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

Good morning, ladies and gentlemen. We will now listen to Bank of Ireland's Interim Results Announcement for 2020, presented by CEO, Francesca McDonagh; and CFO, Myles O'Grady, followed by Q&A.

Good morning, and you're very welcome to our 2020 interim results presentation. We meet today during what continues to be an exceptional period. The impact of COVID-19 is reflected in our results. Our priority throughout the pandemic has been to support our customers, colleagues and communities and while managing the crisis, stay focused on our longer-term strategic initiatives. These include the transformation of our IT systems, the consistent reduction of our cost base and improvement of returns in our U.K. business. In the first half of 2020, we delivered stable net interest income and a net interest margin of 2.02%, net lending growth of EUR 0.2 billion, continued cost discipline with a further 3% reduction, increased market share in key products such as Irish mortgages and pre-impairment operating profit of EUR 271 million. However, the challenging backdrop is also very clear. We have taken a EUR 937 million credit impairment charge. EUR 432 million of this relates to updated IFRS 9 models that reflect our macroeconomic outlook. EUR 184 million relates to our prudent assessment of the credit risks associated with payment breaks, and EUR 321 million relates to actual loan loss experience mainly from a small number of retail-related legacy property exposures. The group's nonperforming exposure, or NPE, ratio has also increased by 140 basis points to 5.8%. Myles will provide more information on these items shortly. We've taken a prudent and comprehensive approach in arriving at our impairment charge for the first half. We expect this H1 charge to represent between 70% and 85% of our total full year impairment charge, subject to no further deterioration in the economic environment or outlook. We have more than a decade of proven expertise of working with customers in financial difficulties to find sustainable solutions. And before COVID-19, we had the industry-leading NPE ratio of any Irish bank with arrears at a fraction of the market average. Combined, this puts us in a position of relative strength for the effective management of impairments. Despite the challenges, our capital position remains strong. Our fully loaded CET1 ratio was 13.6% at the end of June. This is down just 20 basis points since the start of the year despite the elevated impairment charge. Our regulatory CET1 ratio was 14.9% at the end of H1. Our purpose is to enable our customers, colleagues and communities to thrive. In recent months, we've seen countless examples of this purpose in action in both weathering immediate challenges and planning for economic reboot and recovery. We have agreed to 105,000 payment breaks for personal and business customers across Ireland and the U.K. The first of these breaks was granted in March. We have been contacting customers with options at the end of their initial 3-month payment break. Of these customers, 54% of Irish mortgage customers and 62% of Irish SME accounts have availed of an extension, with the remainder resuming capital and interest payments. In the U.K., 33% of mortgage accounts and less than 10% of customer accounts have availed of an extension, with the remainder resuming capital and interest repayments. We are strongly supporting the reboot of the economies where we live and work. Since launch, we have issued more than half of all funds drawn down under Ireland's Covid-19 Working Capital Loan Scheme. And we have approved around GBP 250 million in loans to businesses through the U.K. government schemes mainly through our Northern Island business. As the leading lender to the Irish economy, we stand ready to do more. We have expanded our homebuilding fund to EUR 2 billion and our green lending facilities by a further EUR 1 billion. And we will play a strong role in supporting our customers in Ireland through the new COVID-19 Credit Guarantee Scheme being launched in the coming weeks. The steps we've taken to support our customers are mirrored in the 10-point improvement in our relationship Net Promoter Scores since the start of the year. We are very proud of how our colleagues have risen to the challenges presented by COVID-19. We have always said that culture is commercial. And the transformation of our culture, which we have prioritized since 2018, has helped us respond swiftly to a very complex operating environment. Colleague engagement is up 8 points so far this year to a new high of 70%. This surpasses the global financial services benchmark for engagement for the first time. Throughout the crisis, we have also engaged with governments and industry groups, and we have supported communities in need through our programs such as Begin Together. The progress we're making in our responsible and sustainable business approach can be seen in our improved ESG rating, and this hard work is reflected in Bank of Ireland having recently been recognized as the Best Bank in Ireland by Euromoney. Turning now to the macroeconomic outlook. 2020 will be a year that sees a significant contraction across our core markets. There are many uncertainties including the potential for a second wave and the outcomes of Brexit. However, there have been a number of positive developments since our first quarter trading update. Here in Ireland, the reopening of the economy was accelerated. A majority government has also been formed since our last update. Governments on both sides of the Irish Sea have increased their fiscal stimulus packages. The Irish government has introduced additional measures to support the economy. Direct spend per capita in Ireland is now amongst the largest in Europe. And high frequency indicators suggest that the worst effects of the economic shock have passed. We have seen a sharp fall in the number of people receiving the Pandemic Unemployment Payment in Ireland. Recipients are now 52% below the peak. Car data shows a strong recovery in consumer spending. This is now broadly in line with pre-COVID-19 levels, although some of this may reflect pent-up demand from lockdown. Housing indicators have firmed as the economy has reopened, and our own economic pulse shows an improvement in trading conditions. COVID-19 has also accelerated some existing trends, in particular, increased digital engagement by our customers. This further underlines the importance of our own systems' transformation. Unsurprisingly, branch transactions and cash usage continue to decline. In parallel, we've seen good momentum across our digital channels. We successfully launched our new mobile app to customers in May. This is supporting accelerated growth in mobile banking, which now accounts for over 60% of all our digital traffic. We've also invested in simplifying customer journeys. Today, over 65% of high-volume product applications are fulfilled digitally. In that context, our systems transformation is delivering both customer and cost benefits. During H1, we rolled out market-leading digital platforms in our Wealth and Insurance business. These strengthened our offerings across pensions, advisory and the broker channel, and there's more to come. Our road map includes further digitization of customer journeys. Building on previous investments, we have a number of additional milestones we will roll out in the coming months. This will deliver increasingly competitive and cost-efficient services to our customers. Costs have been successfully reduced in the last 5 reporting periods. We've achieved over EUR 0.25 billion in gross cost savings since 2017. We now expect 2021 cost to be below our previous guidance of EUR 1.65 billion. And we won't stop there. We will look at all tactical and strategic opportunities to reduce cost further beyond 2021. We'll do this by continuing to invest in digital, simplifying and automating more customer journeys, restructuring our business model and optimizing our property footprint for more efficiency, which will be supported by innovation in our workplace of the future. This morning, we've also announced to our colleagues a bank-wide voluntary redundancy scheme. This is a well-considered step in our continued cost reduction. We will provide further guidance on costs when we release our full year results. In the U.K., we've made good progress against our strategy of invest, improve and reposition. We have grown lending in niche mortgages, higher-margin personal loans and in our Northridge business whilst maintaining commercial discipline on risk and pricing. And we have reduced costs and simplified our business. However, the U.K. market remains challenging. Competition particularly in mortgages is intense. Interest rates have reduced with the outlook pointing to lower for longer, and COVID-19 has negatively impacted this outlook further. We have therefore identified further opportunities to restructure in order to improve our U.K. returns. In Britain, we will reshape our mortgage business by running down lower margin and less profitable segments. This will result in a reduction in the mortgage book size over time. We will also reduce our operating expenses and funding costs to reflect this change in scale. We will leverage our expertise in areas such as car finance and travel money and continue to grow our bespoke mortgage business. And in Northern Ireland, we have initiated a strategic review. This review will assess all options for our retail business in Northern Ireland. And we will provide an update on this at our full year results. I will now pass you over to Myles to take you through our financial performance in a bit more detail.

Thank you, Francesca, and good morning, everyone. Today, we are reporting a strong capital position with a 13.6% fully loaded CET1 capital ratio and 14.9% on a regulatory basis, an underlying loss of EUR 669 million due to COVID-19, a 13% reduction in total income, a 3% reduction in costs, a credit impairment charge of EUR 937 million and net lending growth of EUR 0.2 billion. Net interest income was stable in the period. Business income declined by 14%. Falling equity markets and widening credit spreads were the key drivers for a negative income of EUR 123 million relating to valuations and other items. This was an improvement from the quarter 1 position, reflecting some recovery in equity and bond markets. Our impairment charge is a comprehensive assessment. It reflects the expected credit losses under IFRS 9, and this is the first time this accounting standard has been tested in a downturn economic environment. We also want to highlight EUR 136 million within noncore for the impairment of intangible assets, which has no impact on our capital ratios. On net interest income. While average earning assets were up EUR 3.4 billion primarily from liquid assets, the impact of structural hedges and competitive pressures in the U.K. reduced interest income on assets. Lower cost of deposits and liabilities was a positive factor, reducing interest expense. Taking account of these items, our NIM is 12 basis points lower than the outturn for 2019. In terms of the outlook for NIM, we reaffirm the guidance provided at quarter 1 for a full year outturn of circa 195 basis points. Our net interest income, due to lower lending volumes and the low rate environment, we see our full year outturn contracting by about 5% compared to 2019. The group delivered net lending growth of EUR 0.2 billion in H1. This was heavily supported by EUR 1.3 billion of revolving credit facilities. Excluding these RCFs, our new lending declined 19% year-on-year. In quarter 2, new lending declined by 48%. This reflects the impact of COVID-19 and the forced shutdown of the Irish and U.K. economies on all portfolios. However, as the economy begins to reopen, we are seeing a general pickup in business activity in June and July. To give one example, our Irish mortgage applications in July were over 30% higher than June driven partly by pent-up demand post the lockdown period. For the full year, we expect new lending to come in at about 70% of 2019 levels, an improvement on the guidance provided earlier this year. COVID-19 has had a material impact on business income with lower activity driving a 14% contraction in H1 and 32% for quarter 2. Wealth and Insurance income declined by 16%. Back book revenues mitigated some of the impact of softer new sales. Looking ahead, as Francesca outlined, technology investments in our Wealth and Insurance business will underpin future growth and recovery post COVID-19. Retail Ireland income reflects lower levels of economic activity. For the full year, we now see business income reducing by 20% to 30% compared to the 2019 performance, reflecting the accelerated reopening of the Irish economy. We have maintained our strong multiyear delivery of cost reduction with a 3% year-on-year headline fall in operating expenses in H1. Excluding COVID-19-related costs, the reduction was 5%. We expect our 2021 cost to come in below the EUR 1.65 billion previously guided. To achieve this, cost base will require increased costs of voluntary severance. This incremental cost is materially within the business model budget of EUR 300 million, a component of the overall EUR 1.4 billion transformation budget. To reduce costs beyond 2021, we'll require further investment. Guidance unrevised cost targets and required investment will be provided at the full year 2020 results presentation. I'd like to cover off noncore items, which totaled EUR 153 million in H1. EUR 136 million of this relates to an impairment of software intangibles. We continue to make good progress with our transformation program. During the period, we also have assessed the value of our software assets. In February, we highlighted that transformation will go beyond 2021 and would include the continued modernization of core systems. As we progress with this multiyear program, we are learning more about deploying a broader range of technology solutions than originally anticipated and doing so in a more modular step-by-step approach. Due to this, earlier infrastructure investment has less value today. In addition, the rapid pace of technology advancement for the banking sector is such that elements of our prior year investment now requires a write-down. Ensuring we deliver the right solutions for our customers is fundamentally important. To this end, we remain committed to our transformation investment strategy across back, middle and front-end technologies. We are announcing a EUR 937 million credit impairment charge for H1 today. At the highest level, this charge can be broken down into 3 elements. EUR 432 million capturing the expected credit loss arising from the macroeconomic outlook, this is a model output and is at the heart of IFRS 9, which attempts to capture lifetime expected credit losses on Stage 2 performing loans. Assuming there is no significant shift in the economic outlook, we should not expect a material change in this number for the full year. The second element is the management overlay of EUR 184 million for payment breaks provided to mortgages, consumer and sectors more exposed to COVID-19. This charge is designed to capture the risk of required forbearance as customers come off payment breaks in H2. The last element is the actual loan loss experience of EUR 321 million relating to business and corporate exposures. Included within this are a number of legacy pre-2008 investment property exposures amounting to EUR 166 million. While uncertainties remain, subject to no further deterioration in the economic environment or outlook, the 2020 impairment charge is expected to be in a range of circa EUR 1.1 billion to EUR 1.3 billion. Staying with impairments, I provided a range of slides providing more granularity on the staging profile of our loan portfolio. Much of this content you can take away to review, and I'll get through the most important components of our H1 impairment assessment. On coverage, we increased loss allowances to EUR 2.1 billion, representing 2.7% of gross loans, while our coverage of Stage 3 loan losses is at 29%. COVID-19 has increased the risk profile of our loan book. 80% of our loan book remains within Stage 1. We have doubled Stage 2 loans to EUR 11.3 billion. Stage 3 loans increased by EUR 1.3 billion. This includes a EUR 0.9 billion increase for the new regulatory definition of default with the balance from credit migration and corporate and property portfolios. Mortgages account for 57% of our loan book. As you can see from this slide, average LTVs are 60% and 62% for Irish and U.K. mortgages, respectively. Referring back to earlier slides, around 1/2 of Irish and 1/3 of U.K. mortgage customers have extended their initial 3-month payment break. The EUR 149 million ILA we are taking in H1 for this portfolio is largely on performing loans and includes a prudent assessment in respect of customers on payment breaks. Our non-property SME and corporate book is well diversified by geography and sector and predominantly secured. Within these portfolios, our sector is potentially more impacted by COVID-19. These include wholesale and retail, hospitality and acquisition finance. Across this portfolio, we have materially increased impairments to 4%, increasing Stage 2 loans by EUR 3.7 billion with loan loss allowances of EUR 880 million now on balance sheet. Property and construction accounts for 1/10 of our exposures. This is a very different place to where we were at the time of the global financial crisis, when around 1/4 of our lending was to this sector. Similar to our mortgage book, most of our customers have significant equity, with 3/4 of the investment property book on sub-70% loan to values. Within this book, legacy investment property exposures have driven a EUR 166 million increase in Stage 3 ILAs. And largely as a consequence of that, we have effectively doubled our impairment coverage ratio to 5.6% since the start of the year. Consumer lending accounts for 7% of our loan book. The EUR 109 million impairment loss allowance increase on our consumer book is largely on performing loans and reflects management adjustments relating to payment breaks. Our NPE ratio increased from 4.4% to 5.8% during H1. Half of this increase is down to the new definition of default, with the balance reflecting credit migration. Substantially all of our State 3 loans are now classified as NPEs. There are 2 important points I'd like to call out here. Firstly, Bank of Ireland has a proven track record of working with customers to implement sustainable solutions. Secondly, we have previously highlighted the potential for NPE transactions in 2020 with a focus on Irish mortgages. Due to COVID-19, it is more likely that a transaction will occur in 2021. Despite COVID-19 headwinds, the group retained a strong capital position. Our capital ratios improved in quarter 2. The fully loaded CET1 ratio is up 10 basis points to 13.6%, while the regulatory ratio improved by 50 basis points to 14.9%, 560 basis points above the new minimum regulatory capital requirement. And the previously guided 80 basis points impact of regulatory capital demand by end of 2021 is now materially complete in the H1 results. In terms of how we see our capital evolving, our expectation is for the 2020 fully loaded CET1 ratio to be well above minimum requirements. On the 2020 regulatory CET1 ratio, we expect this to remain above 13.5%. While it is clear COVID-19 will have a very material impact on 2020 performance, our outlook for the year has improved somewhat compared to quarter 1 IMS. Gross new lending volumes are expected to be at 70% of 2019 volumes. The rate of property supply, mortgage demand, Brexit challenges and the impact of fiscal packages are key factors in the eventual outcome. Net interest income is likely to be in the region of 5% lower than last year with lower lending and structural hedge income driving this. Business income has been significantly impacted by COVID-19, and we expect Q3 and Q4 to be subdued with recovery towards the end of the year and into 2021. We expect to outperform previous guidance on costs, taking 2021 costs below EUR 1.65 billion. On asset quality, I'm forecasting a full year impairment charge of the order of circa EUR 1.1 billion to EUR 1.3 billion, absent any further economic shocks. As previously covered, capital ratios are expected to remain strong and resilient. And no dividend deduction is assumed for 2020. Finally, the longer-term impacts of COVID-19 remain uncertain, therefore, pre-COVID-19 medium-term targets should no longer be considered current in these circumstances. I will now pass over to Francesca for concluding remarks.

Thank you, Myles. I'd like to recap on the key points we've shared. We now see an improved outlook for 2020 relative to what we set out at our Q1 IMS. We're focused on supporting businesses and households. Our capital and funding position is strong. We believe that the charge taken in H1 covers the majority of our 2020 impairments. Transformation remains a strategic priority, with culture and systems change delivering benefits. We will continue to reduce our costs, and we will restructure our U.K. business to further improve returns. Thank you.

[Operator Instructions] And we will now take our first question, and this comes from the line of Diarmaid Sheridan from Davy.

A couple of questions, if I may. Firstly, just around guidance, I wonder if you might provide an update on trends that you're seeing that are driving the upgrade in outlook relative to what you provided in Q1 and also how that may play into 2021, please. Secondly, in relation to payment breaks, perhaps you could provide some trends on what you're seeing at present around what is happening there. And then finally, around the restructuring in the U.K. and the further cost initiatives that you're announcing this morning, I wonder if you could maybe provide some details and specifically around whether the cost initiatives are dependent on the restructuring in the U.K. or are they -- should we look at them as being independent to one another.

Thank you, Diarmaid. I'll start off, and I'll pass over to Myles maybe to expand a little bit on outlook in general. So in terms of our outlook, I mean, obviously, COVID-19 is still going to result in lower levels of economic activity, credit formation and business income, but our outlook for the rest of the year is cautiously more optimistic than where we were in May when we were reporting on our first quarter results. And that really reflects, I would say, 3 things. One is that the Irish economy has opened up sooner than originally planned in most sectors, not all. And we are beginning to see some positive early trends in some of the high-frequency data. For example, house prices are showing much more resilience than expected. And also in Ireland, for example, the claimants of the Pandemic Unemployment Payment are now 52% below the peak, which we see as a positive. There's a couple of examples there. The second is since our last update, a majority government in Ireland has formed, and they have launched a material fiscal stimulus package. And that took place -- if you look at sort of the package per capita of the population, it does place Ireland in the upper end, and quite favorably, we compared to European peers, at 11% of G&I, and we think that will help the economy reboot. So the third thing is just the observed behavior and insights that we're getting from our personal and business customers every day. We've seen a pickup in sales. So just take to -- if I could just take a couple of examples. Irish mortgage applications were 30% up in July versus June and actually 25% up year-on-year. We'll see how that translates to actual drawdown, and a lot of that is dependent on housing supply. But then when we look at our sort of housing market, all construction sites have reopened. And even though the new housing supply will be less than we anticipated pre-COVID, we are seeing commentators increasing upward revisions of how -- of the supply of housing in 2020. So that is what informs our cautiously more optimistic outlook. And in terms of an update on payment breaks, so in -- across the U.K. and the Irish business, we granted 105,000 payment breaks. 65,000 of those have now come to an end of their initial 3 months. Obviously, we've been very proactive in contacting customers in anticipation of that. And 2/3 of those customers have returned to capital and interest, so they've resumed normal payments, which I think is a good sign. 1/3 have requested a second payment break. And you can see on Page 6 of the pack some of the percentage of customers in Ireland wanting to avail of a second break is slightly higher than in the U.K. And I would say that it's not -- they're not like-for-like comparisons. They're 2 quite distinct markets. And the reason why you're seeing, for example, 54% of mortgage customers roll over in Ireland versus 33% in the U.K. is that payment break started sooner in Ireland across a range of products. I mean I think clarification of some of the U.K., second payment break regulatory steps were confirmed relatively recently. Another factor is that the U.K. furlough scheme payment is quite significantly more than the wage subsidy equivalent in Ireland. And also, particularly for SMEs, this is relevant, that the stimulus package for SMEs in the U.K. came out very early in the shape of CBILS and Bounce Back Loans. In Ireland, that has now been legislated and announced, but we are expecting the Capital Guarantee Scheme to be finalized in the coming weeks. And just to give us some assurance about relativity, when we look at payment break take-up in Ireland or the payment break -- second payment break and rollover in the U.K., we are broadly in line with the market. And just to answer your third question around costs, we've had really, I think, positive momentum in our cost reduction over the last few years. The U.K. has been part of that. So U.K. costs have reduced by 23% since we started this journey in 2017. The overall group is minus 10%, and we've taken over EUR 0.25 billion of costs out on a gross basis. And I would expect the U.K. to continue to improve its efficiency. And in terms of the strategic review, for example, of the Northern Island business that we've announced today, we're not prejudging the outcome of that, so there's no assumption sort of hard baked into the sub-EUR 1.65 billion revised guidance on costs. Hopefully, that addresses most of your questions. I might just give it to Myles to talk more about outlook in general.

Thanks, Francesca. And I think firstly, the updated guidance we provided today represents the material impact of COVID-19 on our 2020 performance. Important not to forget that. At quarter 1 IMS, I would say, we essentially called the floor on income given the level of uncertainty and the scale of impact. And that guidance, it was premised on a full lockdown until August and 2 very difficult quarters in quarter 2 and quarter 3 with recovery in quarter 4. And while Q2 has seen a steep decline in activity, the examples include lending down 48%, business income down 32%, it was not as severe as originally anticipated. And we now have the Irish and U.K. economies opening sooner. And we can see that in some of the emerging activity data for July, which Francesca has called out. So our updated guidance assumes that the level of activity in quarter 2 will be broadly similar in quarter 3 with the beginning of improved trading in quarter 4 and then into 2021. Now this assumes no new lockdown or a significant second wave of COVID-19. And so just to echo for Francesca's point, we remain cautious given the external uncertainties. And just to comment briefly on 2021. So if the current macro environment as set out plays out, we do see recovery towards the back end of the year and into next year. And when I think about our diversified business lines, I see no material structural revenue issues post-COVID. Possibly the U.K. consumer travel FX may take longer to recover. And finally, while we're not providing specific guidance on 2021 lending or income, when I think about 2021 consensus, I'm broadly comfortable with the pre-provision operating profit for 2021.

And we will now take our next question, and this comes from the line of Eamonn Hughes.

It's Eamonn Hughes, Goodbody here. Maybe just picking up, Myles, a little bit just on those final comments. I know you kind of talked about the pre-provision, but you've taken quite an extensive, pretty active action around the impairment number. And I just was wondering in the context of some of the commentary there about improvement maybe in Q4 and into 2021 and the macro. Is there any sort of signposts you'd kind of guide us towards in relation to maybe impairment figures? I mean I think pre-COVID, we were looking at a sort of normalized impairment rate of 20% to 30%. I presume there'll be still part of the economy that will be difficult next year, but any sort of kind of guidance in relation to how you think about that figure next year, if you wouldn't mind? Secondly, just in relation to capital. So Myles again, you talked about regulatory capital guidance greater than 13.5% and then greater than minimum on fully loaded. So just maybe the square-off in relation to how we think of it fully loaded because the gap at the half year was 130 basis points. Is there sort of factors that might reduce that gap in H2, thus, consensus and conscious on fully loaded is around about 13%? I'm close enough to that myself, at the end of the year, 12.8%. So maybe just how we think about that. And then finally, just in relation to -- with data on payment breaks, like you gave the breakdown in terms of people moving on. But just in terms of new business and how -- like are there differentials in how customers both in Ireland and the U.K. are treated in relation to those on wage subsidies and those not? Or there's been a lot of anecdotal and media commentary about it. I'm just wondering, is there kind of -- what's the official say of Bank of Ireland here in relation to that?

Okay. Thank you. Thank you for the questions, Eamonn. I might -- before I hand over to Myles on impairment and capital in more detail, just to share with you, just to step back and just to share with you our impairment philosophy, we talked about being prudent and comprehensive in our approach. We are mindful that the EUR 937 million number is the single biggest judgment that we're making in the first half. And as you would expect, it had a significant amount of management focus from myself, Myles and most -- all the senior leadership team and also oversight and deep diving by the Board. And we've really challenged ourselves on all our key assumptions and judgments. And where appropriate, we've sought external perspectives and some expert advice to ensure that we are capturing the full risk of the pandemic and the impairment charge that we're taking. And also just bearing in mind our track record, so we have over 12 years' experience since the 2008 financial crisis of working out solutions predominantly organically; inorganically, where it makes sense and the market supports a transaction. Pre-COVID, and I would have said this in my opening comments, we've reduced our NPEs to the lowest amongst any Irish bank. Our arrears track record is a fraction of the market. And we do see this as a relative competitive advantage within our market. We've got a team with people that averaged 27 years with experience, so exactly the sort of scars of the past and the gray hair that we like. So that's why we feel comfortable that we have an appropriate level of confidence in our approach and our impairment charge. And I will just talk about the third question very quickly. There's been media coverage in Ireland around whether people in payment breaks or people on wage continuation support would be not provided new lending. We have provided new lending. If someone's income has severely reduced, we'll obviously look at that on a case-by-case basis, but we're not -- we're very much open for business and taking appropriate assessment of someone's affordability.

Thanks, Francesca. And so on impairment guidance, so just to comment on the H1 numbers first of all briefly and consistent with IFRS 9 and its intent, our ambition for the H1 number is to be as comprehensive as we possibly can and to capture as much of the forward-looking risk on balance sheet and in P&L for the results. And so it's in that context we should think about the guidance of EUR 1.1 billion to EUR 1.3 billion relative to the EUR 937 million for H1. And it's probably just worth highlighting that, that is -- that guidance is essentially underpinned by the macroeconomic forecast that we're currently experiencing. And just to give you some sense of -- this is set out in the detailed accounts, Eamonn. But if we think about the kind of probability weightings, I think this is important to highlight, yes, we have -- in arriving at our H1 number, and indeed, our forecast or our guidance, we have 20% weighting to the downside, 50% to the central and 20% to the upside. So we're biased towards central than to downside, and that reflects some level of uncertainty. And if all of the downsides played out, we could expect the charge to be in the region of EUR 330 million higher. If all of the upside applied we could be better to the region of about EUR 250 million. And so my final point to make is -- and we're not giving precise guidance for 2021, but we all look forward to having COVID in the rearview mirror. But I do think -- so back -- to pick up on what you said, to the pre-COVID impairment guidance where we said a medium-term target was between 20 and 30 basis points, and we are probably ticking up towards the upper end of that guidance, that for me, in a post-COVID environment, feels like a good place to be. On capital, on the fully loaded, and so yes, we reported 13.6% for H1, a strong capital position. And when I think about some of the moving parts for H2, yes, I'm thinking about, first of all, that impairment guidance that I've just spoken about. I have an eye on calendar provisioning as well for the end of the year, some of the benefits from the software regulatory relief. And also just depending where our lending book ends up for the full year, I would see full year fully loaded CET1 being around the 13%, so consistent with your own forecast, Eamonn.

And we will now take our next question, and this comes from the line of Jason Napier from UBS London.

Can I just probe further on 2 features, please? The first, on net interest margin, sort of rough second half indications of about 190 basis points. And I guess given that, that sort of step change sort of in your guidance, although volumes are turning out better than expected, I wonder whether you could talk a little bit about the drivers that are inherent in that change in the second half and how those play out into next year. And then secondly, the pivot to a higher-margin mix in the U.K., I think, clearly makes sense. I wonder whether you wouldn't mind giving some more details on how large the low-margin book is and sort of what the associated revenues and the potential restructuring charges involved might be. I'm assuming that there isn't much in the way of cost saves to come from that runoff process, but if that's wrong, perhaps you could also correct me in that area.

Okay. Let me take the net interest margin question first of all, Jason. And so yes, so in the context of a full year guidance of 1.95%, I'd concur we see the H2 in around 190 basis points. And so thinking about that versus where we're at, at half year, first of all, I'm expecting average interest-bearing assets of H2 to decline, and that's consistent with the guidance in relation to where we see new lending being at -- in the range of 70% of where 2019 was at. But the mix is also important because we're seeing strong liquidity maintained. And actually, I think deposits are likely to be higher in H2 on average. They may decline towards the end of the year, I'm thinking about tax payments from SME customers, but overall, deposits will most likely be strong. And so that's relevant because that gets us into holding higher levels of liquid assets, which, of course, are good to hold particularly if credit formation is a little bit subdued because of COVID. Putting those deposits into liquid assets does generate interest income, but it also pulls down the NIM. And so I think when you think about the NIM guidance, you've also got to think about where net interest income is at as well and taking account of lending volumes and also the ongoing impact of structural hedges, so hedging at lower income streams than previously. We see interest income down about 5%. In relation to the U.K. question on NIM, I mean, essentially, we've disclosed the full mortgage book in the U.K., just under EUR 20 billion. And essentially, what we -- that book, I mean in the main, we would see mainstream mortgages. It has been maturing over the last number of years in a very competitive market in the U.K. And even though, I would say, the team are doing quite well to hold margin discipline, nonetheless, it is reflective of a lower rate environment. And it's with that reason that we see ourselves over time coming out of those lower profitability, lower margin mortgages. And Francesca may want to comment on the cost piece, but I would say that the U.K. is a valid component of the overall cost program for the entire group.

Yes.

And we've made good progress reducing costs in the U.K., and we will continue to do so.

Yes. If I just add to that, Jason, I mean, 2 points, one on cost but also just the pivot and how that's supporting -- that will support going forward better margins in the U.K. business. So our bespoke mortgage business was 5% of originations. We've written about GBP 320 million in new lending since we launched that. In the first half of this year, with lower swap rates and just more realistic pricing appearing particularly in second quarter, I think, are temporary results of COVID. We have continued to write good quality business where we can generate the right terms. So we're shifting our focus away from volume targets and thinking about size to really focus on margin. So our margin on new mortgage business in the first half was 30 basis points better than it was this time last year. And within that, bespoke mortgage margin was 20% -- 20 basis points better again. So that just gives you a feel of the sort of margin protection but also the upside that bespoke mortgages represent. In terms of costs, as the back book of lower LTV, less profitable mortgages runs down, you can imagine that our cost base both in terms of operational expenses and funding costs will reduce to right size and reflect that smaller balance sheet. And that is incorporated into our sort of confidence and optimism about continued momentum and reducing our costs.

If I could just follow up on that point. The, I guess, relative market share suggests that you could write substantial amounts of business in the bespoke space. But I wonder whether, in aggregate, you're sort of conditioning investors to expect a period of sort of revenue declines driven by that rebalancing or you can replace one with the other as the lower margin material matures.

So when I think about the revenue profile of the U.K. business, the first thing that I think about it, Jason, is ensuring that the returns are strong. And I thought first priority is to maintain strong margin. Second priority is the actual quantum of income that we generate. And so over time, I do see that whilst a smaller book should generally be replaced by higher margins, and therefore, I'm comfortable with the overall direction of maintaining revenue streams in the U.K. The other point to make, of course, is that in doing that, in taking those actions to reduce mainstream mortgages, that also allows us to rely less on deposit gathering within the U.K. which, frankly, is expensive. And so overall, I'm comfortable that we're going to maintain in the main income levels but generate a higher quality of income.

And we will now take our next question, and this comes from the line of Alastair Ryan from Bank of America.

Mortgage pricing, again, at this time in Ireland, please. There's been some headline-grabbing moves by competitors which seem, I mean, not well grounded in sort of economic reality. But are you seeing mortgage pricing would you clearly need to respond to it if your market shares dip down or as in H1, where you had a pretty good market share outcome, the range of options you've got allow you to keep pricing pretty stable and your market share in the low to mid-20s?

So yes, there's been a few moves by competitors. We've not made any pricing changes in our mortgage business in Ireland in the first half of the year. We saw one of our competitors cut their SVR rate. That was more, I believe, to equalize their front book, back book variable pricing. It is notable, but it's less relevant to our business. So 90% of our new lending is fixed rate, not variable. And our SVR is already equal in terms of front book and back book. We see news about potential new entrants. Let's see. I think the market share of new entrants, smaller entrants in recent years is sort of sub-3%. And I actually think the competition comes much more from the established players as opposed to new entrants. We've seen the post office here defer their launch into their entry into the mortgage market. When I step back and think about our business, we've always said 25% to 30% market share is a comfortable range. We don't chase market share. It's risk, price and volume in terms of our sort of order of priorities. I'm pleased with the increase of market share of 25%. And like I said, we've done that without price cutting. That has been from embedding good relationships across all our channels, both our own frontline and our broker partnerships. So yes, we feel good about our performance in the first half.

And we will now take our next question, and this comes from the line of Chris Cant from Autonomous.

Two, please. On regulatory headwinds, you've obviously taken most of the 80 bps that you've been guiding for, for a while in the first half. You mentioned calendar provisioning. Is there any risk beyond the 20 bps residual implied from calendar provision or other regulatory change? Are you still comfortable with the 80 bps as the cumulative figure? And on winding down the low-margin books in the U.K., obviously, spreads have widened quite meaningfully year-to-date in the U.K. mortgage market, so I'm just curious on the timing of this. Are you basically taking a view that over the medium term, it's not really viable to compete for bread and butter, i.e., non-specialist mortgage business, given your scale?

Maybe I'll just quick -- give a quick answer to the second one, Chris. Thanks for both questions. And I'll pass over to Myles on regulatory headwinds. So yes, I mean we've seen -- I think there's a sort of temporary reprieve in terms of margins in the lower LTV [ remo ] business in the U.K. So we have continued to write the business where we can achieve the right returns in the first half of this year. Our base case is a gradual rundown in parts of our U.K. standard mortgage book that would be lower margin. And that's over time as redemptions reduce the size of the book. So that's the premise. But we're not doing a hard handbrake turn if we are able to still generate business that is in line with the margin that we aspire to, to improve returns in the U.K.

Okay. Chris, yes, on the reg headwinds question, so yes, updated guidance unchanged. We talked about 80 basis points of regulatory headwinds, and we've [ segmented ] 60 of that in H1. The balance is there to support calendar provisioning. There's a little bit of EL in the capital account. That's helpful for that as well. And so when we think about the overall guidance that we've given, the higher guidance on the reg ratio, and I guess I gave some soft guidance on this fully loaded from Eamonn's question, that guidance captures the remaining usage of the 20 basis points and assuming that calendar provisioning is adopted by the end of the year.

And we have 3 more questions, and we will now take the next question. This comes from the line of Aman Rakkar from Barclays London.

I had a couple of question. Could I probe you a little bit more on -- probably one for Myles, on your comment on being broadly comfortable with consensus next year pre-prov? Could you actually maybe just lay out what your view of that number is? I guess the numbers that I have in front of me has something like EUR 750 million of pre-provision profits next year predicated on about EUR 2.5 billion of income. I mean the reason I'm asking is I think you've basically guided up your most important revenue line by the best part of EUR 80 million for this year. Presumably, that bodes well for revenue trajectory into next year. So are you looking for some pretty spectacular drop-off in net interest income next year? Is there some kind of offset maybe in business income? I think the Street is sort of about EUR 600 million in for next year, which I don't think that it's unreasonable if you're looking for some kind of normalization in business income. I mean it just seems like there's some offset there that I'm not really looking -- I'm not able to see. So I guess that would be the first question. And just on capital, so just a small one. I know that you've basically benefited from the expected loss deduction in CET1 that's protected you -- protected your capital position in the quarter from the heavy impairment build. It does look like you've still got a little bit less. Can you kind of just talk us through whether that should protect you from any incremental charges in H2? Or do you need to build it to a certain level? Or does it basically need to stay where it is and everything else that's coming basically is going to feed through to capital?

Thanks, Aman. And let me just, I guess, comment on the 2021. Look, it is important to start off with saying we're not giving guidance in 2021 at this point in time. It is good to see that trading for 2020 looks like it is improving relative to where we thought it would be in quarter 1, and that's a positive, back to Francesca's cautiously optimistic point. But yes, it is premised on a recovery towards the end of the year, no further events with lockdown or second wave. And I do think there's still a little bit of uncertainty out there, and so I would just urge a little bit of caution on that. And therefore, I guess what I'm saying is that in the general sense, yes, you're right, the consensus is at about EUR 750 million pre-provision operating profit. One thing I would say to call out to you is that this year, we have had the benefit of the revolver credit facility sitting on our balance sheet, EUR 1.5 billion in quarter 1 and EUR 1.3 billion for the H1. I don't -- I mean they are helpful to have for this year and their support of net interest income, but they are, in many ways, a feature of COVID with our corporate customers just taking contingent action to maintain liquidity. And therefore, I don't expect to see that in any material way on our balance sheet next year. So I don't want to see it because it's a function of COVID. And so if that goes off or balance sheet, that's, in a kind of fundamental way, a good thing. But also just to remember, we have -- we've signaled that the impact of hedging, the structural hedges coming off, historic hedges that were quite beneficial from income perspective, mindful of the continuation of the low rate environment, that's also going to be a feature of 2021. And that's the best sort of guidance amount I can give you at this point in time in relation to 2021. On capital, there is a little bit of the EL left. And I think about it, yes, it could potentially be helpful to incremental impairments, but I also have my eye on it in the context of the adoption of calendar provisioning by the end of the year. And therefore, I would take you back to the guidance we've given on capital on both the regulatory and fully loaded basis.

Just as a quick follow-up on that just to ensure I understood the income commentary then, I think you're basically saying an element of caution on the business income, but it doesn't sound like you're too uncomfortable with kind of 19, 20, that kind of ballpark as an NII figure next year for the structural reasons that you laid out but also things like the unwind of the RCF. I'm actually just surprised that, that can offset the much better volume dynamic that you guys are basically laying out. I mean maybe I can pick it up off-line. But...

Yes, sure. Why don't we catch up with -- we can talk about that, Amandeep, with the IR team [indiscernible]. But I -- and I think the points that I've set out on this call are where we see it at, at this point in time. Okay?

And we'll now take our next question, and this comes from the line of Andrew Coombs from Citi.

Perhaps I can stay on the same theme and then add one on capital as well. So on the net interest income and your rebased guidance, I mean your margin guidance is broadly unchanged. Obviously, you're -- those slightly better average interest-earning assets. If we look at the mix in the first half, your loans and advances to customers' average interest-earning assets are broadly flat. The big increase has been in the other interest-earning assets, which I think has jumped from EUR 23 billion to EUR 27 billion. I assume part of this is due to the deposit inflow that you've had, which has subsequently been reinvested into the liquid asset portfolio. But can you just elaborate as to the driver of that other interest-earning asset line and also how sustainable that is? So that would be my first question. Second question, sorry if I missed this, but I can see that the SME support factors come through in capital. I think the software amortization step changes for the second half, have you given quantitative guidance on that?

Andrew, and so I think your assessment of the average interest-earning assets is accurate. There has been a buildup on the liquid asset line, and that has been a function of the fact that our deposits have grown. So I think about H2 '19 last year, average deposits were at EUR 81 billion. For H1 this year, we've been at EUR 84 billion. And that's kind of a unique -- it's a unique phenomenon of this particular crisis that whilst we're in an economic shock, we still see very strong liquidity. Now that at the same time, with subdued levels of credit demand, means that we find ourselves putting those deposits into liquid assets. And that will be the feature for H2 as well, where we are -- we do think that lending will be subdued, a little bit better than where we were at, at quarter 1 IMS but still after that guidance of being about 70% of last year. And therefore, in that context, with strong liquidity, we can expect liquid assets to continue to grow. And that is supportive of interest income but doesn't reflect well on NIM. And in relation to the software assets, I mean, I previously -- pre-COVID, I was pretty sanguine about how beneficial it would be. And it looks like the EBA would come out with some more guidance on that, and they seem to be a bit firmer on it themselves. It's for a 2-year period only, so it has a limited impact. But I'd see it's been beneficial to -- by about 20 basis points to capital, which we hope will feature in H2.

And the last question comes from the line of Guy Stebbings.

I wanted to, firstly, just come back to capital and risk-weighted assets. Some quite helpful moves in the period for credit RWA is obviously supported by the SME supporting factor. But there are no obvious negative credit migration, pulled out some favorable asset quality moves in the period. So I'm just trying to gauge how much of this is timing, it's just too soon for that coming through. And given what we're seeing on the ECL provision side, should we expect some negative credit migration in the second half based off your sort of central assumptions as it were, albeit I appreciate some of your models are less procyclical than some peers? And also on RWAs, just wanted to check the treatment of payment holidays. I think one of your peers referenced quite a big pickup in RWAs, specifically payment holidays, yesterday, so I wasn't sure what your treatment would have been here. And then secondly, I just wanted to ask on customer deposits, which fell [ helpfully ] over the period. I just wonder whether the exit rate was much lower than the 21 basis points average for the first half. I'm conscious the U.K. drives quite a lot of this given with close to 100 basis points still in terms of cost there. Taking some of the comments you've made today, I mean, should this be quite a big delta as we look forward?

Guy, so just let me take the RWA question and link it to the mortgage one at the same time. So we -- our credit RWA declined by EUR 2.2 billion in absolute terms, and the density also reduced by 2%. And back to your point about the models, it is important to call out that 72% of our credit RWA is IRB, which, as you know, is designed to capture through the cycle losses. And that's one of the reasons why we should expect less volatility on RWA. And fastest driving down reduction are, as you say, the implementation of the SME support factor and also the change in mix and quality. Now in relation to the mortgage customer break, so the nature of these payment breaks, of course, is to try and ensure as much as possible that these customers don't go into forbearance. And of course, we know some will. So that's why on the impairment side, we've set aside EUR 184 million for the totality of impairment breaks. From an RWA perspective, if they do migrate clearly into forbearance and, therefore, into Stage 3, that will have the impact of increasing RWAs for mortgages. Now to put that into context, for Bank of Ireland, our ROI mortgage density has been clicking down over the last 2 years, so from 34% to 2018 to 30% in 2019 and to 27% for H1 and while the U.K. mortgage density fell from 22% 2 years ago to 19% in H1. And so the overall quality of the mortgage book relative to the last financial crisis is generally pulling down risk weights. So in that context, taking all of that into account, I'm not expecting a material increase in RWA as a consequence of COVID, certainly for 2020. And in relation to deposits, overall, the cost of deposits, I think about H2 last year, the average cost was 27 basis points. It's down to 21 basis points for H1. And we are seeing reductions. This is a good slide, actually, if you've got time. 28 gives some detail on the average balance sheet, but you can see it broken down there. Ireland deposits down 3 bps. Credit balances including the application of negative rates is generating plus 4 basis points at a positive income. U.K. has come from 109 basis points in H2 last year down to 97 basis points. And in our corporate and treasury, it's more than half from 34 down to 16. So this feels like it's a bit like operating cost. Deposit is an area that's within our control, where we can create value, and we've seen some good experience of that in H1.

Do you have any more questions on the line?

No further questions that came through, ma'am.

Okay. Thank you. Well, before just putting the call to a close, I just want to say thank you, everyone, for joining us this morning and for your questions. Your time is precious, and it's always appreciated.

Yes. Thank you. And also, can I just say we wish, Alastair, good luck in his new role. Thanks a lot.