Bank of Ireland Group plc (BIRG) Earnings Call Transcript & Summary

Good morning, everyone, and welcome. Over the year, we have continued to make progress against our 3 strategic priorities: to transform the bank, serve customers brilliantly and grow sustainable profits. This morning, Myles and I will set out the progress that we've made, update you on the action we're taking to control the controllables, and provide new guidance on a number of our financial targets. The group had a successful 2019. We generated underlying profit before tax of EUR 758 million; operating profit, pre-impairment, grew by 10%; we delivered strong net lending growth of EUR 2 billion; Wealth and Insurance income increased by 11%; costs reduced by a further 4%, achieving a second year of positive jaws. We're benefiting from investment in our transformation, and we generated organic capital of 170 basis points with a proposed 9% increase in our dividend. The Irish economy continues to perform with strong GDP growth and unemployment at a 13-year low. Brexit has, of course, made itself felt. Uncertainty impacted consumer and business confidence during 2019. As a result, the pace of credit formation in Irish SME lending and mortgages was slower than expected. The recent Irish general election has been inconclusive. It may take some time for the next government to take shape. However, the overall outlook remains positive and we expect Irish GDP to expand by a further 4.8% in 2020. In the U.K., the economy has been resilient with moderate GDP growth and a strong labor market. We expect these trends to continue in 2020. The most notable change in our external environment since we published our strategy in 2018 has been the material reduction in the interest rate environment. Euro and sterling rates are now expected to be at or below their current historically low levels for a number of years, with muted inflation in the Eurozone and the U.K. These factors represent challenges to all retail banks, including Bank of Ireland, in our core markets. Our 3 strategic priorities guide us in how we think about our business and in every action that we take. 2019 was another year of delivery. Transformation of our culture, systems and business model remained a critical focus for us. This has helped us deliver our new mobile app and migrate 2 million customers to a new payments platform. This was the largest customer migration in the history of the group. We have also exited a number of unprofitable business activities in the U.K., and we've changed our ways of working to reduce our property footprint and to be more efficient. Our priority is to serve our customers brilliantly in a way that delivers attractive, sustainable returns to our shareholders. We've renewed our brands and improved customer experience. This has delivered a 13-point improvement in our customer effort score, and customer complaints are down 29% to their lowest level on record. The group has made good progress over hard ground despite external headwinds by delivering strong growth in net lending, growing our Wealth and Insurance business and generating 170 basis points of organic capital. We also further reduced our nonperforming exposures. We have the lowest NPEs of any Irish bank. Transforming technology in banks takes time. Integrating back-end and front-end systems is a complex process; it must be carefully managed. The launch of our new mobile app took longer than anticipated, reflecting our commitment to getting this right for our customers. Since we started our transformation journey, the technology, business and regulatory landscapes have evolved. We have responded appropriately and dynamically to these developments, while staying committed to the upgrade and replacement of our core banking systems. This investment is bearing fruit. New products and improved customer experience is leading to a growth in sales and customer interactions. Over 60% of our personal loan applications are, for example, now made through a mobile device. And the group's business model transformation has delivered significant results. We have simplified our business and our structure. We have brought [ call these ] closer to the customer with management layers reduced by 20%. The group is committed to remaining within the guided transformation spend of EUR 1.4 billion, equating to an average of 50 to 60 basis points of capital per annum until 2021. Investment in modernizing our banking systems will continue beyond 2021, but at a lower level of capital investment. Our transformation is delivering tangible customer benefits. Our new mobile app has launched to all of our colleagues and is being rolled out to our customers starting in quarter 1. It represents a step change in customer experience. With a 50% increase in functionality versus its predecessor, this is an important step forward in becoming a more digital bank. We also launched new platforms for our Wealth and Insurance customers in 2019. Our digital insurance wallet provides customers with greater access and management of their policies all in one screen. And our digital investment platform provides customers with a one-stop shop to research and open a personal investment plan. These new channels and services will support growth in our Wealth and Insurance business in 2020. An enabler of this will be further penetration of the bank's customer base, which we increased from 26% in 2018 to 32% last year. The group has also mobilized an end-to-end simplification program to streamline our business model. Two highlights are improvements in our personal currency account opening process and first-time buyer mortgages. We've reduced accounts opening time from 1 day to less than 10 minutes by incorporating biometric facial recognition, or selfies, and eliminating unnecessary questions. Improvements to our mortgage process for first-time buyers enables customers to complete the end-to-end journey digitally. We now accept over 70% of documents online, up from 40% previously. These initiatives are enhancing customer experience and satisfaction, reducing costs and helping us compete more effectively. In the U.K., 2019 saw continued implementation of our plans to enhance our return on tangible equity, or RoTE. We've seen good growth by pivoting our mortgage offering to higher-margin business and we grew our consumer lending. We reduced U.K. costs by 18% last year. We've taken steps to improve the funding of our U.K. operations. And we extended our partnership with the Post Office to at least 2026, with better alignment of shared value. We continue to reposition our U.K. footprint, exiting unprofitable areas such as ATMs, current accounts and credit cards. At our 2018 Investor Day, we set a target of high single-digit returns in the U.K. by 2021. We retain that target. However, lower-for-longer interest rates and continued competition in the mortgage market means that it will take longer to achieve that target. In terms of our outlook for the U.K., we will continue to invest in profitable lending whilst retaining a disciplined commercial and risk focus. We will also take steps to further optimize costs. But let me be absolutely clear. Increasing returns in our U.K. business remains the strategic imperative. One of the levers that we talked about at the interim results was the relentless focus on costs across the group. This is the fourth successive reporting period in which we've reduced our operating expenses. At the same time, we've continued to invest in our systems and our people. Our cost reduction is strategic. It has strong momentum and has become embedded in our mindset. I feel particularly pleased with the progress that we've made so far, but we see opportunities to go further. To reflect this, we are, today, committing to lowering our cost target by a further EUR 50 million to EUR 1.65 billion in 2021. Bank of Ireland's purpose is to enable our customers, colleagues and communities to thrive, and central to this purpose is conducting our business in a responsible and sustainable way. In 2019, we signed the UN Principles for Responsible Banking. Sustainability is clearly a growing area of focus nationally and globally. To play our part, we've taken a number of steps. We launched a national financial well-being strategy, we've reduced the group's carbon footprint by 40% since 2011, we established a EUR 1 billion sustainable finance fund to support personal and business customers, and we were the first bank in Ireland to offer a green mortgage. 2019 was a year of further growth in our lending and business income, progress on reducing cost and capital growth. We further transformed our culture, systems and business model. We improved our U.K. business whilst acknowledging we do have more to do. And we generated capital and improved the asset quality of our loan portfolios. We are maintaining our commercial discipline on risk and pricing with stable net interest income. This includes prudent application of negative interest rates. The group has been effective at controlling the controllables. However, there is no getting away from the fact that since we set our targets in June 2018, our operating environment has changed materially. Put simply, it has become more challenging. External headwinds have impacted the time frame for delivery of some of our Investor Day commitments. Today, we are refreshing 3 of the group's targets. We are setting a new RoTE target of circa 8% by 2021, which Myles will provide more detail on shortly. In the longer term, we still target a RoTE of 10%. As I've already mentioned, we are lowering our target cost base to EUR 1.65 billion in 2021. And on capital, primarily reflecting a recent increase in the U.K. regulatory requirements, we are increasing the group's target CET1 ratio to in excess of 13.5% in 2021, from 13% previously. Our dividend policy is unchanged. This is for our dividend to increase prudently and progressively and, over time, build towards a payout ratio of around 50% of sustainable earnings. The group is proposing a dividend of EUR 0.175 in respect to 2019, a year-on-year increase of 9%. I will now hand you over to Myles, our new CFO and Executive Director, to take you through the financial statements in more detail and to provide more guidance on our outlook.

Thank you, Francesca, and good morning, everyone. Against a challenging backdrop, I'm pleased to present a strong financial performance. We have delivered net lending growth, increased Wealth and Insurance income, lower costs, reduced NPEs, net capital generation and a dividend increase of 9%. We are reporting an underlying profit of EUR 758 million, with operating profit up 10%; stable net interest income; other income, up 4%; and operating expenses, down 4%. The group's impairment charge was EUR 215 million, reflecting a more normalized level of impairment and losses on a small number of large exposures. Our noncore items for 2019 includes EUR 67 million relating to the Tracker Mortgage Examination, covering: one, compensation, two, program costs; and three, provision for a potential fine. The balance of non-core costs relate to business model transformation. Loan book growth and pricing discipline have ensured stable net interest income. In terms of NIM, while growth in lending is supportive, NIM declined to 2.14% in 2019 from the U.K. card disposal, competitive pressures in the U.K. mortgage market and growth in the liability base and liquid assets. On outlook, importantly, loan book growth will continue to support net interest income and NIM. And pricing discipline will remain key, both for lending and for the application of negative interest rates to corporate and larger business balances. Nonetheless, lower interest rates represent a material headwind for NIM. For full year 2020, we expect NIM to be around 205 basis points primarily from reduced income on structural hedges and higher liquid assets. Taking account of these factors, and loan book growth, we expect net interest income to be broadly in line with current levels. We've set out new disclosures on the group's structural hedge policy. This policy protected income in recent years from low market rates. However, the maturity of higher-yielding historic hedges, combined with falling longer-term swap rates, will result in lower income from structural hedges over the coming years. Loan growth momentum continued in 2019 with net lending of EUR 2 billion. That's been driven by new lending of EUR 16.5 billion spread across our markets. In Ireland, we had a 24% share of a mortgage market that grew 9% in 2019. Brexit impacted Irish business sentiment with more caution on investment decisions. Even with this impact, we continued to grow our SME market share. And last year, we increased new lending by 3%. In the U.K., lending increased by 15% from growth in mortgages, car financing and personal lending. Our corporate new lending was 10% lower, reflecting careful capital allocation and conservative asset selection. Our outlook for 2020 is net lending growth of circa EUR 2 billion, and we expect Retail Ireland to account for a greater proportion of overall lending compared to 2019. Underlying business income was 6% higher, with Wealth and Insurance as standout performer. Income rose by 11%, delivered by growing new business sales and Life market share. A big part of this was a deeper penetration into our own customer base. In Retail Ireland, income was EUR 13 million lower from reduced cash handling fees and lower overdraft fees. On valuations, the improvement is driven by movement in market rates during the year in both fixed income and equity markets. As you heard from Francesca earlier, we have an absolute focus on cost. Last year, we generated gross cost savings of 6% through: one, process efficiencies and org design, resulting in lower staff costs; two, lower third-party costs; and three, U.K. portfolio exits, including cards. Importantly, within these savings, we absorbed wage inflation of 2.6% and higher depreciation associated with transformation investments. This has resulted in an overall reduction of 4% in 2019 and a 2% improvement in the cost-to-income ratio. And on transformation, we invested EUR 263 million in 2019, of which 38% was capitalized, and we remain committed to operating within our EUR 1.4 billion transformation investment to 2021. Looking ahead, 2020 operating expenses are set to be lower than 2019. For 2021, we are reducing our cost target by a further EUR 50 million to EUR 1.65 billion, with a clear line of sight on the required initiatives. We reduced nonperforming exposures by a further EUR 1.5 billion last year and our ratio to 4.4%. An important feature of this reduction is a contribution from both organic workout and portfolio transactions. Organic workout was supported by our dedicated in-house teams and positive macroeconomic conditions. The 2 portfolio transactions generated 30 basis points of CET1 capital and we expect further improvements on NPEs. On asset quality, the impairment charge was 26 basis points. This reflects a more normalized level of impairments compared to net write-backs recorded in 2018. We've increased our coverage ratio on Irish mortgages to 25%, and the charge on U.K. personal loans has grown in line with lending volumes. In H2, the charge was elevated at an annualized 32 basis points. This is primarily as a consequence of losses on a small number of SME and corporate loans. Taking account of all of these factors, including NPE coverage on calendar provisioning, we expect the net impairment charge to be at the upper end of the 20 to 30 basis points range to 2021. We have strong funding and liquidity levels. Customer deposits on current accounts grew by 6%, reflecting economic growth, with a resultant impact of higher levels of liquid assets. For MREL, guidance was unchanged and we expect to issue EUR 1 billion to EUR 2 billion of senior debt per annum to 2021. And as a key takeaway, we have the funding and capital capacity to support growth. The group CET1 capital ratio increased by 60 basis points in 2019. We delivered organic capital generation of 170 basis points, providing capacity for investment in loan growth, transformation and dividend. Capital initiatives unlocked a further 40 basis points. The group finished 2019 with a fully loaded CET1 ratio of 13.8% and a regulatory capital ratio of 15%. On Slide 26 of our results presentation, we set out the components of capital generation and usage, including regulatory demand, which is expected to consume up to 80 basis points of CET1 capital by the end of 2021, with the majority now expected in H1 2020. We expect capital generation to benefit from both organic and further capital initiatives. We are increasing the group's target CET1 ratio from in excess of 13% to in excess of 13.5%. This reflects the announcement by the Bank of England of an increase in the U.K. countercyclical buffer. This adds 30 basis points to requirements, effective from December 2020. Now there are 2 potentially offsetting capital requirements that may emerge. These are, firstly, the introduction of a systemic risk buffer in Ireland, the timing, sizing and application of which remains unknown. And secondly, new EU capital proposals allowing regulators to permit issuers to partly meet their P2R requirement with AT1 and Tier 2 capital. Taking account of capital generation and usage, we expect to remain above 13.5%. On outlook, looking to 2020, we expect the year ahead to be characterized by further growth and efficiency. We see net lending growth of circa EUR 2 billion, with NIM of around 205 basis points. Net interest income to be broadly in line with 2019 and continued growth in the group's Wealth and Insurance business. We expect 2020 to be the third successive full year in which we reduce our operating costs, with continued progress in reducing NPEs. We anticipate impairments to be at the upper end of the 20 to 30 basis points range. And we will continue to generate capital supporting our dividend policy while progressing towards our 2021 RoTE target. So in terms of our target, I'd like to set out the major building blocks to improving returns from 6.8% to circa 8% by 2021. Further cost reductions, growth in our loan books and increased fee income will be the tangible actions to improve returns. Lower interest rates, MREL issuance and increased capital requirements are the main drags. We expect RoTE to continue growing beyond 2021 on a progressive basis with the potential to get to 10% over the longer term. An improvement in the interest rate environment will help achieve a 10% return sooner. I'd like to close by reaffirming the group's refreshed financial targets that Francesca referred to earlier. On RoTE, as discussed, we see this progressing from last year's 6.8% to circa 8% by 2021 and to 10% over a longer time frame. On costs, we will build on the progress made in each of the past 2 years with further reductions in 2020. And we are setting a new target cost base of EUR 1.65 billion in 2021. This will bring the net reduction in operating cost to EUR 250 million since 2017. We expect to maintain a robust capital position with a target CET1 ratio in excess of 13.5%. And on dividends, we reaffirm our policy as unchanged. Thank you.

Okay. So Myles and I will now take questions. I'll start in the room here in Dublin, then I'll come to questions on the phone. If you could just raise your hand and let us know your name and your institution, please? I'll start with Diarmaid just here.

It's Diarmaid Sheridan from Davy. Three questions, if I may. If I could maybe start off with Myles, you referred to the return on tangible equity and the 10% longer-term targets. If we think about the cost and transformation aspects of those, I mean how should we think about those supporting -- going -- bridging, I guess, from 8% towards that 10% beyond 2021? Should we continue to think of those as being drivers of that? In terms of the U.K., I mean it clearly continues to be a very challenging, competitive environment at the moment. Beyond the initiatives that have been carried out in 2019, what further types of actions do you think you could take that would look to support the increase in returns there? And maybe finally, on capital, and Myles, again, you alluded to the kind of offsetting measures. I just wonder to what extent are those incorporated into 13.5%. I appreciate some of those are unknown at this point, but to what extent would they be incorporated in -- should a systemic risk buffer, for instance, be introduced at some point in the next year or so?

Thank you. So I'll take them in slightly different order. I'll answer on the U.K. and just give you some -- how I think about the RoTE in excess of 10%. Myles will talk more about the component parts of our RoTE, walk and then capital. So the U.K. We remain committed to our U.K. business, but as I said in my opening comments, improving returns is an absolute imperative. We're committed to the U.K. because we've been there for 40 years through a series of cycles, but there's no misplaced nostalgia or romanticism about the fact we've been there for 40 years is the reason why we'd want to stay there. It's because we still see attractive returns being possible in the U.K. market. It is a large-scale market. There's adjacency, and we believe that we have an opportunity to continue to improve our profitability. We are making good progress. We set out our invest, improve reposition strategy. We've invested in growth in niche segments. We wrote GBP 0.25 billion of new, bespoke mortgage business in 2019, which I'm pleased about. We also grew lending in the consumer space with our strategic partners and through Northridge, which was our intention and we've done that well. We've improved the Post Office relationship with an extension of the partnership, and we've also improved our costs in the U.K., they're down by about 20% in the last 2 years. And we've repositioned. We've exited unprofitable businesses such as U.K. cards. So our strategy is working. However, we acknowledge that the external environment is tougher. The lower-for-longer loan interest rate and also just the level of competition in the overcrowded mainstream mortgage market has made the high single-digit guidance that we provided around RoTE, not necessarily something that's going to be delivered by 2021, but we're certainly pursuing it as we grow and improve our RoTE. We constantly challenge ourselves on returns in all of our geographies, in all of our products and segments, and the U.K. is no different. Your question was, "Is there anything more we can do?" Continue on the improved invest and reposition strategy and we challenge ourselves on different scenarios. It's always about shareholder return, and we don't want to take any action. For example, exiting any parts of any part of the group that would be dilutive to RoTE, and we believe exiting any part of the U.K. would be dilutive. Obviously, if things -- if the environment were to change, we would always challenge ourselves in finding ways to improve shareholder returns. So that's how we think about the U.K. Just in terms of the RoTE and the movement to -- we're reporting an RoTE today of 6.8%. Myles can elaborate on how we are confident we'll get to the 8% by 2021. The in excess of 10% is still our intention because when we look at our business model, the Bank of Ireland business model can generate RoTE in excess of 10%, and that's without assuming a big change in our interest rate environment. Obviously, if interest rates were to go up sooner, then we would achieve in excess of 10% quicker, but we see a path to getting to in excess of 10% through continued loan book growth, which we're demonstrating today; improved expansion and diversification of our revenue, for example, for wealth insurance; and the further improvement in costs, which I think we're demonstrating really strong momentum and a proven track record on. And I'll pass to Myles to talk about sort of the RoTE and the component parts and also capital.

Sure. So Diarmaid, the increase in RoTE from 6.8% to our revised target of circa 8%, a fundamental part of that is the cost reduction to EUR 1.65 billion by 2021. But of course, we don't stop our cost reductions at that point, it continues. And so we talked about the progressive improvement in RoTE beyond 2021, and part of that, most definitely, is further efficiencies. And yes, transformation is part of that in 2 ways. Firstly, we've talked about that we will continue to invest in transformation, but at a lower level of capital investment that will be helpful to our operating expense. And secondly, just the efficiencies that we would expect to get from a longer-term transformation program. And on capital. So in setting the greater than 13.5% target, it reflects everything we know today as best as we can now. And that -- and we have incorporated the U.K., 0.3%. That's included. Now I talked about those 2 major events, which is the introduction of the systemic risk buffer, of which details are unknown, but we have assessed its introduction in other jurisdictions, and in particular, its offsetting relationship with outside buffers. And secondly, the ongoing dialogue in relation to meeting P2R requirements from non-CET1 capital such as Tier 2 and AT1, I mean, that is a helpful development. And we see that development as having real potential and being a viable opportunity. And so setting our target at 13.5%, is -- our -- takes account of all of those moving parts.

Thank you. Eamonn?

Eamonn Hughes from Goodbody. Maybe just 2 points, one on capital, one on NIM. Just in relation to the NIM, you've given guidance previously which kind of rounded to 2021 as well. So maybe just try and get our heads around your thought process on that, given that you've given a number for 2020 of 2.05%. So was just -- in relation to that, you've seen, obviously, a big pickup in terms of liquid assets. Have there been any actions, kind of even year-to-date, I'm conscious that it's quite early still, but to give you a little bit of comfort around that, that it's not an issue, that's kind of material into the rest of this year and clearly a factor that could really -- in place for 2021 as well. And then maybe just in relation to the AIB moves and mortgage rates today. I'm conscious it's only happened this morning in the papers, but how should we think about that in relation to maybe NIM sensitivity? Just then on capital. Myles actually just alluded to it there in relation to your answer to Diarmaid, and the step down in relation to transformation post-2021, it's 50 to 60 basis points a year. Is it materiality? Is it half dash ballpark, how should we think about that just kind of as an ongoing capital guide for you guys?

Thanks, Eamonn. I'll answer briefly on how we think about our mortgage pricing and then pass to Myles on -- more broadly on NIM and capital. So in 2019, there were 19 price changes in the Irish mortgage market. We did 2 of them. One was to price up, one was to price down. We have demonstrated prudence and discipline around pricing. We obviously must stay competitive, and we believe we are. So we have a competitive offering even compared to latest competitor developments, and that's been demonstrated by the fact that our market share in the second half of 2019 increased. So our market share overall was 24%. That reflected the fact that we were entering the broker markets early in 2019 as the broker market in Ireland grew, so we didn't participate in all the growth in the first half, but I'm certainly happy with the results that we had in the second half of 2019. We had a good 6 months. And our fourth quarter market share was getting closer to 25%. In December, we had a market share of 28%. So that's a particularly strong month. So I feel the pricing changes that happened in any competitive markets, we're in a competitive position right now. We've increased our channels, we have a strong proposition, and our pricing is working. Over to you, Myles.

So in relation to the 2021 NIM. Look, as new CFO, I want to give guidance on those items that I feel comfortable and confident of achieving. And I'm not providing specific guidance on 2021, and that's because my focus is on generating net interest income, which drives profitability and returns. Now having been asked the question. If we see no further deterioration in the rate environment, I'd anticipate NIM remaining above 2%. It is really important to call out the buildup of liquidity and therefore, higher liquid assets could impact NIM, but being very mindful that this doesn't impact net interest income. And in relation to the transformation spend and beyond 2021. Just to reaffirm, first of all, that we remain very comfortably within the EUR 1.4 billion envelope. And given the nature of activity, it is elevators right now by design. It's investing heavily in where we want to be asked. And beyond 2021, it will be lower. Not providing precise guidance in what that would be on.

Okay. Thank you. Any more questions in the room? We can come back to the room. We'll go -- I don't know if you have any questions on the line -- a couple of callers on the line.

[Operator Instructions] Your first question over the phone lines is from Alastair Ryan of Bank of America.

Just on the IT upgrades. I'll admit to struggling from the outside on just where you are with that. I mean you sound very confident on the numbers today. You were a little slow rolling out the app for retail. Just -- could you just expand a little for us, please, on what we should see to measure the progress that you're making. Because I think your financial goals are quite clear on that. Clearly, just what markers should we be looking forward to see externally that you're sort of delivery is on track? Because clearly, it's such a large project and you're sort of over the hump in a way, certainly, with the core platform. But how do I think about measuring that? I think that would be quite material for you over the next 12 months.

Okay. Thanks, Alastair. I'll respond to that. So we are making progress. We're hitting key milestones within the budget and the items that we've given, and we're very clear on what we want to achieve. And I think we're demonstrating tangible benefits. So our costs are improving. Our customers are getting to feel the benefit now of the changes that we're making in our technology, and we do have increased stability in our overall system. As Myles said, we won't be done on December 31, 2021. That was never the intention. Investing in technology and staying current and relevant, as you'd expect, is an ongoing activity, but we're not going to be investing at the rate that we are currently. That 56 basis points per annum capital allocation will reduce in 2022 and beyond. In terms of how to sort of track our progress, we are -- as we set out -- as we stand up new technology, we're migrating customers and then decommissioning the old technology. So for example, the 2 million migration to -- of customers to a new cards platform will enable us to decommission that platform. As we migrate our customers onto the new mobile app, which is a Temenos technology, we will decommission the old app. And that ability to stand up new technology, migrate, and then stand down and decommission old technologies is a sign of progress. More broadly, our cost improvements. So the cost improvement we're making by having just more efficient processes, whether that's through Temenos and the investment that we make -- we continue to make or whether it's just improving some of our end-to-end processes, like the example on accounts opening or our mortgage journey, is enabling us to grow while our costs are coming down. So you're seeing a second year of successive positive jaws. We're seeing a total cost in the last 2 years of gross cost improvement of EUR 215 million or 11% whilst growing our business. So that's another evidence point. And in terms of our positioning with customers, complaints are down. Our participation and market share where we choose to compete is compelling without necessarily competing exclusively on price. Those are the sort of key measurements and aspects that we would articulate around our transformation journey.

Your next question comes from the line of Aman Rakkar of Barclays.

I had one quick question on your hedge disclosure. So thank you very much for this new disclosure. It's very interesting. Just regarding your strategy on the hedge. So it does look like you've -- you actually quite materially increased your balances in 2019. If I look at the volume of the hedge, it has gone to EUR 33.3 billion from EUR 26.4 billion. So looks like you've loaded on the hedge pretty significantly at a time when interest rates are particularly low. So I was kind of hoping to interrogate the kind of the strategy and the thinking behind that. And the second bit is, I think you also really helpfully called out the yield difference in kind of the average yield and the front book yields on that. So it does look like you're probably on course to lose basically all of the income from that hedge over the next couple of years. First of all, is that a correct interpretation? And as part of that, can the yield actually turn negative on that hedge? And I guess, is there anything you can do as part of your -- [ talk it ] in terms of essentially investing in certain assets or kind of diversifying what's gone into the hedge to kind of offset that drag? Or is that basically unavoidable? Is that something we should just basically model as a drag over the next couple of years?

Thanks, Aman. Go straight to Myles for structural hedge.

Sure. So let me just -- firstly respond with a broader comment just on net interest income. And so you've heard me say that I expect interest income to remain broadly in line with 2019. And just to examine that briefly. So 2020, interest income will benefit from EUR 2 billion of new lending which equates to about EUR 50 million of income next year. I expect that increased income will be largely offset by lower income from structural hedges of about EUR 40 million, I'll come back onto that number in a second, and also the cost of additional MREL issuance to be around EUR 10 million. So there are the big moving parts on why net interest income will be flat or thereabouts in 2020. In relation to the precise question. So a couple of things to call out. One is we have a policy that we apply. We've set that out, and that's about hedging 100% of equity and about 80% of free funds. And it's important to say that, for sure, that rate has come down significantly, and it's lower than where it was compared to our historic hedges. But equally, it's higher than the overnight rate, right? So we are earning more on our structural hedges than we would if those funds were simply placed overnight. So it's a lower level of income, but it's still a higher level of income relative to overnight rates. And the precise impact I've called out, that EUR 40 million impact, and the moving parts on that are if you look at our available, the average balance, we hedge about 15% of that each year based on a 3.5-year average. That's about EUR 4 billion of hedges that will roll over this year. And comparing that to the historically higher rates of hedges, it's about a 100 basis point decline. So EUR 4 billion, 100 basis points, EUR 40 million impact in 2020.

Okay. Thank you. We're still on the line? Sorry, Aman, did you have another question or...

So sorry, sorry. Just regarding the step-up in balances in 2019. It just -- this does indicate some shift in the policy, either that you've increased basically your assessment of what a noninterest-bearing free funds or something? Just the -- you basically increased the size of that hedge by 1/3 in 1 year. So I just wondered where that was coming from.

So I think if you look at the buildup in -- on the liability side of the balance sheet, you'll see that. So deposits in current accounts grew by 5% year-on-year, and that's the primary driver for the increase in the average hedge balance.

Thank you. We'll stay on the line.

And your next question, ma'am, comes from the line of Alicia Chung of Exane.

Two questions for me. Firstly, on your NPEs. Obviously, you're continuing to make good progress on reducing those. That's now down to 4.4% in terms of your NPE ratio. Just wanted to get a sense of what you might be targeting going forward? Obviously, you're already at a good level, but there's certainly a case to be made to keep reducing those NPEs to reduce the calendar provisioning impact that you've been guiding to. So first of all, what would you be targeting over the next couple of years? And also, what will be the impact of the definition of default on your NPE ratio? So how much of a step-up could you see going forward? Secondly, just looking at your -- the strong increase in your business income. Obviously, that was one of the highlights, I suppose, of today. You're seeing very good progress in Wealth and Insurance. What momentum can we expect to see over the next couple of years in terms of market share and customer base penetration? And could you also give a sense of what dynamics you're seeing in terms of fee margin pressure in the business and how that might roll forward?

Okay. Thanks, Alicia. So let me go -- I'll answer on the Other Business income and Wealth and Insurance and how we see that growing. I'll touch on NPE reduction, but then ask Myles to provide more on guidance, on how the definition of default will -- and the impact of that going forward. So yes, as you mentioned, it is an area of growth. We've committed to investing in the Wealth Insurance business. Our overall business income grew by 6% to the EUR 666 million you have in the pack. Within that, Wealth and Insurance grew by 11%. And that was through increased market share in the life markets, we went from 20%, 22%; increased penetration of our customer base in Life and Pensions to over 30% -- 32%. And we feel positive about that improvement. But there's 3 reasons why we feel confident and positive about the outlook and the continued growth in our Wealth and Insurance business. One is the demographic backdrop. So Ireland, as a market, is attractive for wealth insurance. You've got a growing population, full employment, increasing disposable income, and because of the age demographics, people are beginning to think more about providing for their pension, and generally unprovided for, and protecting life and asset, and we're certainly keen to serve them in addressing those needs. The second reason to be confident is our distribution model is unique in Ireland. So Bank of Ireland is the only bancassurer in Ireland. We see attractive opportunities to continue serving our customer base as well, and we've seen our bank channels perform particularly strongly in 2019. So new business generation was close to 30% up in our own banking channels. And the third is investment we're making in digitization of the offering. So we invested in having a life advice platform, which enables customers to explore and pick an insurer -- an investment or a savings plan. We also launched digital wallet, which really reduces the journey, just the ease of picking more general insurance, we'll be adding more products. And we're looking forward to rolling out an improvement to our pension offering, which is an area of significant growth in Ireland that will be very attractive, particularly for corporates who offer pension products to their employees. Plus, we've been digitizing our own back office. So we have reduced our cost. You've got a cost/income ratio in our wealth insurance business, sub-50%, and some very positive jaws. So they're the sort of dynamics. Looking forward, we would certainly see that as an area of growth in our business as we diversify our revenue streams. Just on sort of an overall note on NPEs before I pass it to Myles. So we improved, as you said, Alicia, our NPE ratio by 190 basis points to 4.4%. And we did do that, again, through a combination of organic and inorganic actions. So 60% of that improvement, so about EUR 0.9 billion, was through organic action. That's just working with our customers to find solutions and 40% was from inorganic. So those were the transactions we did that involved NPE securitization and sale, and we were certainly seeing a combination of both as opportunities to continue to manage our NPEs effectively going forward. But I'll ask Myles to give more color.