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

Good morning and welcome to the Bank of Ireland Interim Management Statement Presentation call. Today's conference call will be hosted by Bank of Ireland Chief Executive Francesca McDonagh; and Chief Financial Officer, Myles O'Grady, followed by a Q&A. I would now like to turn the conference over to Francesca McDonagh, Chief Executive. Please go ahead.

Good morning, and thank you for joining. And just before we start, I'd just like to apologize for a glitch that we had simply with the upload of the RNS, the stock exchange. It went out shortly before 8 a.m. But notwithstanding that, I hope everyone is safe and well during these extraordinary times. Since our results in February, the harsh impacts of COVID-19 has been felt around the world. Our focus during this time has been on supporting our customers, colleagues and communities and responding as dynamically as possible to the unfolding crisis. We entered this crisis in a strong position with a diversified balance sheet, with improved credit quality, the lowest NPE ratio of any Irish bank and a proven track record of credit risk management. However, COVID has hit our market fast and hard. Its scale and significance means that the previous guidance we provided for 2020 no longer applies. To reflect the uncertainty of the external environment, we've announced this morning a prudent impairment charge of EUR 266 million. This includes a EUR 250 million management overlay for what we expect to be the initial impacts of COVID. Myles will provide more detail on this impairment charge shortly. We also entered this crisis in a strong capital position with a CET1 ratio of 13.5%. Our CET1 ratio will remain above previous regulatory capital requirements, and that's across a range of COVID scenarios. We have the capital and we have the liquidity to further support our customers in the times ahead. This morning, we will update you on our Q1 results, which pre-COVID, showed a good start to the year. We grew lending, issued more than 1/4 of all new mortgages in Ireland, reduced our NPEs and continued our multiyear progress in cost management. Of course, COVID will have a material impact on our financial performance through lower lending and business activity and through higher impairments. I will set out how the bank has responded to COVID and the actions that we've taken. And while no one can be definitive, I'll share how we're starting to think about the future from a business perspective. Our purpose is to enable our customers, colleagues and communities to thrive. This has never been more relevant or important than it is today. The progress we've made over the past couple of years to transform our culture, systems and business model has supported our operational response, giving us the head start as we phased into this crisis. We're also very aware that the financial crisis of 2008 impacted the reputation and financials of Irish banks for more than a decade. Our response to COVID, which is a health and economic crisis, will define us for the decades to come. Starting with customers. Since March, we've significantly increased our proactive engagement with customers across every one of our businesses and geographies. In Ireland and the U.K., we've offered payment breaks and other flexible arrangements on mortgages and personal loans. For business customers, in addition to payment breaks, we've provided working capital support, free finance and FX solutions. As an example, our corporate and SME customers have drawn down over EUR 2 billion to improve their liquidity and shore up cash flows. Our systems transformation investment over the past 2.5 years has enabled us to be innovative in our response to COVID. 2/3 of mortgage payment breaks in Ireland have been processed digitally, and system improvements have provided operational resilience and stability during a period of huge change and customer demand. Across the island of Ireland, we introduced practical support for customers who are self-isolating at home. This allows them, for example, to nominate a trusted family member or friend to bank on their behalf. And we put in place a range of special measures to help the elderly, carers and health care workers, with almost 4,000 customers making use of these services so far. We've seen a 12-point increase in our island of Ireland Net Promoter Scores since the start of 2020, the best we've had on record. This reflects the hard work of our colleagues and, importantly, tells us that our customers are feeling the difference when they need it most. Our response to COVID has been made possible by the incredible work of our colleagues. I've hosted video conferences involving the majority of our 10,500 colleagues over the past few weeks to personally recognize how they've gone above and beyond the call of duty. And I want to take this opportunity to publicly thank them for their commitment and dedication. We've taken a number of actions to support our colleagues during COVID. One of these is the scaling up of remote working. Before COVID, around 1 in 3 colleagues were working remotely some of the time. Today, more than 70% are working from home full time, enabled by the agile ways of working that we've been rolling out since 2018. We temporarily closed our smallest branches with the lowest footfall. We did this to reallocate resources to the services most in demand right now and to protect colleagues and customers with social distancing. And we're helping colleagues stay well at this time with a dedicated support line, a COVID communications hub and mental and physical well-being resources. We know that some colleagues have caring duties, and we're supporting them, and we're providing a special allowance for those working on-site and in the frontline. We've just completed our regular survey with all colleagues to get their feedback on working at Bank of Ireland. Despite the challenges being faced, the results show a record high in staff engagements and positive experience of our culture, up 8 and 11 percentage points, respectively, in the past 6 months alone. We continue to support our communities. And when I say community, this includes all of our stakeholders: investors, government, regulators and the society we operate within. We've engaged constructively with the governments in Ireland and the U.K. to implement support for the economy and especially SMEs. In Ireland, we took the lead in changing our standard payment terms for our own SME suppliers, paying within 5 days rather than the contractual 30. This has provided a cash flow lifeline to small businesses across Ireland, many of whom are also our customers. And we donated EUR 1 million to support the immediate needs of some of the most vulnerable right now, including the victims of domestic violence, the elderly and the isolated. We've maintained an active program of engagement with our shareholders throughout the crisis, and we've been proactive in agreeing the measures we've taken with our regulatory stakeholders. We'll continue that engagement as we move through the crisis. I've touched on the payment breaks that we've put in place for customers. As this is such an important part of our response to COVID, I'll delve into this in more detail on Slide 5. In Ireland, we are providing payment breaks of up to 6 months to support customers in financial difficulty. Prior to COVID, payment breaks would typically total just 3 or 4 requests per day. Since COVID, this has increased to more than 1,000 cases on Sundays. However, following the initial surge, new requests have fallen materially in recent weeks with 90% processed by mid-April. To provide a detailed overview, we set out in the slide the number of payment breaks and other support that we've agreed across our personal and business loan books in Ireland and the U.K. We've also included what this represents in percentage terms for both accounts and the overall portfolio. Importantly, the granting of these breaks doesn't automatically trigger a move to stage 2 under IFRS 9 nor does it impinge on customers' credit records. Over the coming period, we will continue to do as much as possible to support our customers, and that includes engaging with them during this temporary disruption to help get them back on track as soon as possible. Our credit risk management has been a distinct, competitive advantage for a long time and remains a key strength of the management team. Over the past 12 years, we've supported customers through very challenging circumstances, consistently demonstrating the lowest arrears within the Irish banking sector. This depth of experience and proven track record will stand us in good stead in the time ahead. In terms of the macroeconomic outlook, there are some known issues. We know that COVID will cause a severe contraction in economic output and a deterioration in the labor market, as illustrated in our economist forecast shown on Slide 6. We know this will have an impact on our lending growth and our business income, and we've started to see this already with slower activity in mortgages and SME lending since the second half of March, which Myles will expand on. The consensus is for the start of a rebound in economic activity later this year. And while Ireland is a small open economy, it has a relatively high exposure to more resilient sectors such as pharma, tech and agri food. But there are a number of unknowns that make it impossible to forecast the future with certainty. The true depths of the downturn and the gradient of the recovery is uncertain. Economic recovery will be influenced by the effectiveness of the fiscal and monetary policies adopted to cushion and restart our economies. A second wave, however, of infections and associated shutdowns can't be ruled out, and the timetable for the development and rollout of a vaccine is unclear. A definitive prediction is therefore impossible, but this directional view informs our outlook, which I'll cover in my final slide. COVID will have a material impact on the group's 2020 financial performance, with lower levels of activity impacting our income and increased impairment charges. We're being prudent in our risk and impairment assumptions. Our strong capital position is expected to remain above previous minimum CET1 requirements across a range of COVID scenarios. And we have the capital and liquidity to support our customers. We look at recovery into 3 phases: horizon 1, 2 and 3. Our response to the initial months of this crisis, horizon 1, with economies effectively in lockdown, has been comprehensive, practical and resilient. But we're also preparing for horizon 2 when restrictions start to ease and horizon 3, the new normal, whatever that may be. We will continue to leverage our transformation program to respond in an agile and increasingly digitized way. We will look at tactical and strategic solutions to further reduce our costs. We will allocate the resources to ensure the group is best positioned and appropriately structured to compete in the post-COVID environment, and we will remain focused on practical customer solutions that create fair and sustainable outcomes. Our commitment to delivering sustainable returns to our shareholders remains unchanged. I'll now pass you over to Myles who will take you through our financial performance in more detail. Myles?

Thank you, Francesca, and good morning, everyone. Let me start by saying that in the context of COVID, our objective with these financial slides is to enhance disclosures relative to a normal IMS update and, notwithstanding the uncertainty of this crisis, to provide as much guidance as we can. Before the onset of COVID, the group had a good start to the year. For quarter 1, we recorded stable net interest income and a NIM of 2.07%, 17% growth in new lending and as part of our ongoing cost reduction programs, a 3% reduction in cost, with continued organic progress in reducing NPEs. Towards the end of the quarter, the initial COVID impacts began to emerge. Driven by falling equity markets and widening credit spreads, we reported negative income of EUR 155 million relating to valuation items. Let me give you more detail on this number. EUR 120 million of this relates to our NIAC wealth and insurance business. Lower values for customer unit-linked investments reduced the present value of future free income from these products, while the valuation of bonds and related fixed income assets fell, driven by credit spreads. And EUR 35 million relates to group valuation items from customer derivative positions. We've also taken an impairment charge for the quarter of EUR 266 million, of which EUR 250 million is a COVID management overlay, and I'll provide more detail on this impairment charge in a later slide. Despite these effects, the group finished the quarter with a strong capital position with a fully loaded CET1 ratio of 13.5%. So moving on to lending. We saw good momentum in lending in quarter 1, with gross new lending up 17% on the year to EUR 3.9 billion, with growth across all divisions. Our Irish mortgage market share climbed to 26% in the quarter. As COVID began to impact, we saw increased usage of revolving credit facilities by corporate customers. It is important to highlight that much of these drawdowns appear to be contingency actions rather than liquidity issues at this stage. In April, excluding RCF, new lending was 1/3 below the same month in 2019, while mortgage and new life and pension activity reduced by half. And we've seen lower fee and FX income due to reduced economic activity. So in terms of outlook for 2020, new lending could be between 50% and 70% of 2019 volumes and business income could be 30% to 40% lower. I'm going to move now to Slide 11 on the net impairment charge. We entered this crisis with a strong balance sheet and solid risk metrics, underpinned by very good underwriting capability across the group. The EUR 266 million net impairment charge we are announcing today for quarter 1 equates to an annualized 133 basis points. I'd like to spend some time on this number so we are clear on what it represents and, importantly, what it does not capture at this stage. Firstly, we have not experienced actual loan loss outcomes relating to COVID in the quarter. Our management overlay of EUR 250 million is the bank's initial IFRS 9 assessment based on the economic outlook set out by Francesca earlier. This charge does not reflect a material migration from stage 1 to stage 2 loans. And when we think about the H1 and H2 impairment charge, we can expect the following: actual loan loss experience as lower economic activity and unemployment impacts. As part of our H1 credit model process, it is likely we will see a significant increase in credit risk and material migration from stage 1 to stage 2. And this is against an evolving and generally deteriorating macroeconomic backdrop, which will determine the eventual impact of COVID. At this stage, it is not appropriate to be definitive on the likely impairment charge for 2020. However, we know it will be material and will have a major impact on profitability. In this context, in the following slides, I'll set out overall capital guidance based on a range of macro scenarios. So moving on to capital. During quarter 1, the group delivered organic capital generation of 10 basis points, which is after the impact of valuation items referred to previously. This increase was augmented by 40 basis points arising from the previously announced cancellation of the 2019 dividend. The group continued to invest in transformation and in loan growth during the quarter. And of course, the management overlay relating to COVID amounted to a 50 basis points impact. We finished the quarter with a fully loaded CET1 ratio of 13.5%, down 30 basis points from the end of 2019. And on a regulatory basis, our CET1 ratio is strong at 14.4%. This capital position provides the group with significant buffers. Our headroom over the minimum regulatory requirement for December 2020 currently stands at circa 510 basis points. We do expect to see modest RWA inflation from credit deterioration, with offsets from lower loan growth. As previously communicated, we expect the evolving regulatory framework, including EBA and ECB guidelines, to consume up to 80 basis points of CET1 capital by the end of 2021, with the majority expected in the first half of this year. The recent European Commission proposals may reduce this impact. Nonetheless, in a range of scenarios, we foresee our fully loaded CET1 ratio remaining above our previous minimum CET1 regulatory capital requirement of 11.45% and in a central scenario to be well above that level. Slides 14, 15 and 16 set out the profile of our loan portfolio, and the key takeaway here is a well-balanced book by geography and sector, underpinned by low loan loss experience and favorable credit metrics. Residential mortgages represent 56% of the group's loan book, split relatively evenly between the Republic of Ireland and the U.K. The average LTV of the stock of mortgages in Ireland at the end of March was 59%, while in the U.K., it was 63%. Nonproperty, SME and corporate is spread across Ireland, the U.K. and our international business. And our consumer book encompasses motor, credit card and other personal loans. More than 80% of the overall loan book is secured, with 3.7% in stage 3, for which we have a 33% coverage. I'd like to give you more detail on some of these sectors. Within the nonproperty, SME and corporate portfolio, we have EUR 4.4 billion or 5% of our loan book that could be more impacted by COVID. Wholesale and retail customers account for EUR 2.6 billion of this, with a further EUR 1.8 billion extended to hospitality customers. Payment breaks, combined with government support measures, will assist these customers to navigate the present challenges related to COVID. And there are 2 other points just worth mentioning here: the pragmatic and supportive approach that Bank of Ireland is showing to customers; and secondly, the deleveraging that has taken place across many businesses and households since the previous financial crisis leaves many of these customers relatively well placed to meet the present difficulties. I'd also like to talk a little bit about our acquisition finance business, which accounts for EUR 4.9 billion or 6% of gross loans. This portfolio is well diversified by sector. By geography, 45% of our exposures are in the U.S. with 38% in Europe and 17% in the U.K. The book is also well diversified by borrower with the average exposure in the region of EUR 20 million. I should also mention that this business has enjoyed a strong trading record for over 1/4 of a century in Bank of Ireland, encompassing a number of business cycles with a low loan loss experience during that time. This low loan loss experience is a direct consequence of our disciplined risk appetite. Generally, we declined a vast majority of lending opportunities presented to our acquisition finance team. And that discipline will continue to serve the group well. And just to comment on property, 9/10 of the property and construction portfolio is secured against investment property, with development lending accounting for only in the region of 1% of the group's gross loans. The greatest concentration of the investment property exposures is in Dublin, and 3/4 of this book has an LTV of sub-70%. And of this portfolio's exposures, 38% relates to retail; office, 34%; and residential, 15%. Just to comment now on credit risk management. Bank of Ireland has a proven track record when it comes to managing risk. We have the lowest NPE ratio of any Irish bank, reducing to 4.2% in the quarter from organic workout, and the arrears profile of our Irish mortgage book has consistently been significantly better than the industry average. We have, through the cycle, experienced loan workout teams, which positions the group well for dealing with emerging credit quality deterioration. And so to conclude and turning to the outlook on Slide 17. It is clear that COVID-19 will have a material impact on the group's 2020 financial performance. At this early stage in the crisis, we have set out the potential impact on business volumes. We can also expect to see a decline in NIM, reflecting the interest rate environment and growth in liquid assets. We retain our previous guidance that 2020 costs will be below last year's outturn, and we entered this crisis with relatively strong risk metrics. The strength of the group's capital position is reflected in how in a range of scenarios, the fully loaded CET1 ratio is expected to remain above our previous minimum CET1 regulatory capital requirement of 11.45% and in a central scenario to be well above that level. This, aligned to our strong liquidity, leaves the bank well positioned to continue to support our customers. And the flexibility provided by the recent easing of minimum capital -- regulatory capital requirements is a helpful contingency. And on dividend, our policy is aligned with the ECB's recommendations. I look forward to providing more updates on outlook and guidance as part of the June interim results. Thank you, and back to you, Francesca.

Thanks, Myles. We'll actually go back to the operator just to remind everyone how to ask a question. We'll go straight to Q&A. Thank you.

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

A couple of questions, if I may. Firstly, around the capital and impairments. I appreciate the guidance that you're providing in terms of the range of scenarios that you have assessed. I wonder if you could perhaps provide some additional detail around the severity of those scenarios versus the base case that you've outlined in your slides this morning, please. Secondly, just around income, if we could perhaps get a little more sense in terms of the impact that the reduction of Bank of England base rates and I suppose the general interest rate environment on your free front hedging is having on your net interest margin as well, please. And then finally, appreciate the comments and the guidance around new lending. I wonder in terms of, if we look at redemptions, how would you anticipate those to evolve for the rest of the year. I mean presumably, we should expect to see lower redemptions based on lower levels of activity in the economy as well.

Thanks, Diarmaid. So let me take you through those questions. Firstly, in relation to the macro scenarios underpinning the impairment in the capital guidance. So just to be clear, the management overlay of EUR 250 million is aligned to the macros outlook that we've set out, so that GDP decline of 8% in Ireland and 8.5% in the U.K. with a recovery next year. Now in arriving at capital guidance, we have thought about a range of scenarios and also not just the scenarios themselves but the severity of particular macro factors. And so we've taken GDP to 10% to 12% in 2020 and a recovery of, say, 5% next year with a more protracted recovery over the following years. And so that's the kind of range of scenarios that we've thought about underpinning that point about that capital will remain above 11.45% and in that central scenario well above 11.45%. Your second question, which was focused on NIM and the impact of the rate environment. So you'll remember, Diarmaid, that we guided the market to a NIM of 2.05% for 2020. And we will be below that for this year. And that is a consequence of the interest rate environment, the lower lending combined with strong liquidity, which really means that we have a higher level of liquid assets that, in themselves, don't necessarily pull down income but do have the ability to reduce NIM. Now some guidance on the rate environment, and when I look at the -- where the euro 7-year swap has gone since the end of the year, it's about 25 basis points lower. And in the U.K., the equivalent sterling is about 50 basis points lower. And of course, the actual base rate in the U.K. is impacting as well. So sitting here today, it's hard to be precise about this. It's the early stage of this health and economic crisis. But I could see that NIM could be 10 basis points lower in that region to the original 2.05% guidance. And as that translates then into net interest income, the combination of the rate environment plus lower levels of lending, net interest income could be 10% lower than that original guidance, which you'll remember, we expect it to be broadly in line with 2019. And on redemptions, I mean it is an interesting question because this pandemic and this crisis is a little bit unique in the sense that whilst we can expect to see lower levels of economic activity, we still see a lot of liquidity in the system. And so I think it's fair to say that redemptions could be somewhat lower, although we assume that they will remain pretty strong relative to where we thought they would be. And that's an item that clearly we will pay close attention to.

Your next question comes from the line of Eamonn Hughes from Goodbody Stockbrokers.

Just 2 or 3, if you don't mind, for me. Just when you think about the new lending environment and you've given kind of ballpark figures for this year, how soon, based on seeing a recovery -- and Myles, you alluded to kind of slower recovery kind of further out. How soon do you think it takes to get back to sort of 2019 new business levels as you look out over the next few years? So just in relation to what's under the new normal. In relation to costs, good performance in Q1, down 3%. I suppose just, again, given that the balance sheet potential now is shrinking, any sort of additional color you can maybe give us in relation to how you're thinking about the cost base, maybe additional levers that would help in relation to ROE, where obviously with a smaller balance sheet, those sort of [ ROE ] targets now clearly are pushed out. And then I suppose finally then just in relation to capital, can we take it that under the various scenarios and how you're thinking around the impairment charge that -- and those scenarios that effectively 2020 -- or December 2020 is the low point in relation to capital given your views about a recovery in the economy into 2021? That's it for me.

Thank you, Eamonn. I'll answer the question about costs and -- but sort of helpful when we talk about the new lending environment and outlook and time line for recovery, but Myles will pick up on that in capital. So on cost, I mean we've come a long way on costs. We've taken our cost base from what was EUR 1.9 billion in 2017 to a new target that we articulated at full year financials of EUR 1.65 billion by 2021. And we're well on track to achieve that. So the further 3% in the first quarter supports that. And the 2020 guidance, even though we've pulled it for everything else, I think it's fair to say we are going to have our cost in 2020 lower than in 2019. No new guidance on -- going beyond that and the EUR 1.65 billion in 2021. But as you can imagine, we are looking at all strategic and tactical options to become more efficient and to rightsize our business given the outlook for our balance sheet and for the trading environment and for our top line. Our cost base always reflects our choices. They're tough choices, but they are in our control. We will continue to invest in our systems transformation. And I think that the spend that we've done over the past couple of years has paid dividends in terms of the stability and resilience of our systems in response to big changes in behaviors during COVID and also ability to respond very quickly. In terms of further reductions in costs, I mean half of our costs are people related, half nonpeople-related. We'll look at a number of ways to continue to become efficient and do that as we have done in a smart, sustainable way in the best interest of our shareholders. Just want to pass over to Myles. Just in terms of the new lending environment, I would say the world has changed in the last 8 weeks. It is difficult to be definitive. So it's easy to be definitive but easy to get it wrong about what the next 8 weeks, 8 months, 18 months are going to look like. So it's just we can provide directional perspective, but there are a lot of unknowns there. And it will depend on how effective the easing of restrictions are in -- whilst maintaining the health crisis. But Myles will have an overview.

Yes. Eamonn, in setting out the overall guidance on lending for 2020, as you'd expect, it's underpinned by a pretty steep decline in quarter 2 and quarter 3 and then the beginning of a recovery in activity in quarter 4, and then back into 2021 with that economic outlook. And again, that is a central scenario. But I do think, I suppose, just to reiterate the level of uncertainty, unknowns right now, we just have to be careful with that guidance. And it seems to me that it's one thing to have those economic forecasts. The reality of how we see the lockdown being lifted and, in particular, how that lockdown is applied to different parts of society and different sectors of the economy will play -- will be key. And I suppose as well -- and this is a qualitative comment, but the -- how soon will there be a vaccine across the globe. All these things will play out. So there's more uncertainty than certainty, Eamonn. On capital, you're right. So given the nature of IFRS 9 and the way in which it is applied, and you'll -- again, back to the point, we've taken that initial impact on the forward-looking impact of the macro factors. IFRS 9, the moving of loans from stage 1 to stage 2, and of course, the actual loan loss experience does suggest that the majority will be taken in 2020. And therefore, you're right, the capital will have its low -- back to that capital guidance with the low point in 2020.

Your next question comes from the line of Chris Cant from Autonomous.

Two, please. Just taking into account what you're saying on revenues in the round, NII down 10%, business income down 30% to 40%, even if I park to one side the sort of fair value and other items and the volatility that's going through the other income line, that's pointing to a heck of a revenue decline year-over-year, I'd say larger than most banks in Europe are pointing to at this stage. So is there anything particular that you would point to, to explain what is driving that relative to, say, what you're seeing in terms of trends in other jurisdictions? And then secondly, you talked about Pillar 2R changes being helpful, but obviously, you can only really take advantage of that if you issue or maintain additional regulatory debt relative to what you would have been expecting before that change. So could I ask what the total capital ratio was at the end of the quarter? And on a related point, you've got a EUR 750 million AT1 coming up for a call in June issued out of the operating company. Will that continue to count for capital beyond the call date, please?

So in response, I suppose, to the revenue point, Chris, the first observation is that if you're comparing Bank of Ireland to other banks across Eurozone or indeed in the U.K., I think a starting point is just to remember that Bank of Ireland is primarily or heavily biased towards being a retail bank, okay? So -- and that is relevant in the context of what we see, and we've set out our guidance as best we can. I do think by design, we have been relatively conservative in thinking about the impact, but that's a reflection of a couple of things. One is, most certainly, the steep decline that we can expect in Q2 and Q3, and we began to see some of that come through in April. Hopefully, you'll see that from the slide. And also, back to that uncertainty point, just no one really knows at this point how soon we will be out of lockdown and how soon we can expect economic activity to pick up. So that's the point about revenue. There is a related point also just if you're thinking about the overall, I suppose, profitability for the year. And I just want to touch on the impairment charge. So you know we've taken that initial overlay of EUR 250 million. And when I look at that number as a multiple, say, of last year and I compare that to what I'm seeing across European banks and U.K. banks, I think we have been relatively prudent in arriving at that number. And I'm certainly comfortable in that prudence because of the reality of this uncertainty. And in relation to your capital question, the fully -- the total capital stack on a regulatory basis is 17.9% regulatory and 17% on a fully loaded. And you're right, the AT1 is up for a call. Looking at market conditions, I mean they're very disrupted right now. There's been no real debt issuance, sub-debt issuance in the Eurozone banks since late February. And so a little over a week to announce the call, the potential to do so remains uncertain. But to the extent that it is on our balance sheet, it is supportive of P2R.

And just in terms of beyond the call date, does that continue to then count in some form for reg cap? So if you were not to call that instrument, it would sort of effectively enable relative to plan, I guess, a little bit more usage of that P2R reduction?

Yes. And our assumption in setting out our capital stack risk is that the call does extend beyond a working case, does extend beyond June to December, and that's captured in the capital position.

Your next question comes from the line of Andrew Coombs from Citi.

If I could just have a couple of follow-ups. One on business income. You talked about 30% to 40% lower year-on-year. Can you just elaborate on which divisions you're specifically seeing that decline in? And also, the -- where the -- when you expect that to trough. Is that a case of Q2 is going to be very, very weak but you're expecting Q4 to move to more normalized levels? And then second question would be on RWA inflation. You talked about the capital dropping this year as the majority of the impairments are booked. What's the time frame for the averaging in of credit risk migration? How much of an impact is that on your capital thoughts?

Sure. Thank you, Andrew. And so in relation to business income, the 2 areas that are impacted, of course, is the level of retail fees. And with that lower level of activity, we can see some decline in that, in particular, in quarter 2 and quarter 3. And we see a recovery of that coming through in quarter 4. The major impact that's driving that business guidance -- business income guidance is biased towards our wealth and insurance business. And you'll know we had a strong year last year. And so that guidance is off last year's number. And let me just give you some thoughts on that because what we're -- what we might expect over the next couple of quarters is decisions by corporates to possibly to hold off making pension contributions or enhanced contributions for their employees. That's one item. Two is that desire by customers just to hold on to cash a bit longer in the context of the crisis. And therefore, we can expect to see a lower level of investments. But you're right, we do expect to see that it should -- the trough is in Q2 and Q3 based on our central scenario with a recovery in quarter 4. On risk-weighted assets, we can expect to see, as pointed out, that there will be a credit deterioration migration. But it is important to call out that about 75% of the loan book is IRB, which, by its nature, captures through the cycle losses, and of course, in the context of an Irish bank, captured those significant losses back to the last financial crisis. And so that's why the credit migration is a factor, but perhaps it's not as material as you might expect or compared to other jurisdictions. And we do think about that in the context of loan growth as well. And they kind of negatively correlate, right? So if loan growth was to be higher, then we'd expect to see a lower level of credit migration to lower credit quality.

If I'll just add on that wealth and insurance point, Andrew. So the outlook on the business income reflects just the reality. I mean April, new life pension applications was about 50% of April 2019. And we would see that sort of business rise and fall in line with economic activity. But strategically, wealth and insurance is still, over the longer term, an area of growth. The fundamentals that we've talked about in previous presentations remain attractive. There is downside risk here because people are avoiding -- reducing the discretionary spend or avoiding any big investment decisions, holding on to cash during COVID. But as we come out of horizon 2 and horizon 3, there's upside potential there. People are thinking more about protection of family and assets. They're having certainly more time to organize their personal finances. So it is still an area of strategic priority. In the longer term, it is a very low cost/income ratio, and it is increasingly digitized. So it's a very -- it's a fit business.

Your next question comes from the line of Daragh Quinn from KBW.

A few questions, please. The first one is maybe just on the NII guidance you've given. If you could provide a little bit more color around where the major impacts are coming from, U.K., Ireland, the liquid portfolio, et cetera. A second question, just if you could give us a bit more detail on the EUR 155 million losses. How much is the permanent impairment on those business portfolios? How much is related to market moves? And to what extent have you seen a recovery in any of those valuations or positions as of April? And then a final question, just a bit more broader, is we've seen from a number of European countries, major government-backed credit guarantee schemes. The measures announced by the Irish government so far seem to be quite small in comparison. Just wondering your feedback in terms of how important is a scheme like that for you to be providing liquidity and support into clients. Or do you not see it as much as a necessity to be providing credit lines to SMEs and corporates?

Thanks, Daragh. Let me take the net interest income question and also the EUR 155 million valuations. And I'll pass back to Francesca for the government support question. Daragh, so the -- I suppose the -- looking at our major markets in the U.K. -- sorry, in Ireland and the U.K., we see the impact on net interest income broadly being reflected pretty evenly across both jurisdictions. And I suppose it is heavily biased towards a lower level of activity. We talked about mortgage applications and drawdowns in Ireland at about 50% of where we would thought it might be. I think that's a -- generally a good trend that we can expect to see for the full year. We have a car finance business in the U.K. and that has fell off steeply, as you would expect, in the context of this crisis. And of course, back to my point about the liquidity, our deposits were ahead of where we thought it would be for the quarter. And with lower levels of lending with high liquidity, that will be a feature on the liquid assets. But again, that in itself doesn't have a major impact on net interest income, but it does have the ability to pull down NIM. In relation to the valuation items, it is essentially mark-to-mark on the unit-linked investments in NIAC wealth and insurance and on the bond portfolio within that business, too. And it is driven entirely by the movement in external rates. So your equity markets were down 20%, 25% globally in the quarter, and we're seeing that come through. And equally, credit spreads have widened significantly. So it is simply capturing that movement. Now I should say that in the context of the capital guidance, again, we have been relatively conservative by not assuming any material uplift from that position. I should say that, however, in the month of April, the markets have improved and we have seen some of that EUR 155 million come back. Having said that, this could be a volatile year in the context of where the markets are at. And I'll just pass over to Francesca.

Sure. Thank you, Daragh. So to date, the Irish government's announcement of various measures total EUR 14 billion, which is 7% of national income of the country. And that EUR 14 billion, just very quickly to explain the breakdown, EUR 3 billion of that is for health expenditure and sick pay, EUR 4 billion is for wage subsidies and unemployment payments, and EUR 7 billion, so 50% of the total interventions, are around business support particularly for SMEs. And there's various components within that, including an 80% credit guarantee scheme, tax debt, warehousing and a stabilization and recovery fund. Some of that is live now. Some of it does require legislation. So it does require a new government, which is forming. I think on the positives, we certainly welcome that high proportion of support for Irish SMEs. We are the largest lender to corporates and SMEs in Ireland. I think it's good that we're seeing a willingness of the Irish government to do this in an iterative stage. It's never kind of one and done. And we've seen other countries take 2 or 3 attempts to get some of these interventions sort of into a good space. We are speaking to, as you'd imagine, our SME and our corporate customers every single day. And the feedback and the thematic commentary from them, we will be sharing with government officials, and that engagement or feedback is proactive and constructive. I think it's good also that the Irish government has set out a very clear and a little room for confusion there, a clear road map for reopening the economy across different types of economic activity. However, 3 observations: One is we do need to take a sector-by-sector approach. So a grocer, a food producer, a vintner, leisure sector, they're all going to have very different experiences and impacts of COVID and what lockdown means for their business. The transmission method must be, particularly where banks are involved, clear and efficient and effective and -- for customers to make the most use of them. And there are always opportunities with feedback to reiterate and enhance that. And then the key issue is one of scale. So the 7% of national income for Ireland is -- depending on how you look at it, is similar to some of the other global and European countries, some of the smaller countries, but it is below sort of percentages you're seeing in sort of U.K., Italy or Germany. There is always a risk that you create an unlevel playing field, an uneven playing field that has consequences on competitiveness of Irish SMEs. But in engagement with the government, we're seeing that they're very aware of that and they're also managing a public deficit. They want to be middle of the pack, not necessarily an outlier, and that is an engagement we're having. I think there may be scope to do more over time, if needed. And to be honest, in speaking to SMEs on a regular basis, they're weighing up which supports to use. They're not necessarily using them until we get into that sort of horizon 2. And a lot of them are just figuring out how to function in a world of social distancing. And I think we'll get a better idea of the adequacy and the effectiveness of the government support as we get into the horizon 2 and you start seeing parts of the economy opening up.

No further questions.

Okay. Just to make sure, last opportunity to ask any questions if anyone was planning to come in late. Otherwise, we can be contacted through our Investor Relations team. If there are no other lines -- no other questions on the line, I would just like to say thank you for your time today, very much appreciated, really good engagements. And I hope you continue to stay safe and well. Thank you very much, everyone.

Yes. Thank you very much. Take care.

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