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

Good morning from Dublin. We're joined today by analysts, investors and colleagues from across our international footprint. Wherever you're joining from, you're all very welcome. This is my first presentation as Group CEO. I'm honored and enthused with the opportunity to lead this great organization. I'd like to acknowledge the sterling work of Francesca. As many of you know, I'm not new to Bank of Ireland, and I'm proud to see that the decisions we've taken in recent years have delivered an excellent performance in 2022. That is particularly evident in our strong and our growing organic capital generation, which gives us a great place to build from. In 2018, we set out an ambition to be the National Champion Bank with complementary international businesses. And while we're never complacent, we've made enormous strides. Our sharpened purpose is to help customers, colleagues, shareholders and society to thrive. We'll show you very shortly how we put that purpose into action to our refresh strategy and updated targets. First, let's look at our full year results. We had an excellent performance in 2022. That includes on RoTE, income, costs and NPEs. Our underlying PBT was EUR 1.2 billion. We also made 2 transformational acquisitions and welcome 440,000 new customers to the group, an 11% increase. That contributed to strong growth in customer balances. And on top of that, we returned to full private ownership. All of this feeds into our refreshed targets for 2025. And Mark will take us through the detail of these. But in summary, this is a business with the capacity to deliver returns of around 15%, efficiency to a sub-50% cost income ratio, a dividend payout ratio to 40% by 2024, and in addition, the potential to return surplus capital annually. Today, I'm pleased to announce a distribution of EUR 350 million through a mixture of dividends and buybacks. That's more than 3x last year's distribution. 2022 was also a year of strong business performance. Here in Ireland, we increased our mortgage lending by 64%. We acquired Davy. We bank almost 2 and 3 companies establishing in Ireland, and we had net lending growth in Business Banking for the first time in more than a decade. In the U.K., we continue to deliver our successful strategy of prioritizing value over volume. 2022 was a year of strong customer performance. The investments we have been making are bearing fruit in 2 core ways, how we serve our customers is changing. 85% of new mortgages are managed digitally, and satisfaction is at its highest ever level with customer NPS up 10 points year-on-year. ESG is at the center of all of this, and we've made a real step forward last year. We were the first Irish bank to have our science-based targets externally validated. And at the same time, we grew our green lending. Sustainability-related finance is now EUR 8 billion. Financial well-being is at the heart of customer interactions, and we continue to make Bank of Ireland a better place for our colleagues with engagement and culture improving. These are meaningful interventions that make a real difference. So 2022 caps at 4 years of delivery by the team here at Bank of Ireland. This was very, obviously, through a period of uncertainty with Brexit, the pandemic and negative interest rates top of mind. Our response was to control the controllables. That allowed us to hit our RoTE targets with 10.6% achieved in 2022 and exceed our cost and capital targets. And it's not just about the financials. Our customer scorecard is good, and we've transformed what it's like to work here. All of these things are important for the long-term sustainability of our business. Mark will now take you through our financial performance in more detail.

Thank you, Myles, and good morning, everyone. As Myles said out, we've had an excellent performance in 2022 with our strategic actions of recent years bearing fruit. We drove net lending growth in our Irish mortgage and SME books of EUR 1 billion, an important moment for the group. We maintained our cost discipline with like-for-like costs down. We delivered on our RoTE ambition with RoTE of 10.6%, equivalent to return on CET1 of 12.4%. And as Myles mentioned, we proposed to modern travel distributions. Slide 16 sets out our income statement and key performance metrics. I'd like to highlight 2 things: Firstly, the 15% improvement in pre-impairment operating profit. This reflects our operating leverage, business momentum and the benefit of higher interest rates. Secondly, we've updated our RoTE basis of calculation to be more conservative. We now deduct non-core costs. Next, we provide further information on our net interest income. Our strong growth is driven by deposit and lending growth in Ireland, reflecting our strategic actions, our successful U.K. strategy and, of course, higher interest rates. This is partially offset by higher wholesale funding costs. We have maintained our commercial discipline on both asset and liability pricing. This can be seen from our increased loan asset and liquid asset spreads. There has, of course, been a huge change in the interest rate environment over the last number of months. It continues to be volatile. To help you think about 2023, we've disclosed our Q4 annualized NII, which is about EUR 3 billion. Looking ahead, we see 2023 NII more than 12% higher than this figure. We increased the size of our structural hedge to EUR 60 billion last year and locked in value. This was predominantly in the second half of the year. The average yield of the structural hedge was 45 basis points in 2022, but this will materially increase as the hedge rolls over. As a consequence of the increased hedging, our NII sensitivity has reduced relative to the half year. And overall, our actions have improved the resilience of net interest income. Slide 19 details our lending. As I mentioned earlier, we saw net loan book growth in Irish mortgages and SMEs of EUR 1 billion. This is the highest level for more than a decade. And this momentum gives us confidence as we look into 2023, where we expect to see stronger net lending, particularly in mortgages. In the U.K., deleveraging was in line with our value over volume strategy with the benefit of that contributing to the higher net interest income I referenced earlier. In 2023, we expect deleveraging to moderate with the pace reflecting ongoing pricing discipline and market dynamics. On Slide 20, we show strong growth in business income in 2022. This was assisted by the inclusion of 7 months revenue from Davy. Excluding that, business income was up 15%. The outcome was higher than 2019 levels, which I suggested that our interim results would be a good performance. Our Wealth and Insurance business did well in difficult market circumstances. Recruitment of new customers from exiting banks and higher activity generally drove a meaningful uplift in income in Retail Ireland. In the U.K., the outturn is a function of our commission sharing agreement with benefits reflected in net interest income, as our FRES JV benefited from the recovery -- it benefited from recovery in international travel. Looking ahead to 2023, the introduction of IFRS 17 is the reason why we expect a high-single digit contraction in reported business income. Adjusting for this, we expect business income to increase, supported by growth in wealth, Retail Ireland and the benefit of a full year of Davy. One of our key priorities over the last number of years has been clear cost discipline. As we're setting out today, we have maintained that cost discipline. Despite inflationary pressures, we reduced like-for-like costs last year. Reported costs of EUR 1,746 million reflects the acquisition of Davy and a EUR 28 million investment to attract and onboard customers from the exiting banks. This EUR 28 million investment has delivered significantly for us. We attracted EUR 7 billion of deposits and current accounts with annualized fee income benefits of more than EUR 20 million in addition. In 2023, we see mid-single digit percentage cost growth compared to 2022 reported costs. There are a number of moving parts here, and I'd like to highlight the following. Keeping with our cost discipline, like-for-like expenses will be broadly in line with 2022 levels. The completion of the KBC portfolios will add about EUR 25 million to our cost base. We've allowed for the lifting of variable pay restrictions with any payment performance related. And we see further opportunities to realize efficiencies beyond prior plans and have allowed for an investment to support these. Our cost guidance for 2023 factors in all of these moving parts. Non-core items in 2022 primarily comprised 3 elements: transformation, mainly in the U.K., acquisition costs and the conclusion of the Tracker Mortgage Examination. In 2023, we expect to see lower non-core costs. There are 2 key moving parts in our impairment charge. Firstly, our IFRS 9 models had a net charge of EUR 137 million, mainly due to our prudent macroeconomic assumptions. This was largely offset by PMA releases. Secondly, our loss experience and portfolio activity resulted in a gross charge of EUR 214 million. This is incurred evenly over the year, was partially offset by some recoveries. Putting all of that together, we have an overall net impairment charge of 25 basis points. For 2023, subject to no material change in the economic conditions or outlook, we expect a charge in the mid-30s basis points. Our next slide sets out our NPE walk and staging overview. We made material progress in reducing our NPE stock last year through a combination of workouts and disposals. This significantly derisks the balance sheet. Our impairment coverage is strong. Indeed, our coverage ratio remains higher than it was pre COVID-19, even though our NPE stock has meaningfully reduced since then. We delivered a strong capital performance in 2022 with 135 basis points capital generation. There was a step-up in H2, which we expect to continue in 2023. We invested capital in acquiring Davy and in supporting growth in our loan books. And we are proposing total distributions of EUR 350 million, more than treble last year's level. We are proposing to pay an ordinary dividend of EUR 0.21 a share. And subject to approval, we also intend to distribute an additional EUR 125 million via share buybacks. We've updated our CET1 guidance to be in excess of 14%. This reflects updated management consideration as a group embarks on a new strategic cycle with an updated distribution policy. Slide 26 summarizes our 2023 financial guidance, which I've set out earlier. When we bring all of this together, we expect organic capital generation to materially increase as we go forward. And this supports our ambition to deliver attractive returns to our shareholders. We're now going to turn to our refresh strategy for 2025. Before I hand back to Myles, we're going to show a short video. [Presentation]

Welcome back. What we saw during that short video was a story of a successful bank in a successful economy. The strategy we are setting out today builds on being the National Champion Bank, and it presents a value creation opportunity, one that optimizes the real potential of Bank of Ireland. This is a simple equity story encompassing the strength and depth of the Irish franchise, the nature of the Irish economy and supporting demographics, complementary international businesses, revenue growth from balance sheet growth and interest rates and more efficiency from our operating model. All of this delivers a business model with significant capital generation capability, which can support strong distributions for shareholders. We have a unique opportunity in the years ahead. That opportunity is built on 2 interconnected elements, highly attractive markets and our differentiated business model. First off, Ireland is a highly attractive market. It has been the fastest-growing economy in the EU for a number of years, which is likely to continue. Ireland also has a young population with 33% of the population less than 25 years old. And we have a strong savings culture. This supports the resilience of the economy and it points to a greater need for wealth management into the future. On top of this, the Irish market has consolidated, growing our deposit base and lending books. And of course, we're never complacent about the risks. Like Brexit, the war in Ukraine or inflation, we remain vigilant to these risks and understand our role in mitigating them. The second interconnected element is our differentiated business model. Put simply, we are unique amongst Irish banks and financial services providers. We have Ireland's most compelling wealth, insurance and banking business model. This means we have the opportunity to serve our customers' financial needs at every stage of their lives and for their entire lives. We complement this model with our successful U.K. and international businesses, and we have a strong financial profile. Looking to the period ahead, our strategy is all about making the most of the attractive market and our differentiated business model. And it builds on our track record. For that reason, I think of this as a natural evolution with 3 pillars: stronger relationships, simpler business and sustainable company. These pillars underpin our purpose, which is to help our customers, colleagues, shareholders and society to thrive. Under the stronger relationships pillar, our aim is to establish mutually value-adding customer relationships. We will do this by meeting more of our customers' needs more easily. We will make ongoing investments in technology, and this will help grow customer satisfaction. We will also drive forward with a needs-based approach, which gives us the opportunity to increase product holdings. Turning to the next pillar, simpler business. I want to make the day-to-day operation of Bank of Ireland and how we work with customers and colleagues much, much simpler, better for customers, better for colleagues, supporting efficiency and a cost-to-income ratio of less than 50%. The third pillar is sustainable company. This includes playing our part in addressing some of the big challenges our customers, colleagues and wider society face. And as we deliver with these important stakeholders, we'll also deliver for shareholders through improved financial returns back to that target of a 15% RoTE. So how do we get there? Some core parts of our business are going to be central to delivering this strategy. And I'll briefly double-click on each of these. First up, Irish mortgages. Our starting position is strong. We have a market share in H2 last year of 31% and are #1 for green mortgages. We're going to further improve our platform and service. This will enhance customer experience and efficiency, both of which protect the franchise. Bank of Ireland has a long-standing record of maintaining risk and commercial discipline. It is part of our DNA and will continue to serve us well. With this backdrop, our expectation is for a growing share of a growing market. In everyday banking, we have a growing deposit and customer account base. This franchise is especially valuable given the current rate environment and in the context of 49% growth in Irish household deposits since 2017. More than one in 3 Irish consumers and businesses bank with us. We're setting out to enhance the customer experience and increased product holdings. As a bancassurer, we helpfully offer Life and home protection products for our mortgage customers. Deepening customer relationships offers opportunities for cards, insurance and wealth products, all of which translates into growing customer relationships and income. In Wealth and Insurance, we have a unique offering in a market with very attractive demographics. We are Ireland's only bancassurer. Our New Ireland Assurance subsidiary is a mature business established over a century ago. It has an embedded value of EUR 1.2 billion, with strong investment outcomes for our customers, comparing favorably with other market participants. Combined with Davy, we covered the full spectrum of Life protection and wealth. And of course, we retain 100% of the economics with both businesses wholly owned and integrated. When you look at the market dynamics, this is a compelling position to be in. Today, we have 650,000 customers across our Wealth and Insurance businesses. However, one and 3 Irish workers is still without a private pension, and we have seen substantial growth in deposits in recent years. So this is a business we will grow. Our objective is to grow AUM by between 5% and 10% per annum. Turning to Slide 37. Our ambition is to maintain our strong position in business and corporate lending in Ireland. We have a 300,000 strong active customer base. For the years ahead, progressive technology, combined with our great relationship model will help us even better meet customer needs. And we see a significant opportunity in sustainable financing and advisory. I want to comment briefly on our international corporate business, which has been a source of balance sheet growth. We saw the value of this during COVID-19 and Brexit when domestic demand for credit was muted. The international book will continue to be a big contributor to the group's performance, mindful of current global uncertainties, drive a sustained and maintain approach. Our U.K. business is a very important contributor to the group as well. Here, we will continue our approach of delivering returns through a niche strategy. This has transformed the business. We have almost trebled our underlying PBT in the U.K. since 2017, while at the same time, reducing our lending assets by about a 1/4. We will continue our new strategy for mortgages, expand our car finance distribution and support this with further investments in technology, an example of being system to support the car dealer network. And we will also seek to improve our customer proposition in Northern Ireland. In all of this, our environmental, social and governance ambitions are at the center of our strategy. ESG is integral to how I view the most sustainable way we can provide long-term for our stakeholders. We've made some significant progress here already, but there is much, much more to go for. By 2025, our ambition is to have around EUR 15 billion of green lending with our customers. We're also on track for net-zero in our own operations by 2030. Tackling the climate crisis takes deeds, not words. So at Bank of Ireland, we want to offer our customers practical support to reduce their carbon consumption. Along with the E, the S and the G are important to us as we think about our future business. Under social, we are proud of our position as Ireland's #1 bank for financial wellbeing. We're determined to hardwire financial wellbeing into how we think about our customers' needs. We've also put inclusion at the center of our strategy. We're delivering positive change in culture, and we've made progress on diversity with more to do. And in governance, ESG is now mainstreamed into our group's performance management system. This puts it on every colleague to-do-list. Through all of these actions, I am confident that Bank of Ireland will be better for customers, colleagues, shareholders and society by 2025. This is supported by our recently announced approach to both variable pay and more family-friendly policies. For customers, we're targeting outcomes to improve relationship scores and meet more of their financial needs. This ensures alignment with continued delivery for shareholders, which is a nice link back to Mark, who will take you through our medium-term financial targets.

Thanks, Myles. Our key financial targets are founded on the strategic actions we've already taken over the past number of years, together with those contained in our strategic plan. These targets apply for each of 2023, 2024 and 2025. As Myles said, we intend to deliver annual RoTE of about 15% each year. 2023 is anticipated to be stronger based on our interest rate assumptions. Growth in income and our focus on efficiencies will lead to a sub-50% cost income ratio. And on distributions, we intend to build to a payout ratio of around 40% of statutory profits by 2024. Our follow policy of 40% to 60% provides the group with further flexibility. In addition, we will consider distribution of surplus capital on an annual basis. Slide 44 shows a macroeconomic forecast underpinning our plan. We have set the forecast at the cautious end of the spectrum. For example, our plan assumes flat Irish house prices for 2023 and 2024, which compares to market expectations of high single-digit percentage growth over that period. However, we believe the caution is appropriate given the current uncertain external environment. A key assumption is a level of interest rates where we have factored in declines from 2024 on. However, the market has been volatile, and current expectations are for materially higher interest rates, this would be a net positive for the group. Slide 45 sets out the key drivers of the reduction in our cost income ratio between 2022 and 2025. As I mentioned earlier, the target applies in each year. Net interest income growth is the most important factor with strategic actions to grow mortgage and deposit volumes in Ireland, the acquisition of KBC and the higher rates all supportive. This is offset by higher liability costs. On business income, as Myles referred to earlier, we see wealth and our Irish retail franchise as the key growth drivers, reflecting the quality of our franchise with IFRS 17 and offset. On costs, the factors that are similar to those I spoke about earlier when giving 2023 guidance. Inflation and investments are the key impacts with existing and new efficiency initiatives and IFRS 17 being the key offsets. Combined, we see these factors sustainably reducing our cost income ratio below 50% over the plan. On RoTE, higher pre-impairment operating profit, reflecting the factors I've just spoken to, would be the key driver of the increase over the period to 2025. Other factors will be RWA investments supporting loan growth and the KBC acquisition and more normalized impairment charges, which we expect to be at similar levels to 2023. Reflecting on all of this, we are confident in our ability to generate RoTE of circa 15% over the period. This is a material step up on 2022 levels. Slide 47 sets out how we think about capital over the Life of the strategic plan. We expect to generate significant capital over the planning period. If I translate our 2023 guidance into capital terms, we could see our organic capital generation being double last year's 135 basis points. We will invest some of that in growing our loan books, in KBC, investing for the future and on dividends. Having allowed for these items, we believe there will still be a meaningful surplus over our capital guidance of greater than 14%, and we will consider further distributions of the surplus capital on an annual basis. I will now hand over to Myles for our concluding remarks.

Thank you, Mark. I know you're keen to move to questions, we'll crack on and move there quickly. But first, let me briefly recap. We have a track record of delivery, and this gives us a great place to build from. We are heavily invested in and excited by the refresh strategy we've set out today. Our National Champion franchise in Ireland is strong and deep. Each of our 2 acquisitions are standout in their own right and truly transformational when combined. The economy and demographics are supportive. There are very strong macro tailwinds and efficiency is central to what we do. All of this translates to great and growing returns and distributions. Our purpose is to help customers, colleagues, shareholders and society to thrive. Each group is front and center in our strategy. Our 4 million customers, our 10,000 colleagues who I especially want to thank this morning, our more than 80,000 shareholders and with a history and heritage spanning more than 2 centuries, our ambition is to make a positive contribution to society. Thank you for your time provided this morning.

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

3 questions, if I may. Firstly, on capital generation. Mark, during the presentation, you referenced the level of capital generation in 2023 is expected to be 2x that of 2022, and you plan to build to a 40% payout ratio. Do you believe you could get to the 40% payout ratio in 2023? And should distributions now be materially higher than 40%, given the strong capital starting position and capital generation that you outlined. Second question is on RoTE and specifically the circa 15% target. Your plan includes interest rates rolling over with 100 basis points reduction equating to circa EUR 300 million on the euro side. Therefore, is it fair to assume that the RoTE could be potentially a good bit higher than 15% in 2023? And finally, third question on costs, please. Just based on my numbers, you look to be quite a bit below 50% cost to income ratio in 2023. For 2023 you forecast mid-single digit percentage higher cost versus '22? Do you forecast similar growth in '24 and '25?

Thank you very much indeed for your questions. I'll take the capital generation question. I'll also comment on the RoTE target more broadly, then I'll ask Mark to comment on interest rates and also costs. So on capital generation, Diarmaid, yes, we're targeting a return on tangible equity in the region of 15%. And of course, that's not a destination target that's for each year of the 3 years to 2025. And underpinning that is the business model's ability to generate organic capital in excess of 250 basis points each year. And in that context, we have set out an updated distribution policy. That includes achieving a 40% payout, that's a cash payout by 2024. But of course, on top of that, when I relate that back and when you do the maths, with that level of capital generation, it's likely that our capital position will be very comfortably in excess of 14%. And in that regard, the policy what we've announced today is the return of surplus capital by way of buyback. That's a firm commitment by the group, which we will consider on an annual basis. I'll just comment briefly on the cost more broadly, Diarmaid. So Bank of Ireland has a very strong track record of cost discipline. We surpassed our original cost target of EUR 1.7 billion. And we took out EUR 250 million of cost over the last number of years. That equates to a 14% reduction. And as we look to the future, there is -- we are entering a growth phase, so there is an appropriate opportunity to invest. There is inflation as well. But underpinning all of that is the group's firm commitment to maintain efficiency across our business platform and maintain that operating efficiency. Mark, just to you on interest rates and also cost.

Yes. Great. Thanks Myles. And maybe just on the RoTE first then -- so Diarmaid as Myles said, the targets apply to each year, and that's really a reflection of our confidence in the prospects, our conviction in the business model. And the -- as I called out in my presentation, our current assessment is in 2023 we would be little bit stronger than that. As we think about RoTE over the period, there are a couple of things maybe just to think about. So one is those rate assumptions. So our assumptions are that the key ECB deposit rate gets to 3% in 2023 and then fall to 2.75% in 2024 and 2.5% in 2025. We've provided illustrative interest rate sensitivity on that as part of our disclosure. So we can come and talk about that. Obviously, clearly, current market rates are materially higher than that. I think the other factors that you should think about are the business momentum, and we've talked about the momentum we've had in 2022 on both the asset side and on the liability side and also through our wealth and our fee income businesses going forward as well. RWA investments will be a piece over the period as well. We've got KBC coming on board in 2023. We expect loan growth. We have to think about Op risk RWA as part of that. And finally, there is some cost inflation and investment as well. But all of those put together give us confidence in the 15% over the period and with 2023 being little bit stronger. And just on costs then, Diarmaid, maybe a couple of things on the cost. So the cost income ratio, that target will be less than 50%. That is a ceiling. We're very, very comfortable with that. And we're obviously driving to get below that. We're not setting a floor on that. The 50% is very much ceiling in that regard. And there are some maybe specific pieces -- as you're thinking about 2023 into 2024 and 2025, there are some specific pieces in 2023, which I wouldn't extrapolate in the future years. So for example, we've got KBC, those portfolios coming on board in Q1. So there's uplift in costs associated with those as previously guided. We've also allowed for the lifting of variable pay restrictions, which is a real positive for the group and remove some risks.

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

A couple from me then. On your NII guidance assumptions, it'd be really interesting to hear kind of the key assumptions underpinning that. Your assumptions, for example, around kind of deposit pass-through and mortgage spreads. I know you kind of called out the asset spread, but thinking about mortgage pricing, in particular, spreads there in Ireland. And then secondly, around distribution, how should we be thinking about the excess distribution this year in the context of that new CET1 target? And I guess what factors will we be considering regarding the magnitude of that surplus return?

Great. Thank you very much for that. Let me take the distribution question, first of all, and also comment on net interest income and then Mark, please feel free to comment on that as well. Regarding distributions, again, so just to recap on the comments from earlier, with an ability to generate organic capital in excess of 250 basis points, we're highly confident that our capital position is going to be comfortably above that 14% CET1 target. And therefore, that's why we're committing to the return of surplus capital. Now we want to consider that on an annual basis, it's a firm commitment to do that. And that's all around at that point in time we will think about whatever the opportunities may be in the marketplace, we'll have an eye certainly on the risks that may relate at a point in time. But overall, the main message to share, Grace, is that we expect to be comfortably above 14% and the return of surplus capital by way of buyback is a firm part of our distribution policy. In relation to your comment on net interest income, I mean, as a kind of broad response to that question, we are at a very strong position in the context of our balance sheet, in particular. So I look at our mortgage portfolio with the addition of KBC in Ireland, we've got a EUR 30 billion mortgage book. That is more than 70% in the fixed rate component. That means there's a lot of protection for customers. There's also a lot of protection for the group as well. And in relation to deposits, that's been a very strong part of our balance sheet. We grew deposits by EUR 11 billion last year. That's an 18% increase, and I expect deposits to grow over the life of our strategic period, broadly in line with the economy. So with that as a backdrop, we recently announced an increase in deposit rates as a 50 basis point increase. And certainly, we will keep that under review as the rate environment unfolds. Mark?

Yes. Thanks Myles. Maybe just to add on net interest income, Grace. So just as we're thinking about 2023, in particular, we provided our Q4 annualized run rate of circa EUR 3 billion. So that's one key input. Second is KBC coming on board in February. So we've previously disclosed an annualized benefit there of EUR 150 million. So that's a factor. We've got that business momentum, as Myles said, both on the lending side. We see real strong momentum in our Irish mortgage business. We finished last year very strongly, and we've got a good pipeline coming into this year. And then that deposit momentum as well. And again, those key interest rate assumptions then to go back to those in terms of 2023. So our assumption is that the ECB moves to 3% in March and remains there for the rest of the year. The market obviously is projecting something quite a bit different than that at the moment. That will be certainly a positive, and a net positive for the group. We've given an NII sensitivity as part of the disclosures to help you with that.

Perfect. Maybe if I could just follow-up, I guess, maybe within the NII, are you assuming any widening of spreads either on the asset or liability side?

Thanks Grace. Mark?

Yes. So Grace, what I would say there is, I'd look to maybe 2022 on that. And if you look at our loan assets and liquid asset spreads in 2022, you'll see both of those have widened over the course of the last year, reflecting movements in both, obviously, the asset and liability side of the balance sheet. So I think we've spoken previously and regularly about commercial discipline being a key part of our DNA, and that will certainly remain a part of our DNA going forward.

And your next question comes from the line of Sanjena Dadawala from UBS.

I have 2, please. The first one, if you could give a bit more detail on your expectations for movement of deposits during 2023, both retail and corporate. And then the mix change towards term deposits within those and how we expect those to impact our guidance? And then perhaps if you could talk about your expectations from the hedge in 2023, the size, income contribution, anything else?

Sanjena, thank you very much for those questions. I'll comment on the deposit profile, first of all, and then Mark, please, on the hedge question as well. So back to -- kind of recap from my point from earlier, a very strong position on deposits. We expect deposits to grow over the life of our strategic period, broadly in line with the economy. And that, of course, includes 2023 as well. And of course, in the context of the interest rate environment and as we reward deposit holders more, we can expect customer behavior to starting to take some of the deposits from demand into term that will be a feature of the profile, Mark?

Yes, absolutely. And Myles, maybe just on the structural hedge then. So we've got a very passive strategy there. So we're hedging our free funds, about 1/7 of that rolls over each year. And we have seen a step up in that in H2. That's reflecting deposits coming off a negative interest rates, also reflecting that EUR 11 billion deposit growth that Myles referred to earlier as well. We've also made a conscious decision to add a portion of demand deposits to our hedge in the second half of the year as well, which really is just bringing us into line with peers. To your question then in terms of the expectations on that going forward, I'd say it's more mechanical and from here in terms of -- it will reflect that growth on the liability side of the balance sheet. I'd point out that the average gross yield on the hedge was 45 basis points in 2022, but we'd expect that obviously to materially tick up as the hedge rolls over. And finally, I'd say the hedge, what that's doing is it's locking in value. It's providing that NII resilience. So you'll see that our sensitivity to interest rates has reduced relative to the half year and it's lower than it otherwise would have been, but that's a change in the hedge.

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

If I could just ask on capital, please. I invite you to elaborate to little bit more on the thinking behind the greater than 14% CET1 target. When I look at your slides, you're essentially guiding to close to 300 bps of headroom to your expected future MDA, which is fairly lofty relative to what I see some other banks targeting. And obviously, the risk density in Ireland is pretty high. And within that MDA expectation, you have a meaningful countercyclical buffer expectation, which we have seen in recent years, regulators do [Technical Difficulty] cyclical buffer during kinds of economic stress. When I think about the other developments in recent times, you haven't ended up with a second systemic buffer in Ireland. [Technical Difficulty] changes in recent years have been very favorable. I guess I'm struggling a little bit to understand why the CET1 target needs to tick higher. So if you could just explain a little bit more why you think the bank needs that level of headroom to MDA? And I guess thinking prospectively, would you expect that capital level to behave countercyclically. So if countercyclical buffers went above through the cycle levels, would you expect to maintain that level of MDA headroom? Or are you essentially capitalizing for a peak cyclical buffer there? Because it don't seem to be quite a large quantum of headroom? And then relatedly on RWA investments, you talked about RWA investment within some of your kind of medium-term guidance. How much RWA growth should we be thinking about here? And are you allowing anything within the plan for sort of underlying RWA model improvements given that some of the legacy loss data is now pretty far in the rearview mirror across many of your asset classes?

Chris, thank you very much for those questions. And I suppose just an overarching comment in the context of a RoTE target of 15% and organic capital generation of more than 250 basis points I said it earlier. But it is important to reiterate the point that we do expect our capital levels to be very comfortably above that new 14% CET1 target. I'll ask Mark to comment on the basis for that target.

Thanks Myles. So as we're launching the new strategy today for the next 3 years with an updated distribution policy, which is far more specific in terms of the ordinary dividend and also with that commitment on the excess capital, which we expect to have over the period, we think it's the right time to look at the capital guidance in that context. Chris, we've done some of the same analysis that you referred to. We've looked at peers across Europe in terms of capital guidance versus MDA. And what we see when we look -- we've looked at sort of 25 or 30 different institutions there. What we see is that the gap is somewhere around close to 300 basis points, so in the high 270s, 280s. And our move to greater than 14% really brings us into line with peers in that regard. And I'll come back to what Myles said, like I think that this needs to be seen in the context of the significant capital generation that we expect and it's implied by our model and targets over the period. In terms of the RWA, I'm sorry, Chris, maybe just to take up your other question then as part of that. We believe that, that's the appropriate level knowing all we know over the 3-year period. So we've obviously taken into account the changes in the capital framework, which the regulator introduced in Ireland last year. So it's guidance, which applies for the 3 years. In terms of RWA, Chris, maybe just a comment on that. So probably the key elements as we think about our 2022 level of EUR 47.5 billion, we've got KBC coming on board, slightly more than EUR 3 billion there. We will have Op risk RWA, which is a function of higher income. And then we'll have loan growth, obviously, will be the third element there. In terms of loan growth, obviously, ROI mortgage is a key part of that where the risk rates are low and attractive, I would say, sub 20% there. We'll also see some growth in our Irish SME and corporate books again, where the risk weights are a little higher. And then that cautious approach, Myles called it in the presentation on the international corporate side, bearing in mind what we see in terms of the macro outlook as it stands today. So those are all factored in. Consensus RWA, we have at the moment about EUR 55 billion at the end of 2024. That doesn't seem unreasonable to us, just maybe to help you in that context. And I don't think that model changes are a material factor in the RWA development as we see it.

And your next question comes from the line of Ali Woods from Morgan Stanley.

When looking at Irish banks, we see excess liquidity, excess deposits, 2 banks leaving the market, which all points to a low deposit beta. Are you able to share a bit more about your deposit beta assumptions or also just give us any more information we're estimating it? And then secondly, on CET1, you said that you're going to be very comfortably above 14%. Are you able to give us -- are you expecting to get down towards 14% over the course of this strategic plan? And if so, can you give us some sort of time line? Is it sort of bigger buybacks in future years? How do you expect that progression to be?

Okay. Ali, thank you very much for those 2 questions. And in relation to the deposit beta question. I mean, first of all, let me just reiterate the very strong levels of deposits in the Irish system and indeed on the Bank of Ireland balance sheet. That points to 2 things. One is a very stable funding base but also a positive source of income. And in addition to balance sheet growth and indeed, business income growth, interest income is also going to grow supported by that profile of deposits as well. I am very mindful that Ireland is a small market. It's a little bit different to the U.K. So I'm not going to be definitive on deposit because this morning for that reason, because I don't want to signal to the market. But I think that we can say comfortably that it's reasonable to assume that deposit betas will increase as rates also rise as well. In relation to the 14% to be above that, I mean, that's a target that we have over the life of our strategic plan. And again, we expect to be comfortably above that. And it's in that context that in addition to achieving a 40% payout -- a cash payout by 2024, that we'll also annually consider the return of surplus capital. And certainly, that's -- we expect to be comfortably above 14% in that regard.

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

Just 2, please. If we strip out Davy and IFRS 17 from business income expectations, it kind of looks around about flat. So is there anything worth calling out on underlying business income like acquisitions and accounting changes. Exactly, now rates have gone up in the euro area, the U.K., albeit restructured, probably a drag on the RoTE. So at what point do you reconsider the strategy there and perhaps get rid of the business quicker or so?

Okay. Well, thank you very much for those 2 questions. I'll comment on the U.K., first of all, and then I'll also briefly comment on business income before handing over to Mark. So we're very happy with our U.K. business. That strategy is playing out very well. And there's plenty of metrics that I can quote from, but the ones that come to mind is the -- we've nearly traveled our PBT in the U.K., whilst reducing our balance sheet by about a quarter. I referenced that earlier in my presentation. And that really does speak to our strategy. We've surpassed that ambition to improve returns from a low single percentage to a high single percentage. That's been successful. So we're very happy with that. It's an important part of our business. It contributes well, and we expect that to be a feature, a very strong contributor to our model as we go forward. On business income, last year, up 27% and 15% when you exclude Davy. I know Mark will talk about the numbers on an IFRS 17 basis, but growing business income, again, particularly in Wealth and Insurance and in Retail Ireland will be a feature of our model, which supports a cost to income ratio of below 50%, and therefore, by default, supports a 15% return on equity.

Maybe just to reflect back a little bit on the 2022 performance. We include associates here in the business income as well, so that's called out in the slides. But sometimes some confusion on that. So just to be clear on that. But if we look at that in 2022, EUR 734 million, if I exclude Davy. And I think at the half year, I said if we got back to 2019 levels that would be a good performance. 2019 levels were EUR 705 million. So we've had actually a very strong performance in the second half of the year there. We have had a -- if I look at the individual drivers in that Retail Ireland and that's benefiting from customer activity, but also winning those customers from exiting banks and fee income associated with that also in our wealth and our travel joint venture in the U.K. 2023 is down. But the reason 2023 is down on a reported basis is because of that impact of IFRS 17, and we've given some additional disclosures in the appendix around IFRS 17. If I go underneath that a little bit then, again, we see that growth in Retail Ireland, we see that growth in wealth from Davy coming through as key drivers. One other thing, just to be conscious of is, you'll see Retail UK is an expense in our fee income. So what's happening there is that's reflecting partnership commissions and the better that our business does in the U.K., the higher those commissions are and the higher that expense is. So actually, that's a sort of something really positive that's happening there. We expect that expense to be a little bit higher in 2023, reflecting our confidence in the U.K. business. So that will give you a sense of maybe the growth in the pieces I spoke about earlier.

And your next question comes from the line of Alastair Ryan from Bank of America.

Nice to have a reasonably straightforward outlook after all those years. So yes, that's a pleasure. And my question, I guess, is where are you going to find mid-30 basis points about debt from this year. It feels like your U.K. book is pretty resilient. The Irish economy is performing quite strongly. That feels like a very conservative number as things stand, given the high levels of provision coverage you've already got. So just invite you to comment on that, please.

Alastair, I hope you're well. Mark, we'll ask you to take that impairment question.

Yes. Thanks, Myles. And Alistair, I agree, I think we've taken a measured approach in our provisioning overall. If I look at our 2022 year-end levels, as you quite rightly point out, our coverage ratio is at 1.8%. So that's higher than pre-COVID. It's higher than last year on a like-for-like basis, when we adjust for those NPE sales during the year. We think that measured approach is appropriate. If we think about the mid-30s guidance into next year, then really what's happening there is we're emerging from 10-plus years of low or negative interest rates and moving to a more normalized interest rate environment in the mid-30 basis points. Our guidance there really reflects that. We've had a considered view right across our portfolios. So I think we're -- we think that's good guidance.

And your next question comes from the line of Robin Down from HSBC.

And welcome back, Myles. My questions are really probably more for Mark, I'm afraid. Can I come back to the structural hedge? You've obviously built it up quite dramatically in the second half of '22. And that kind of makes it a little bit harder for us to work out what the yield is going to be on maturing swaps, I know that go back kind of 6, 7 years and look at what we've done then. So I don't know if you could give us some sort of indication as to what you think the average yield might be on maturing swaps I'm guessing it might be kind of closer to 0 than the 45 basis point number. And also just to confirm that the kind of 7-year rollover that we should just see that's kind of a straight line through '23. There's nothing peculiar in terms of the timing of when you've got redemptions coming through. And then the second question, and I guess I may not get an answer to this. But if we come back to your interest rate sensitivity, historically, traditionally, it's been -- these things have been built on the basis of -- assuming a 100% pass-through of rate rises to the lending book and the 50% pass-through on the deposit meters. But I think you probably diverge from that. I just wonder if you could give us some sort of color as to what you're assuming in terms of pass-through to the loan, but particularly the mortgage book, and what sort of deposit beta assumption you've got to get to that interest rate sort of that you've given us?

Let me take some of that, and then I'll also pass over to Mark. I'm a keen fan of the structural hedge myself. I should say to you that, to my mind, the intervention last year on increasing the level of structural hedging, a reflective of a growing liability base, but also locking in that value in the rate environment. That's really important. I link that right through to our guidance on a return on equity of 15%. And when asked -- I think the rate environment, the increase in rate environment is clearly going to have an impact on both assets and liabilities. There's a reality mortgage rates will be impacted by it. And of course, we will continue to reward deposit holders as well. Now for competition reasons, we're not going to be too precise on that today. But I know that our -- the disclosures that we've given in the context of the interest rate sensitivity are designed to allow the market to really work out where interest income overall is going to play out. Mark, over to you.

Yes. Thanks, Myles. Good to talk to you, and particularly about structural hedge, it's one of my favorite pet topics as well. So on the hedge, and so that step up in last year and particularly in H2, again, that is largely mechanical because it's a passive strategy and just the 3 elements of that again. So one is those deposits coming off negative interest rates, which weren't included in the hedge and now get included in the hedge. Secondly, we've got the deposit volume growth in Ireland, that EUR 11 billion, a lot of which was second half weighted coming through again to the extent that, that's current accounts in particular. And then the third piece that's heard change there, which is more conscious is including a proportion of demand deposits and the structural hedge. So we didn't do that before. That's just bringing us into line with peers. Just Robin, to give you a sense, you're correct in terms of the average rate of 45 basis points. Some of the maturities will be below that in terms of the rate at which the increased hedging took place in the second half of the year of the order of 2.5%. So just give you a sense of some of the moving parts there.

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

I have 2 quick questions, if I may. The firstly is on capital return. I would like to ask how do you consider in the capital distribution between the dividends and share buybacks also considering that the stock trades at around 1x tangible book? And then my second question would be, if you could provide some color on the cost of risk guidance beyond 2023 and also expectations for asset quality?

Okay, Borja, thank you very much for those questions. And in relation to the capital return and the mix between cash and buybacks my -- when I look at our shareholder base, it's a broad church. And some of our shareholders have a leaning towards they prefer cash, some also particularly like buybacks. So that's why the policy and the targets that we've announced today take account of both of those requirements. But to be precise about is we are committing to a target of a cash distribution of 40% payout, and we expect to get there by 2024. And back to that point from earlier regarding our capital level is likely to be comfortably above our CET1 target of 14%. It's that level of the capital that we would expect. The return on surplus capital will be executed by way of a buyback and again, that's to accommodate the different type of shareholders we have. Mark, would you like to comment on the cost of risk assumptions, please?

And just maybe a couple of things. So we -- our guidance for 2023 is mid-30s. We expect cost of risk to be at similar levels in 2024 and 2025, reflecting our overall macroeconomic and rate assumptions. Just maybe thinking about asset quality overall, then to pick that up. So we've had a really significant reduction in our NPE ratio during 2022, down from 5.5% to 3.6%. That's significantly derisking the balance sheet. The pro forma for KBC, that's somewhere around 3.4%. We've taken an additional PMA as part of an impairment charge of EUR 60 million to cater for dealing with legacy SME NPEs. So again, that's again supporting our ambition of driving that NPE ratio lower over the course of the plan.

And the question comes from the line of Omar Keenan from Credit Suisse.

I've got one question, which is a little bit more strategic and linked to the capital planning. I'm afraid another structural hedge question and some annoying analyst NII questions. So just firstly, on the capital planning, so -- and the strategy. So when you set out the deepening customer relationships over the next couple of years and you've flagged a couple of numbers for us like an increase in financial needs of 5%, and it makes complete sense. You have 2 million customers and enhanced product suite and scaling into that makes a lot of sense. Do you think you have everything that you need to maximize the potential there? And here, I'm thinking about anything else, particularly insurance products or any other adjacencies where either internal investment or external investment might be a competing priority with buybacks. So that was my first question. And then my second question on the structural hedge. So I was wondering if you could give us idea of the exit running gross income on the structural hedge compared to the interim level. The size has changed quite meaningfully and how that looks like quite meaningfully impact our sort of sequential NII modeling going forward. So if you kind of give specific numbers around the exit income versus the interim then maybe some timing of when that put on would be quite helpful? And just my last NII question is obviously given the shape of the yield curve. I guess we're looking at possibly -- who knows what will happen, but as the market currently looks, rates will go high this year and then come down in 2025. And I appreciate for competitive reasons, you don't want to talk about deposit beta in the near term. But is there anything you could say about cumulative deposit betas and what the lending zone could be a couple of years out?

And I'll take the strategy question and ask Mark to comment on the structural hedge and some of those exit income assumptions as well. So when I think about back in 2018, my predecessor set out an ambition for Bank of Ireland to be the National Champion Bank clearly complemented as well by international businesses. And we've made enormous progress in that regard as the National Champion Bank. And by that, we mean our ability to offer the full suite of banking services and of course, as being the only bancassurer in the country as well. So let me expand on that a little bit. So the market right now is particularly attractive in Ireland. We expect the economy to be resilient -- and in fact, we're growing as well. Demographics are also very, very supportive. We have one of the youngest populations in Ireland relative to European peers. That complements our business model very well. So when we talk about financial wellbeing, that's offering the full suite of products right through from basic bank accounts. And by the way, we opened up more than 5,000 accounts for Ukrainian refugees last year. That's important. Right through to everyday banking products, 90% of those products we do on a digitized basis, i.e., no paper. True to our lending I think about the mortgage business with a EUR 30 billion book post KBC acquisition, that book is going to grow, and of course, also on business banking and corporate where we saw net loan growth last year, that's going to be a source of growth as well. And in Wealth and Insurance, the combination of our existing New Ireland Assurance business -- and I commented on this earlier in the slide script, that's a mature business that we wholly own. It's got an embedded value of EUR 1.2 billion and is performing very well in terms of asset performance for our investors who take on those products and of course, also live from protection as well. Now when we take that and we combine it with the successful acquisition of Davy and when I think about it Davy, I think about the region of about 900 colleagues who have come into the group and we welcome them. I think about the 50,000 customers that are part of Davy as well, and we welcome those customers. So that means we have quite a -- we have a very strong position in Wealth and Insurance. And we have a very clear ambition to be the #1 wealth partner for our customers in Ireland. We're less in the mass market, whether that's in the mass affluent or whether it's in the high net worth area as well. It's in that context that we think about being a National Champion Bank. And the final point, Mark, is that when we set out our capital plans and our ability to achieve returns in the region of 15%, all of that has taken account of as our -- as is the distribution policy. So we've got the capital to grow our business, to invest for the future and of course, to reward our shareholders as well. Mark, on the structural hedge piece.

Yes. Maybe, Mark, just to help you there. So that step-up on the structural hedge during the second half of last year, certainly much more Q4 wages, and that picks up sort of that average yields that average gross yield of 2.5% that I referenced earlier. So hopefully, that helps you as you're thinking about the modeling going forward.

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

A couple from me, please. One is on rate sensitivity. So in terms of the EUR 270 million for 100 bps upward parallel shift you've given, you've noted that, that's from a base rate or deposit currency rate moved from 2% to 3%. Just kind of looking at the structure, the hedge profile and how that rolls as well as the like pretty incredibly loan deposit betas is the medium term? Would you say that extrapolating that number would be conservative for moving from rates of 3% to 4% because it looks quite light to me? And then second question, just on cost guidance. So if I just strip out some of the IFRS 17 stuff, in '24 consensus is looking for 1,872 operating costs ex levies and reg fees, what would you comment in relation to the -- to where -- how comfortable you are with that number at this point?

Thank you very much for those questions. I'll comment on cost. I no doubt Mark will add to that as well and also the right sensitivity question, Mark, please. I mean, just to reiterate some of the comments from earlier, but it is important to call that out a strong cost discipline in Bank of Ireland back to that EUR 250 million cost reduction, 14%. And efficiency is very much part of our cost projections even though we are in a growth environment as well. And more broadly, when I think about our targets of return on equity of 15%, and that's off a cost income ratio of below 50%. I mean I'm very comfortable with our cost income ratio assumption to be sub-50%. Mark, over to you.

Yes. So John, maybe a couple of things. On the rate sensitivity then, that is, as you say, is some 2% to 3%. The market obviously is ahead of that at the moment. As we go forward, we've always said that the sensitivity is not linear. And you can see that. You can see that even if we compare our full year disclosures to our half year disclosures when we were at 0 at the half year, we're at 2% now. Picking up what Myles said earlier, in the context of higher interest rate environment, in general, we expect deposit pass-throughs would increase as rates go higher. So I think that would be a factor. So therefore, it would be necessarily extrapolate the 2% to 3% move into a 3% to 4% move. On the cost guidance then, maybe just a couple of things on that. So we've given very clear cost guidance for 2023. And obviously, we've got that target of being less than 50% in each year going forward. As we said, that's a ceiling, and we continue to strive for those efficiencies. Like-for-like costs, we broadly in line in 2023. So we see again the continued emphasis on cost discipline, delivering those efficiencies and offsetting the headwinds, which of course are there. Just again, and I called this out earlier, but in that move from 2022 to 2023, we have some items, which I'd say are not repeating. We've got KBC coming into the cost base. We've also got the reintroduction or the lifting of those variable pay restrictions, again, which is a real positive from the group's views, mitigate a key risk. But those I wouldn't expect to continue in the same way in a year-on-year basis going forward. Hopefully, that's helpful.

And actually, if I could just add, Mark, just one final point, John. I referenced on a couple of occasions, our RoTE target of 15%. Just to remind everyone that, that RoTE target includes noncore costs. So it's more aligned to a more typical statutory return on equity. And even though non-core costs are reducing, nonetheless, it is within that return. John, thank you very much for those questions.

And your next question comes from the line of Seamus Murphy from Carraighill.

Fantastic performance. Just a quick one. I know we obviously want to be conservative in terms of our NII guidance. But when I put it all together, I look at EUR 3 billion annualized Q4 exit rate on KBC for EUR 100 million, EUR 150 million. And then I know we've all talked about the structural hedge and when we add in the maturing swaps plus the growth in deposits, I'm getting at least kind of another couple of hundred million, plus the ECB deposit rate is obviously higher as we look into '23. And also, when we -- even though you know you don't slow when we look at the system data, ECB data, we can kind of work out the deposit betas in Ireland, which are roughly around 4% to 5% right now. It just looks like your guidance NII is exceptionally conservative. I suppose just some comment around that, please.

I'll ask Mark to comment on the NII guidance. I would frame the answer to that question in the context of a target of return on equity of 15%, which I wouldn't describe as conservative and indeed our cost to income ratio being sub-50%. Mark, over to you.

Yes. Thanks, Myles. Hi, Seamus, good to talk to you. And no, I think the guidance is balanced in measured James, that's how I characterize it. I think the key moving parts you've called out is we've got that exit rate. We've got KBC coming on board. We've got that deposit and loan growth coming through. We've obviously made appropriate assumptions in relation to changes in the asset and liability side, and we've got the right assumption. And clearly, the rate assumption, you can look at that rate assumption. The market is higher than that, but we've given the sensitivity to help you with that.

Okay. Okay. And just one follow-on. Just in terms of the deposit betas. When I look at the Irish data on the ECB, used in ECB, it's coming in around at a low single-digits. Do you think that's -- is that where you guys are as well, I mean, on the base that you're 34% of the market.

And we are -- I suppose the market is responding to what is a very fast evolving rate environment going from a long period of negative rates right through to increasing rates now. So again, I really don't want to -- I am conscious that we're in a fairly consolidated market, Seamus, in Ireland. I don't want to comment specifically -- but it is -- I mean, rising rates will equate to rewarding deposit holders more. But thank you very much for the question.

And your next question comes from the line of Aman Rakkar from Barclays.

So I just wanted to preview on the kind of commercial outlook -- commercial pricing outlook for mortgages. I mean, look, it's a really positive update. And I think there's conservatism embedded in some of your revenue guidance that we're kind of probing on the call. And I appreciate that you're looking to adopt a kind of disciplined approach to pricing. And you've kind of indicated that net deposit rates should be expected to rise from there. But I guess the one bit at a system level that there is no discipline on evidence right now, because on the asset side, mortgage pricing I would describe is close to very rational, if you look at the kind of compression in spreads versus swap rates. So I guess that you're kind of banking the benefits of the deposit income tailwind and using that to kind of tolerate very, very narrow spreads on the asset side. I guess the risk longer term would be that if spreads were to kind of operate at this level longer term, it would be a kind of headwind to revenue. So what's your take on the outlook for mortgage pricing in a market that's consolidated where presumably competition is an issue for you. Are you looking to introduce some kind of rationality back into asset pricing if deposit rates go up, can we expect line rates to go up as well?

Thank you very much for that question. I do think it's worth spending just a little bit of time on this because it is really important. If I think about what Bank of Ireland has done over the last number of years, risk and commercial discipline, very much part of our DNA. I mean over the last years, when there were many other players were reducing rates on the mortgage side, we didn't do that. We maintained our discipline. And that means we entered into this rate environment from a strong position. That's the first thing. Second of all, a little bit around just the composition, for example, of the mortgage book, because this is really important. I referenced it earlier, but I repeat it. More than 95% of the business that we have done in mortgages over the last number of years has been a fixed product offering. And now as a consequence of that, more than 70% of the book or 70% or thereabouts is fixed. So that means, firstly, our customers are protected from the rising rate environment and also we're protected from a hedging perspective. So that's -- they're kind of some of the moving parts. Now back to that discipline point, it is absolutely fair and reasonable to say that as rates continue to increase, there will be an obvious impact both on mortgages and on deposits. And we think about both of those in the round. We don't think about them in isolation. It's the entire balance sheet, the strength of it that's driving our discipline on commercial interventions. But we're very mindful, of course, that a rising rate environment ultimately does result in a combination of mortgage prices being higher and deposit holders being rewarded more.

That was our last question. I will now hand the call back for closing remarks.

Okay. Well, thank you very much this morning. I know it's a busy results season for everybody. And I do want to thank you for taking the time. I know we were -- this is slightly longer, because we did both results and also a strategy refresh. But thank you very much. And certainly, Mark, and I look forward to meeting many of you face-to-face over the coming weeks. Thank you very much indeed.

Thanks, everyone.