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

Good morning, ladies and gentlemen. We will now listen to the Bank of Ireland's Interim Results Announcement for 2021, presented by CEO, Francesca McDonagh; and CFO, Myles O'Grady, followed by a Q&A. Thank you.

Good morning, and you're very welcome to our results presentation. In the first half of 2021, we've seen a strong recovery in our performance. We've continued to deliver our strategy. We've maintained a laser-like focus on costs. Our economic outlook is increasingly positive with sentiment back to prepandemic levels, and we've announced 2 significant acquisitions. This progress is reflected in our results. Group operating profit of EUR 465 million is up 72% compared with the same period last year. If we leave at the total year 2020 and compare our results to the same period in 2019, our underlying operating profit pre-impairment is up 7%. Our asset quality remains strong, supported by the improving economic backdrop and our net impairment charge of just EUR 1 million reflects this with the group's NPE ratio improving by 20 basis points to 5.5%. Myles will give further detail on these points shortly. We've also maintained a crystal clear focus on delivering our multiyear strategy, and that includes in the following 5 key areas: our discipline regarding cost improvement is well established. Today, we are announcing a further reduction in cost for the seventh consecutive reporting period. We have continued to invest in our digital capabilities and product journeys which is driving improved customer satisfaction. In the U.K., our transformation of our business model has delivered a turnaround in financial performance, reporting a 52% increase in operating profit. Our planned acquisitions of Davy and KBC Bank Ireland further strengthened our growth outlook and support our national champion ambition. And we've strengthened our capital position with our fully loaded CET1 ratio increasing by 70 basis points to 14.1%. Our purpose is to enable our customers, colleagues and communities to thrive. Slide 6 shows some examples of how we're living that purpose this year. To mention just a few. New customer lending is up 12%. 99% of all payment breaks have now concluded. And very positively, we've seen minimal impact on asset quality. And our financial well-being program continues to grow with a circa 140% increase in customer financial health checks. In recognition of the group's progress, Euromoney recently named Bank of Ireland, the Best Bank in Ireland for a second successive year. Slide 7 sets out an increasingly positive macroeconomic outlook. The Bank of Ireland's economic pulse stood at 89.3% in July, above its prepandemic level. We've seen a marked improvement in labor market conditions. Consumer spending is rebounding as the economy reopens. Latest data shows that in volume terms, retail sales in Ireland in June 2021 were up over 13% when compared to June 2019. And the multinational exporting sector also continues to be very resilient. All this contributes to a strong outlook for the Irish economy. We expect a strengthening in GDP growth in Ireland to 9% this year. This will be supported by increased household spending as some of the 17% growth in household deposits since the start of the pandemic is tapped into. These factors are expected to reduce unemployment further. Our positive economic outlook is also supported by Ireland's vaccine rollout, now amongst the highest in the world. In the U.K., we expect strong GDP growth of 6.8% this year with another solid increase in 2022. And in terms of Brexit, while there are ongoing challenges following last December's deal, we see indications that businesses are increasingly adjusting to the new trading arrangements. Slide 9 shows how customer engagement continues to shift to digital. We recorded almost 22 million visits per month to our digital channels. That's up 8% on the same period last year, continuing a long established trend. Today, 75% of all our product applications are fulfilled digitally, up from 69% last year. Our investments in digital also supports our strategic priority to drive improved customer satisfaction. Complaints have fallen 54% from H1 2019, and our mobile app customer effort score has more than doubled, improving from 24 points a year ago to 49 today. As set out on Slide 10, our transformation is clearly delivering customer benefits and improved business outcomes. For example, this year, we launched a seamless digital journey for our Irish mortgage customers. We've also overhauled the digital process for small business and agricultural loan applications. Nearly 3 in 4 applications are now digital compared to just 1 in 4 before the journey was enhanced. And there's more to come. In the second half of this year, we'll introduce new customer engagement tools and enhance our mobile app with spending insights, nudges and card management capabilities. As part of our strategy, cost reduction has remained firmly in our sights. On Slide 11, you'll see that we have reduced cost consistently in the last 7 reporting periods. Since 2017, we've decreased gross cost by over EUR 300 million or 17%. This reduction in cost has given us the capacity to invest in our people and in our technology. Overall, net costs are down by 13% during this period. We are on track to deliver a cost base of below EUR 1.65 billion this year, and the building blocks are in place to reduce this to EUR 1.5 billion by 2023 based on our current business model. These building blocks include completing the voluntary redundancy scheme that we launched in 2020, delivering more digital journeys for our customers, completing the restructuring of our U.K. business and reducing our property footprint. Transformation of our U.K. business model continues as highlighted in the next slide. Today, we're reporting that our U.K. performance is significantly improved. In the first half, we delivered a 52% increase in operating profit. Net interest income grew 12%. Costs reduced 11%, and we're growing in bespoke mortgages, which now account for more than one-fifth of our new U.K. mortgage lending. We are delivering these improved returns in the U.K. through higher new lending margins with clearly defined discipline and commercial risk appetite, reduced funding costs, lower operating costs and a smaller, more profitable balance sheet. Growing our wealth and insurance business has been a core element of the strategy that we set out in 2018. Slide 13 details the organic growth that we have delivered over the first half, including an increase in operating profits of 27%. New premium sales up 34% and assets under management growth of 17%. The digital platforms that we launched in our wealth insurance business last year are also giving us the ability to scale. Today, over 2/3 of new individual pension business arrives digitally following the launch of our broker portal. Our wealth advice platform has seen 60% of applications on a straight-through process with sign-up time cut by 2/3 and nearly 40% of all general insurance policies are now generated via our digital wallet. We have recently announced 2 significant inorganic opportunities, which are highly complementary to our strategy. Whenever it comes to potential acquisitions, we always ask ourselves 2 key questions: does it offer value to our shareholders? And is it a good fit for our business? The acquisitions of Davy and KBC Bank Ireland tick both boxes. Davy is the #1 provider of wealth management and capital market services in Ireland. It is several times larger than its nearest Irish competitor and will bring about EUR 16 billion of assets under management to the Bank of Ireland Group. While we've grown our own wealth and insurance business organically by around 1/4 since 2018, the Davy acquisition strongly supports our ambitions for further business growth. And it comes at a time when the demand for wealth products and services is increasing in Ireland. We've agreed to acquire Davy, which had an adjusted PBT of circa EUR 33 million in 2020 for an enterprise value of EUR 440 million. The next significant inorganic opportunity is the KBC Bank Ireland transaction, for which we entered into a memorandum of understanding in April. This is on a portfolio basis and our interest is focused on circa EUR 9 billion of performing mortgage loans. KBC Bank Ireland has around 300,000 customers who we look forward to welcoming to the group. These transactions, which will be financed from internal resources are important contributors to our mission to achieve sustainable returns above our cost of capital. Both are subject to standard regulatory and competition authority approvals. Turning now to Slide 15. We've made good progress since the launch of our responsible and sustainable business strategy. There are 3 pillars to this strategy, and we are delivering under each. Highlights include our progress on gender diversity. We also launched a national campaign the F-Word, the F stands for finance, and challenged the taboo about talking about money. This campaign has contributed to Bank of Ireland being ranked first place amongst all brands in the latest Ipsos Brand Shout. And in the first half of 2021, we committed to expanding our sustainable finance fund by 250% from EUR 2 billion to EUR 5 billion. We also raised EUR 1.25 billion from the launch of 2 green bonds. Before I conclude, I want to look ahead. We will refresh our medium-term targets at a strategy update, which is expected in 2022. We see clear growth opportunities for the group as economies recover from COVID-19, from changes to market dynamics in Ireland and from the turnaround of our U.K. business. Given our strategic delivery in recent years, including on cost, wealth and insurance, digital transformation and culture, these are all opportunities that we are very well placed to take advantage of. The KBC and Davy acquisitions will further our ambition to be the national champion bank in Ireland. In addition, the Irish government's decision to sell down its 14% ownership in Bank of Ireland is a milestone moment. This further normalizes the state's relationship with the group. Having been the first and only Irish Bank to fully repay the taxpayer, Bank of Ireland will now be the first Irish bank to return to full private ownership. This is an important validation of our team and of our strategic direction. I'll now pass you over to Myles to take you through our financial performance in more detail before we move to Q&A.

Thank you, Francesca, and good morning. I hope everyone as well. Today, we are pleased to report an underlying profit of EUR 465 million, representing a strong recovery in performance and improved outlook; a EUR 1 million net impairment charge with macro conditions benign, net lending growth and an NPE ratio of 5.5%, down 20 basis points since the start of the year. Our capital position also is threatened in the period, reporting a regulatory CET1 of 15.3%. That's 14.1% on a fully loaded basis. We've seen increasingly positive economic conditions supporting increased trading activity and minimal credit impairments. As set out on Slide 20, total income increased by 14% in H1 with all businesses contributing to the strong performance. Net interest income was 2% higher, and I'll return to this in a few moments. Business income increased by 8%. Valuation items made a positive contribution, while operating expenses reduced by 4%, and noncore items of EUR 59 million were driven by planned restructuring costs. Slide 21 covers net interest income in detail. Our 2% increase in NII reflects tailwinds, including reduced funding costs and the application of negative interest rates to corporate deposits. Both of these factors were more than sufficient to offset headwinds, and these were from negative yields of liquid assets and reducing structural hedge income. The group has maintained its pricing discipline with a loan asset spread 16 basis points above the same period last year. And we also participated in the TLTRO in March, which benefits interest income with further potential income upside to come in H2. Turning now to Slide 22. Overall, the net lending book was higher at EUR 77.2 billion. On a constant currency basis and adjusting for planned U.K. deleveraging and the successful NPE transaction, the book grew by EUR 0.3 billion in H1. All divisions are demonstrating solid recovery with new lending, up 12%. That includes new lending growth of 38% in corporate and 15% in retail Ireland. And as Francesca referenced, in the U.K., we saw a strong growth in bespoke mortgages. These grew by 170% while retaining a disciplined approach to pricing and risk, which is a good demonstration of our strategy execution. The group's business income increased by 8%. The 5% increase in wealth and insurance reflects higher new sales activity and existing book income. Retail Ireland posted a modest decline as a result of lower card fee income, while growth in corporate and markets reflects higher underwriting fee income on the back of strong new lending in H1 and stable FX income. The contribution from valuation items is as a result of improved equity and financial markets. And the outlook for business income is positive and expected to grow in H2 supported by continued reopening of the economy. As mentioned earlier, this is the seventh consecutive period in which we have reported lower costs. And the EUR 35 million reduction we are announcing today is after absorbing wage inflation and higher pension costs of EUR 11 million. Our noncore charge is chiefly driven by ongoing business model restructuring. And for this year, we reaffirm our target for operating expenses to be below EUR 1.65 billion, and we have the building box in place to reach that target. For H1, we are reporting a EUR 1 million net impairment charge from improved economic conditions and minimal loss experience, while maintaining coverage to address credit risk from the removal of COVID-19 government supports. I'd like to spend a few moments on the individual components of this charge. There are 4 key points to highlight: firstly, improved macroeconomic forecasts resulted in a requirement to hold lower allowances and therefore, an impairment write-back of EUR 163 million; secondly, this was broadly offset by model changes resulting in a charge of EUR 172 million, predominantly a prudent decision to change mortgage LGD assumptions and maintaining adequate coverage levels, including the application of LGD floors; thirdly, there was minimal loan loss experience in H1; and finally, to capture the potential credit risk arising from customers who may experience credit difficulty after the removal of COVID-19 government supports, a release of EUR 8 million to P&L, while maintaining EUR 229 million stock of management adjustments held on balance sheet with this latent risk. In terms of outlook, we expect the H2 impairment charge to be broadly similar to H1. Slide 26 updates on our NPE position. Overall, NPEs fell marginally in the period. We have a long track record of market leadership in the management of NPEs in Ireland. In the first half, NPEs reduced by 20 basis points to 5.5%, driven by an Irish residential mortgage transaction. In terms of our approach to NPEs, we will continue our successful dual track approach, combining working with customers to find sustainable solutions and transactions. Turning to Slide 27. We have a diversified balance sheet with strong credit quality. On stage migration, Stage 2 loans increased by a net EUR 2 billion in H1, primarily reflecting the reclassification of loans underpinning the post model adjustment for business banking and mortgage portfolios. This is minimal P&L impact in H1 as the charge was taken in 2020. Our capital performance was very strong in H1. Our fully-loaded CET1 ratio increased by 70 basis points, helped by 90 basis points of organic capital accretion, a minimal impairment charge and the NPE transaction. Our regulatory CET1 ratio of 15.3% provides circa 550 basis points of headroom to our minimum regulatory capital requirements, excluding P2G. And moving now to outlook. We are guiding for H2 2021 total income to be circa 5% higher versus H1. This guidance reflects 3 key points: higher net interest income, including the TLTRO upside if the second benchmark is achieved in December; higher business income; and broadly unchanged valuation items versus H1. And as Francesca said out, we read our guidance on costs, that is 2021 cost to be less than EUR 1.65 billion and 2023 cost of EUR 1.5 billion based on current business model. On asset quality, subject to no material change in economic conditions or outlook, we expect the H2 impairment charge to be broadly similar to H1. On capital, our end 2021 CET1 ratios are expected to increase by circa 30 to 50 basis points above June levels, which captures a range of assumptions, including loan growth, transformation and distributions. Additional balance sheet optimization initiatives are being progressed during H2, which will be incremental to this capital guidance. In relation to the important inorganic opportunities we have discussed this morning, the group has sufficient capital resources to support their execution, and distributions are to recommence on a prudent and progressive basis based on performance and capital outlook. Thank you very much for your attention this morning. We will now go to questions.

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

Three questions, if I may. Firstly, on your guidance and specifically on the income side, if you could provide a sense of the key moving parts on both net interest income and fee and commission, please? Secondly, and mindful of your comments, Myles, I just wonder if we could understand the variables and probabilities associated with the dividend and capital distributions? And finally, just looking into 2022 and beyond, I wonder if we could get a comment on how inorganic opportunities might impact on earnings and return on tangible equity?

There are three questions there. I'll go to the second first, capital distribution and the sort of outlook for the 2022 and beyond given the M&As and then I'll -- Myles will get back on guidance on revenue. So in terms of capital distribution, so we obviously absolutely understand importance of distributions to our shareholders and the strong capital position that we're reporting today. And given the guidance about future capital accretion, obviously support recommencement of distributions. As we've said, it is our intention to do so on a prudent, progressive basis based on performance and outlook. And it's also noteworthy that the strong capital position that we have today coincides with 2 fantastic and significant acquisition opportunities. And our belief is that allocating surplus capital to these transactions is the right decision that intent will materially enhance future returns. So as these 2 acquisitions play out over the second half, Myles and myself, the Board will discuss distributions at the full year and we'll make the appropriate decision at that time, okay? And in terms of just M&A and sort of the future, obviously, we've got 2 opportunities here, both of which create value for shareholders. They're both good strategic fits. So let me just briefly talk about each in turn and what that means in terms of returns outlook over time. So obviously, Davy, market leader in wealth management, capital markets. The business is 75% wealth management, 25% markets that we're acquiring. It is a multiple of the nearest Irish competitor. It brings with it EUR 16 billion of AUM and that just compares to our own organically grown wealth insurance AUM of about EUR 21 billion. So this is good increase, a very nice strategic fit and gives us an opportunity to diversify revenue to include more business income and also to capture growth in the Irish demographic and some macro backdrop. KBC, the focus there is on the acquisition of the portfolio. It's a back book acquisition, and we're focused on the EUR 9 billion performing mortgage book and about EUR 5 billion of savings. We've entered into an MoU, and we're looking to complete both transactions subject to approval and final agreement in the case of KBC in 2022. In terms of what that means for returns, so on North Start, our focus in terms of our return on tangible equity has continued to be in excess of 10% in the longer term. And that's unchanged. That doesn't -- that hasn't been diluted by COVID. And actually, that North Star and that target is independent of M&A. Obviously, these 2 acquisitions will get us beyond the 10% ROCE and we'll get there sooner. We're not being explicit in terms of timing. We've provided that we'll do a strategy refresh in 2022. And even though we'd have loved to have done that this year, we want to get the conclusion of those 2 acquisitions to be more explicit in terms of timing and medium-term guidance. Hopefully that answers 2 of your questions. I'll go to Myles on the first.

Thanks, Francesca. So on guidance, we are guiding that the second half of the year income will be 5% higher than H1, which essentially equates to for the full year, income being about 9% above 2020. And that's a better-than-expected outcome to where we thought it would have been, say, 6 months ago. That's driven by strong performance from our corporate business but also stability in retail Ireland despite the lockdown and better margin -- overall margin experience in the U.K. And that lending performance has also supported our participation in TLTRO which is enhancing the income. So they're the broad moving part. So [indiscernible] interest within that 5% overall, if we go to net interest income, we expect the second half of the year, to be higher by about 5%. It was up 2% in the first half of the year. And the major moving parts or interest income in the second half of the year are that dynamic of the application of negative rates and lower funding costs offsetting -- generally offsetting the impact of negative yields on liquid assets and lower structural hedging income. But also importantly, the guidance on interest income is supported by meeting the lending benchmark for TLTRO at December 2021. In relation to business income, fee and commission income, up 8% in the first half of the year. And underpinning that overall 5% growth in income is an assumption that business income will be up by about 20% in the second half of the year. And much of that is coming from our wealth and insurance business. We have talked before about the opportunity for wealth and insurance. Aside from the opportunity from Davy, the organic growth in that business, and much of that 20% uplift is going to come from the wealth and insurance business. And overall, we assume no major movement on valuation of items. They are the major moving items there within the guidance.

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

Actually, I might sneak one or two more questions than just the usual one or two. May just in the U.K., clearly massive reversal there in terms of a lot of it's got to be doing with the work you've been doing yourselves in relation to the business. But just kind of get -- trying to get a sense around margin progression into H2, do you expect the market there to become a little bit more competitive, certainly than was better in H1 than prior guidance? So maybe that's just the first question. Secondly, maybe just staying on the Irish mortgage market share at 23% was probably a little bit lower than expected, maybe thoughts around H2. What you're seeing in terms of applications? Myles, specifically maybe on NPE flows into NPE. Any particular parts of the book that kind of we started to see a deterioration? And then maybe Francesca, if I can maybe come back to the ROCE point. I mean, you talked about greater than 10% long term. I mean, look -- and I know you haven't kind of said anything specifically in relation to the acquisitions in terms of contribution. But pretty material upgrades today, acquisitions flow through. Could we conceptually see that number in 2023?

Okay. Thank you, Eamonn. I'll answer first couple, and I'll give you a short answer on the ROCE and then go to Myles who will also talk about all and talk about NPE. So in terms of the U.K., I mean, this has been -- the progress that we're seeing with the 51% increase in operating profit per impairment is a reflection of the last 3 years of transformation of that business model. It is a turnaround for us. We see revenue improving cost down, and the shift in lending and supporting that, and we're delighted with the results that we're seeing in the U.K. We are driving values -- volume as a result of using funding costs and operating costs. Specifically, your question on NIM. So -- and NIM is up 29 basis points year-on-year to 1.95% overall. There are a few moving parts in there. Some of that is improved product margin and mix. So a step away from the sort of very low LTV, very price-competitive remortgage market and obviously an increase in our new regulation of bespoke. We've also lowered our deposit pricing, and we need less of it. And we see obviously a base rate flat at 10 basis points. And margin is up across all of our product lines. And in terms of the outlook going into the second half of the year, obviously, we would expect more increased competition in the mortgage market. I think we're seeing that with other U.K. banks as well. And our NIM improvement is expected to continue in the second half, but not necessarily at the same rate. So we're guiding for an exit NIM of circa 2% for the U.K. rule. And that's the first question. The second one on ROI mortgages. Yes, so our market share for the first half in drawdown was 23%, and that compares to just over 25% for 2020. So there is a reduction. Two -- let me just explain 2 reasons for that: one is there is a different approach towards how the macro credential walls are used by competitors. So we all have a level of exemption. We spread that over the course of the year. We will see some other competitors use more of their full year exemption in the first quarter. And that's one of the factors. We would think that accounts for sort of plus or minus 1% of the market share reduction that we've seen. We expect that to be better in the second half. And our second half traditionally always is stronger than the first half in mortgage business. And the second element is just the growth in the broker market, especially in the switcher base -- the switch segment. So broker market, really important, has become increasingly relevant in the Irish market. They're up to 30% participation. Last year to 40%. And we just see -- with the price competition in that space, we've applied a very disciplined approach. An element of that is a switcher market, which we -- is relatively small for us, but it's more active for the broker market. The second half, I'm obviously not going to give guidance on market share per se, but we are investing in our digital platform for mortgages. That's really great nonprice differentiation, continue to do product innovation, and we typically always have a stronger second half of the year. So we would feel good about the pipeline of business. Just on the third point, very briefly on ROCE. I mean it is -- I'm not giving explicit guidance on when we would be in excess of 10%. Obviously, the 2 acquisitions are both materially accretive to ROCE, and we look forward to those completing and giving you an update at our strategy refresh in 2022.

Great. Thanks, Francesca. On NPE's question. So the overall, NPE movement fell from EUR 4.5 billion at December '20 down to EUR 4.1 billion with the percentage points 5% down to 5.5%. 2 major moving parts. An offline pay reduction as a consequence of successfully executing that Irish residential mortgage impacts and some net inflows of EUR 0.2 billion, predominantly in the corporate space. But nothing really material in relation to those inflows. And overall, we are generally encouraged by the relatively low level of our actual loss experience. We saw that throughout the second half of last year and we've seen it again in the first half of the -- half of this year, in terms of where NPEs gravitate to. Obviously, we continue to apply our successful approach of executing transactions combined with -- working with our customers for sustainable solutions. And as I'm sitting here today thinking about the second half of the year, the area of our focus is clearly on those customers right now who continues to avail of government support and really a careful eye on them, whether they're mortgage customers or whether they are SME customers receiving support from the government, that's our area of focus from an NPE perspective. And of course mindful that we are holding from a stock of provision perspective, EUR 229 million at the half year to cover that latent risk, and that's our NPE focus as we progress through H2.

And Myles, actually, if you don't mind, just a quick follow-up. Just when you mentioned that, I suppose, the EUR 229 million sitting there presumably gives a good bit of comfort. I know you've kind of talked about reasonably negligible charge for H2, but also as we think about kind of 2022 as well, I mean the traditional normalized impairment number is in and around 30 basis points. So it sounds like you're feeling reasonably good about that print as well, possibly?

Yes. So I mean, we -- I think we've been clear and tracked the COVID prices to get our arms around the credit risk arising in COVID. And I think we did that successfully last year. And we are in a relatively benign economic environment, and we are hoping that revision, as I say, to protect us against the latent risk from COVID. We assessed that at the end of the year there is some sense that possibly as customers come up that would support, we might see the impact until quarter 1 or possibly quarter 2 of next year, but we'll certainly make that assessment as part of the year-end process and into 2022.

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

Two, please, if I could. The first on costs. So obviously, you've reiterated the EUR 1.5 billion, circa of EUR 1.5 billion to 2023. But just thinking about your 1H print and the EUR 1.65 billion for this year, I think that implies [ 800-ish ], maybe a touch above that in the second half, which I guess, looking into 2022, just annualizing and allowing for that momentum that you've been building up on cost, I guess your operating cost number ex levies for 2022 is sub EUR 1.6 billion. Is that fair, accepting the M&A will then have an impact as and when those transactions close, but pre that, is that how we should be thinking about 2022? I think consensus at more like EUR 1.65 billion for next year ex levies. And then the second on provisions, please. So just thinking about your opening remarks about the strength of the macro recovery, it looks to me like the macro inputs to your IFRS 9 models are lagging quite a bit where consensus macro expectations would be for 2021, in particular, thinking about GDP is better than you have in, unemployment would be better than you have in on a weighted basis. I think house price inflation is already running ahead of what you've got in for this year on a weighted basis. If you were to mark-to-market now, what would that do to your provision position, please? Because I'm guessing your second half guidance when you said broadly stable, that's predicated on no change to your macro inputs, I presume. But if you were to change your macro inputs to align with consensus, how should we think about the scale of the release there, please?

Thank you, Chris. I'll answer the cost question. So yes, it made very good progress. We're happy with where we're going. Our guidance is unchanged, as you know, for 2021 to be sub EUR 1.65 billion. In terms of your extrapolation into 2022, I just encourage you to assume sort of linear run rate in terms of that continued cost reduction. And our guidance to be at a cost base of EUR 1.5 billion by 2023, we reiterate. Obviously, that target and those numbers are based on the existing business model. So we set them before we would have been in of the acquisitions of Davy and KBC. What's good about that is KBC portfolio is a backward portfolio with marginal additional costs coming with the portfolio and when we do complete. And obviously, Davy is a revenue acquisition that has a relatively smaller cost base, very much people driven and very much a people business, that's what we're acquiring. So that's just sort of an extra element there. I know you're asking more of the guidance in 2022, but I just wanted to give that context also. I'll pass to Myles on IFRS 9.

Sure. And you're right. There's a range of new forecasts on the macroeconomic assumptions have come out. And you'll appreciate as part of our H1 process, we go to print at a certain point in time to deploy those assumptions into our credit models. As I think about a couple of thoughts, one is when we use macroeconomic forecast to drive the EL charge, we do so over a multiyear basis. So even though the in-year forecast may be more optimistic, it may not be as pronounced as you would think in terms of the EL charge because we forecast over 3 years. But having said that, it is fair to say that the outlook is improving. And particularly for Bank of Ireland's balance sheet, I mean GDP is a good headline indicator. But the 2 that really pose influence our EL charge is unemployment and property prices. And certainly, I take the point that property prices are looking more favorable than say they would have been 4 to 6 weeks ago. In terms of the impact, we do make some helpful disclosure, I think on -- as part in the Appendix, Slide 44 and 45. And they have some decent parameters to work out how the EL charge could move as a consequence of different economic scenarios. And maybe just to give you some examples of that. For example, if we were to gravitate a charge to our upside scenario, which accounts for 20% of our overall weighting, that would improve the loan loss allowance by EUR 222 million. And to take your point on residential property prices, if the property price is increased, it's a 10% above our forecast, that would improve the loss experience by EUR 33 million, about an 8% impact. Hopefully, that gives you a sense of the ranges. But I'd say those disclosures do give helpful parameters to plus the EL charge across a range of different scenarios.

That's really helpful. If I could just clarify on the cost question. I think you were in an agreement there in terms of the momentum. Did you say Francesca that you'd expect to be kind of straight lining the cost progress linearly, running that cost progress down to EUR 1.5 billion in 2023 as we look through 2022, which I think would get you to the same conclusion, sub EUR 1.6 billion, ex M&A ex-levies next year?

Yes. Sorry, Chris. Of course, yes, year-on-year, yes.

[Operator Instructions] Your next question comes from the line of Sanjena Dadawala from UBS.

I wanted to ask about the additional balance sheet optimization initiatives that you've mentioned for the second half. Could you please provide more detail on those?

Sure. Thank you, Sanjena. I'll go to Myles on additional balance sheet optimization for the second half.

Yes, happy to. So the range of optimization initiatives that we have good track record in executing and underpin that activity in the second half of the year, as the first is in relation to a credit risk transfer. We've done a few of those. I won't share the -- you'll appreciate I don't share the commercial elements of that today, but they do offer our ability to share some of the risk on our balance sheet, which offers relief and capital. And also just generally, with the benefit of having New Ireland Assurance as a subsidiary, there's an ability for us to optimize our capital position between the subsidiary and between the group. And they will be the 2 main interventions that I expect will have a material impact on capital in the second half of the year and in particular, our support related to the execution of inorganic opportunities, which we have at the moment.

Sure. And just a clarification, these measures are in built in the 30 to 50 basis points incremental ratio number?

No, they are not. They are incremental to the 30 to 50 basis points.

And we have a further question from the line of Eamonn Hughes from Goodbody.