AIB Group plc (A5G) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the AIB Group plc Medium-term Targets Update Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Colin Hunt, CEO. Please go ahead.

Good morning to you all, and welcome to our investor and analyst update as 2022 draws to close. Colin here, and I'm joined this morning by my colleague, our CFO, Donal Galvin. And as usual, for these sort of events, I'll kick things off with an overview of the strategic context and the macroeconomic backdrop, and then Donal will bring you through all the financial details, and of course, we will have time for questions. On this day, 2 years ago, in the depths of COVID, we set out a plan to strengthen to streamline and to simplify AIB. We laid out a blueprint to transform the group, to deal comprehensively with legacy issues, to complete our product suite and to position ourselves to take advantage of what we're at that point, anticipated changes in the banking landscape here in Ireland. And 2 years on, the progress that we have made on the implementation of those plans, a changed economic and financial industry environment, and the monetary policy normalization process, which is now underway, it means that it is appropriate at this juncture to reset our medium-term targets. For 2024, we are targeting a RoTE of greater than 13%, a CET1 ratio of 13.5% and a cost base below EUR 1.75 billion with a cost-to-income ratio circa 50%. For the year immediately ahead, we're expecting a cost-to-income ratio of less than 55%, progressive dividends and an RoTE greater than 10%. We are confident in our ability to deliver against these targets. And notwithstanding the fact that we're continuing to deal with continued global macro uncertainties, we have the plans in place to do that. Turning to the economy, the economic backdrop. While the array of global uncertainties and higher price pressures have seen momentum easing, Ireland is still expected to be a material outperformer economically in '23, with real growth as measured by either GDP or modified domestic demand remaining comfortably in positive territory. Confidence in the continued expansion of the Irish economy is supported and underpinned by tight labor market conditions with total employment at an all-time high, a supportive fiscal stance and continuing decent FDI flows with Ireland's attractions as a location and destination for U.S. investment enhanced and augmented by Britain's departure from the European Union and its single market. On the pricing side, on the inflation front, while headline rates have followed the same trajectory as in neighboring countries, and are undoubtedly having a dampening effect on confidence levels, we are expecting the distortionary effects of higher inflation to moderate as we move through 2023. And meanwhile, the balance sheet of households and businesses remain in very good health with real leverage levels at multi-decade lows and deposits continuing to build. Ireland enters '23 in good shape. But that said, given uncertainty internationally, at AIB, we will maintain a conservative approach to our underwriting standards as we move through the economic cycle. Looking back over the past 4 years, we've made significant progress in delivering on our ambition to be at the heart of our customers' financial lives through our own product development as well as business and portfolio acquisitions. At the same time, we have successfully positioned our services the unrivaled champion of the sustainability agenda in Irish Financial Services. We've consolidated our digital leadership, and we've driven an ongoing transformation program through our business. We've reshaped our property footprint. We've exited underperforming businesses, and we've adopted hybrid ways of working successfully. There's obviously further work to be done on delivery of our transformation plan to the end of '23, but we continue to make good and meaningful progress, and it remains a key priority for the Board and the Executive Committee. Focusing on sustainability now for a moment. We continue to advance towards our 2030 targets with a Corporate PPA now signed, which you'll see 80% of our electricity needs being met from renewable energy sources, while the proportion of new lending, which is green or transitional in nature, is now running at 24%. We continue to believe that the vital switch to a low carbon future creates a huge opportunity for us to deploy capital at scale in an environmentally supportive and risk-conscious way. I've often remarked that the most extraordinary feature of this business of AIB is the strength of our customer franchise. Some 40% of personal business customers in this country choose to have their primary banking relationship with us, and that market position which underpins our plans, and our prospects will be further boosted by our success in attracting customers from the departing Ulster Bank and KBC. We estimate that some 48% of the migrating customer flow from Ulster and KBC to the 3 remaining retail banks is coming to AIB, and we're now well set to grow our customer base above 3 million. As the year draws to close, as we bring 2022 to an end, the group is in its strongest position in decades. We've rebuilt our product suite, we've seized the opportunities presented by the imminent departures of Ulster and KBC, we've dealt comprehensively and conclusively with legacy issues while maintaining exceptionally strong capital and liquidity positions. We are very optimistic about our business, and we look forward to AIB delivering sustainable and progressive returns to our shareholders consistently over the years ahead. I'll stop at this juncture. I'll hand over to Donal. Thank you.

Thank you very much, Colin, and good morning, everyone. I just want to start off with the medium-term our targets trajectory. We would have set targets a number of years ago, in fact, 2 years ago to this day, in the depths of COVID with a very uncertain outlook. And we think the evolution of our targets, particularly our return on tangible equity reflect the change in the external environment and indeed, the domestic banking market in Ireland. In terms of overall, our balance sheet composition and the impact indeed of these external factors, we are continuing to see organic growth on the asset side and a continuation of the growth in our liability base. We think that this is going to slow in the coming years, but our loan-to-deposit ratio at the half year was obviously 59%, which gives a good idea of the construct of our balance sheet. Overall, you would have seen that the sensitivities and for all of our main currencies and exposures. Obviously, as we move into 2023 and 2024, these sensitivities will become more alive. We're obviously seeing all of the changes with respect to market rates and official rates. But obviously, as we move into '23 and '24, pricing of assets and liabilities will become a much more important factor, but that's something that I will look to go through more detail on -- in our year-end presentation. In terms of our cost targets, we have maintained a hard cost target of EUR 1.75 billion or less than EUR 1.75 billion. We think that this does allow external observers to reconcile our cost base more appropriately and internally ensures that we maintain our cost discipline. The cost-to-income ratio of circa 50%, we really wanted to add this on to the cost story so that we can articulate clearly the growth in income significantly outperforming the impact on costs. But the environment is inflationary as we know, specific to Ireland, Irish inflation between '21 and '24 is estimated to be around 20%. We will have all of our inorganic initiatives fully embedded by 2023 or cost headcount related to that. We will have an enlarged balance sheet, obviously, from our organic and inorganic acquisitions, and we will have a significantly larger customer base of over 3 million customers. Throughout the year, we've been working hard to rebalance priorities and resources really to maximize on the opportunity that we see in the marketplace. And to be more specific about that, it really is about the origination of new customers to the bank from those exiting customers. There's a huge focus on that in the organization, and we are committed to capturing as much of these new customers as is possible. With respect to our CET1 targets, greater than 13.5%. No change to that. This is a 2% buffer to regulatory requirements, excluding P2G, obviously but represents the amount of capital management feel we require to run the business in the environment in which we operate. We've got really strong profit and business momentum from '22 going into '23, that will provide organic capital generation. We do expect to see RWA increases from this growth, but there's always regulatory headwinds, typically in the areas of the unknown, new buffers. We have tried to incorporate all of the buffers as we currently know them, but obviously, as the environment involves this can change. With respect to RWA efficiencies, we always look to ensure that we're making or taking the benefit from all of the available reliefs within the CRR and that will be ongoing. And naturally within our overall capital stack, we assume that our AT1 and Tier 2 buckets are always filled. So that's really what gives us the comfort to reaffirm that CET1 target. Obviously, having a target of greater than 13.5% and a Q3 CET1 of 15.4% requires us really to fill in for investors what our intentions are with capital. And I would say that we feel we have captured the inorganic opportunities that are available in the market. So we don't see any more significant inorganic activity. And really from that base, it allows us to think about what the end-state capital position is going to be, and really how we want investors to think about distributions. So for 2022, obviously, we're nearly there. We'll utilize our existing policy, a 40% to 60% payout ratio, and we'll assess the balance between dividends and buybacks at the end of this year. In recognition of the current environment, AIB intends to propose distribution within its normal dividend policy for 2022, and that would be in quarter 1 of 2023. Beyond '22 and subject to a supportive of economic environment and annual Board and required regulatory approvals. In the coming years, AIB will seek to move towards the [ CE1 ] target by prudently increasing levels of distributions, supplementing cash dividend with share buybacks where appropriate. So we feel, as management, the Board of AIB, that this pathway is realistic, conservative and clear, and I'm sure we will be able to go into a little bit more detail around that in Q&A. If I look at the RoTE target of greater than 13% in 2024, quite a few things really behind this. There's really strong revenue momentum in 2022 coming into '23 and '24. From the geared balance sheet for rising rates, from the onboarding of the inorganic activities, from the growth in the balance sheet from organic activities, and we do see sustainable loan book growth going forward. Our customer base is growing quite strongly, particularly given all of our efforts to onboard all of the customers who are with the departing banks. And going forward, we feel that this will really support our fees and commission line. We've executed a number of RoTE-enhancing inorganic activities. And underpinning this, we feel we have strong asset quality and we're conservatively provided coming into an environment of higher rates, inflationary impacts and somewhat of the unknown. Specifically, for 2023, we've tried to just create a bridgehead to that '24 number, and we will target a RoTE greater than 10% for 2023, and as I said, with really strong revenue momentum from '22. So that's the high-level overview of the targets. I'll hand it back to Colin to wrap it up.

Thanks so much, indeed, Donal. And in wrapping it up and concluding the slide presentation, I just want to take a moment to underline our investment thesis. This is a strong organization. We have a track record of delivering on business transformation in a very clear and ambitious strategy for our future developments. Our balance sheet is clean, it's robust and we are focused through our approach to capital deployment on keeping it that way. We are in a leadership position with a soon-to-be complete product suite in a consolidating market with a solid economic backdrop. The group is transforming, and it is well positioned for the future with value and sustainable returns being delivered to our shareholders. So that is where I will stop and turn the microphone over to the floor.

[Operator Instructions] And your first question comes from Raul Sinha from JPMorgan.

I've got 2 questions to start with, if I may. The first one is on the profile of the capital return trajectory. Just given what you're saying about the multiyear journey towards your target. How should we think about the profile of this? Is this kind of back-end loaded mostly coming in 2025, or is this going to be in equal steps, 2023, 2024, 2025? And the reason I asked this is because if I look at consensus expectations, I think consensus has got CET1 broadly flat at 15%, so not really any significant decline in terms of capital. So that's the first question. And that would imply obviously quite back-end loaded. The second one is just on asset quality. And just sort of triangulating that with the returns target of greater than 10% for 2023, are you signaling that you are more cautious on the asset quality outlook for 2023 versus consensus?

Okay. Thank you very much, Raul. Look, I think the -- on the distribution side, the way we're thinking about returns in the '23 to '25 period is twofold. From 2021, paying effectively $0.045 of cash or $0.078 in totality. We will look to grow that cash dividend on a sustainable and growing basis, okay? So that's underpinning, I would say, the capital return. And then above that, we will look to pay out within our dividend policy of 40% to 60%, and obviously beyond and above that in the '23 to '25 period. We don't expect to ever seek to make a payout greater than 100%. And indeed, we feel in the '23 to '25 period, I wouldn't call it back-ended or flat, I'd probably -- our current thinking is really that, that will just be upward slop, but really to land us on that end point, which allows us on an annual basis really to look at the environment and make that decision. But it's going to be subject to an annual Board discussion. It's going to be subject to regulatory approval vis-à-vis a buyback, but we feel that we have a very strong business trajectory. And I would say within the capital return universe, we are very much focused on buybacks over cash per se. I think given that the price-to-book valuation at the moment that makes a lot of sense for us. And indeed, anything really on the warm makes sense. And I think within the way we look at or think about the buyback priorities in this order is warm. Our preference would always be a directed buyback. Two, would be a form of participating type of buyback, which we executed this year. And then lastly would be an on-market buyback. Naturally, that requires the agreement and the participation with the government, but that's certainly how I would describe management's intentions with respect to capital returns. On asset quality, I would say 2 things. Number one, the RoTE target for 2023, I do not read into that, that we are getting nervous around asset quality. I don't think our position on that has changed. The Irish environment continues to be strong. The inflationary impacts and high-rate environment will inevitably have an impact on credit quality. We have signaled a small charge for 2022. And in the '23 to '25 area, I think we're still in the view of a cost of risk in the range of 30 to 40 basis points. To date, there's been very little stress in the portfolio. But I would say that the speed at which the rate changes have taken place, it's unlikely that we are going to start seeing that stress until Q1-Q2 next year. But look, again, the government have, similar to COVID, provided or are putting in place lots of support measures at household, on a business level, which are quite significant. So these are things that we have to consider when making our guidance estimates for cost of risk, and I'll plan to do that, obviously, in our year-end presentation.

Yes. And if I could just add briefly to that, like our ethos has been to maintain a very conservative and cautious approach to asset quality. We take that approach very seriously and it is applied both to our underwriting standards and to our approach to provisioning. We're unapologetic about that. It is unquestionably the right thing to do, but our book is underwritten to very, very robust standards. And we are very happy with how it is performing and how it is likely to perform over the months and years ahead.

And your next question comes from the line of John Cronin from Goodbody.

A few -- as a follow-up on capital return and you have alluded in the past the prospect of RWA efficiencies through the likes of synthetic securitizations, for example, and we did see one of your peers to significant CET1 capital over the years as they completed such trades. And I suppose, is that a possible source of upside over the medium-term, I suppose, over the next 3 years in the context of what the size of potential distributions to shareholders could be and within the parameters of what you spoken to about in relation to the kind of upwards and point with respect to capital returns that's 100%? The second one here is just a confirmatory point really. Look, based on your comments, obviously, Donal, looks very little credit distress to date, and it's going to be laser realistically and when we see the full impact of the uptick in the rate environment, but is it fair to say, therefore, that look, given your guidance is for a small ECL charge in FY '22, thus you would be substantially -- expected to substantially bulk up on overlays were you to get there? And then thirdly, just on loan pricing, obviously, it's quite a topical point and you've moved to a significantly greater extent in terms of fixed mortgage pricing relative to peers. And notwithstanding your comments around the greater pool of customer inflows and the fact that your natural market share is now going to be significantly higher than it was historically given the changed landscape. Are you happy in some respects to see some flow share in this environment given your higher pricing? I suppose what I'm getting at really is, look, your view on risk and your registrars.

Thank you, John. I'll take question 3 and then Donal can do with 1 and 2. Monetary policy becomes ineffective unless the financial system plays its role in transmitting monetary policy. We take a very rational approach to respond into monetary policy decisions. We take a very rational and considered approach to responding to official interest rate changes. And we will continue to do precisely that, because it is the right thing to do for our customers, and it is the right thing to do for the institution. We have an exceptional market share, as you know, but we want to write business that is sustainable and is reflective of the prevailing monetary policy environment. That's what we've done to date, and that's what we will continue to do.

Yes, I think, John, with respect to expectations for a small charge in '22, that's still very much our expectation. We are not seeing any flows to Stage 3 of significance. So some of the areas that we will be looking at, and we're trying to be forward looking. I mean effective funding costs have changed; we think it's an inevitable outcome that real asset levels are going to adjust downwards. So looking at that, where are the potential weaknesses in the portfolio, try and make an adjustment for that. Understanding the rate environment and the inflationary environment together with government support its impact on net disposable income, and then for borrowers who, let's say, might be most affected by that. So they are the kind of things that we're looking at for year-end '22, and they'll be very much forward-looking types of analysis as opposed to there being any actual stage movements. I think lastly, around RWA efficiencies. Yes, we historically have not engaged in any forms of balance sheet securitization. I think I've said before that it's definitely something that we want to look at in the future. But I wouldn't encourage you to take potential upsides for that. Our history has been that regulatory headwinds and RWA efficiencies have moved in tandem, should we say? There's a bit of uncertainty, I think, still around Basel IV implications for up risk. It's impossible to predict the future there. But we don't -- we have not incorporated SRT benefits in any of our projections, which have allowed us to present these medium-term targets, that's the best way I could describe it.

And your next question comes from the line of Diarmaid Sheridan from Davy.

A couple of questions. Maybe just switching focus slightly from those earlier. Just around the lending targets that you had set out earlier in the year, the 5% compound growth. Is that still something that you'd be comfortable with? And I'm just mindful of, as you rightly point out, the 2 kind of big factors that have changed or some of the big changes that we've seen in the Irish market in terms of who's lending and who may not be at this point in time. And secondly, some of those macro headwinds, in particular, there was a large levels of growth in maybe some of the more corporate type areas. So how should we think about that type of loan growth that you would have set out earlier in the year? And secondly, just around the cost piece and the chart is very useful, Donal. The final 2 blocks that you set out in your chart there, I just wonder, how -- to what extent are they permanent, and you should think about those as being kind of ongoing features of the cost base, or is there still some element of temporary kind of costs, one-off elements that you're still seeing in the context of that changed market? And I suppose also in the context of the initiatives that you would have set out 2 years ago in terms of taking costs out of the business?

Yes, overall, I would say that we are not looking to change any of our guidance. I think on loan growth, for me, I mean the environment is still supportive. We know we're operating in -- we're in an environment where 2 banks have left, and we do still see a lot of momentum in that area. The area that's unknown for us is if we choose to price products in a certain way that suits our return profile, and others who might have a different strategy do not, could that have an impact on market share or on asset growth? I think the answer is clearly yes. Is that something that we would be concerned about? Not necessarily. As Colin pointed out, we have a quite rational approach to margins on lending products. I think in wholesale markets, spreads have fully -- have moved quite a bit wider. And I think that we will maintain our approach in that area, and then we'll have to wait and see what the -- how the external environment evolves. So that's the only thing I would say that we're looking at, but it wouldn't be a cause of concern. I think on the cost side, as you can appreciate, there's a few things going on. The external environment and how long inflation endures, if I was to pick 1 area for external input that I'd love to know, that would probably be the one. That will help define what the trajectory is going to be. We've utilized for our forecast here, what current expectations are. So we'll have to wait and see how that transpires. I mean 2022 was quite acute, I would say, the hiring front in Ireland generally across all businesses. We do think that, that is probably going to slow down somewhat as business activity slows down globally. But I think specific to your question on our cost takeout program, obviously, we had in December '20 identified EUR 230 million of cost savings, and of that, 30% would be complete and done, 50% of that, we would feel is very much on track, 10% of that we have delayed and 10% of that we have effectively canceled. The delayed part is really down to 1 specific project. We'd always talked about trying to simplify the end-to-end process for business credit, and naturally, we've -- we're onboarding a large business credit portfolio from Ulster. So we've adjusted time lines allow us to onboard all of those customers, and then we'll be able to continue to execute that program with the new assets. With respect to the transfer programs, it's a small amount. It's quite specific to the environment in Ireland overall and some of the initiatives we were thinking about with respect to our branch footprint throughout the country and how we were thinking about that. So overall, those cost programs are still very much on target and very much a focus for the organization. And then, of course, alongside that is the new block of work, which is onboarding all of the customers of the departing banks. And that's an area where we're really, really focused. We have taken onboard quite an amount of temporary workers. And what we need to see is how many of those we feel we need on an ongoing basis to ensure not only do we onboard the customers, but, obviously, that we can serve them with the full product suite throughout their financial lives.

Yes, very good. And if I could just add 1 thing as opposed to that just for the avoidance of any doubts, we are very, very pleased with how the business is performing. And we have good visibility on a pipeline of high-quality lending opportunities as we turn into 2023. The business is performing well.

And your next question comes from the line of Chris Cant from Autonomous.

I had a few, if that's okay. If I could just follow up on the last point around costs to begin with and in terms of delivering [indiscernible] cost program. I think going back to your 2020 cost guidance, you're talking about 1,500 headcount reduction by 2023. I know you've got some M&A and allow for the M&A, I think pro forma that would have implied that headcount about 8,400 there or thereabouts on your old plan post the M&A. What headcount you're expecting to be running in 2024, please? Because I think implicitly, it's going to be something like 1,000 higher than that, and I'm just struggling to reconcile that against the comments you just made around delivering on policy of the cost initiatives that you have been talking about previously. I'm just struggling to tie those 2 things together. If I could then just ask on RWAs, please? You indicated that you're not expecting to distribute more than 100% of earnings in any fiscal period. But not sure I understand why, but taking that assumption, what RWA growth are you assuming out to 2024? Again, if I think about your previous guidance and this would have been listed from to date last summer, which included most of the M&A, I think you're talking about implicitly something like EUR 59 billion, EUR 60 billion of RWAs in '23 including the [indiscernible] track a bit. What are you now assuming for 2024? I guess it must be a bit higher than that to avoid a situation where you don't need to distribute more than 100% of earnings in order to get down to capital, okay? So what are the earnings should we be thinking about for '24? And then on revenue, please. I mean I've been trying to reconcile your cost-to-income figure for '24 in the circa 50%, and the cost number you've given with the sensitivities and the revenue guidance you've given for this year, specifically NII. And I'm struggling. I guess, simplifying the issue, how close to 50% is the circa 50%? I mean you're assuming 50% there or thereabouts, or is there quite a lot of bandwidth around that circa 50%. Is the only way it sort of makes sense specifically this is if it's actually kind of more like mid- to high-40s rather than 50?

Okay. Thanks very much, Chris. Look, I think with respect to a walk of headcount from prior years to today, that is -- that's probably going into more detail, frankly, than I even have at my fingertips. But that's -- look, that will be something that I'm happy to delve into at the year-end and go through that walk. As you rightly say, there's a headcount impact from the inorganics. And obviously, there's going to be a headcount impact from the onboarding of the customers. And it's just not clear to us right now, what quantum of that endures and what quantum of that is temporary. But given that uncertainty, we've come up with a cost target to 2024, that we feel captures all eventualities in that area. If I was to look at RWAs, I don't -- I think that the asset growth expectations and even if I look at consensus in the outer years, I think that's bang on the money. I would, I think, no miss there or a difference of opinions. And then with respect to distributions, I think it's -- the environment is still uncertain. As we all know, conflict on the eastern border. And I think most of us are trying to bed down our own macro positions in U.S., Europe, et cetera. So there is uncertainty. We feel, obviously, as a large pillar bank in Ireland staff. It's incumbent on us to manage the business prudently. And from the capital return story, that's really why we wanted to be quite clear on our expectations and also realistic about timing as well. So that's the reason for that one. And then on revenues overall, I wouldn't back solve a cost income ratio to that being an outturn for revenue in 2024. Needless to say, management teams set targets that they expect to beat. And there's always a different line items, amount of variability. And I think what you should take from the call is that 2022 business momentum is very strong going into 2023, and we're very comfortable and confident with our growth and our financial performance in the coming years. So try not to get, I think, caught up on a couple of percentage points above or below 50%. Really, we wanted to put that there as a guide to show the trajectory and income versus the trajectory in costs.

That's helpful. I mean in terms of 5% off of the 50%, if I say now slightly different, what ECB deposit rate and you assume in 2024?

Well, I think, look, the interest rates that we are imagining, well, certainly for Euroland, I had assumed a year-end ECB Depo rate of 1.5% for 2022. So I think that, that is going to be probably a little bit higher. And then '23-'24, we've assumed an ECB Depo rate, if I think of average balance levels throughout the year, like 2.75% to just under 3% in Euroland. And I think that's one of the key inputs. I mean we probably feel that the terminal rate in ECB land is between 2.5% and 3%, but we shall see how that is going to pan out. But look, I think in '23 and '24, we're going to be moving out of theoretical sensitivity tables into the real world with respect to rates, liabilities and pricing. And obviously given we have a very large liability base, and the strategy to our liability pricing is going to be really, really important. I think it's just a bit too early. And that's something I plan to talk about really at year-end because as we sit here today, I would say the liability side on the pricing side hasn't really been adjusted.

And your next question comes from the line of Grace Dargan from Barclays.

A couple on revenue, if I can. So firstly, I guess you touched on it in the presentation, but could you quantify the revenue opportunities both thinking about NII and fees from the KBC and Ulster exit? I'm not thinking more around kind of the acquisition of the customers and that deposit base rather than the inorganic side, which I think we understand. And what kind of benefit from that you're also factoring into your 24 RoTE target? And then secondly, just thinking about your sensitivity, whether you could just give us a view on the size of the assets and the liabilities that make up your market rate, official rate, manage rate buckets that you talk about?

Grace, thanks very much. Look, I think I've given guidance for '22 on other income, and we're very comfortable with that number. If I look at consensus in the outer years, that would seem to be pretty reasonable and would be in line with our own expectations. Couple of moving parts, though, on other income, which I'll kind of just reiterate from prior years. It's -- we have fees and commissions in there, which is obviously the stable amount and then there's always other items, which impact us. Undoubtedly, with more customers, the fees and commission line will be a larger component. We don't really budget our guide for, let's say, one-off gains that appear in other income. But I would say that I think you should expect to see a more robust underlying fees and commission line and just to reiterate that consensus looks pretty reasonable for us. Overall, I don't think I've broken out the balance sheet and the way in which we characterize the assets and liabilities other than to say, I mean, I think our balance sheet, our total balance sheet at the half year was EUR 133 billion of assets, our customer loans were probably around EUR 60 billion. So you can reasonably see there that the part in the middle that makes up the difference is; number one, a securities portfolio of around EUR 20 billion; and number two, deposits at central banks of around EUR 40 billion. Now both of those asset classes or both of those groupings are all rate-sensitive, okay? EUR 20 billion securities portfolio is asset swapped, okay? So as Euribor's move, that's all generating higher income. And obviously, within the Central Bank balance portfolio, that's obviously a floating asset as well, but incorporated within that is obviously a quantum of EUR 10 billion of TLTRO. And obviously, we have got the update from the ECB on how that is going to be treated. And we haven't concluded on this as of yet, but it's our expectations that we will repay the EUR 10 billion of TLTRO before the end of the year, and that will obviously have a knock-on impact on the overall balance sheet.

Perfect. And then maybe just quickly coming back on the fees and commissions. Would you think about scaling that the kind of linearly with customer growth, or we shouldn't think about it that way?

Yes. Look, at the moment, really, and this is almost related to the cost question. What started off as an exercise to operationally onboard customers very quickly becomes a segmentation analysis on new customers and what their needs are. And I think that's probably what we're trying to size at the moment. I think it's quite easy to take quantum's from customers and multiply out, let's say, simple current account fees. I think it gets a little bit more interesting when you -- obviously, you look at the possibilities of further sales. We haven't incorporated any benefits, let's say, from that in our thinking or that said another way, that wouldn't be represented in consensus, but we haven't concluded on that analysis yet. And again, something we would expect to update on at year-end.

And your next question comes from the line of Rob Noble from Deutsche Bank.

Can I ask what's the RoTE guidance sensitivity around your base rate assumption, if it was maybe 50 basis points lower than you think, presuming you say that the sensitivity tables will become less relevant, if you give us an idea of what the 2024 sensitivity is around that? Also, as rates get to that level, how do you see the tracker book performing as the rate on that approaches to 6-month rate. Is that something you thought about or what will change going forward? And then lastly, your slides kind of show the majority -- and I think everyone thinks this anyway, the majority of the revenue increase comes through in 2023, but your RoTE guidance is -- I wanted it to flow, but it's relatively low. So is there something -- how far can you exceed the 2023 RoTE guidance?

Okay. Yes, look, a quick rule of thumb: income, EUR 100 million of income as a percent of RoTE. That's the best way to think about it. I think on the tracker portfolio, that's obviously -- that's a good question. And it is somewhat related to the margin and some trackers were written on very low margins, some trackers were written on higher margins. So if you imagine a refi rate of 3% in 2023, if you're on a 50 basis point margin, I'm not sure if you'll change. If you're not higher than that, you might consider it. So it is hard to know. But the tracker books in Ireland, Inc., I would say, are mature and very seasoned. And given most of them were written in the early 2000s, they're probably in the latter end of their life. And I would say customers in that phase of a mortgage are less likely to switch. And indeed, to date, in our own tracker book, we have not seen too much, let's say, switching out of trackers to other products. And in the Ulster tracker portfolio, which we are looking to acquire. To date, we do not think that there has been significant changes there either. But that is subject to change. And from our perspective, if people move from tracker to fixed from an AIB perspective, that's okay provided our fixed rate levels are all accretive from a return-on-equity perspective, which obviously drives a lot of our pricing decisions. So that is obviously something that we do take into account.

And Rob, it's also worth reminding ourselves that the book that we're proposing to acquire from Ulster in terms of the tracker book there is being required a significant discount to par.

Yes, I think you asked the question as well on 2023 RoTE greater than 10%. Again, I'll reiterate, these are medium-term targets. You should expect management to present targets that they have confidence in beating. And I think the '22 trajectory, as I said, is really, really strong going into '23, which would give us a large amount of confidence in indeed doing that.

Your next question comes from the line of Guy Stebbings from BNP Paribas.

First, I just want to come back to the 10% or less than 10% RoTE next year and cost assumptions underpinning that. I appreciate you've given cost income guidance being sort of euro million term, should we be thinking about linear progression towards the close to 1.75 in 2024? Is it a much larger jump in 2023, and then more of a plateau? I mean if I think about the growth in terms of RoTE target, it would seem to imply a big jump next year, but then some of your comments around confidence of exceeding targets maybe that I shouldn't read as much into it as that? And then the second question was just around regulatory headwinds and sort of I think coming around uncertain capital. I mean can I assume you're talking specifically around countercyclical buffers, possible changes to P2G, albeit those could go in either direction versus current expectations, or is there anything else? I mean you commented you're happy with the consensus RWA, so I assume not, but wanted to check? And related to that, just quickly, I mean, why not pay out over 100% if the circumstances make sense? I mean, if performance in 2023 is stronger than expected, do you find yourself above plan, risks are receding at that point in time, is there something that stops you paying out above 100%? Is it broader appetite or something else? And I appreciate it might not be your central plan, but there's certainly a scenario which would seem to imply you would need to pay out over 100% to get the capital target down?

Okay. I would firstly say on the regulatory headwinds, definitely nothing specifically on the table that would give me a reason for concern or anything that I think needs to be adjusted. Really, my caution here is simply around the environment, the fact that buffers can change, and that's very little control over that. Obviously, we're working through IRB programs and our experience there has never, in fact, been that we've had RWA reductions post inspections. But there is nothing, again, that I have visibility on specifically that is going to have a negative impact there. But over time, I think that is just our experience that we do have regulatory headwinds, we manage those, we deal with those, and obviously, we continue to always look at efficiencies as well. I think on the distribution side, it's some somewhat academic, okay? I mean, we've set out our capital plan and the reason we've defined it as such is we think that this is the most realistic clear pathway that we can present to investors, analysts and indeed, our own stakeholders, being the regulator and the Board. So this is, I think, what we feel is a very credible base case. Obviously, if the environment changes, up or down, things can change. But really, our trajectory and our projections here are around the base case, around the macro environment panning out as we expect. But things can change a lot in 2 years, as we well know.

Okay. That's very clear. And just on the cost point for next year, you're able to give us any sense in terms of nominal cost base terms for next year, how we should be thinking about the move from 2020 to exit the 2024 guidance?

Yes. Look, I'm really steering clear of any guidance beyond what I would have done a Q3. I think that, again, if I look at consensus endpoint is done on the money, reaffirmed today. So I think that for 2023, it's -- I would say the gap isn't really that -- isn't that material. So I think you could adjust either which way. The '23 results, okay, or the '23 RoTE will really be defined by the top line. And that trajectory coming through on the top line exactly how the rate trajectory pans out, which is now becoming a lot clearer. So I probably focus a little bit more on '23. And bearing in mind my '22 guidance was greater than 15% NII. And I had imagined a rate environment or end rate of 1.5%. So like the endpoint of '22 into '23 is going to be really strong.

And your next question comes from the line of Eoin Mullany from Berenberg.

I just want to come back on the cost point. Q2, you said this sort of 2/3 of the EUR 50 million increase in costs was due to temporary staff for onboarding, and now in your guidance to 2024, you do have sort of that growing customer base in there. Should we think about that sort of EUR 35 million-or-so you guided to for the temporary onboarding is becoming permanent, or is that embedded within your EUR 1.75 billion and potentially that could fall away if you're able to deal with those new customers with your existing resources?

I think that's exactly, yes. I mean, really, we're trying to ascertain the headcount required to ensure we can service these customers on an ongoing basis. I think at the time, we were looking very much at the -- in the moment exercise of account opening and plus I think the range of possibilities here with this enlarged customer group is clearly greater than just opening accounts. But then we get into the question of the products. Are they all on the automated platforms? Do we have to have more bodies to, let's say, physically contact sell? That's the stuff that we're working through. So we certainly, in our cost guidance, given ourselves the capacity to pivot either which way, and we will adopt the approach that we feel is going to be most appropriate or suitable for our customers and indeed for the bank.

And your next question comes from the line of Borja Ramirez from Citi.

Two quick questions, if I may. The first one is regarding the announcement of the Central Bank of Ireland regarding targeted measures to ease the market lending rules that was announced in October. Does this provide an opportunity for faster mortgage growth? And also, if you could give some more details on the potential opportunity? And then my second question would be, following up on the rate sensitivity, could you please provide details on expected deposit bids going forward into '23 and '24?

Okay. Just taking the first one there, we're obviously fully aware we note the changes to the macroedential rules. I'm not really going to say too much at this juncture other than to say that we have very deliberately taken a conservative approach to underwriting. That is unquestionably the best long-term interest of every stakeholder that we serve at AIB. We are very conscious of where are the pricing decisions that we have made, which have been soundly and rationally based. And we will see how that impacts on our performance in market share terms as we turn into '23 when the new macro -- sorry, in '23 when the new macroedential rules come into play. That said, at this juncture, given the fact that we have announced rate increases already, we remain very happy with the pipeline of applications that are flowing through to AIB. The mortgage market is changing at pace in terms of, obviously, the rule changes, but there's also a very significant change in terms of the number of players who are active in the space and the relative balance between the broker and direct channels. So there's a huge amount of factors at play here. But ultimately, we have got a responsibility to deliver product that is sustainable. We've got a responsibility to underwrite to an appropriately conservative standard. And we also have an obligation to price rationally and for the medium to long-term. That's what we've been doing, and this what we continue to do. Donal?

Yes. Just quickly on the deposit betas. Certainly, in our sensitivity table, okay, the assumption we basically 50%. But like I mentioned earlier, I think the -- we're kind of approaching the time to move out of sensitivity tables and into the real-world liability strategies. And throughout '23, I think from an AIB perspective, we will be, let's say, switching back on all of the normal liability products that kind of historically we have had. And obviously, since 2014, negative rates in Euroland, these products haven't really been dosed it all for a while. And I think going forward, '23, '24 those products, that pricing mixed with consumer behavior around that is going to be really, really important. But we certainly feel that the sensitivities and the methodology behind the sensitivities stack up, and we are certainly also look out a consensus versus my own views and where rates are going, that would all seem to be at least in line.

There are currently no further questions. I will hand the call back for closing remarks.

Thank you very much, indeed. Thank you all for your time this morning. Thank you for your questions. Very little else for me to say at this juncture, but I would like to say on behalf of Donal, myself, the IR team and indeed all of us at AIB, I'd like to wish you a very happy and restful festive season, and we look forward to speaking to you in the spring when we present our full year results for 2022. Thank you.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.