatory costs, was 69%. This is 8% higher than the prior year, but as mentioned earlier, that was -- last year was heavily influenced by one-off income on the top line.

Let's now turn to our nonperforming loan book. As you know, significant progress was made during 2018 as we reduced the nonperforming loan book from EUR 5.3 billion down to its current level of EUR 1.7 billion. That's the lowest among the 5 banks that are looking at NPLs, by a distance actually.

As you know, we've achieved this by -- this promising transformation by executing 2 portfolio sales during the second half of last year. We also ran a voluntary surrender campaign for our buy-to-let customers, and we continue to work with our customers to deliver organic recoveries and cures. Looking forward, and again, as mentioned by Jeremy, we are committed to meeting the mid-single-digit NPL ratio in the medium term, and we estimate that around EUR 300 million of NPLs in the current stack are on a path to cure in the next 18 months.

We will consider all options in connection with reducing the NPL balance, including loan sales, securitizations and social solutions such as (inaudible) rent. And our aim is to reduce our NPL position, while at the same time protecting our capital position.

As you'll see from the table on the bottom left hand side of the slide, our asset quality and level of provision coverage remains at an appropriate level. With an expected credit loss of EUR 1.1 billion and EUR 16.9 billion of assets, we have an overall 6% coverage rates, and we believe that is appropriate.

If we move to Slide 20, we can demonstrate the progress we've made in Properties in Possession. And this is an area where we've been extremely active, and we've made very good progress in the first half of 2019.

At the end of December '18, we had just over 1,000 or nearly 1,200 properties. We -- in the first 6 months, we took possession of 123 properties. We've actually reached -- we've either sold or sale agreed 434, leaving a stock of 882 at the end of June. And alone in July to-date, we've sold 153 of those. And there's another circa 200 of those properties -- 200 properties for sale as well. And we can see in the next 1 to 2, 3 months that those properties will sell as well.

So we plan to exit the majority of -- the majority of these properties over the next 6 to 12 months. And the numbers themselves speak by way of the progress we're making and the impact they're having also on our P&L.

If we move now to Slide 21. Our funding position remains strong. Our strategy, as outlined in previous presentations, continues to ponder about funding our balance sheet for customer deposits while also keeping other funding lines open and accessible, and it's -- that's where we are at this moment.

All funding and liquidity metrics remain strong and are well above regulatory requirements. We are now over 95% funded by customer deposits, which, as mentioned by Jeremy, are hard to compound, so for instance, have increased significantly, and they're at the highest level in 10 years. And that, in turn, highlights the loyalty and connection and activity that we have with our current account base.

Our indicative MREL target has been set at 25.8%. We believe the total issuance will be in the region of EUR 1 billion, which we have to issue before the 1st of January 2021. We will start the process in September and October, and that depends on market conditions. And we intend then to come to the market next year with 2 further issuances. Our regulatory capital ratios remain comfortably above the minimum requirement. Our core equity tier 1 ratio on a fully loaded basis is 14.4%, and it's increased by 40 basis points from the December '18 level.

Our core equity tier 1 ratio on a transitional basis is 16.8%, which represents a slight reduction versus December, but this is based on transitional rules so nothing to do -- the reduction is a normal part of the journey towards the fully loaded ratio.

If you look at our core equity tier 1 minimum regulatory transitional requirement, it is now at 11.45%, and that's increased in 2019 as a result of the introduction of 62.5 basis points for the capital conservation buffer, and the introduction, it also includes the introduction of the countercyclical capital buffer of 1%, which was introduced on the 5th of July, this -- only 3 weeks ago and at this stage. So 11.45% represents the minimum. And you can compare that against 16.8%. So we have plenty of headroom with regard to where our capital position is. The management core equity tier 1 fully loaded target now has moved to 13% given the movement in the requirement by way of having these additional buffers.

Just turn to Slide 22, and this is just to sum up in effect, trying to echo what Jeremy has said, we continue to show both commercial and financial progress in our -- in the bank and in our numbers. We increased the total lending volumes by over 22% or EUR 700 million, leading to a share -- a 15% share of the mortgage market. We've increased our NIM at the same time. We've reduced our funding cost significantly in order to offset the impact of NPL reduction.

We're implementing bank-wide initiatives to reduce complexity and improve efficiency across the bank. And as a result, we're making cost savings to pay for digital transformation, and that is a core platform and a core piece of our strategy by way of how we move forward is our promise to the market around our transformation.

Reducing NPLs remains a key focus of the bank, and we're committed to reducing that NPL rates at the mid-single digit. And as we mentioned, we will do that on the basis of protecting our capital position. And we continue to make progress with our franchise, which is supported by the growing Irish economy. We also have to recognize the challenge of the lower-for-longer interest rate environment and the ongoing resolution of legacy issues that we have in the bank, but we believe, over the next 6 to 12 months, we will make further significant progress in closing those as demonstrated by the closure of the Tracker Mortgage Examination issue in the first half.

So in that regard, I thank you for your attention, and Jeremy and I will now take some questions. And we will take them from the floor first and then move to the telephone. So thank you.

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Questions and Answers

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Unidentified Analyst, [1]

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(inaudible)

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Eamonn Crowley, Permanent TSB Group Holdings plc - Group CFO & Executive Director [2]

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So I'll just pick up on the net interest margin. Jeremy, you may comment on the mortgage market piece. So there is an ECB meeting happening this morning, so we have to wait and see what comes out of that by way of the decisions or further direction from ECB on interest rates. Basic interest rates will stay at they are, and one of the impacts we would have within that issuance, and like all the other banks, we have to re-trend our target by early January 2021.

We had firstly delayed our movement into the market by way of an initial issuance because we have 2 things we wanted to demonstrate, progress by way of NPL reduction, and obviously, it's associated cap -- impact on the capital position; we also wanted to demonstrate, in the first half of this year, that clearly we're making progress on fronts -- on all fronts by way of our banking business. And that's a key measurement for anyone to group by paper. And we also wanted the other banks to set benchmark pricing in the market, the 2 larger banks in that regard.

So as we're coming to the market, we only have about EUR 1 billion to issue. But it will have an impact. If you look today, it will have an impact on our net interest margin, which will move our net interest margin down to around the mid-1.70s level. And we would see that level for probably the next 2 years given the way interest rates are moving -- are not moving because of ECB. And in that regard, we would be looking at some recovery in that number in a couple years' time as we grow our SME -- our larger SME divisions and a larger consumer finance book together with the natural reduction of your Tracker proportion, so reducing low-yielding Tracker mortgages with high-yielding mortgage with new mortgage business.

So there's a couple of moving parts there. But you would probably note that in our presentation we haven't referred to the fact that we are highly geared to interest rate increases because of the interest rate environment, but that is the case. It still remains that we, as a bank, are very highly geared to interest rates, if they were ever to move up again. With regard to mortgage pricing, Jeremy, do you want to...

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Jeremy John Masding, Permanent TSB Group Holdings plc - Group CEO & Executive Director [3]

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The market remains competitive and, I mean, we know that. And we always keep our rates under review. As I said in my remarks, nothing new to announce today. Something I've been looking at, we hope to make an announcement shortly through (inaudible) that I think customers will like. I am excited to say this, but we don't really compete on price, of course. I mean I try not to be the market leader on price. I'd rather be a task fellow because I believe that we have really, really good people and a really, really excellent service proposition. I mean that's what the feedback tells us. And therefore, it's not just about competing on price. We also still believe in a cash-back model. So for me, it's a combination of different factors that make up the offering position to our customers.

In terms of the hardcore mortgage price, let's think about it. This morning on the radio, obviously, as Eamonn said, there's a very important interest rate meeting this morning. But I do think, and indeed, thanks to people in this room, the narrative has changed slightly in terms of understanding that one of the biggest (inaudible) of all this pricing is capital intensity. And I mean that's not getting any -- it's not getting any better. So I would be surprised if the mortgage pricing market hadn't stabilized.

Of course, there will be changes in different cohorts at a marginal level, but I'm just seeing the level of capital intensity and the level of costs that are required to transform digitally. When you put all those into the model, I would imagine that mortgage pricing is relatively stable, he says hoping that's true.

And then thirdly, on Brexit. We believe that we would be in the second wave. Obviously, we have no direct exposure in terms of U.K. business. That is not to say that we are not thinking about it seriously. Our capital and liquidity stress positions appear to me to be satisfactory, that we believe that the bank has sufficiently capitalized and has sufficient liquidity to manage a Brexit scenario. I think the challenge for all of us is what exactly is a Brexit scenario. I'm not sure anyone really, really, really knows. I'm sure my peers have made their best efforts to do that. And we think we're okay.

Operationally, I think we're prepared. Contracts, negotiations are in a good place. So I think we've been professional in the way that we have thought about it. Now we just have to -- we have to just wait and see. I mean as we know, there are some important dates coming up over the next number of days. So -- but I think, we're okay.

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Owen Callan, Investec Bank plc, Research Division - Head of Financials Research & Banking Analyst [4]

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Owen Callan from Investec. Just on the deals. Obviously, there's a huge amount of progress made last year and at very good terms or outcomes from your perspective. But in the first half of the year, relatively static on the NPLs. And notwithstanding the EUR 300 million that you've noted are trending towards organic cure. And what sort of challenges (inaudible) and are left other than simply going by another disposal region, given the political backdrop to that is less helpful again. Over recent months, there have been suggestions of new legislation. Do you see a greater challenge with the next portion of disposal in (inaudible) that is versus previously? Or do you still think that the buyer market, they're still very solid, and ultimately, there is no legislation in place yet, therefore, it should still be something which you can achieve? And then just on costs. I know you've going to do a stable cost outlook -- operating cost outlook. Do you have any cost income ratio targets that you feel achievable that you would disclose or target in the medium term?

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Jeremy John Masding, Permanent TSB Group Holdings plc - Group CEO & Executive Director [5]

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Okay. So with regard to the cost income target, no we don't at this moment. Yes, the -- as we're demonstrating, and by the way that's consistent here, we demonstrated last year. We were able to actually invest in a bank and investor infrastructure (inaudible) invest in what's required. So for instance PSD2, we all know that the market wants to go live on PSD2 on 15th September. We have been investing in PSD2 by way of our capability in those areas, and we're doing it in the face of same cost on move.

So there's a -- last year, we took EUR 20 million of cost saves and invested EUR 20 million in various different things. So we have an ability and size and the flexibility in an approach with regard to cost management. So what we should expect in due course, and the question, obviously, is when as we get through this investment period. But we should see cost reduction in time. But at this moment, we're transferring and forming the bank. And the outline of the branch, that was the new branch, we have an Omni, describes as well how we've been thinking about our distribution channels and where we see them going. And we, given our size and approach, are much more nimble and faster with regard to doing these things, and the other transformation expertise and ability to get things done. So that's just -- so I'm confident on the cost base, but we have to invest as we move around. And I promise that we'll do it in the same cost envelope.

Coming back to NPLs, we've have the lowest number of NPLs versus the other 4 banks to include KBC and Ulster, NIB and Bank of Ireland, and it’s by a distance. And the next one of (inaudible) billion. So I'm not concerned with regard to our ability to reduce our NPLs further. Because we've smaller amounts due, there are already transactions that have been announced also, as you know, announced EUR 900 million transaction. I assume they would not have announced unless the data was with interest. And so on that basis, the environment, I don't believe, has changed to any great extent. And if it has, it has. I mean that's the reality. We should see further progress in our NPL reduction over the next 12 to 18 months. That's kind of the key thing. But as an organization, we've moved from 28%, which was still quite on the outer edges of European NPL percentages down to a level where we are in the middle, and indeed, in an Irish context, we've the lowest nominal amount of NPLs. So I don't see any challenge in that regard.

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Stephen Lyons, Davy, Research Division - Financials Analyst [6]

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Stephen Lyons from Davy. Just firstly, a couple questions. Firstly, just on the CET1 target. Appreciate the upward move to 13% given the phasing, particularly of the countercyclical buffer. Seen a lot recently from the Central Bank of Ireland on systemic risk buffer. I appreciate it's not in yet. I doubt if it poses a greater risk to yourselves keeping with the other 2 banks. There's the debate over whether there might be an interchange with the O-SII buffer that you don't have. So I'm just trying to get a sense from yourselves that, is the 13% sufficiently prudent. But if the systemic risk buffer does come in at a future point at a more modest level, but you think that's still -- there's ample capacity to absorb that within the 13%, for instance, thinking of P2R?

And then secondly, just on costs. I appreciate the investment (inaudible), and you're self-funding it for the moment and your guidance on the costs being pretty flat for this year relative to last year. But it looks like the investment in H1 seems to be maybe the lower end of that EUR 100 million 3-year digital program that you previously articulated, and you seem to be generating underlying efficiencies to the mid-single-digit per annum. But as we look a few years ahead, I appreciate you don't want to get a cost income target given the uncertainty of the top line, but on the cost nominal base itself, would you expect that 3.30 to drop off. And within that, if you could just remind us what is the A&E cost within that as well.

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Eamonn Crowley, Permanent TSB Group Holdings plc - Group CFO & Executive Director [7]

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Okay. So you're right. That's exactly what we're making is a capital investment. We estimate that if you take the EUR 100 million that we have mentioned at the last presentation, about 80% of that is CapEx, and that investment has not come into operation yet. So we are still in investment mode in that regard. But when it does, it'll start getting reflected in the depreciation line.

But we would see savings in other lines of our P&L in order to offset that. And that will be by way of either the normal headcount efficiency or lower operating cost because we have a more streamlined end-to-end process with our customers that requires less paper, less handoff, less involvement for -- across the whole bank.

And -- so if you take EUR 100 million and you put a 5-year depreciation on that or -- and it's been introduced over a period of a number of years, it gives you a feeling for something in the region of EUR 15 million annual increase in our depreciation cost, right?

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Jeremy John Masding, Permanent TSB Group Holdings plc - Group CEO & Executive Director [8]

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That EUR 15 million in that level means you have to make that EUR 15 million saving elsewhere, which we will. So that's the way it works.

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Eamonn Crowley, Permanent TSB Group Holdings plc - Group CFO & Executive Director [9]

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But we're not in the hundreds and hundreds of millions of investment that other payers are in. We're actually in quite a manageable level of investment, and manageable within our envelope. And as that comes into play, you would expect them to be both generating income, because you're able to do business with your customer base in a much more streamlined manner. So we expect to get some headline growth there. And secondly, a more efficient cost piece or cost of operating. And -- so that's that. Does that answer your question in that aspect, yes?

With regard to the target -- in that regard, we own the target because we want to start generating top line growth. In an environment where interest rates are -- we're not sure exactly where interest rates will go, and hopefully, the next couple of months will give us some more clarity in that regard. And we know we have to remove some legacy issues from our top line, such as further NPL reduction. We will end up with a baseline of core income that we will then grow. We know, and you can see from the first 6 months that we're making progress in consumer lending. We're making progress from a low base on SME, but it is progress. And we believe that, based on what we can see, that there's an opportunity for PTSB to play in that market in a much more fulsome way, and it's an area we haven't played before, and before it's higher margin. And it suits our community-based banking approach with regard to being close to our customers. So these are areas where we see upside. But in order to get there, we have to reinvest, transform, and then over the next number of years take a hard look at our cost base, i.e., to drive it on. But there's no -- we don't have a target of cost income ratio at this moment that we can say.

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Stephen Lyons, Davy, Research Division - Financials Analyst [10]

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And on the capital target?

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Eamonn Crowley, Permanent TSB Group Holdings plc - Group CFO & Executive Director [11]

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Certainly, capital target. Okay. So we are not deemed to be a systemic institution. The indication is that buffer was designed in order to be -- possibly attract the larger banks. We -- our 13% represents the buffers that exist today, not buffers that exist possibly in the future, and we would have to consider how we would think about that 13% in line with the registry requirements with regard to an additional buffer. So there is not a built-in expectation that buffers will continue to increase within that 13%. We are just going to wait and see what happens.

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Jeremy John Masding, Permanent TSB Group Holdings plc - Group CEO & Executive Director [12]

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The only thing I would add would be -- sorry, the 2 things I would add. Firstly, obviously, the stock itself reflects an organization that was distressed. The components thereof are predominantly done on a rare team there. I hope that the transformational delivery that we've exhibited and will continue to exhibit, makes it (inaudible) the regulator easier for that in terms of having to see through to the business model and see through to the risk of capital, risk of liquidity, the clarity around the business model. And the better way we're governing the organization. So that I hope within the stock there is some relief for the better quality of earnings and a stronger balance sheet. And then, I mean, also as part of that calculation.

And then secondly -- forgive me, Steve. I really -- you'll never be getting targets up, right? I might give you some guidance, and there will never be targets. Why? Because the world changes, right? Facts change. Competition changes. So where and now as the moment is, we think, I said this would not, but we think that Steve has done a reasonable job bringing that bad bank from the brink and getting it to a better place for Eamonn's leadership. The balance sheet is much stronger and safer. But now we recognize we need to give the market a bit clarity of where we're going. We just need to take a deep breath through the second half and just be really clear what our agenda for growth is, and then find a way to communicate to the market effectively. So we're in a bit of a holding pattern. I recognize that. And I recognize that it is incumbent on us to provide perhaps the next version of the value story. But I just need to be clear on when my story is best.

So we open up questions from the phones now.

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Operator [13]

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Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) The first question comes from the line of Andrew Coombs.

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Andrew Philip Coombs, Citigroup Inc, Research Division - Director [14]

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If I could just come back to the point on interest rate sensitivity. We've obviously got the ECB coming out later today, even if we didn't get it today, it's possible we might get a cut in September. Can you talk us through your sensitivity to ECB rates? And in particular, I'm interested in how the various different loan portfolios are linked. So if you could just remind us the link to MRO versus the deposit rates versus LIBOR across the portfolio?

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Eamonn Crowley, Permanent TSB Group Holdings plc - Group CFO & Executive Director [15]

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Okay. So we have limited, if no link to your arrival at all in our box. With regards to the deposit rates, actually, if we've excess funds with the Central Bank, it attaches to the deposit rates. And there has been a feature in the Irish market that for retail customers there, we don't go below 0. Some of our competitors for corporate deposit business are charging negative rates. We are not doing that at this moment, but our corporate book is not a material part of our funding. And actually, then the area where there would be the most focus would be on the Tracker book, which is exactly linked to the ECB rate and we price this more or less immediately, in fact, it's typically within 1 month with regard to Tracker book link. So that's where the key sensitivity is with regard to our books, both positive and negative. I wouldn't see any further -- sorry, any benefit in rate -- in the rate reduction -- the reference rate reduction with regard to our deposit book. So primarily then you look at the tracker book. Within the presentation, we clearly highlight what are exposures to trackers both performing and including nonperforming loans. So it's the case of then assigning by way of sensitivity the reference rate cost to the tracker book.

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Andrew Philip Coombs, Citigroup Inc, Research Division - Director [16]

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So just to clarify, if you were to see a deposit rate cut, but not a cut on base rate, that would have far less impact on your labeled net interest income, is that correct?

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Eamonn Crowley, Permanent TSB Group Holdings plc - Group CFO & Executive Director [17]

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It would be -- yes, it would -- there would be some impact, but primarily it's with regard to excess cash that we have. And you would see that. Also we have demonstrated, particularly in the last year, our ability to manage excess cash that we got, something in the way of EUR 2 billion of excess cash from the sale of 2 portfolios, which we managed accordingly and still rolled down our cost of funds by 10 basis points on average. So yes, there -- it would be around the edges and would not be material for the purposes of our performance. And so euro comes naturally, but it wouldn't burn a hole in the (inaudible) the impact.

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Operator [18]

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Your next question comes from the line of Alastair Ryan.

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

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Just to follow up on the capital question, really, on 3 fronts. This is one of the -- when things start to work out, what your requirement is going to be, and on the systemic risk, do you have any visibility from the Central Bank as to what they're thinking? Your answer is quite useful that maybe there are other big banks, but systemic risk buffers. Very few people have them so far and it is 15% of the mortgage market. In some ways, you're clearly systemic or [layer] small and absolute terms. So do you have any visibility or that's just a general sense of present? And second thing, your [regulatory] requirement, as you said, it's [3 45], I think it's the highest in year, and it's higher even with multitasking. Given that mechanically the drivers of that gone, do you get any visibility that, that itself can come down in the next stretch? Or the regulator is not transparent enough, and it's going to come down, but it could take ages?

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Eamonn Crowley, Permanent TSB Group Holdings plc - Group CFO & Executive Director [20]

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So to take the second question first now, so we don't have -- we have to still engage with the regulator with regard to the (inaudible) process. It typically happens late summer, very often with future fixing the position for next year. We would concur with your view that it is one of the highest in Europe. But I think across Europe, we haven't seen much reduction in these levels over recent years. However, I would suggest that our performance as an organization by way of derisking the bank has moved significantly on. And typically, the regulators look in the rear view mirror, i.e., they're not projecting forward what the risk position will be. They're looking back 12 months and last year. And into this year, by way of closing out the 2 transactions successfully for the purpose of how we think from a regulator perspective and moved those NPLs off our balance sheet, I think we'll -- we would expect to have some bearing in the discussions we have with the regulator about the rate that you quote is not fair. We can only influence by action. And I think we don't believe we're actually doing that.

With regard to the position with regard to the additional buffer, we have no visibility at this stage. We will understand it with the Department of Finance with regard to their view. And with regard to how they may or may not introduce this by way of legislative change. And then the question would be how we fit within that? But as I mentioned, the 13% that we're quoting now would exclude any future buffers that may or may not come to top. So we just have to wait and see at this moment. And we do have some headroom in our numbers. We are operating at 14.4% fully loaded level at this moment. But naturally, we would like, as a motivation, to demonstrate to shareholders that we, first of all, can remove what's called the different block up from our current interaction with the regulator, and then move into a situation that over a period of time that we would normalize that relationship with shareholders by way of how we think about returning some capital, but that is something that we have to work on over the next number of years.

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Jeremy John Masding, Permanent TSB Group Holdings plc - Group CEO & Executive Director [21]

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Alastair, I would be very disappointed if you didn't have some positive momentum in the future. I would have to say that. I absolutely respect the regulator's position in terms of challenged assets since 2012. But I think that the progress we made last year. And I genuinely hope it is rewarded because I think it should be. Of course, I would say that, wouldn't I. But I do think the facts demonstrate that. And In terms of future buffers, I just confirm what Eamonn says. I have no line of sight to how those will be applied. So therefore, in the round. I've been thinking of that internal target of 13% seems unreasonable to me, perhaps on a net basis. But I don't think it seems that we could -- I'm sorry, I can't get any more specific than that.

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Operator [22]

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There are no further questions at this time. Please continue.

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Jeremy John Masding, Permanent TSB Group Holdings plc - Group CEO & Executive Director [23]

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Okay. Thank you. Are there any further questions from the floor. There's one more then, and then we'll...

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Diarmaid Sheridan, Davy, Research Division - Financials Analyst [24]

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It's Diarmaid Sheridan from Davy. Just one question, if I may. If I look at the impairment line, then obviously, a coverage on your mortgage book is much higher than your peers who have experienced some writebacks over the last few years. Just wondering what you're thinking on that as you know the dropping of the reference in the view of your impairment coverage in the statement this morning. Is that a case that you've seen good collateral uplift over the last few years or you're mindful of maybe further NPL disposals and further the forthcoming introduction of the provision changes from the ECB parts that are making a little bit more of exciting demand on writebacks?

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Eamonn Crowley, Permanent TSB Group Holdings plc - Group CFO & Executive Director [25]

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As you rightly said, our book appears to be higher provisions than our competitors. In that regard, we did probably -- we did start with highly weaker book by way of LTVs and the nature of the book. And there are naturally a couple of moving parts that operate within any book and that's the provision in the collateral. For instance, by way of Glas and Glenbeigh, we clearly could demonstrate the collateral. In a general sense, have the micro view collateral values, if they work out. We're also seeing by way of further work out, by way of, for instance, sale of our Properties in Possession and what prices we're realizing versus where we see our provision values on collateral progression -- possession. And indeed, what I say is that our provisioning -- this is demonstrated by the sales as well, our provisioning is on the conservative side, and in that regard, we believe we're well provisioned.

The -- so there's a number of moving parts here. But we think we will be able to navigate our way in a positive sense. The -- you also mentioned with regard to the ECB requirement for all banks to look at long-term secured NPLs and the provisioning levels on that. And there's a requirement for us by the end of 2020 to have a 40% provision level on our NPL stack. You can clearly see that we're there already. But as we get into the following number of years, usually requirement of provision is currently within our SREP requirement. And as we understand, it applies to all banks across Europe. So that's something in the background that we have to consider. It's not for this results, if we were looking in a year's time, would be something that we would be disclosing in a more fulsome way. So in that regard, all these points by way of Glas, Glenbeigh, Properties in Possession being released values. All these have given us confidence that the level of provision we currently have in the book is at an adequate level. And it's fit-for-purpose in that regard. And probably slightly on the conservative side, but that is order to take account of moving parts and down the moving NPL position. Thank you.

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Jeremy John Masding, Permanent TSB Group Holdings plc - Group CEO & Executive Director [26]

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Okay. Thank you for listening to us both. We'll call that a day. Thank you.

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Operator [27]

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That does conclude our conference for today. Thanks for participating. You may all disconnect.