AIB Group plc (A5G) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to our Third Virtual Annual Results Presentation. I'm deeply conscious that we are reporting numbers today, while on the other side of our continent, a terrible war is being waged against the people of Ukraine. A humanitarian crisis is unfolding in real time before our very eyes, and this organization will fully embrace all measures undertaken by the European Union in response to the invasion of Ukraine. I'll spend a few minutes reviewing our progress in 2021, outlining our priorities for 2022 as well as our plans for the years beyond before I hand over to Donal, who will bring us through the financial details. We are presenting our results today against the backdrop of buoyant activity as COVID restrictions ease, the domestic economy reopens and normal life resumes in Ireland, at least. Notwithstanding the current uncertainty and acute geopolitical stresses, the post-COVID fundamentals of our economy looks strong and robust with growth of more than 7% forecast this year. Ireland is once again expected to be the fastest-growing economy in the European Union. We are pleased to report a return to profitability helped by better-than-anticipated economic performance with pretty exceptional PBT of EUR 947 million delivered in the year. [ I'm proud ] of the profits generated and in line with our existing dividend policy, we're proposing a distribution to our shareholders of EUR 213 million, including EUR 122 million in cash form and EUR 91 million through a buyback. We're currently in discussions with the state in relation to a directed buyback, and we'll update the market on this in due course. Total new lending grew by 13% in the year with a significant pick up momentum in the second half, which is very encouraging, up 28% on the first half performance. At the same time, we saw a reduction in NPEs to 5.4% of gross loans, bang in line with the pre-COVID end 2019 out-turn. And we're reporting a CET1 position of 16.6%. All our capital and liquidity metrics remained very robust. Last year was a year of delivering on our ambitions for AIB. Our three-year transformation plan, which will realize cost savings of EUR 230 million in 2023 is now one year in and 35% complete. Good steady progress was made on our various inorganic initiatives, which served to enhance our product suite and provide welcome revenue diversification. And meanwhile, sustainability remains core to our mission, and we're pleased to hit a number of very important milestones in 2021, EUR 2 billion in green lending, the launch of our Social Bond Framework and recognition of the progress we've made in gender diversity in recent years across board and senior management with AIB ranked first in Ireland and 11th of more than 650 PLCs reviewed across the EU. So all in all, it was a year of recovery and progress. Turning now to the economy. The charts gathered together here highlight the strength of that recovery in 2021, the expected broad consistency of domestic growth all the way out through 2024, a truly exceptional and extraordinary performance by the labor market, with the totals of work now higher than they were ever before in our history, the scale of deleveraging seen across the economy, households and corporates since the GFC and improved sentiment in Irish manufacturing and services industries as seen in the trend in our PMIs, an encouraging backdrop here for our business this year and indeed beyond. And that business outlook is built on the foundation of an exceptional market franchise, which is unrivaled in terms of market position and the range of products and services, which we present to our customers. In terms of personal borrowing, business and corporate lending, mortgages, digital activity, payments and distribution, we are the leading bank in Ireland. And that position will be underpinned over the years ahead by continued investment in our digital infrastructure, the underlying strength of our capital base and the great strides forward we're making in embedding sustainability across our business, and we're well on track to deliver on our target RoTE of over 9% by 2023. And just to focus on sustainability for a moment, we've long maintained that it's possible for AIB to do well while doing good. It's an area of great opportunity for the Group. We doubled our climate action fund to EUR 10 billion last year, and we're making solid progress in deploying that capital in an environmentally responsible and risk-conscious way. We've deployed EUR 400 million in social housing finance since 2019 with material additions to be made in '22 and '23, and we've attained broad gender diversity at leadership level across the organization, while continuing to adopt best-in-class transparency disclosure metrics in sustainability. And we have a very strong track record to point to as we implement our strategy at pace. We have strengthened, simplified and streamlined AIB as we pledged to do, and we are committed to continuing to implement our strategy over the years ahead to build an ever more efficient digitalized and agile bank in the interests of our customers and our shareholders. We are well on track to hit the medium-term targets we've established and to deliver sustainable returns on a progressive basis over the years ahead. And the metrics that we're quoting on the slide are just a snapshot of our progress on our key strategic imperatives and also captures the strength and the solidity of our business. Three years ago, in a pre-pandemic world, we expressed concern about the near-term economic outlook. While COVID-19 was not on the horizon at that juncture, we were concerned about the prospects for a moderation of growth, given the longevity of the economic expansion at that point, Brexit-related uncertainties and heightened trade tensions around the world. And bearing those worries in mind, we set about controlling the controllables through NPE reduction, through prudent cost management and by ensuring the robustness of our new lending. We also committed to fill product gaps using the underlying strength of our balance sheet and our franchise 2.8 million customers to allow us to deliver on our purpose of being at the heart of our customers' financial lives. And over the intervening three years, we've made good progress on each of those controllables. We've reduced NPEs to EUR 3.1 billion at the end of 2021, which is the lowest absolute level since the immediate aftermath of the global financial crisis. And of that 5.4% NPE ratio at the end of '21, 1.5% are legacy pre-COVID NPEs. 2021 was a year of very significant progress with three portfolio sales completed, which were important in addressing the legacy of long-term default NPEs. And we'll make further progress in '22 as we move ever closer to our 3% target for next year. We will work closely with our customers, and we will use every means at our disposal to hit that target because it is in the interest of our long-term strength and in the interest of all our stakeholders. When we updated the market on our Strategy '23 back in December of 2020, we outlined the details of our transformation plan, which was designed to take out EUR 230 million in costs by 2023. And I'd like to update you on our progress in this area now. On our network, we have completed 21 branch amalgamations in the Republic of Ireland, while a further 22 branches have moved to our sales and advisory model. We've also enhanced our long-standing relationship with An Post as well as the quality of our digital services with a push to increase automation in the interest of both customer outcomes and risk management. Our end-to-end credit project will have material benefits as we automate and centralize risk management. And for '21 alone, we can report a saving of 45 FTEs from this initiative. We're adapting our work model for a post-COVID environment with another head office location exited, while further changes in our property footprint are in train, and are well embarked on embedding our hybrid working model right the way across the Group. We've in-sourced over 240 digital, data and change specialist roles, notwithstanding the challenges of a very competitive labor market. We've concluded the strategic repositioning of our GB and NI business with our British SME business sold, eight branches closed in Northern Ireland and FTEs being reduced by 300. We've embedded a ZBB approach to cost management across the group, and we completed three NPE portfolio sales, as I mentioned already. So last year, 2021 was a year of very steady, focused delivery on that transformation plan. We were very pleased with our new lending performance last year with total new lending up 13% year-on-year and a significant increase in momentum seen as COVID restrictions were lifted with second half lending 28% higher than in the first half. We saw particularly strong performances across our mortgage, property and energy climate action and infrastructure businesses, while personal lending was slightly weaker as COVID restrictions weighed. We retained leading market shares in the key segments, which stands us in very good stead as the economic recovery unfolds. And now as we look to the future, we play to our real recognized strengths in housing mortgages and energy, climate action and infrastructure in particular. On the housing front, there remains a gap between construction output and housing demand. But that gap is set to narrow over the years ahead with 2021 commencements materially outstripping expectations and standing at the highest level since 2007. This improved output should lead to greater demand for mortgages with an increase in total new mortgage lending expected of almost 40% in the 2021 to '24 period for the market as a whole. Meanwhile, climate change remains the challenge for this generation. We've long pledged to play a major role in financing the decarbonization of the economy and the opportunity for us, for risk-conscious secure lending in this area is immense. For Ireland, an investment of EUR 20 billion per annum to 2030 may be required, 70% of which is likely to be financed by the private sector. And in the U.K., multiple billion annual investments will be needed if the threat of climate change is to be contained. The opportunity here is real and significant. And at AIB, we have the people, the skills, the ambition and the track record to realize this opportunity in the interest of our customers, our shareholders and wider society. 2021 was a year of significant progress on previously announced inorganic initiatives. The proposed acquisition of the Ulster Bank corporate and commercial loan book is fully aligned with our strategy, and will position AIB as the country's leading business bank. The CCPC approvals process is continuing, and we're hopeful that we will conclude on this in the first half. Goodbody joined the group on the 31st of August last and now significantly enhances our wealth and capital markets offering. We are very pleased both with the acquisition and the pace of integration into the Group. On our JV with Great-West Lifeco, we're making good progress with CCPC approval already received and the Central Bank of Ireland licensing process is now underway. This initiative will significantly enhance our retail wealth proposition across savings, life, pensions and investments, with benefits for our customers and also for revenue diversification. And we also acquired a 50% stake in Autolease Fleet Management trading as Nifti, making an initial investment of EUR 6 million to help provide more sustainable car leasing options to business and personal customers, and we'll provide further funding to support the expansion of that business as it works with customers switching to electric and hybrid vehicles. 2021 was an exceptionally busy year for all of us at AIB. But 2022 is going to be even more important, in my view, as the benefits of our collective efforts are realized. We will expand our loan book to support our customers and the economy. We'll continue to implement our cost saving transformation plan, and we'll do it with vigor. We will conclude on legacy items. We will make significant progress towards our NPE target, and we will complete our various inorganic initiatives. We'll end the year having built a stronger, more resilient, more diversified and more efficient enterprise, and we look forward to 2023 with confidence, determined and equipped to deliver on our medium-term targets and most importantly, our RoTE target of greater than 9%. Thank you. I'll hand you over to Donal.

Thank you very much, Colin, and good morning, everybody. Our financial performance for the year is highlighted below. As we came into '21, our real financial goals were twofold: number one, to return to profitability; and number two, to start returning our distributions to shareholders. So I'm pleased to say that we're able to report a profit after tax of EUR 645 million and a proposed distribution to shareholders of EUR 213 million. I think alongside that and of great strength is our capital position, a CET1 fully loaded ratio of 16.6% and very strong liquidity metrics. We think that puts us in a very, very strong position as we look forward to capture all of the opportunities that we think are available in our core markets on an organic and inorganic basis. Just to run through the income statement. Interest income, down 4%, impacted really by excess liquidity. Other income, very strong performance there, up year-on-year around 18% in fees and commission and 21% overall. So total income is up 1%. Operating expenses of EUR 1.5 billion are down 1% if we exclude the impact of Goodbody. And bank levies and regulatory fees, as you can see, year-on-year, have increased. Two reasons for that. Obviously, the increase in liabilities has increased underlying deposit guarantee scheme fees, but there's also a one-off adjustment around single resolution fund payments, which we believe will reverse in '22 and '23. So I would say a more normalized run rate for the levies and regulatory fees is around EUR 140 million for '22 and 23. And then in 2024, as the SRF fees dissipate. Obviously, that number will go down to around EUR 85 million. Net credit impairment write-back of EUR 238 million, reflecting the strong macro environment; exceptional items of EUR 318 million, and that really gives us some metrics year-on-year; return on tangible equity, 8.2%; earnings per share of EUR 0.214; and distribution per share of 7.8%. In terms of interest income, I obviously talk to our income line from the NII perspective. NIM continues to be distorted from excess liquidity factors, but down 4% year-on-year. And the moving parts on the liability side, benefits of EUR 141 million, and that's created from EUR 58 million on negative deposit pricing strategy and a benefit of EUR 65 million from TLTRO where we would have maxed out on our capacity to draw down TLTRO, and we would have achieved all of the lending requirements. A reduction of EUR 119 million in the year, and that's from lower customer loan volumes and that lower rate environment coming through on the asset side of the balance sheet. Investment securities are down EUR 47 million year-on-year, really reflecting the roll-off of higher-yielding securities and reinvestment at lower rates. And then the cost of excess liquidity of EUR 51 million, representing the cost of excess cash sitting with the Central Bank of Ireland on an average balance basis of minus 50%. So in terms of excess liquidity management, we have a number of actions in place that we would have talked to previously. On a negative rate strategy, at the end of the year, we had approximately EUR 12 billion of balances on negative rates. And indeed, in Q4 of 2021, we would have reduced the charge on those negative rates from negative 50% to negative 75%, and that will obviously flow into 2022. As we look to 2022, as always, there are headwinds and tailwinds. Obviously, the TLTRO benefit will not be with us in 2022. We would have sold GBP600 million worth of assets in the U.K. They will have an impact of around EUR 20 million. So that's -- they are the headwinds that we're facing. But on the positive side, we will continue to make inroads on the benefits on the liability side. So our negative deposit pricing strategy, the quantum of liabilities is around EUR 12 billion. We see that by the half year being up around -- up by an additional EUR 6 billion, so up to around EUR 18 billion by the half year at that negative rate. And I'll come on to it later, but we do see loan growth in all of our core markets, and we do see that on a net basis. So as we look to 2022, we're guiding stable NII year-on-year. It's quite important to understand the rate assumptions that I've used for that guidance. Obviously, market is quite volatile at the moment and for the sake of simplicity, we've assumed that the ECB deposit rate remains at minus 50% for the remainder of 2022 and that the Bank of England rate would be at 1% by December 2022. So staying on this theme of interest income sensitivity, I would say that AIB is well positioned for rising rates. What I'm trying to do here is break out the sensitivities on a currency basis. And now I'll just run through some of the methodologies that pertain to these numbers. So obviously, the estimates are based on simplifying assumptions, such as a static balance sheet as at the end of December and a parallel rate movement in swap rates. So they are the core assumptions. And all of these sensitivities are considered to be an annualized interest income effect. So obviously, not mark-to-market type of impacts. As you can see, the total NII sensitivity is EUR 272 million on a 100 basis point scenario over a 12-month period. And you can see below, I've tried to show how that exposure has changed over the last number of years. So NII sensitivity, particularly in euros, has been increasing steadily. And this is really due to the excess cash that we have accumulated through COVID being placed with the Central Bank of Ireland. It's important to note that as rates rise, as you can see in euros, nonlinear dynamics become a little bit more pronounced. And the sensitivity to rising rates obviously accelerates as you get through zero. And there's two reasons for this: #1, we have a large quantum of floored Euribor-based loans of around EUR 8 billion, and so once you go through zero, obviously, your benefit begins to accelerate; and naturally, as a large retail bank with current accounts that's at zero on the liability side, anytime rates go above zero, that's going to be beneficial for us. On sterling and dollars, the impact is more straightforward and it's on a linear fashion. I wanted to just describe the way in which AIB actually breaks out its interest rate sensitivity portfolio and indeed how we manage it. We break the assets and liabilities of the organization into three portfolios. Firstly, we look at market rates. So these are assets and liabilities that are just linked, for example, to Euribor. So you'll have investment securities, you'll have Euribor-linked loans, and indeed, you'll have wholesale liabilities, which are issued at a reference to LIBORs. Then we have official rate portfolios. And these are assets and liabilities that are directly linked to official rates, okay? So an example of that would obviously be the ECB depo rate or the ECB refi rate, which is what's used in tracker mortgages. So they are the two market rate portfolios. And then lastly, we have the managed rate portfolios. And this is obviously a whole balance sheet construct. So we look at assets, we look at liabilities and what are the products where the pricing of these are in our control. So for example, standard variable rates, fixed rate mortgage pricing, rates applied to liabilities and deposits. And that's -- it's through those three different cohorts that we look at our interest rate risk exposure. I think it's important to note that as we do look at the rates and as you see the sensitivities, our managed rate portfolio, the assumption that we use for that is that through assets and liabilities, we manage that to a flat basis on an ongoing basis. So looking at the portfolio, assets and liabilities, we just make an assumption that, that is managed to a flat basis, which means that the benefits that you can see accruing from a rising rate environment of EUR 272 million, for example, in the 100 basis point environment, is entirely observable, okay, because it is all linked to market rate portfolios and official rate portfolios. So I think that should make things understandable and, let's say, reconcilable from an external perspective. Look, I do recognize that the -- with respect to market rates, that there is one hike built in, in [ euroland ] for this year and obviously, a number of hikes built in, in the U.K. as well. But particularly over the last 10 days, looking at short-term futures, it was difficult to ascertain exactly where we were. So I've really anchored it off minus 50%, the negative rate environment in euros and really 1% for the Bank of England. So you can really -- depending on your own view around timing of rates, lift and drop your own assumptions from this sensitivity table. Other income overall, very pleased with this, up 18%, particularly fees and commission, up 21%. Obviously, within the fees and commissions, we have a bit of income here for Goodbody of EUR 24 million. On the other fees and commission, really strong progress, I would say, particularly in the second half of the year, customer accounts, up 15%; lending-related fees, up 26%; card income, up 13%; customer-related FX, up 23%. That was really strong trajectory from half one to half two. And indeed, we do see that momentum carrying forward into 2022 and we're giving guidance of EUR 630 million for other income in 2022. Costs down 1% as guided. You can see the breakout here of our cost base between depreciation, G&A and staff. So cost down 1%. Overall, the numbers include EUR 23 million for Goodbody for four months of the year. Normal items impacting costs, we've got lower FTEs year-on-year, which is partially offset by wage inflation and then increased depreciation year-on-year of EUR 5 million. Exceptional items of EUR 318 million, it's made up of legacy restitution costs of EUR 173 million, which Colin would have alluded to earlier, which we look to conclude this year, EUR 132 million relating to the implementation of our cost strategy for 2023. And we've taken EUR 21 million of the transaction-related costs for Ulster Bank and the JV with Great-West Lifeco in 2021. So as we look to 2022, we're guiding flat on costs for the year. I think depreciation is going to continue to increase by another EUR 15 million or EUR 20 million. I think we'll have a full year impact of Goodbody of around EUR 50 million. And obviously, we'll have the reduction in costs that Colin would have alluded to that were executed throughout 2021. In terms of provisions, we had an ECL write-back of EUR 238 million. Main moving parts there, macroeconomic assumptions definitely improved year-on-year, with large redemptions and repayments. I mean, naturally, given the large quantum of provisions that we took in 2020 as customers do pay principal and interest, it just creates redemptions and repayments. So very strong. And we did make a post-model adjustment for EUR 135 million at the end of the year, just to represent an amount of caution around those, whether it be individual or business customers in those heavily impacted COVID sectors as we go into 2022. And we do think 2022 is going to be a very important year with respect to the ECL provision and stock for AIB. You can see throughout the year that the stock reduced from EUR 2.6 billion down to EUR 1.9 billion. And a large amount of that is due to usage of provisions in executing those nonperforming portfolio sales. So at the year-end, we have around EUR 600 million of post-model adjustments. So 50% of those are related to pre-COVID legacy NPEs and 50% of those would be related to COVID-related NPEs in those sectors that I would have talked about. So for 2022, still early days, hard to know exactly how things are going to pan out. We do think the macro environment remains robust, notwithstanding geopolitical events, and we expect a small charge for 2022. But we do see a lot of progress being made, particularly in that post-model adjustment area as legacy NPEs continue to be addressed and as the environment unfolds and we really understand at the business level and the individual level what the COVID impact could be. Balance sheet, I would say it's a similar theme. On a total level, our balance sheet increased from EUR 110 billion up to EUR 128 billion, very much liability-driven growth on the customer retail side. And obviously, with the increase in the takedown of the TLTRO on the asset side, you're then seeing the impact on the Central Bank balances from EUR 27 billion up to EUR 47 billion. Most notably, I think, performing loans increased by EUR 200 million with that strong second half performance. And as at December, the quantums that we had with various central banks, EUR 35.2 billion with the Central Bank of Ireland and EUR 6.6 billion with the Bank of England. So gross loans of EUR 58.4 billion, and Colin would have talked to the new lending of EUR 10.4 billion. I'm just trying to break out here the trajectory between half one and half two and then talk some more about how we see the impact on asset growth in the coming years. As we would have talked about at the half year and Q3, we did see strong trajectory in all of the key markets with the normalization of restrictions and businesses getting back to normal activity. You can really see that strong trajectory from H1 to H2 in all of the key markets. So at the end of the year, we did EUR 10.4 billion of lending, very strong trajectory, and we do see in 2022 that we'll do new lending of around EUR 13 billion. You notice here that I've referenced a 5% compound asset growth metric. I think we believe that we're in a different environment now with respect to credit formation and credit growth. We do see, after a number of years of contraction, that our balance sheet is going to grow. And really, what I'm trying to do here on the next slide is break out in a little bit more detail, precisely where we see the growth coming in the different portfolios. I've tried to show the risk weightings here just to ground them and indeed the yields. So on a go-forward basis, when I'm talking about new business and asset growth, this is how I'm going to segment the AIB business, really just to give at a more granular level what the growth expectations are. So whilst you look at on the left-hand side here, mortgages, EUR 29.4 billion at the end of December 2021, we see mid-single-digit growth in the coming years. Colin would have alluded to commencements in the mortgage market size. So probably on a CAGR basis, around 4% per annum. On personal lending, EUR 2.7 billion. Again, it's going to be coming from a low base post-COVID, but we do see a lot of opportunities in the coming year and again, mid-single-digit growth in the coming three years. In some of the business lines, [indiscernible] on corporate and SME, we see low single-digit growth in the coming years, specifically in those portfolios. And then the areas where we do see a more significant growth is, firstly, in the energy, climate action and infrastructure portfolio. So this is a specific wholesale business targeted on project finance, green energy, EUR 3.1 billion of quantum at the end of 2021, and we think that that's going to approximately double in the next three years. On the property side, EUR 7.6 billion. We think that that's going to grow at high single-digit levels for the coming years really as AIB supports the requirement for increased housing stock in all the various sectors in our core markets between '22 and '24. So I think it's important to describe what I see as the trajectory. So it's 5% average growth, '22 to '24. I think '22, it's going to be more like 3% as we continue to reduce NPEs and then '23, '24, more like 6% per annum. So that's the kind of growth trajectory and growth outlook that we see in our core markets in the coming years. Nonperforming exposures, really strong story, continued reduction in NPEs, EUR 4.3 billion down to EUR 3.1 billion. Of the legacy NPEs, the items that we would have spent many years discussing, they're down at around EUR 900 million or is at 1.5% of the NPE ratio. And then the nonlegacy NPEs, which we can probably call the cohort post-COVID environment NPEs, they're at EUR 2.2 billion. So we're going to look to aggressively reduce the legacy NPEs as we have done in the last number of years. And for the post-COVID NPEs, work very closely with business customers, personal customers to try to help them emerge from the whole COVID period in an unscathed fashion. Funding on capital, I've probably touched on previously. Loan-to-deposit ratio, 61%, a little bit lower than what I would like; LCR 203%; net stable funding ratio, 160%, very strong, very comfortable from a liquidity perspective, gives us lots of confidence to be able to support the growth that we see in our core markets in the coming years. With respect to MREL, our MREL target is meshed with EUR 6.6 billion of MREL issued already. And on a go-forward basis, we think we're going to be a benchmark issuer of two to three transactions per year going forward. On capital, just walk through the moving parts for 2021, obviously started the year with 15.6%, having taken a EUR 1.4 billion provision. So profits for the year had 120 basis points benefit. And RWA benefit, a reduction of 10 basis points. We had a calendar provisioning benefit of 30 basis points Goodbody's acquisition would have taken 20 basis points. And then other items like AT1 coupons or DTA impact of 20 basis points. So year-on-year, up to 16.8%, obviously then leaving us with a 20 basis points reduction for the ordinary dividend, which we've already announced, leaving us at 16.6%. You can see on the RWAs year-on-year on the face of it, very flat. Second half of the year would have increased by approximately EUR 2 billion, 50% of that very much related to the strong performance in the second half of the year, particularly in those energy and property portfolios that I would have mentioned, which have higher RWAs and around EUR 1 billion of that increase was related just to ongoing model adjustments that we make. When we look at capital and capital targets, a little bit to update you with, obviously, our P2R reduced by 25 basis points from 2.75% to 3%, and the CET1 portion reduced from 1.69% to 1.55%. So we've optimized our capital structure with AT1 and T2 issuance. That really leaves us with a 3% or greater than 3% buffer from our SREP to our medium-term target of 13.5%, but obviously up around 6% versus regulatory minimums. But we feel that CET1 target of 13.5% accurately reflects the risk profile of the Group. So as I look to '22 and beyond, if our starting point is 16.5% because effectively in January, we would have taken a further deduction for the approved buyback. So our starting point is really 16.5%. Inorganic initiatives, we now think will cost 140 basis points. So that's 130 basis points for Ulster Bank, which we think will be a 2022 effect and a 10 basis point impact for the joint venture that we have with Great-West Lifeco. Organic growth, which I would have outlined with the EUR 13 billion new lending level will obviously consume capital. In terms of RWA efficiencies, we will continue to ensure we implement self-help measures around RWAs. So that's around modeling, ensuring our modeling is as efficient as possible, ensuring we capture the benefits of regulatory articles such as SME 501 and then capital generation will obviously be driven from profits, and then we will look to make distributions. So as I would have said in Q3 updates, the way we're thinking about distributions for 2022, we're very focused on onboarding all of the inorganic items, which we have disclosed and really understanding precisely the final nature of those items. And that's going to be the main focus of the organization through 2022. And 2023 from 2022 is profits, we will look to implement our normalized policy of 40% to 60% payout ratio. So that's for 2022 as we get absolute certainty on the environment and the inorganic initiatives. As we work through 2023 and indeed in 2024, utilizing '23s results, we will move towards and drive towards that medium-term target of 13.5%. So I'm going to wrap up the guidance here, and I'm going to just explain how we're currently seeing Ulster Bank. Obviously, all of the guidance that I gave was on an ex-Ulster Bank basis just for the sake of ease of analysis. So NII expected to be stable, other income at EUR 630 million, costs flat versus 2021. On cost of risk, we expect a small charge. So the Ulster Bank loan book is evolving. The latest update is we see the book being a total size of EUR 3.7 billion worth of loans and RWAs of EUR 4.6 billion, which is obviously slightly less than what we would have talked about previously, as given the passage of time, this is just reflective of paydowns. Total income will be EUR 120 million, costs associated with the take-on of Ulster staff at EUR 35 million and the CET1 impact of this acquisition, we estimate to be 130 basis points. So obviously, it's a live book and as things adjust and amend, we'll be able to update the market. And really, what I'm hoping is, once we do get the CCPC approval, we'll begin the onboarding process immediately, and then you'll be able to get a better understanding of the timing of the revenue cost impacts of this. So wrapping it all up, 2023 targets reiterated, costs less than EUR 1.475 billion, CET1 ratio greater than 13.5% and an RoTE of greater than 9%. So thank you very much and look forward to your questions.

Okay. Thank you very much indeed Donal. We'll now open the lines and look forward to getting your questions.

[Operator Instructions]

Raul, looking forward to giving us your first question?

It's Raul Sinha from JPMorgan. If I can start with two, maybe just the first one on capital. And just to draw down about a little bit further in terms of the comments you made very interestingly on the payout and the timing of the glide path of the capital return from here. I guess the question I have is, are you indicating that we should be thinking about moving within the range of 40% to 60% over the next couple of years? But by 2023 full year results, you will potentially look at moving above that to sort of optimize the capital stack. Is that a fair read? And then related to that, just to understand how this -- like the share buyback will work in the very near term. Can you perhaps give us some indication of kind of how the process will work? Probably the first time we're seeing something like this happening with the IV. So how long will it take to get that buyback on a directed basis? The second question is just around the NII sensitivity. Thank you very much for the disclosure and all of the details in terms of the moving parts. I guess the one question I still have left over is sort of your passthrough assumptions. What are you assuming within -- you've got a very low loan-to-deposit ratio, lots of service deposits and cash to be on the balance sheet. I would have thought your passthrough in effect would be quite low. But just to understand, when you give us that sensitivity, what have you assumed in terms of the sort of nonlinear pass-through for the year on deposits?

I'll take the question in relation to the buyback, and Donal will take the questions in relation to capital payout and deposit ratio. We are in discussions with the state at the moment. We have been engaged in those discussions in anticipation of the regulatory approval that we've received to make that buyback. But this is ultimately a decision for the Ministry of Finance and for the state. They'll be the ones who determine the timing of that transaction. But we have, from our perspective, all the necessary approvals in place to allow that to happen as expeditiously as possible. But the timing is entirely at the discretion of the Ministry of Finance, but we're ready to go in the [ years ].

I think on the distributions question, I'm trying to be here as consistent as I was in Q3. 2022, we need to land the inorganics, okay? We need to conclude on size, scope, et cetera, okay? So I don't think it's prudent to think beyond that as being our focus, okay? So we will continue to focus on delivering results for '22. And in '23, with '22's results, look to utilize our normalized dividend payout ratio of 40% to 60%. As we get beyond '22, as we have concluded on our inorganic items and as we have a firm grasp on their size, quantum, et cetera, through '23, that's the time for looking at a roadmap to getting from whatever our CET1 ratio will be then towards our medium-term target of 13.5%. So like I've said, throughout '23 and/or in '24 with '23's results, that will be the time period at which we try to normalize or move towards that 13.5% target. But the starting point of all of this needs to be what is the impact of the organic growth, what is the final impact of the inorganic growth and then obviously stress test that and ensure suitable capital positions going forward. But look, it's not this management's intention to hold on to capital unnecessarily. As Colin would have alluded to, the inorganic items that we are looking at are well disclosed, very focused on our core markets, and we don't feel that we need to hold any capital that we do not need. I think with respect to the pass-through assumptions and the way that I broke out, the way we manage our book within the managed rate portfolio, there is liability pricing, there is mortgage pricing, okay? The assumption that we make is that we manage that to a flat basis, okay? Now, like all models, they need an assumption, and that is our assumption. Naturally, there is competitive dynamics that come into effect, and then there's structural balance sheet dynamics as well, whereby you might want more assets, more liabilities, et cetera. But we don't disclose what our model says we might do. If rates move here or there, because it's just a model assumption, humans have to sit down and make rational commercial decisions with information. I think that the key message I was trying to land is assume that, that is flat in the managed rate environment, then the benefits that you can see from the rising rate environment are entirely externally observable. And I think that is the way that I will be able to talk to the interest rate sensitivity going forward.

Thank you, Donal. I think that 2022 will be very important, as I said in my own presentation, in terms of us eliminating uncertainty, resolving question marks about the actual capital impact of the inorganic initiatives that we're currently engaged in, and of course, putting the legacy -- or bringing the legacy issues to conclusion. So we'll have far, far better clarity in terms of total capital impacts of those two issues in particular as we move through 2022. Now on to John Cronin in Goodbody for the next question.

Just a few for me. One is looking through the guidance on loan growth and NII evolution in FY '22. But can I ask you, just beyond FY '22, to maybe break down in a bit more depth how you expect NII to evolve, particularly given the pickup in loan growth that you expect to observe? And my second question is just a follow on really on the rate sensitivity. Can you give us a bit more color in terms of how you're expecting deposit rates to move, I suppose, in the event that ECB base rates were to move by just 50 basis points and how deposit rates would be likely to evolve as rates break through the 50 basis points barrier? And I suppose I'm thinking more particularly there around pricing behavior in relation to negative deposits that are subject to a negative rate. And then thirdly, look, we've seen a lot of banks move away from cost guidance. You've obviously seen a bit of an uptick in your rate fees, but you're sticking to the guidance in terms of underlying cost evolution. I just want to ask what underpins your confidence around that, given the broader inflationary environment? Is that really just a function of the continuous success of taking out costs in line with your cost reduction targets?

Thanks, John. I'll take the costs and Donal can deal with the rest of it. Look, just to give you a bit of context, look, we pulled up the drains of this organization when we conducted a fundamental strategic review of our business during peak COVID back in 2020. And as part of that, we identified EUR 230 million in terms of cost savings. Very, very clear plan, which we have been very, very transparent in sharing with you about how we're going to get to that level. And we're executing well against our plan. We're only one year in, and we are 35% complete. We've also, since 2018, reduced our total headcount by 14%. And we have very, very carefully managed our costs, while facing into quite a severe headwind in the form of rising depreciation, which arose because of much needed digital investment over preceding years. But we are absolutely committed to our cost target. We accept the fact that there are challenges out there in the form of higher inflation pressures than any of us would have envisaged even four or five months ago. But that's our real target. It's an essential tool for this management team. It's essential in terms of driving cost discipline through the business, and we remain very much committed to us.

Thanks very much, John. On the loan growth -- on the rates question, really what I was hoping to do today by outlining the different portfolios and ascribing different growth trajectories was to get that baseline well understood on those key portfolios and how we think they're going to grow in the future, okay? Again, that's why I would have called out the yields on these different portfolios to ensure that you don't get above, behind, et cetera, on those different books. So I think stage one, understand that asset growth, have your own opinion on that. But really what I tried to do is give you the risk weightings and the yields so you can calculate. Giving guidance for '23 and '24, I mean, that's like asking me what my rate expectations are in all of the key currencies. And I think that -- on that one, I don't really know just yet, which is why I tried to just break out in a table in some detail, 25, 50, 75 or 100. Depending on your own view, I think then you can lift and drop that rate impact through the P&L, depending how you yourself see the environment emerge. I mean this -- every other week, I would say that the trajectory is changing. I'm quite sure, with the inflationary pressures, that there will be an interest rate response, the timing of which I really just don't know about. What I would say though is, particularly on euros, irrespective of what your view is one, two rate changes in 2022, it's all back ended. It's not a '22 story in any case. I think it's more a '23 story and a '24 story depending on your assumption around trajectory. Look, I think on the mortgage pricing and deposit rates, the things that you would imagine to happen in a rising rate environment, does fixed rate mortgage pricing change, I would expect so. Let's see. On deposits, if interest rates are in a normalized level in a number of years, would we expect to have deposit rates for corporates at negative 75%? I wouldn't think so. So we've managed the managed portfolio in a fairly rational commercial sense. But we do look at the environment, the competitive environment, the rate environment, and then we have to look at the impact on earnings, timing, et cetera. So again, I wouldn't look at any one part of our assets or liabilities and hone in on that. We look at the things in totality.

Thanks, Donal. We're now going to get a question from Diarmaid Sheridan across the road from us here in Davy.

A couple of questions, if I may. Firstly, just on the loan book growth coming back to that, Donal. In terms of the yields that you're -- that you've put there, do you think they will broadly remain intact as we go out, '22, '23, '24? And just on the mortgage market piece, in particular, your market share has obviously, in the last couple of years, been a little bit below what you've done previously. Do you think that, that can recover? Or is that more kind of a structural change in the market in terms of some of the new competitors and the shift to intermediary channels that have happened? And then finally, back with the Q3 call, when we were talking about capital deployment and inorganic opportunities, you referenced that there were still opportunities left in the market. So I'm just wondering, is that part of the rationale that you talked to being 2023 before you'll meaningfully be able to move to kind of action the surface capital that you have sitting on your balance sheet?

Okay. I'll just give you an overview in relation to what we saw coming through in terms of lending growth last year. As I said, we were up 13% in the year, up 28% in the second half compared with the first half. very much merged in terms of what we saw coming true in the mortgage market. And we have already highlighted the fact that our mortgage market share had fallen through the back end of 2020 and into early 2021. It is in good shape at the moment. And we have some great momentum in that business coming into 2022, and we're very pleased with the market shares that we are printing at the moment. I'm not going to go further than that at this juncture. We saw extraordinary market share growth across a number of our businesses. And that is, to a large extent, a reflection of the fact that we've had a massive bounce back in the Irish economy. We're not expecting to see the sort of a continuation of 13% growth in new lending over the years ahead. But we are confident that as the economy recovers, we will have a big role to play in meeting our customers' needs and an increase, which will lead to obvious consequence -- positive consequences for our loan book. Mortgages, of course, continues to be a very, very important part, and we will maintain a very competitive position in the market as we've done even as the interest rate cycle evolves over the years ahead.

Yes, I would just add to that with respect to the yields. If you look at the yields on our core products over the last number of years, it's been amazingly resilient. So not leaving aside what your views are on interest rates and what that might do, we would imagine that those yields are going to remain overall across the portfolio in and around where they are. Some parts of the portfolio, definitely in more competitive environments like the energy, climate action and infrastructure, which is why what I really called out that the yield on that is lower, like it's 2% because it's lower risk. And we're obviously working on an international basis in that area. But I don't see any reason for yields to fall in any of our core products in the coming years.

And I think I skipped one of your questions there, Diarmaid, in relation to other Ulster Bank portfolios. We're looking at a change in the Irish banking landscape, the like of which we've never seen before and unlikely to see again. And where we can deploy capital sensibly in a way that fits strategically in our core market and increases our number of customers, we will, of course, look at every opportunity that arises. I'm not going to comment on any individual opportunities that might be out there at this point in time. But what I can say is that where it makes strategic sense and where it makes commercial sense and where it makes our life easier as we drive towards that RoTE target of above 9%, Well then, of course, we will always have a good look at those opportunities. Chris Cant from Autonomous is next up.

If I could just come back on deposit feature assumptions, please. It is really important for us to understand what you're assuming because the nonlinearity in your sensitivity is pretty dramatic with pretty limited sensitivity for that first 50 basis points. And if I think about the structure of your balance sheet, if I take your year-end '21 position as in the 5% per annum loan growth and the Ulster book, even pro forma for all of that with no deposit growth, your loan-to-deposit ratio would only be at 77% and you'd have EUR 21 billion of surplus deposits still. And as I said, that's with no deposit growth, which has kind of been running away from you in the last couple of years. So it feels like you should be in a position to be passing on very, very little. You can afford to see an awful lot of those deposits disappear. You talked about EUR 18 billion of negative rates deposits by the middle of this year. But when I think about your LCR position, 203%, I think it was in the slide, you could afford for pretty much all of those deposits to disappear, I think. So I would expect you to be assuming quite a low deposit -- very low deposit to be trending. And I would have thought that, that would be giving more of an offset to some of those asset spread pressures you referenced in terms of trackers being repo-linked and the EUR 8 billion, if you like, or linked commercial deposits. I think to get back to the number you're giving us, you must be assuming a meaningful passthrough of improving rates. And I appreciate assumptions may vary, we can all kind of take our own view, but it would be very helpful if you could give us some more color on what it is you're assuming on passthrough because it feels very important in terms of the P&L development from here? And on a sort of related point, I suppose, structural hedge, I can't see anything in the deck, perhaps I've missed it. But could you give us an update on the size, duration and yield of your structural hedge, please?

Thank you very much, indeed, Chris. Look, at a general level, the surge in deposits we've seen is largely due to the fact that people couldn't consume and people couldn't invest during the COVID emergency. In effect, the bulk of the surge in deposits that we've seen are forced savings. And I do expect that we will see some of those savings, some of those deposits being translated into consumption and investment, given the fact that we're now living in an economy, which once again is fully open. So that's going to have an obvious volume impact. But I'll hand over to Donal.

Yes. Thanks, Chris. Look, I think on the deposit side, if we look at the -- all of the customer deposits, there's really two cohorts. There's those who are paying zero and those who are paying negative 75%. So I mean that's your starting point. So as a pillar bank in Ireland, with the changing landscape, we probably see with the changing rate environment that this is a real opportunity for us going forward to capture market share, to get more customers. I understand the math in an Excel spreadsheet, if you could exit EUR 20 billion. But I mean, that's 1 million customers. And I think it's our job to ensure that we have products for all of these customers and indeed, that we can make the economics work. That's exceedingly difficult when interest rates are at negative 50% and you have surplus cash, okay, as we both know. But I think as the interest rate cycle turns, I think it is going to be a far more interesting opportunity for us, particularly and this is why we executed the inorganic items such as Goodbody to grow wealth and indeed start the joint venture with Great-West Lifeco. It would be a terrible shame to lose a significant amount of excess liquidity for customers who are looking for a home for cash for investment products and that we weren't able to facilitate that within the suite of products that AIB has. I mean, so I mean, with respect to the pass through, it isn't formulate, the market does not act in a formulate manner, in Ireland, on the mortgage side or on the deposit side. Okay. So it is bespoke and it is -- I wouldn't say case by case, but you know if this is a significant move in interest rates we sit down and we look at deposit pricing generally asset pricing generally and how we see the volume and growth going forward and ensuring that we always do manage our margin as appropriately as possible. Really what I tried to do in the rate sensitivity analysis was to, I mean just disclose the assumption that we manage that to, a zero basis, but I guess I'm not going to get into how we commercially price assets and liabilities and really point to the fact that the upsides that we've been reporting for the last few years, with respect to sensitivities are related to market rates. And you can directly under directly observable. Would you expect those reasonably in a rising interest rate environment to be able to price assets and liabilities, commercially to produce a return your expectation would clearly be yes, I think that would be our hope and expectation as well. But for the purposes of today before there's lift off, let's say in a Eurozone environment. I wanted to get the base case out there. How we look at that. With respect to structural hedge program. Again, if I bring it back to the way in which I described how we manage interest rate risk, the structural hedge program for me, falls in to the market rates portfolio. Okay, because it's just linked to UK rates or Euro rates, and rising rates doesn't help structural hedge programs if you're to isolate it, okay. We don't really look at us on a standalone basis, it's part of a wider construct, but I suppose given you specifically asked the question, the total let's say structural hedge program that we had on the balance sheet at the end of December was around EUR 11 billion of that three was Sterling and the rest was Euros. The Sterling duration is around five years, the Euro duration is six or seven years. The contribution to NII for '21 was 8% or 9% and that was consistent with the prior year. If you imagine, the negative rate environment in June until the end of '22 that will be the same, if you have a different assumption around rates, that's going to be less. But again, when I outlined the sensitivities and said that the EUR 272 million or 100% of the of the Euro changes was attributable to those observable rates that includes the SHP, okay. Irrespective, so depending on what your view is going to be of rates.

Guy Stebbings from Exane, next.

And the first question is really building on Chris' prior question and then I had a follow up on buybacks. And so on rates, I appreciate all your comments about what to look at in totality, the comments about, was it to retain, was it customers and taking commercial longer term. I was wondering if you could remind us what the size of those manage rate balances, you referred to you all on either side of the balance, just so that we can fair around, and making some of our own assumptions on what not managing to entirely flat might mean and then I just quick clarify on the hedges duration, you mentioned, but those are -- the duration is as of investment, not the average duration, obviously you've given the numbers you just gave. And then the second question is just on directed buybacks and the comments on timing of capital structure, just trying to work out the way to directed relatively soon, would that be within sort of payout ratio range and therefore any distributions to be announced at the end of financial year 2022 would be sort of netted off against that or would it be additive to fair ratio range. Just any color there would be helpful?

No, there's no fundings in the distributions that are proposed, we have the necessary approval for the directed buyback. We'll go to AGM at the start of May for the cash dividend and that will be paid in May, but I know that there is no fundings here in relation to time which is the timing ultimately is the discretion of the Minister of Finance.

Yeah, just on the SHP that was the investment at the time that was the yield at the time we put the rights on, that's all in current yield today. So our, the way in which we do a lot of structural hedges as we use it for duration and between five and 10 years, which isn't an area where we naturally, we see fixed in our day-to-day business, so I would say versus others, our duration is longer, our quantum is smaller and given the low rate environment in Europe, obviously our yield is still, it's still pretty healthy. So I think that's probably the main differential. I would say, versus other banks who have much bigger swap books structural hedge programs, but our duration is longer as a result. So those, that the yields that I mentioned, what about what generates 89% of NII is based off the current yields today, which have been quite stable particularly in euro land over the last couple of years. That's on that -- and then on the directed buyback here.

Grace Dargan from Barclays, you're next.

Just firstly, just coming back on the directed buyback, I just wanted to double check if there are any limit on the quantum of buyback or any restrictions on the amount that can be done and in the period? And then secondly just on the inorganic acquisition just like your comments around the timing of Ulster, I guess is there any updated to view of the P&L, I know previously you've talked around about EUR 230 million revenues for inorganic initiatives by '23, I guess, is that still the ballpark you're thinking about.

So we have AGM approval for up to 5% in directed buyback that was put before the AGM last year and in relation to Ulster the timing of that is subject to CCPC approval. We're very constructively engaged with the CCPC at the moment. We expect that process to conclude in the first half of the year. We are going to bring those subject to approval, we're going to bring those customers in their loans into AIB Group on a tranched basis with the largest loans coming in the earliest phase. And we hope to have again, as soon as that approved, we would be hope to have those loans on board by the end of the year.

Yeah, again just with respect to Ulster impact we try to refine it a little bit further today versus what we would have seen on day one. So that the annualized impact is now EUR 120 million of revenue, EUR 35 million of costs and 130 basis points of CET1 annualized effect. So we need to wait and see when we got CCPC approval and we'll be able to update the market with the precise impacts then.

Rob Noble from Deutsche Bank. Floor is yours.

Just a couple of these on costs. I guess when you put out your cost plan, you were looking to reduce your underlying cost by greater than 10% by 2023 and seen a small decline this year you're guiding flat this year. I see, all of the targets, but what makes the absolute cost number inflect in 2023? I mean, how does it, was it depreciation sort of leveling off and then everything else coming through, talk through that, please. And then just, I just wanted to clarify one of the hedge questions, it was -- your hedge in UK is invested in the rolling portfolio of five year swaps, is that what I should Euro in six to seven year swaps, is that how it should be read?

You do the swaps, I'll do the cost.

Yeah. UK approximately EUR 3 billion, five years current yield on that is around 30 basis points, 40 basis points and so won't take too many hikes in the UK to turn that one around. Obviously, the euro, the euro swapped book is bigger slightly longer duration and a little bit more in the money but that's correct, that's how you should listen, to that hear that.

Yeah. And on the costs, it was a three year program it was always going to be back loaded as I said earlier, we're one year in 35% complete in terms of the actual projects but the cost benefit was always going to be back loaded into 2023. So that's, when you see the full benefit of the EUR 230 million that we've identified and targeted and we're working towards. That's when we'll see those benefits bearing come into life. I'm told we run out of time or well past where we thought we'd be in terms of the clock this morning. I want to thank you all very much indeed for attending the presentation and thank you for your questions. And [indiscernible] and the IR team will be available for any further questions you might have. But at this juncture, can I just wish you all a very good day and thank you.