AIB Group plc (A5G) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to our head office here in Dublin for a business update and the announcement of the conclusion of our strategic review as we approach the end of this extraordinary year in all our lives. My name is Colin Hunt, and I will bring you through our strategic update to 2023. I'm joined by my colleague and our CFO, Donal Galvin, who'll bring you through the financial details. And at the end of the formal presentation, we'll have an opportunity for questions and answers on this morning's announcements. We first met in virtual format on March 6, last. When we outlined the details of our strategic refresh, our commitment to simplify, streamline and strengthen this organization and our new financial targets. These were for a 2022 cost base of less than EUR 1.5 billion. A CET1 ratio in excess of 14%, and a return on tangible equity north of 8%. But one short week later, Ireland first went into lockdown. And over the course of the past 9 months, we all have grappled with an unprecedented and peace time social, health and economic crisis for the world, for our customers, for our colleagues and indeed for this organization. Immediately, when the pandemic hit, we got to work on designing payment breaks collaboratively with our industry, with government and with our regulators. And on getting those vital supports into the hands of our customers at a time of great uncertainty, while at the same time, moving the vast majority of our colleagues within AIB to a working-from-home model. While these were the immediate and primary areas of focus, in terms of transforming our products and our policies and shifting to a remote working model, we began at that point to work on the strategic plan and the change which was made necessary and possible by the pandemic. Today, we are announcing the conclusion of that strategic review, which will see our organization transformed and delivering on a new set of targets to 2023. We are reiterating our commitment to deliver a return on tangible equity, exceeding 8%. We retain our objective of having a CET1 ratio north of 14%, and we are announcing a new cost target 10% below the previous ceiling, delivering a cost base for the group of less than $1.35 billion in 2023. While so much has changed in our world and in the operating environment over the course of the past number of months, our fundamentals, the fundamentals of this business remain robust, solid and strong. We continue to have leading market positions in what is a very attractive banking market. With a modern infrastructure and a resilient and digital -- a resilient and flexible digital offering, which is highlighted by our ongoing position, as having the #1 banking app in Ireland. We have a very resilient balance sheet. We've been focused on ongoing asset quality. And of course, we have very strong funding and a very strong capital position. And we are unquestionably the leader in sustainability and financial services in Ireland. A position we intend to consolidate and build on over the years ahead. Over the course of the past 9 months, we have delivered unprecedented support to our customers, communities and the economy in the form primarily of over 76,000 payment breaks. As of today, 97% of those who were on an addition -- on the initial payment break payment break one have now completed, and over 80% of those on payment break 2 to have completed. And on a blended basis, 88% of those ending payment breaks have returned to full payment of principal and interest. And that's a level substantially higher than we would have expected when those products were being designed in the very uncertain spring. So we we're very pleased with how those products have performed from a credit perspective. At the same times we were delivering those payments that breaks, we fundamentally changed our operating model. And we did without, in any way, impacting on our ability to deliver for our customers. We proved ourselves to be extraordinarily agile and extraordinary resilience at a time of great stress. And I want to take this opportunity today to say a very sincere thank you to everybody on the AIB team for the way they have conducted themselves over the course of the past 9 months. I'm truly grateful. Of course, our macro environment has changed, and we are still dealing with an array of uncertainties as we reach the end of this year. And in fact, I believe that for the first time in economic history, the near-term outlook is more clouded than the medium-term outlook. Clearly, there's been a very negative impact on growth in the leading economies of the world, including here in Ireland for our GDP will decline in 2020. There's also been a significant impact from COVID-19 on asset quality, on the pace of new lending, and it has led to surging deposits. And at the same time, it has extended the period of lower for longer interest rates with a particular change happening in the British marketplace. When we announced our strategy on March 6, we outlined five strategic pillars, and they remain as valid today as they were in the spring. But as we began to think about the strategy for the next 3 years, these 5 pillars had to take into account 3 significant accelerating trends that we've previously identified. And they are towards greater sustainability, a greater digitalization and increasing agility in how we work as an organization. And all those trends have shaped the strategy that we're announcing today. Turning to digitalization. First of all, COVID-19 has fundamentally changed the way that our customers interact with us. We've seen a very significant reduction in the number of customers who are visiting our branches. And even still now today, those numbers are running at about 30% below what we consider the norm in the world pre COVID. We've seen a very significant increase in digital adoption, 9% increase in digital adoption amongst the customers over 40, and a 27% increase in digital daily usage amongst our most mature and experienced customers, the over 65s, delivering an average monthly mobile transaction level of $4.5 million, representing a 32% increase on the numbers pre COVID. More and more of our sales have been delivered digitally. 77% of personal loan drawdowns in the third quarter of this year were completed via digital. The most popular digital channel by some margin is mobile accounting for 82% of that 77%. We've also seen a very significant increase in digital wallet use. And a significant reduction in cash volumes with AGT volumes down by about 40% compared to the pre COVID landscape. So I think that it's very clear that COVID has driven a fundamental change in terms of how our customers interact with us. And in effect, we have seen something of the order of 10 years of change in the space of ten months. This change in terms of how our customers want to engage with us for their everyday transactions, has encouraged us to reconsider the role of the branch in our business offering. We remain very committed to our branch network. We want to be embedded in the communities that we serve. And we think that it is a differentiating and distinguishing factor for this business. So while we will remain committed to our branch network, what happens in the branch will inevitably evolve over the years ahead, reflecting the very significant change in customer behaviors that we've seen as consequence of COVID. And over the course of the next 3 years, the service offering in our branches will move beyond transaction support and increasingly towards sales and advice. So it's an evolution of our brand services coming over the course of the next number of years. And today, we are announcing that we are merging a number of branches in urban locations where there are very, very clear geographic overlaps and we will see 5 branches being merged into adjacent AIB facilities over the course of the next 6 months. We've invested very heavily in our IT infrastructure in recent years, and the return on that investment is very, very clearly highlighted by our ability to deliver products digitally now. Today, this year, we will have something of the order of 77% of our personal loans being originated via digital channels, and we're seeing a significant uptick in digital origination in mortgages as well, of course, a very, very important product in our suite, with 27% originated via digital in the year-to-date. We look forward to an ongoing significant investment in the digitalization of our credit journey. And we expect to see more and more of our products being originated digitally in the years ahead. There clearly is room for significant uplift, particularly in our SME lending space. And this is all about replicating an excellent customer experience for our personal customers to our business customers. And this experience will be characterized by faster response and turnaround times and our ability to safely get financial products into the hands of our customers in a very, very timely way. The reduction in headcount that we're announcing today, a net reduction of some 1,500, an increased agility, increased reliance on working from home is inevitably going to have an impact on our property footprint. At the start of this year, we had 8 buildings in our Dublin head office estate. We've exited Bankcenter earlier this week for the final time. And in the coming weeks, we will leave a Humm house in Ballsbridge. So at the end of this year, we would have 6 head office buildings here in Dublin. Over the course of the next 3 years, as leases move towards maturity, we expect to leave 3 more buildings thus reducing our total property capacity in Dublin by some 40%, generating a cost saving for the group in 2023 of EUR 15 million. And of course, having a very, very positive impact on our carbon footprint. Today, we are recognizing the change is a permanent feature of the landscape of our industry. And in accepting that reality, we are announcing the creation of 400 roles in change and digital disciplines, which will allow us to significantly reduce our third-party dependency and also will have the benefit of reducing costs here by EUR 15 million in 2023. Not only is this positive from a cost perspective, but we think it's also a significant positive from the point of view of the resilience and the skills base within our organization. We have as elsewhere completed a fundamental review of our businesses in Northern Ireland and in Britain. Today, we are recommitting to our franchise in Northern Ireland, and as in the South, there will be a focus on increasing efficiency and maintaining business growth in that marketplace. We've identified a number of opportunities for business growth in our corporate banking business in Britain. With a particular focus on areas of interest to us, in renewables, infrastructure, health care, manufacturing and warehousing. We have conducted a fundamental review of our SME lending business in Britain. And we have reached a conclusion that this business is subscale, it has a high cost to serve, and the returns that are available to us in that business segment do not justify the amount of capital required to run it. And accordingly, we have decided to exit SME lending in the British marketplace up to levels of 5 million borrowing. And that exit will occur over the course of the next number of years, generating a cost saving to the group of EUR 35 million in 2023. While the -- inevitably the primary focus of today's update is on the cost challenge we face as an organization. Any successful transformation program must have a second chapter, and that has to be about growth opportunities. As an organization, we recognize that we are heavily reliant on net interest income. We also recognize that we have a number of gaps in life, savings, investment and wealth products. And those gaps impinge on our ability to deliver on our stated ambition. To be at this very center of our customers' financial lives. Today, I can confirm that we are in active discussions with a number of parties with a view that to plug these gaps in the interests of our customers. And further announcements we made in 2021, as we conclude these discussions and I look forward to updating the market further at an appropriate juncture. And while we are excited by the potential offered by these discussions, we've prudently excluded any projected income uplift in the plan we are presenting this morning. Sustainability has being at the very heart of our agenda. Sustainability rating agencies and also by industry bodies, but we will do more. In November, we made a commitment to be net 0 in our own operations by 2030, while deploying an ever-greater amount of capital to support our customers on their own transition programs. We've long maintained it is possible to do well while doing good. And the fastest part -- growing part of our lending book is in our energy and climate action sector. And while enjoying very strong growth, growth that has continued right the way through 2020. This part of our book has proven to be remarkably resilient during the pandemic with the loan book requiring no COVID-19 modifications. Once again, today, I'm very pleased to be reaffirming the commitments we have made to be net 0 in our own operations and ultimately, in our lending book. So in conclusion, the plan update we are presenting this morning will see us reshaping our business to deliver sustainable returns, an excellent, efficient customer experience. An agile business, capable of dealing with evolving market dynamics, diversified income streams and improved service offerings, a network which is truly embedded in our communities. And an ever-greater contribution to resolving the terrifying challenge of climate change. In essence, the execution of this plan will make AIB stronger, more robust and better equipped to deal with the challenges and the opportunities that lie ahead in the interests of all our stakeholders. I'll now pass you over to Donald, who'll bring you through the financial details.

Thank you very much, Colin, and good morning, everyone. Obviously, 2020 has been an amazingly difficult year for individuals, for businesses and obviously for banks as well. And whilst significant uncertainty remains, I think it's fair to say that the Irish economy has performed slightly better than how we would have seen things at the half year. As represented by GDP growth, you can see that Irish GDP will be lower in 2020, but this drop was not as deep as we had imagined at the half year. The reason for this is obviously the nature of the Irish economy, very strong foreign direct investment, significant pharma, technology, export space. Which does mask some of the on -- the impact on the domestic economy, where I would say domestic demand is more -- is down more in line with European countries of 8% or 9%. Brexit is obviously a hot topic at the moment. And whilst we have based our projections and our thinking around a negotiated Brexit conclusion, we do recognize that there's a range of possible outcomes there. Colin has alluded to the interest rate environment. Obviously, within the Eurozone, we've been living with negative rates for a number of years. I think throughout 2020, what's different is that yield curves remain very flat for very long periods of time with no increases incorporated in outer years. Accordingly, in our thinking over this planning cycle, we haven't incorporated any interest rate inflation over the life of the plan in any of the core currencies, particularly the euro. In terms of the COVID-19 impact, the experience in Ireland, I think most commentators would say Ireland has screened very well. The government was very quick to implement measures to protect citizens health. And at the meantime, protect workers' wages through various support schemes. We had a strong Q1, we had a low Q2, we were recovering in Q3 and then we locked down again from a second wave in Q4. The reason I point this out, though, is to make an important difference between the financial or the economic impact of lock down 1 versus lock down 2. Looking at our own statistics on consumption, even on loan demand, it was far less impactful in locked down 2 than it was in locked in 1. Indeed, if you look at services PMIs in April, it would have fallen to around 12%, whereas in October and November, it fell to only 40%. So that is an important difference. And we think the reason for this is twofold: The government would have outlined very clear road maps of living with COVID, should we say. But individuals and businesses have also adopted how they operate for the environment that we are facing. The sectors, which we called out in Q1 has been likely to be most impacted, still remain the most impacted sectors, not just in Ireland, but I would say across Europe. These are accommodations, these are bars, these are restaurants, hospitality, et cetera. But in October, an addition to the support schemes that the government had put in place, they added and included additional measures for businesses whose turnover was impacted by COVID due to lock down. So these measures have had a very material impact on business cash flows. So up to EUR 5,000 per week is paid to businesses that have to remain closed due to lockdowns. And that's an important factor, okay? Because if wages are already being subsidized, businesses can get commercial rate holidays and VAT holidays, their debt and interest is probably on a payment break from a bank. This additional funding effectively allows the effective circulation within the supply chain in the domestic economy, which is very important for the ongoing health of the economy. And that leaves me then into nonperforming exposures. I think we all know the sectors that are going to be impacted. For 2020, it's fair to say that we have not seen a huge flow of businesses moving into default difficulties and solvencies. This is on the back of the government supports that have been put in place. They will remain in place until March 31. It probably is not until the second half of the year that we're really able to ascertain and see what the impact of COVID is going to be. But certainly, the support that the government has given to businesses has provided a lot of cash flows and Colin alluded to the payment break statistics, which are very strong, again, those are helped by those government support measures. So we believe that NPEs will peak between '20 and '21, and and over the life of this plan to 2023. We want to get our NPE ratio back to our pre-COVID target of circa 3%. In terms of credit demand. With the stop start nature of lockdowns and the economy, I think there's been some variability throughout the year. At the half year, I would have talked about a potential mortgage market housing to maybe EUR 6 billion. October, November, despite the fact that the country was in a second lockdown, saw some of the largest months for mortgage applications in the last number of years. So we think that mortgage market is going to outperform. On the guarantee schemes, which I would have talked about at the half year, the government would have implemented these in Q3, all of the banks would have mobilized to ensure that they can get credit into the hands of businesses on a very timely basis. The take-up here has been quite muted overall. I don't necessarily see that as a bad thing. We believe that these businesses are getting other government support measures. I think that they're waiting for clarity on what's going to happen with Brexit? What's going to happen with lockdowns? Will there be a vaccine? When will it be rolled out? Effectively, they're waiting for a point in time that they can build a new business plan with certainty for the future. And we do believe at that stage, that's the more appropriate time where we will see more demand in these types of products and indeed the government has pushed out the ability for these schemes to remain open through the first part of 2021. In terms of deposits. I think within Ireland and also in the Eurozone, it's been an incredible year for the group growth of liabilities. Our loan-to-deposit ratio was approximately 85% at the end of 2019, and we believe that it will be around 70% at the end of 2020. And in many other years, our growth of liabilities like this would be a welcome addition to the balance sheet. But obviously, given negative interest rates, this is proving a drag. This is proving a challenge. Against this, we do have a negative rate strategy in place, and we do have an additional collateral management projects that we can reduce this cost from. So all in all, from the half year, I think it's fair to say that the economy is slightly better than where we thought, but uncertainty remains. For 2020, on income, I'm very happy to reiterate the guidance that I gave at the half year. But the focus for today is going to be on costs and RoTE targets, and I won't be guiding income beyond 2020. So if we believe the items or except the items I talked about in the low rate environment, it means that income is going to be challenged in the coming years due to that rate environment. So it does mean that a lot of the focus of bank's targeted returns is going to be focused on the cost side. So today, we are adjusting our medium-term target for costs to less than EUR 1.35 billion by 2023. And that's greater than 10% cost takeout, which will deliver a leaner and more efficient organization. For 2019, our costs were EUR 1.5 billion, I've guided that cost for 2020 will be around 2% higher. So over the life of this plan, we'll take out EUR 180 million from 2020 to 2023, to reach a cost number of EUR 1.35 billion. So there's a number of moving parts here. EUR 230 million of the cost takeout will be in the staff and G&A line. The digitalization initiatives, which Colin would have referred to, being looking at the branch network, branch activity and also end-to-end credit, we will save EUR 100 million. Our ways of working, which incorporate our property strategy and our in-sourcing strategy will save EUR 30 million. The refocusing of our U.K. business on corporate and exiting the SME business will give us cost savings of EUR 35 million. And that will be achieved through a reduction of people, processes and property. Finally, for legacy items and simplification of support infrastructures, we'll take another EUR 65 million out of the business by 2023. Of the items I've just talked to, I would say the legacy simplification quantum of EUR 65 million would have been part of a discussion that we had in March 6 to achieve our old cost target of EUR 1.5 billion. That's really around the normalization of our nonperforming exposure workout unit, which will normalize over time to 2023, as I would have outlined. We paused any changes to this area earlier in 2020, recognizing that there would be a significant amount of support required for businesses and individuals through payment breaks. Not just granting of them, I would say, more importantly, successfully rolling businesses and customers of these. But at the end of the day, going to impact on NPEs and ECLs. However, we do remain focused on reducing those NPEs to that circa 3% level. Depreciation will increase by EUR 50 million between 2020 and 2023, and that's just the inevitable payment of prior year investments in all of our technology estate. To give a little bit more detail on the FTEs, we will take out 1,500 full-time employees from the end of 2020 to the end of 2023. Which is a 15% reduction on a net basis. The digitalization initiatives will take out 900 FTE, ways of working is obviously an increase in employees of 400 FTE. And then our business model changes, which will be based around the U.K. restructuring, the normalization of our legacy and NPE workout unit and the simplification of our support structures will take out another 1,000 FTE by 2023. So this cost takeout will require investments so, we believe that we will need a EUR 400 million effective restructuring charge which is primarily made up of people and property over 2021 and 2022. So that will be the cost to deliver these significant cost savings. We believe that this cost target is both ambitious and achievable. In terms of our investment plan, I've just tried to outline here '19 to '23. I think you should be familiar with how we bucket all of our different investment spends. You can see, again, over the life of the plan that there will be a reduction in investment spend. This would reflect the fact that a lot of the heavy IT architecture work is done in place and working very successfully. But as we move forward, the amount that we feel we need to invest in the business, particularly strategic, but also regulatory and sustainment is higher than where we would have imagined it, another -- a number of years ago. And this is just an inevitability of banking in a digital age. Just to talk you through some of the key investment themes in our buckets. In strategic, obviously, digital transformation, including credit processes, as Colin would have outlined, which enable our customers to digitally self-serve. And we need to expand the technology available to our frontline staff to implement our negative interest rate response. In resilience, we will look to replace our existing accounting platforms for business type of activity. We currently have 3 platforms. We want to move it to 1 for simplification reasons. And we'll also change and upgrade the accounting platform within our EBS mortgage business. In sustainment, we recognize in an age where there's increased e-commerce type activity. We need continuous investments in cyber resilience. We need increased investment in digital workplace investments. Which will allow our staff to work anytime, anyplace, anywhere, in line with our overall property footprint and also just for the ongoing upgrade of our IT systems requires investments. On the regulatory side, we think that the investment in open banking PS2 -- PSD2 is effectively coming to an end, and that will be fully completed by the end of 2021. But there are always ongoing regulatory asks, and we will expect that to continue into the future. The most significant ones, we believe, for 2021 will be addressing sustainability type reporting and also the EBA loan origination regulations. IRB models are an ongoing cost for us. We are always looking to improve our modeling capability. Not just for IRB modeling, but it does allow us to digitalize more and to do more auto decisioning, et cetera. And in terms of property, we need to -- the cost for property will be far less than prior years. And obviously, going forward with a lower footprint, we think that, that will be a lower number in total. Our second medium-term target is on capital, which is a CET1 target greater than 14%, which is no change from our prior targets. We feel we have a very strong and robust capital position, which gives us optionality. So our CET1 capital requirements fully loaded by 2021 with 10.19%, which is a significant buffer to SREP/MDA. We have indeed received our SREP communications, and I can confirm that there is no change to P2R, and there is no significant change to any buffers. Our medium-term CET1 target of greater than 14% needs to be looked at versus our Q3 CET1 outturn of 16.1%. And I would have talked at the half year about regulatory headwinds and tailwinds, which would broadly offset between 2020 and 2021, headwinds, slightly greater in 2020. The -- a lot of those headwinds and tailwinds remain. There's a number of moving parts in there. I think on the plus side, software intangibles will be slightly better than where I would have expected it. And on the counter side within our corporate trim, our syndicated and international finance business have -- will have a increased RWA, which will have a broadly offsetting RWA impact, which will comfortably allow us to land at the end of the year at 15% CET1. So we do recognize looking at peers across Europe that they have adjusted their CET1 target on the back of issuing hybrid securities and availing of the Article 104a allowances. This is something that we have considered, given that we have issued and filled our buckets. But we just felt, given the uncertainties in the environment just now, not at least Brexit that it was not the right time to make any adjustments. And indeed, we didn't feel that, that was necessary to reach or exceed our 8% RoTE target. On distribution policy. I -- this is clearly becoming quite thematic at the moment because there's an expectation that there will be an update from the regulator before the end of the year. I think from our perspective, it's very important to simply wait and see what these regulatory developments are. We've delivered a plan, and we've delivered a cost base that does give a clear road map to an 8% RoTE. It is certainly not this management team's or this executive team's expectation that we would quote or need any capital amount above these buffers, but we do need to wait to see what the regulatory developments are. We do have an existing capital policy in place, which is 40% to 60% ordinary payout dividend. I think post the updates from the regulator, it's fair to say say that we will look at what the environment is, look at the way in which banks and regulators are approaching capital return. Ordinary dividends were historically the natural way that banks and indeed, AIB returned capital to shareholders. But at current valuation levels, we can obviously see the merits of buybacks. As a potential alternative or addition to these form of payouts. But I think it is premature to get into detailed discussion around this until we get the updates from the regulator on capital. Third target, probably the most important one is our RoTE target of greater than 8%. I think it's fair to say early April looking at the rate environment, looking at the potential range of outcomes, we would have accepted a known from an early stage that if we didn't begin working on significant plans to look at our cost base, achieving this target was going to be very, very challenging. If we look at the slide below, I think it's probably fair to say consensus market estimates for our 2023 RoTE was around 6%, creating a gap of around 2%. And really, what we've tried to do today is break out a number of new initiatives that can ultimately bridge the gap between the 6% and the 8%. And we feel the way in which we have presented the cost items between digitalization, ways of working and business model changes. That is a clear articulation of how we will exceed the 8% RoTE target. Again, I would reiterate that we have no changes in interest rates assumed and it would be wonderful if interest rates moved up 100%. I just don't see it in the next 3 years. We see modest loan growth over the life of the plan, and alongside that modest growth in RWAs. And as Colin said, we've excluded the impact of any inorganic opportunities here on income and indeed on capital. So all in all, what we've tried to do is bridge the gap between 6% with a set of very clear cost-cutting measures to land on a target of greater than 8% by 2023. So just to wrap it up, we believe that we'll have a reshaped business, delivering sustainable returns with a cost base less than EUR 1.35 billion, a CET1 greater than 14% and a RoTE greater than 8% by 2023. Thank you very much.

Thank you, Donald. Okay. So I believe we have a number of phone lines open. So if anybody wants to ask with some questions, we're happy to do our best to answer them.

[Operator Instructions] And you first question comes from the line of Diarmaid Sheridan from Davy.

I have two questions, if I may. Firstly, just around capital, and your prepared comments, Donald around that. I just wonder at what timing might you think that looking at we businessing your marginal targets? I mean, are we looking for for further clarity around the pandemic, around Brexit as well as the distribution clarity from the regulator. Is that what we should be thinking of about. And in terms of a medium-term buffer that we would like to run out. So if you have any thoughts on that, that would be great. And then basically, just on the U.K., I appreciate your problem and this morning not being necessarily about revenue. I was just wondering if you could comment around the revenue impact that you would envisage from the runoff of the SME portfolio. Do you think that this is something where you can offset with increased corporate lending? Is that how we should think about go forward?

Okay. Thanks very much. Look, on the targets, we are -- I mean, the timing today and Brexit discussions are unfortunate. The Irish economy is performing better than expected. Whilst these uncertainties exist, we just don't feel that it is necessary or prudent to reduce that CET1 target, okay? It's clearly a statement of fact that we could look to reduce it because we have issued more hybrid securities. But I just don't think now is the time to look at that. I think that the uncertainties remain, and it is something that we will simply look to review at a point in time in the future. But there is no reason other than management's view of the environment and the Board's view of the environment, which is a contributory factor to this. On the U.K., very good question. I would say that you should and this is the only income guidance for '21, I'm going to give, by the way. So well done for asking and that's a second question. I think we -- to exit that business, it will mean that we will exit GBP 1 billion worth of assets. And if you assume that, that's business that's on the balance sheet at 3%. I would say for '21, I would reduce your interest income by around GBP 30 million for '21 and on a go-forward basis.

Does that [indiscernible] early offset our it's just that incremental won't [indiscernible].

I don't -- that offset is not going to come in the near term. It's going to take a while to grow, et cetera, et cetera. So I mean, given I'm not really getting into income guidance beyond 2020, I think it'll be premature to go into that space just now.

Our next question is from Eamonn Hughes. Good morning, Eamonn.

[indiscernible] Should kind of think about in FY, I think, '21 and '22. So can we take that 23% is kind of a clean number underlying or NASH are underlying is kind of the same? So that's the first question. Secondly, just in relation to -- and I know you're not kind of giving any revenue guidance, but would your hope be that -- and you kind of talked about kind of modest loan growth, would your hope be that by the time you get to 2023, that the loan book could be back at sort of FY '19 and FY '19 levels. Should that be kind of broadly how we think about it? Or kind of are there issues in relation to if you're kind of trying to get the NPE ratio back down again. You're going to see disposals and a few headwinds in relation to how the longer progresses. So maybe just leave you at those 2?

Sure. Yes. I mean, the restructuring charge between '21 and '22, I am -- yes -- take that as evenly split 200-200. And we certainly see a clean exceptional line there -- exceptional line by 2023. Obviously throughout 2021, we will look to be concluding some of our legacy enforcement items. So that's it on exceptions. Then on the RoTE target, why -- I mean, really, what I was trying to show you there is that we see modest loan growth, and we see modest RWA inflation between '20 and '23 overall. So you're -- I think as you described, this is then probably accurate.

Okay. And just maybe just one final question, if I'm allowed. Just in relation to distributions, just again, conscious of the exceptions can you kind of chat about down sort of 2020 and 2021, does that impact in terms of distribution capacity? Or is it done on an underlying basis or a net basis? Or how should we think about that?

Yes. I mean, okay. So I think I've given you a fairly clear cost guidance. What I would say on the cost line or the trajectory of that cost takeout, okay? From 2020 to 2023. We think that there will be a reduction in cost, 2021 of minus 2% and then linear thereafter, okay? So I think you've got a clear picture of how we're seeing costs. On ECLs, it's -- I may as well answer the question here because it's -- it will inevitably come up later. I would reiterate our position and our guidance on ECLs. Obviously, there's a number of items that can change between now and the end of the year, et cetera. But if you remember, our strategy was always to take out as much of an ECL charge in 2020 as we can, i.e., where we see weakness in portfolios, et cetera. And that remains to be the case. And our rationale for doing that, was to ensure or to allow for a normalized cost of risk environment for 2021, 2022. And we do believe that, that is -- that still is my strategy, and that still is what we believe to be the base case outcome. And when I say normalized cost of risk, I mean 30 to 40 basis points or a 40 to 30 basis points, '21, '22, '23. So that gives you the ECL trajectory there as well. So I think if you have the cost, the ECLs, et cetera, I mean, you will get to a position whereby we will, we should be and aim to be in a net profit position in 2021.

Next question is from Raul Sinha at JPMorgan.

Maybe just to start off on the strategic bolt-on potential that you are plugging very clearly over here moving into 2021. And I was just trying to understand a couple of areas related to that. Firstly, what are the sort of key priority areas you think within the sort of fee income bucket that you've outlined that are really key for AIB to offer a sort of full-service to its customers. So what is -- if you could rank for us the sort of order of priority of the areas you need to fit in or the areas that you think currently lack in terms of your product proposition? That would be helpful. And then the second question, I guess, related to that is, obviously, Ulster Bank, is thinking strategically in terms of its future in Ireland, depending upon what happens around that, there may or may not be opportunities for you to add on to your net interest income positioning in the market. So could you talk to whether or not you would be open to any opportunities that might present themselves on the net interest income side as well through acquisitions of loan book? Or is it just a pure fee income-related area. And sorry, if I can just squeeze in the third one, what flexibility do you anticipate around the cost base if the environment was, let's say, slightly more difficult than here. Is this plan, you said it's an ambitious but achievable plan. Is this plan sort of a step way to a more efficient organization further down the line? Or do you think that this is as far as you can stretch in terms of the current sort of environment?

Thank you, Raul. Just in relation to the inorganic opportunities. I've obviously been very, very conscious of the power words today, and I very, very carefully consider each and every word that I used to describe these earlier. But I think that what's really important here is to reflect just briefly for a moment on what is the true underlying strength of this business, which is the fact that some 40% of Irish personal customers and some 40% of Irish business customers choose to have their primary bank held with us. So it is incumbent on us, given the strength of that underlying franchise. It is incumbent on us in meeting our stated financial ambition to present to them a full and complete product set. We've been working on this for a very considerable period of time. This is not something new. But what is new is that we are now in a position where the discussions with a number of parties have progressed to the point where we do expect to those discussions to conclude in the coming months. Once they do conclude, we will be communicating immediately with the market. But the product gaps that we've identified, just to reiterate, are in life, are in investment and are in wealth. They're the primary product gaps that we've identified, and they are our primary areas of focus. You asked in relation to Natwest groups, a strategic review of its business here in the Republic of Ireland. And what I would say in response to that is that I'm not in the business of speculation, on the strategic reviews that other financial organizations are conducting themselves. And that the primary focus of myself and Donal and our colleagues right away across the group is on managing this business. And doing it in the best interests of all our stakeholders and not the least, our customers. Of course, we are alert to potential changes in the market dynamic that's out there. We are very, very conscious of them. And we will continue to be alert to them, but our primary focus is on running this business. And in relation to the cost base, it is worth reminding people here today. This is the announcement of the end of the strategic review. We've spent the best part of 9 months getting ready for today and examining every single part of this organization and every single part of AIB's operations. I would have regarded an ambition to cap our cost line at EUR 1.5 billion, the ambition that we outlined in March, has been a significant one. Particularly when you bear in mind the fact that we have the ongoing challenge of an increase in depreciation arising on the back of investment decisions. Much needed investment decisions in the past. So having -- had that existing ambition out there, about EUR 1.5 billion. And having today delivered a very clear and transparent and achievable plan to get that 10% lower. I think we've -- I think we're demonstrating an extraordinary degree of cost consciousness and how we run the business. And at a personal level, given the amount of work that I know has gone in across the business. And given the amount of work that I know that so many people have been involved in, I find it difficult, given the ongoing increase in depreciation, I find it difficult to envisage a situation where we will get the cost base very significantly below EUR 1.35 billion by the end of 2023. It's been a big lift to plan for this, and it will be a big lift to execute on it.

Our next question is from Chris Canton Autonomous.

I just wanted to come back actually on that point you just raised on the EUR 1.35 billion. So I suppose one of the things that it doesn't look like you've done with this update is look at that depreciation, amortization piece, which is presenting you with a cost headwind. And if I look at Slide 20, I think you're complying there an annual CapEx rate of about EUR 240 million but dropping to about EUR 200 million by 2023. And Slide 19 implies that the P&L amortization depreciation charge will be EUR 340 million by the time we get out to 2023. So obviously, there's quite a big gap there. At what point do you expect those things to align? Because obviously, ultimately, your P&L charge should, over time, align with your CapEx rate, and you've got EUR 140 million delta by the time we get out to 2023. So that would be point one. Do you see that depreciation, amortization line dropping from 2023 onwards on your current expectations? And then related to that, if I look at your IT estate, you do have a very high balance in terms of intangibles given the size of the bank. It's about 1.6% of your 1H '20 loans, your nearest domestic peer Bank of Ireland, it's about 90 bps. So you've got a lot of capitalized intangibles on the balance sheet, which is obviously creating this accounting headwind. Have you looked at that IT estate for signs of possible impairment given the softer revenue environment, you now find yourself in? Is that something you've done as part of this review? Is it something you would only be doing as part of your year-end process? Because obviously, any reappraisal of the value could temper some of that depreciation growth and may actually change the cost number just from an accounting perspective?

Thank you very much, Chris. I would say, on the depreciation, I mean we obviously are aware of the history. I mean, AIB didn't invest anything in infrastructure for a period of 4 or 5 years when it was in -- going through very, very heavy restructuring. And then embarked on a fairly significant modernization program in in very short succession in a short number of steps, which did allow -- and allowed the bank to take a huge number of steps forward. So I think what's different between us and others is that our depreciation is continuing to rise aggressively because of the fact that we started from 0, okay? That's not really the question. I think the -- from 2023, '24 flat line, and it will only begin to reduce from 2025. But it's certainly not upward sloping in perpetuity, which is really why I tried to show the investment slide for '23 to show that ongoing investment is going to be less. In terms of the intangibles, again, peer analysis around our IT architecture can be looked at, I suppose, from an accounting perspective or from a functionality perspective, I think we certainly feel like we've got good value for money in that space. But I mean if we -- you follow through the themes of everything that Colin was talking about, COVID has changed the ways of working for everyone, not just people and banks. So there may be an impact or some read across to intangibles for the year-end. But today wouldn't be the day to look at that. That would be something potentially that we will review anyway. We do impairment tests every single year, and we'll just have to look at all of our assets through a COVID lens as well and to see if there is any impact. But that would really be something that would not become clear until the year-end results are concluded.

Just to round that up. That's a very clear answer. And to come back to the answer to the previous question, I guess you've got 2 components within your cost base. You have the sort of accounting component, which is currently running against you and the sort of operational cost piece, which is where you're actually looking to do this big lift, as you said, Collin. So when you say you wouldn't see room to go further than the EUR 1.35 billion, I get the sense you're talking more about that operational cost piece that the cost of running the business day today rather than the accounting, which is -- it will be what it would be, I guess.

Yes. Look, you're exactly right. That -- it is -- the focus on the takeout. We've taken a 20% effectively of staff and G&A, which is a very significant chunk but obviously, the net is 10%. So obviously, we -- it's pretty clear with a really strong capital position and an increasing depreciation line, one could look at accounting capital and output. But there are a number of considerations to that when doing -- when looking at intangibles. And like I said, and we look at -- we do impairment tests every single year, and we will at this year-end, and there is a new lens, which is COVID-19 and future ways of working. So let's wait for the conclusion of that.

Thank you, Chris. And next question is from Amandeep of Barclays.

Can I just come back to capital, Don? I'm sorry, I'm probably rehearsing a question and a set of answers that you may have already given us before. But just around the point about tailwinds and headwinds to capital broadly offsetting each other. Can I just drill into that a bit more then? Because I guess you you've got a combination of calendar provisioning and the SME Trim coming in, which should probably take the best part of about 100 basis points out of your CET1 ratio, that seems to be confirmed by your expectations that it would be around circa 15%. That then presumably marrying up your comments about tailwinds offsetting headwinds. Presumably, we're going to claw that back next year. But could you just help me understand exactly what you expect to benefit from next year, please?

The main areas for 2021 that I believe we will look to claw back will be twofold. Number one, it will be a further deeper implementation of financial data capture tool, which reads across into our SME 501 benefits. So that will be an area of outright benefits, no cost associated in '20. The question on calendar provisioning and the guidance that I would have gave around calendar provisioning, you need to look at that versus the NPE end state that I would have talked about, and that will give you an indication for where and how and why we would see improvements on that in 2021.

Perfect. Is there any way to quantify any of those 2 benefits?

Well, I could quantify those, but then I'm leaving at 15 other moving parts, okay? And it's all moving fairly fluidly at the moment as we come into year-end with ECLs. So I've -- for now, without wanting to get into a detailed capital discussion, I did reaffirm what I said at the half year for CET1 with respect to the headwinds and tailwinds. And I just thought it was relevant to outline those 2 items. Where we have done a bit better, which is on software and on syndicated and international finance TRIM, where we have done slightly less. Overall, netting off and will end the year where I would have said and guided at the half year.

Okay. Thank you, Aman. And next question is from Andrew Coombs at City.

Just a follow-up on Q4 capital and then one on costs. On the capital, forgive me if I'm mistaken, but I thought the Q3 number at 16.1% was already pro forma for the 80 basis points on TRIM. So can you just talk us through what the step change is from 16.1% to the 15% you expect in Q4? I'm sorry, if you think you've already answered this, but I just appreciate a bit more clarity. And then the second question on costs. Previously, you've always guided cost inflation, wage inflation of around 3%. I can't see any reference to that in the numbers. So I'm assuming the EUR 230 million cost saves are net of wage inflation already. Is that a fair assumption?

Yes. On the costs, I would say that the savings are all in and absolute. With respect to the 16.1%, that was pre the headwinds and tailwinds. So the main 1 of which was calendar provisioning, there was a TRIM impact. There were some benefits, which was getting us down towards the circa 15% year-end position. With some of the benefits to reemerge in 2021.

Yes. And just for the avoidance of any doubt in relation to the cost target, the cost are -- it's a nominal cost target. It's not a real cost target. It's a nominal cost target. So it's EUR 1.35 billion in 2023 money terms, significantly below today's. Okay. And the next question is from Marta Romero at Bank of America.

Going back to capital. Your 14% target is that assuming no changes to your Pillar 2 required through the life of the plan because 3% is still way too high. So another way of phrasing it is what's the management buffer over your SREP requirements and your MDA? And my second question is on NPEs. What is the expected P&L cost and the net impact on capital you foresee for bringing the NPA ratio down to 3%? Would any extra cost be embedded in your cost of risk guidance of 30 to 40 basis points? Or are there any below the line charges expected for the next couple of years?

Okay. Thank you very much. Yes, update for SREP. We have simply assumed that it remains at our P2R remains consistent at 3%. We don't actually disclose what our management buffer is, but it's no different to where other banks have their buffers as well. And there is no unusual P2G SREP item, which is missing from your calculation. I think -- not I think, our decision to hold and not change our 14% target is just a management decision. In terms of NPEs, what I would say on that is we've clearly taken a very large forward-looking provision at the half year in 2020. We look across the entire portfolio when we are making our provisioning decisions, and we look at the treatment strategies and the workout strategies for different parts of our balance sheet. And for this year-end, unlike and similar to other year ends, we will ensure that we are adequately provided for across all of our balance sheet. I mean in addition as well, beyond and outside of nonperforming exposures, you could call calendar provisioning a form of a provision as well, just through the capital line as well. So as we reduce overall our NPEs, we will look to get back some of that calendar provisioning charges. But then specifically to the question, are there any other restructuring costs associated with reducing the NPE number down? The answer to that is no, we did not foresee that over and above what I've already disclosed.

Sorry. And if I may, a third question. Could you remind us the contribution to net interest income from your NPE book?

Well, that's a good question. You've Flomox me on that one, so I'll have to come back to you.

Thank you. Next question is from Rob Noble at Deutsche Bank.

It's just a quick question of clarification. At what -- how much do you factor in for wage inflation within your cost target? I think the previous -- your previous guidance included 3% per year. Is that the same sort of level you're thinking now?

We're not going to front run negotiations that we'll be conducting with our trade unions and our workforce over the course of the next number of years. So we're not disclosing what's in the plan for that at this point. But you can take it as a very solid, meaningful, serious commitment that regardless of the wage inflation environment that we're dealing with, we will deliver a cost base in 2023 in nominal terms, less than EUR 1.35 billion.

Can I -- what proportion of your employees are covered by the trade unions?

The -- a very significant portion of our employee base is covered by trade unions. Particularly in grades up to manager level. The majority level will be covered by our prior trade unions.

Next question is from a guy at Exane.

I just had a couple trying to help unpick the 2023 tangible equity base that you're guiding against. Firstly, in terms of RWAs, it sort of builds on some of your previous answers. And I appreciate there's a lot of moving parts in the coming years with regulatory changes. RWA per sciatic, et cetera, the NPE reductions and the rundown of the British SME business. So I'm just trying to get a sense of what your central expectation is, putting all together, if we took a starting point of circa EUR 50 billion, and should we take your comments of modest growth in RWAs to assume mid-single digit. So we'd be looking sort of full part, EUR 52 million, EUR 53 billion, broadly speaking. And then secondly, just to help think about what the TAM and equity base will be when we judge the 14% of RWAs, what that actually means in RoTE terms? Can I get your views on the evolution of the gap between tangible equity and CET1 from things like DTAs and other regulatory adjustments, given it's not immaterial. I think as of today, that gap would mean that the 14% of CET1 in RoTE terms could be some sort of 200 basis points or so below the 8%. So I'm just trying to get a sense, should we see some convergence between CET1 and tangible DTA over the next few years? Such that, that gap isn't so material?

Yes. I think on the RWAs, obviously, we'll have a better growth, we'll have NPEs deleveraging. But I think you -- for 2023, you'd be in the right vicinity to say it's EUR 52 million, EUR 53 billion. I think on the on the question around DTA tangible equity. Again, it's one of these items that we would consider structurally on an annual basis by impairment tests, analysis, et cetera, et cetera. And I wouldn't want to front run that discussion in any shape or form.

Okay. So ladies and gentlemen, we have not run out of time, but partly, we run out of questions. So I want to thank everybody for joining us virtually here this morning. I wish you all the very best as we reach the end of this extraordinary year and look forward to engaging with you again in early 2021. Thank you very much.