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

Good morning from Dublin, and thank you for joining us. A year ago, we presented our refreshed strategy. That strategy is built on 3 pillars: stronger relationships, a simpler business and a more sustainable company. And it's very much guided by our purpose, which is to help customers, colleagues, shareholders and society to thrive. We are now more than 1/3 of the way through our 3-year strategic cycle, and we are executing our strategy well. This is evidenced by a step change in the performance of the group, loans, customer numbers and AUM have grown. Our financial performance is strong with profits of EUR 1.9 billion, a cost-to-income ratio of 42% and RoTE of 17.3%, outperforming our target. This is delivering capital generation of 340 basis points. Today, we're announcing an ordinary dividend of $0.60 per share and a share buyback of EUR 520 million. This brings total distributions to EUR 1.15 billion, more than 3x what we announced this time last year, equating to a total payout of 72%. Ireland is an attractive market. 3/4 of our profits come from here. Ireland has record total employment, up by 14% since pre-COVID 2019. Households and businesses have healthy balance sheets and housing completions last year reached a 15-year high with more growth expected. While we are mindful of the risk presented by the external environment, this positive backdrop is important. And Bank of Ireland is very well positioned to create value in this market. This all helps drive our strong Irish retail performance. In Irish mortgages, we've increased our share of a growing market to 41%, with organic net book growth of 8%, whilst maintaining our risk appetite and pricing discipline. Irish deposits and current account balances grew by EUR 2.5 billion to over EUR 80 billion, while customer fee income grew by 11%. Our assets under management increased by 18% to EUR 46 billion. This is supported by strong customer inflows of EUR 3.3 billion, highlighting the quality of our New Ireland Assurance and Davy businesses. The performance of our other businesses is in line with strategy. We grew new lending in our Irish corporate and SME loan books. We've also maintained our disciplined approach to property and international corporates with exposures down by 10% over the last year. Here, we've increased our commercial real estate coverage ratio by 100 basis points to 3.4%. We've taken this action to capture known and potential future risks to this portfolio. In the U.K., our approach of delivering returns through a niche strategy has transformed its performance with underlying profit before tax up 57% since 2019. Our U.K. business continues to generate returns above the cost of equity. This was a strategic imperative when we commenced the execution of this strategy back in 2020. As I mentioned, our strategy is to build stronger relationships, a simpler business and a more sustainable company. In terms of stronger relationships, new to bank customers increased 8% last year. At the same time, complaints in Retail Ireland fell 5%, bringing the reduction since 2018 to 50%. This shows continued delivery of our simpler business strategy, where our work to improve customer journeys and enhance digitalization is having a positive impact. As part of a sustainable company, we're well on our way to meeting our sustainable finance target of EUR 15 billion by 2025. This lending increased 35% last year to EUR 11 billion. Sustainability is about more than green lending. We've increased the share of female senior appointments by 6 points to 46%. While colleague engagement and culture scores reached all-time highs. These improvements support our ambition to attract, grow and retain the best possible talent. Our strategy is delivering for shareholders. Exceeding our RoTE and cost income target is enabling stronger-than-expected distributions. We're meeting a 40% payout ratio target 1-year early, and we're adding to this with a EUR 520 million buyback, returning surplus capital as we committed to last year when we communicated our updated distribution policy. I've previously spoken about Bank of Ireland's unique position as Ireland's National Champion Bank. We are serving our customers' financial needs at every stage of their lives. Through Bank of Ireland, Davy and New Ireland, we offer banking, wealth and insurance propositions, all from within the group. We operate in an attractive economy with supportive demographics, and our U.K. and international businesses are complementary. All of this delivers an enduring step change in our performance and confidence in the strategy. The group strengthened business model is well positioned to deliver our financial and nonfinancial targets. From an investor perspective, our strategy is producing great commercial outcomes [ translating ] to a very strong financial performance and supporting sustainable capital generation and increased distributions. Acknowledging this strong capital generation, the step change in our distribution capacity and our desire not to hoard capital. Interim distributions are to commence in 2024. Mark will now talk us through our financial performance in more detail.

Thanks, Myles. Slide 15 sets out our strong financial performance. We delivered growth, efficiency and excellent returns last year. The performance reflects our strategic decisions in recent years and commercial delivery right across our business lines, supported by higher interest rates. This translates into the step change in capital generation and the distributions that Myles highlighted. Slide 16 details our P&L items. Total income was up 42%, with all lines contributing. Our cost income ratio improved by 12 points year-on-year, reflecting higher income and operating leverage supported by previous investments. Our impairment charge is higher than our guidance. There are 2 key points to note on this. Our actual loan loss experience is slightly higher than 2022. And the higher charge reflects additional management adjustments to address potential risks primarily in CRE. Finally, our RoTE is 17.3%. This exceeds our medium-term target of circa 15% and is equivalent to a return on CET1 capital of 21%. On Slide 17, we cover our NII performance. Our NII is 48% higher than the prior year. We deliver this through higher lending and liquid asset income, which more than offset growth in funding costs. Looking to 2024, we expect NII to be 5% to 6% below the 2023 Q4 annualized run rate. This reflects our rate expectations with an ECB deposit rate at end '24 of 2.75% and higher deposit costs. These factors will be countered by our ongoing business momentum, particularly in our Irish franchise. Our structural hedge is designed to smooth the effects of the interest rate cycle, and it is working as planned. We took actions to materially increase the hedge in 2022, which you can see in the top chart. These actions are providing clear benefits. Our gross hedge income increased nearly fivefold last year. We expect hedge income to continue to grow by circa 10% in 2024, with a significant proportion of this already locked in. The structural hedge will be a positive factor in our NII development over the coming years, protecting income as rates go lower. Bank of Ireland is a strong and stable retail deposit base. Looking specifically at our everyday banking franchise in Ireland, we saw growth here in H1. In the second half, continued inflows were offset by high net worth customer migration to Davy, where we have specific offerings to meet the needs of these customers. As anticipated, we've seen migration into term pick up during the year from low levels, with flows highest in the final quarter. Looking at 2024, we expect modest growth in our Irish deposit franchise, reflecting our economic outlook and customer behavior expectations as interest rates trend lower. We also expect a similar rate of migration to term as experienced in the last quarter of last year. On Slide 20, we chart the key movements in our loan book. The book evolved in line with our expectations. With the acquisition of the KBCI portfolios, higher net lending in Ireland, deleveraging in the U.K. and our cautious stance to our CRE and international portfolios. A highlight is a EUR 2 billion growth in our non-property net lending in Ireland, up more than 60% year-on-year. Our mortgage performance is the main driver here and delivered while maintaining our commercial discipline and risk standards. In 2024, we expect modest growth in the overall loan book driven by continued growth in our Irish portfolios and stability in our U.K. loan book ex-personal loans. Our business income increased by 10% last year. When we launched our strategy one year ago, we spoke about Wealth & Insurance being the key driver of fee income growth. This is playing out as we planned. Wealth and Insurance was the largest contributor to our fee income growth last year. For 2024, we expect mid-single-digit percentage growth in our total business income, which includes the contribution from associates and JVs. Again, we see wealth and insurance is the most significant growth engine in this. Slide 22 covers costs where we've continued to maintain our discipline and our outturn is in line with our guidance. In terms of our 2023 performance, inflation and BAU items account for less than 1/4 of the headline increase. Acquisitions and other items, including additional investments account for the balance. Looking at 2024, we expect mid-single-digit percentage growth in OpEx. This growth includes additional strategic investments to drive future efficiencies in a period where we are generating attractive returns. Noncore items reflect acquisitions, divestments and our liability management exercise. For 2024, our expectation is for a similar level of noncore items as last year. Slide 24 shows the group's diversified loan book with good collateralization. Circa 60% of our lending is in mortgages with low LTVs. The group's asset quality improved last year with a 50-basis points reduction in our NPE ratio to 3.1% and Stage 1 loans up. We continue to maintain strong coverage levels, 1.5% on the overall book. On a like-for-like basis, 2023 cover is the same as 2022. On Slide 25, we give detail on the group's CRE exposures. We reduced our CRE book by 12% during 2023. This reflects our active portfolio management. Our book is predominantly Ireland's focused. We have a small U.S. CRE book, which accounts for less than 1% of total group loans and as prudently provided for. We are continuing to see positive borrower behavior right across our portfolio, supported by average LTVs of circa 60%. Our overall series asset quality is stable, and we meaningfully increased our coverage levels from 2.4% to 3.4%. This includes a trebling of our Stage 2 coverage. These actions underline our proactive approach. This leads us to Slide 26, where we look at the building blocks of the group's cost of risk. Our loan loss experience and portfolio activity charge of EUR 265 million is slightly higher than last year. We also made additional management adjustments totaling EUR 138 million, comprising PMAs, FLI and model adjustments. The largest element of these additional adjustments relates to our proactive stance towards our CRE exposures where we have addressed potential future risks. Looking to 2024, we expect a charge in the low 30s basis points. Turning to Capital. The group generated 340 basis points of net organic capital last year. This has allowed us to invest in our business, complete book acquisitions and increased distributions more than 3fold. We expect another year of strong capital -- organic capital generation in 2024. 2024 distributions will comprise a mix of buybacks and dividends. And as Myles has set out, interim distributions are to commence this year. Our final slide recaps our guidance for 2024. The moving parts here lead us to expect a RoTE of greater than 15% with associated strong capital generation. We are firmly on track to deliver all of our medium-term targets. Thank you for your attention. Back to you, Myles.

Thanks, Mark. To recap, 2023 was a great year that gives us a strong platform to build from. We are focused on driving the group forward in 2024 and beyond. We'll now open the line for questions.

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

Three, if I may. Myles, maybe just starting with broadly the strategy and how you look at the business in terms of Ireland and the confidence you have in the business. Clearly, in 2023, you outperformed the target you set 12 months ago. You're guiding for that to continue into 2024. So maybe just talk to the areas where you're seeing that in terms of that outperformance and the confidence you have in that relative to what would have been set out 12 months ago. In terms of capital, Myles, you referred to substantially higher distributions. How should we think about that in 2024 and beyond, both in terms of the mix between ordinary dividends and buybacks and your CET1 guidance. And Mark, maybe finally, you're guiding 2024 net interest income lower, given 2025 interest rate expectations are lower again. I just wonder if you could talk to the moving parts as we look into out of 2024 into 2025 in terms of structural hedge and the other parts of the moving parts there in terms of how that can play out?

Thank you for those questions. I'll take the first 2, and Mark will take the net interest income question. So in terms of confidence in our business model, I mean, last year was all about executing strategy and translating that into commercial outcomes. I think we've done well there. All parts of the business performing strongly. Last year was also about building on the foundation of the material strategic decisions that we took in previous years that relates to acquisitions and multiyear transformation programs. And in our home market, we've got a very strong market position. Our business model and actually our balance sheet, in particular, is structured very well to create sustainable value for customers and shareholders. And also, just to remind those on the line, we're also the only wholly owned bank assurer in Ireland with New Ireland Assurance and Davy. Ireland's leading wealth business. And in the U.K., you may have -- you've heard me reference earlier that this is a business that is consistently delivering returns that are above the cost of equity. And on asset quality, the balance sheet has strengthened last year compared to the previous year. And also, we've increased our sustainable finance by 35%. So I called that I ask you because when I bring all of these components together, it certainly offers me continued confidence in our strategy and in our business model. This is very much reinforced by the '24 guidance markets provided and indeed my own commitment to deliver the targets we announced last year. So turning back, I guess what excites me as a CEO is the actions we are taking to truly future-proof our business beyond the current strategic cycle. And of course, that translates into an outcome, which is sustainable enduring capital generation and distributions to shareholders, which takes me on to your second question. So I expect distributions this year will comprise ordinary dividends and share buybacks, very much anchored in a progressive dividend per share and continuing to return surplus capital. And given our highly capital-generative business model, we've referenced 260 to 280 basis points for 2024. That equates to 65, 70 basis points per quarter. We plan to commence interim distribution this year, which I regard as a very positive development. The mix of interim distribution likely to include a cash dividend will be assessed as we get closer to H1. Important to note that the primary decision for distribution will take place at year-end. And therefore, any interim distribution will be a component or a subset of the overall decision for 2024 distributions. Also important to say that share buybacks are subject to regulatory approval as is the case for Eurozone regulated banks. So I mean stepping back a little bit, like last year, we committed to growing the dividend payout of 40% by 2024. We've done that a year early. We also said, we would not hold capital and our share buyback announced today is a demonstration that we are not hoarding capital. And our CET1 ratio, we've landed at 14.3% is very much in line with our capital target and indeed our distribution policy. It also demonstrates that we're comfortable running the business at this level. So I'd wrap up before handing over to Mark, our delivery last year and the transition to interim distributions reinforces, I guess, our capital return credentials and should give you a sense of our confidence in our business model and the ability to generate and return capital to shareholders. Mark, over to you.

Thanks, Myles. And maybe just on NII, maybe standing back, I would say NII is playing out as expected when we launched a strategy a year ago. At that point, we expected 2023 to be the strongest year in a 3-year cycle with attractive returns in each of the 3 years. Just before we get into 2025, maybe just maybe it's worth dwelling on the 2024 guidance and really 3 elements behind that. So firstly, rates and our assumption based on market expectations at the beginning of February is that the ECB will cost in April and every meeting afterwards other than December, getting us to 2.75% by the end of the year. I know the market is probably a little bit more hawkish on that moment. We've given an NII sensitivity to support the market in that regard. The second factor is higher deposit costs. That's primarily reflecting our flow to term assumptions in Ireland. And again, just to recap there, our assumption is that the flow to term will continue at the same rate at Q4 2023 throughout all of 2024. Now of course, at the market, and we are expecting rates to come lower. So obviously, you can make a judgment on that. And then the third element is business momentum, and we are seeing that business momentum, particularly in Ireland, we've seen about EUR 2 billion growth in Ireland last year in terms of non-property lending, up 60% year-on-year, very strong performance in mortgages for a good start this year as well. And we're also projecting modest deposits as well. So those factors will counteract the first 2. And then on 2025, again, maybe at an overarching level, and just to check what Mark said, we're firmly on track to deliver our committed financial targets, our RoTE of certain 15% and our cost-to-income ratio of less than 50%. And obviously, we're not giving formal guidance on 2025 today, but my best view is on NII that we have relative stability versus 2024 levels. And if I think about the factors underpinning that, obviously, rate, as you pointed out in your question, lower is a headwind, and that is obviously a key variable. But there are 3 offsetting factors. So one is, we will see lower funding costs as rates go lower. And secondly, that lending and deposit growth that I spoke about in terms of 2024. And thirdly, then the structural hedge benefit becomes more pronounced for NII as rates go lower. So hopefully, that is helpful in terms of thinking about that strategy.

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

Two, please. One on kind of NII again and then the second on capital. So firstly, on NII, I guess, just thinking about -- coming back to your commentary around deposit migration and in a falling rate environment. I'm thinking about broader market competition. You've had -- overall, I think it's fair to say relatively low beats and in terms of deposits on the way up. But thinking about how, when rates come down, how are you thinking about the balance of deposit pricing versus mortgage pricing? And then secondly, just to push a little bit more on the distribution point. Is there anything stopping you moving much closer to a total payout of 100% this year and next year, especially now you're able to move to interim distributions. Do you think that helps with the amount of surplus you'll be able to return each year?

Great. Thank you for those questions. Let me take the capital question. First of all, I'll also comment on our pricing strategy for mortgage and deposit customers. And Mark, you may have more to add in relation to the broader deposit question as well. On the capital distribution question, Grace, our overall objective is, first of all, to be clear that we want to have a progressive dividend per share, building on the $0.60 per share that underpin the '23 announcement. And of course, that's going to be driven by a range of factors, P&L performance, but also the share buyback itself is supportive of that. And our policy, so our payout last year was 40%. Our policy allows us to operate within a 40% to 60% range. So we have the flexibility to use that as required. And also, again, on the other components of distribution on the share buyback, again, hopefully, our credentials are strong in this in the context of what we've announced today. And I would reiterate the point that we have no desire to hoard capital. So I think it's less about whether it's the total payout of 100% and more about a progressive DPS and the return of surplus capital. And again, I think getting down to 14.3% is a good demonstration of that. In relation to pricing strategy in the context of the rate environment, I mean just to maybe recap for a moment on what happened last year because, again, this back up, for example, of ECB rates increasing by 4.5% in a, I guess, a 15-month period, we took a, I would say, a market-leading position to take a balanced approach to how we apply those rates. Now all our pricing decisions will always be economic. They will always be based on pricing discipline to ensure we secure the right returns. But within that, for example, ECB rates up 4.5%. We passed on 1.75% rate to mortgage customers. And on the deposit side, we brought to the market a number of products, including a 3% supersaver product as well. And that's our -- that's what I mean by our balanced approach. Now it's true in the context of your [indiscernible] comments that last year, customers were slow to take on term deposits. I think that's a factor of a very long and protracted period of low and negative rates. We saw that increase in the last quarter of last year as we expected. And we expect that also to continue into this year. That is very much captured in the guidance that Mark has offered. And also, in the context of my comments that in as much as we apply the balanced approach. Last year, we will do the same this year, always underpinned by the disciplined commercial approach to pricing and always underpinned by our commitment to the market in the context of our RoTE and cost/income ratio targets. Mark, I don't know if you want to add more on to that.

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

Could I ask about RWAs, please? So in the slides, you've flagged Basel 3.1 as a modest positive now for 2025. And obviously, you've got this exit from the U.K. personal loan business, which I guess is going to be nudging down your expectation for RWAs at the end of this year from the mid-50s. But wrapping the commentary together, I'm guessing you're expecting an average RWA base in 2025 of something like EUR 53 billion. But if you could speak to speak to the numbers there, that would be appreciated. It feels like an area, where one of the things I'm struggling to square this morning is your reiteration of the RoTE guide with some of what you're saying on the P&L. And I think the thing that squares the circle is that consensus has been the wrong denominator for the RoTE. So if you could speak to the RWAs, please. And I guess related to that, in terms of your policies on payout and that kind of thing, when I think about the TNAV that you're expecting, obviously, you have this quite complicated ex pension surplus at 14% CET1 based TNAV denominator that we all wrestle with. I think you're expecting a TNAV in 2025 of maybe [ 9.25 ] through the year, which will be about a EUR 1.4 billion net income number to get to 15%. Just wondering if that's sort of the right ballpark.

Chris, I'm going to ask Mark to take the risk-weighted assets and the TNAV as well. But I'd like to comment very briefly on just squaring the circle in relation to RoTE. So you know our target is for each of the 3 strategic areas for 2025 as a RoTE of circa 15%. We've outperformed that in 2023. And as Mark has alluded to, we expect that to be the case of '24 as well. So yes, we may come off the very -- the high level of RoTE 17.3%, but still very much committed out to 2025 that the RoTE will be in the region of 15%, strong range of contributors to that. Mark, the risk-weighted assets and the TNAV question.

Yes. Chris. So just on the -- firstly, Chris, on the RWA. So in 2024, what we're expecting there is probably low single-digit growth in RWA. There's a couple of things there. As we look loan book growth, mix changes with a prefer step-up in op-risk RWA as earnings go higher. So that's the mechanical piece. And then we'll have the offset from and we're assuming the exit of U.K. personal loans at EUR 900 million or UA tied up in that business. And the reason for that is, again, back to our capital allocation discipline. So that's a business that ultimately requires scale. It's a business where we couldn't see us getting to sustainable returns over the medium term, and that's what's driving and the actions there. On Basel IV, then -- so Basel IV is due to -- the 1st of January 2025. Obviously, there's some final legislative approvals required there. And obviously, we can see those in 2024. But our best view right now is that, that is a modest positive for the group from 1 January 2025. And order size, Chris, we expect in the low single-digit reduction in RWA from onto 2025. And then maybe just turning to TNAV for a second. So TNAV, as we think about TNAV in 2024, the key element there is going to be our profits. We've given us good guidance on that and distributions, which need to come out to the 2023 distributions need to come out. But of course, the denominator needs to be adjusted as well for the impact of the share buyback. That should give you a good sense on the moving parts in terms of TNAV progression.

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

Just on the NII guide. You've seen quite a lot of ECB rate cuts. What's the sensitivity to the guide to plus or minus 25 basis points on the ECB at the end of the year? And then just on the last point on capital. How often do you consider your capital target and we're finalizing Basel will that make you reconsider the level that you'll target?

Robert, let me just take the target capital question, first of all, and Mark will take the NII sensitivity. So our target capital to be above 14% is valid for the strategic cycle out of 2025, Robert. And the Basel IV is more about a consumption of capital rather than a capital target itself. Mark on NII?

Yes. And so Robert, actually we published our NII sensitivity on Slide 18 in the pack, so you can see it there and broadly 25 bps higher for a full year is about 60 basis points in RoTE.

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

I have 2. Firstly, is on NII, if you could please provide more details on the contribution of the structural hedge in 2024 and 2025. And also, if you could give more details on the deposit [ beta ] that you are assuming for the year? And then my second question would be, given the fact that rates are expected to decrease, if you would make sense to do any restructuring of the branches or staff in order to improve the efficiency?

Mark will take the structural hedge and deposit beta question. And in relation to the rate impact on the operating model, I mean, there's a couple of points to unpick here, [ in order to be flexible ]. First of all, we always knew that 2023 from an NII perspective was going to be a very strong year, and that's one of the reasons why our overall RoTE is 17.3% above our committed target of in the region of 15%. And we knew that, that would have an impact into 2024, but not in any way, putting at risk our commitment to securing a RoTE of circa 15% this year and next year. And in fact, this year, we're likely to outperform that as well. And also, the other target that's very important, which is our cost-to-income ratio to remain below 50%. Again, that was very strong at 42% last year, and we're very confident that we will, for sure, commit continue to commit to that target out to 2025. And maybe more broadly on the cost question, let's find a moment on that because Bank of Ireland, over many years now has demonstrated a very strong discipline to managing costs. Prior to the inflationary environment, we made some of the very big decisions to reduce net costs. I'm thinking back to net cost down by 13% by the end of 2021. And we are entering an inflationary environment, and we're managing that very well. Essentially, we are pivoting from a cost reduction to a cost efficiency play. And that efficiency will always play out and our cost profile is appropriate for the business model which we have and very much supports our cost-income ratio to remain below 50%. There is no risk to that target. Mark, on NII and the structural hedge and deposit beta?

Yes, Myles, I might just add one other thing on the cost piece, Borja. So we have flagged that we are making additional investments in 2023 and also in 2024 to drive future efficiency. We've got a good pipeline in that regard. On the structural hedge, Borja, so structural hedges design, smooth NII over the cycle. And as I've referenced an answer to Diarmaid's question earlier, that's going to be a key dynamic in NII development as we go into the back part of 2024 and 2025 as well a key supportive factor for NII. We have guided that our gross received hedge income is going to be circa 10% higher in 2024. That's a function of volume and rate. But if I think about the average the exit rate on the hedge, which is 165 at the end of this year, and I think about a 7-year swap in a euro context has been somewhere between sort of 250, 260, one can expect that the rate trend towards that over the coming years. From a volume perspective on the hedge, we've guided that we think the volume comes down modestly, that's a direct function of our flow to term assumption. Obviously, if that behavior doesn't play out, that has a read across on the hedge as well. In terms of deposits beta, I think Myles has answered that in one sense in terms of the pricing approach earlier. I think the key focus for us from an ROI perspective is a flow to term assumption. I think that's probably where you need to focus.

[Operator Instructions] And your next question comes from the line of Andrew Stimpson from KBW.

Two for me. One on rate sensitivity and then one on the commercial real estate, please. On the rate sensitivity, I mean, other banks have talked about really cutting the rate sensitivity of their books in the second half of 2023. And I know you did some of that work maybe earlier than others, but it looks odd to me, having a completely unchanged number for the second half of '23 versus what you had at the first half. And actually, if I look in the detail of that, it looks like the euro rate sensitivity has actually gone up very slightly. And I can't actually think of another Eurozone bank where that's been the case. So just an explanation there about why that is and whether you're waiting for some and got caught by the drastic moves in November, December or if there's another reason why that hasn't really moved and then whether there's an outlook and whether that could change in the future as well, please? And then secondly, on commercial real estate and the overlays. What elements do you think that your models are not capturing, i.e., what are you seeing in the commercial real estate market that your models aren't taking account of? Is there loan specific issues you're seeing on vacancy rates on particular loans and collateral that you've lent against or are these very much top-down overlays to something that you're seeing? I think if you can elaborate on that, that would be really, really helpful.

I'll take the asset quality CRE question, and Mark will take the rate sensitivity. On asset quality overall, I will get to the precise nature of your question on CRE, but we should call out that the overall asset quality of the book has improved at the end of 2023 compared to 2022. Our quantum of stage loans have increased. The quantum of Stage 2 and Stage 3 loans have decreased and our NPE ratio has fallen from 3.5% to 3.1%. And I expect that to fall further in 2024. And our impairment charge is designed to capture both known and future risks. And on commercial real estate, for example, our overall charge is comprised of our view on the macro environment. So for example, our central case scenario assumes that commercial real estate prices will fall by 10% next year. Let's see how that plays out. The second component of our charge is also capturing case-by-case portfolio outcomes as we work very closely with our customers. And then against a very strong financial performance, we've also captured an additional post-model adjustment of EUR 48 million. And that really is around our point of getting our arms around the potential future risk. And my slide -- so here's the top-down, I guess, to your point, Andrew, that last component. And more broadly on CRE, our book is EUR 7.2 billion. That's 9% of our total loans. And by design, in my call I said earlier, that's down 12% in the year. And my final point is that there are different components of commercial real estate. So there is, for sure, some pressure on office space. If I think about other components, for example, on homebuilding, particularly in our home market in Ireland, we continue to be supportive of putting capital into the building of affordable and sustainable homes. We know the supply of homes continues to be under [indiscernible] demand, and that's an area where we feel very positive about. Mark, on rate sensitivity?

Myles, I might just add on the impairment, I say we're in a very good position to be able to take that additional charge. And so -- but on the rate sensitivity, it's pretty straightforward with no material difference. If I think about the rate starting points, there were 3.5% back in the summer; over 4% now from an ECB perspective. The hedge is broadly the same size as it was then. And we were just going back in the second half of 2022, we materially increased the size of the hedge there, and that is locked in value and reduce the sensitivity on the downside. But there's just -- there's no material difference in the position versus the half year.

Okay. So the fact that the belly of the curve has started to come up again, that's not an opportunity for you to reduce that rate sensitivity like today or tomorrow, et cetera?

Yes. I mean, ultimately, if you look at our -- the size of our hedge relative to our deposit base, about 60%-odd, maybe a little bit more than that 65%. So we always keep an eye on the size of the hedge relative to our free funds on their deposit base. And as I said, in relation to the earlier question, as we go through 2024, our guidance and the size of the hedge is directly related to our assumption in terms of flow to term. So if that proves to be different, that obviously gives an opportunity in the hedge swap.

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

Two, please. The first is just a clarification on the deposit migration assumption. So are you assuming EUR 700 million migration per quarter in 2024? And then second, you mentioned that you're participating in the FCA's review of historical motor finance arrangements. So if you could give more color on those loans and your expectations from that, maybe gross lending over there, shape of the commission arrangements, anything that can be helpful for us.

Let me take the car finance question, first of all, and then Mark to come back on the assumptions under that -- in deposit migration. Sanjena, first of all, maybe just for those who may not be familiar with our U.K. business, we offer mortgages, savings products, foreign exchange and finance including Northridge car finance. And of course, we also offer a full service banking models in Northern Ireland. In relation to the FCA review, firstly, we welcome that. It offers structure to that assessment. The book itself is EUR 2.4 billion at the end of last year, so relatively small in the context of a total balance sheet. We've got about 167,000 customers working with 314 car dealerships across the U.K. Now at the end of the year, there wasn't the case to take an impairment. We have recognized as a contingent liability in the accounts. And certainly, since this issue presented itself, I guess, 15 months ago, the work that we have been doing over the last 12 months is to really be comfortable from a customer fairness perspective that we've treated our customers appropriately. That's been a good piece of work that we've completed, and we certainly look forward to working with the authorities as this progresses through 2024. Our term deposit migration?

Yes. As you know in the deposit piece, so you can see again, you can see it on Slide 19 that our term and other products have gone from EUR 4.5 billion in June up to EUR 5.2 billion.

Can you hear me? I think the line is not very clear.

Well, we can hear you very well.

We can hear you perfectly. Yes. So the term and other piece has gone from EUR 4.5 billion to EUR 5.2 billion to EUR 700 million. The bulk of that was, Sanjena, not all of it, but both, that was in Q4 and we're projecting that the same rate of flow into term continues throughout all of 2024. That's a -- you can form your view on that in the context of the -- our other assumptions in the rate environment.

And your next question comes from the line of Guy Stebbings from BNP Paribas.

I have one more on deposits and then one on RWAs. Thanks for all the comments and detail around customer behavior on deposits. I just double check for clarification that you're explicitly saying that in a world that 2.75% Bank of England base rate to 40%, you expect the average customer deposit rate to be higher than where we sit today, reflective of that continued deposit mix effects? I mean just sound rather conservative on the face even with that late cycle deposit mix behavior that we've been seeing. And then on RWAs, just to follow on from Chris' question. If I just put together the regulatory-driven effects from operational risk, and then from Basel IV, if I net those 2 bits together, does it sound -- sounds like the op risk is perhaps fractionally higher in terms of the impact there in the next couple of years related to the Basel IV release. Is that a fair way to think about it?

On the deposit question, a couple of maybe data points to share. Just to remind everyone that the ECB rates, as you know, increased by 4.5% through the back end of '22 and across '23. And so in that context of that 4.5% increase, we've deployed deposit propositions, for example, that offer 2% term for 1- and 2-year money and a 3% product for savings up to EUR 30,000. So it's that balanced approach that we've taken in relation to that rate environment increase. So we feel we've been quite careful about how we deploy that. And that will continue into 2024. And I think the migration of deposit into '24 is based on, I guess, first of where the current rates are at. Now as we have done so last year, we will assess the appropriate rates as the rate environment evolves and always guided by the importance of remaining commercial discipline and making sure we deliver on our 2 committed targets of a ROTE of 15% and a cost-income ratio of below 50%. So we feel that there's plenty of space for us to operate within that to ensure we achieve those targets. Mark, I don't know...

Yes. Sorry. And Guy, just to make sure that you're clear that we are -- our assumption of the flow to term that rate in Q4 throughout all of 2024, that is alongside our assumption on the ECB deposit rate going to 2.75%. So just those are the assumptions that we're making and you can make your assessment around those. On the RWA piece and op risk, in 2023, if we look at our RWA evolution in 2023, about 20 bps or about just under EUR 1 billion of RWA was due to op risk RWA. And I think that's not a bad way to think about 2024 as well.

And your next question comes from the line of [indiscernible] from JPMorgan.

Great. Just 2 follow-ups on commercial real estate. Looking at your Slide 25, please. Just with regards to the geographic split between Ireland and the U.K. and the U.S., are you able to share the coverage levels across the 3 regions? And then secondly, just looking specifically at your U.S. exposure, would you be able to share the split between office, multifamily and any other larger segments, please?

I'll ask Mark to take that question, please.

Yes. So just I mean maybe an overarching level, and I would say the book is in good shape. The asset quality is unchanged relative to last year. So our NPE ratio of 5% and same as 2022. And notwithstanding that, we've increased the coverage level and that's reflecting that addressing those potential future risks, as Myles said earlier. In terms of the coverage levels, over 3.4% on the overall book in terms of geographies within that the U.S., which is about EUR 600 million of exposure. So less than 10% of the CRE book. The coverage level there is just below 10%. About 3 quarters of the U.S. CRE is in office, primarily East Coast, New York, Boston and Washington. We fit that hard from a provisioning perspective. So again, as Myles said earlier, we believe we've got our arms around that.

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

Just a couple of questions. I'm just struggling a little bit on the deposit guidance and the average that you're assuming. So just looking at the average balance sheet on Page 39. And then when you reference Slide 19, you'll see that the cost of deposit funding. There was a step -- there was no step change event in H2, particularly in Ireland. So therefore, current account balances still grew in H2. It seems that was primarily a U.K. issue and the cost of funding in the second half. So I'm just wondering what happened in Q4 and current account balances in Ireland relative to Q3. So specifically, how much did the balances fall -- the current account balances fall in Q3 -- sorry, Q4 relative to Q3 and by quality peak basically on current accounts? And on the basis of that, I'm just looking at in terms of what's happening with our structural hedge. So you're kind of guiding for EUR 5 billion max potential reduction in the hedge in 2024. So that would tell me that you're expecting term to move to roughly EUR 33 billion, I think, in total in 2024 or certainly a EUR 5 billion rise in the number of term accounts. And I suppose then when I look at your deposit -- overall deposit guidance that your deposit balance is going to be flat in 2024, even though you're expecting loan growth, I suppose I'm wondering what's going on there because one would expect basically deposit balance to be stronger. But I'm just wondering, and you mentioned it in your slide deck, I think on Slide 19, about the strength of internal competition within Davy. So you say that you're -- basically, you're getting competition from your asset management and your wealth management side for deposits. So I'm just wondering whether that is a driver of your kind of -- is captured within your movement to term assumption in one sense because obviously, from a group perspective, earning 20 basis points in a bond fund is much more -- is much less attractive than 275 basis points you would make at DCP, let's say, by the end of the year, 300 basis points on average over the course of the year. So I'm just wondering, could you just talk about what happened in Q4 in current accounts, talk about the structural hedge, the EUR 5 billion reduction, whether that's the movement of term and whether that captures the expectation that you will get movement to bond funds through the wealth management competition in Davy? Okay.

Seamus, thank you for those questions. I might comment firstly on just the Davy comment. And then Mark, over to you on both deposits and structural hedging. Seamus, one of the advantages of having Davy in the group is that in addition to offering a range of more standard deposit products, I referenced, for example, the term deposit that's available, offering 2%. I referenced the SuperSaver product as well at 3%. And also, for those customers who are looking for something which is a bit more sophisticated money market funds like we've seen about EUR 2 billion of our deposits move across from more mainstream deposits to money market funds in Davy. And we're very happy with that because it demonstrates the quality of the breadth of the offering we have in the marketplace. So I'd much rather see those funds go across Davy then go somewhere else. And the second point to make as well, it does play into the strong performance in Wealth. So I think you got to look at both components together. So firstly, that money market fund offers an income contribution from Davy, but also on a more strategic basis offers an opportunity for the Davy guys to, over time, to offer a broader Wealth offering to those customers as well. So very comfortable that our customers who want that more sophisticated product can opt for the Davy money market fund as well. Mark?

Yes. And maybe just briefly on that as well. I mean, Seamus, if you think about the value it attract to [ wealth and earning stream ] over the medium term that was certainly one of the reasons that we bought Davy in the first instance. So we're really quite excited by that opportunity. I mean just going back on the deposit, this -- shares and you do, obviously, we've given the H1, H2 disclosures on Slide 39. To my point earlier, in terms of the flow to term that will be more in Q4. And we're, again, projecting that the same run rate continues throughout 2024 as pertained in Q4 of last year. But maybe just -- maybe standing back on the deposit piece overall. If you think about deposits at a system-wide level in Ireland, they typically grow in line with Irish GDP, you can sort of back test out over 20, 25 years. And EOI, given our position in the market, EOI deposits also typically grow in line with the system as well. During 2022, obviously, we had a big bank when 2 banks exit the market and we captured more of that opportunity. In 2023, at a system level, the system grew 2.4% last year, a little bit below economic growth in Ireland. And that's probably -- possibly cost of living factors. But also, we know that there were COVID tax breaks given, which were being repaid by companies. So it's probably a factor in the overall system growth last year. And in terms of our performance then, we performed really in line with the system last year with a very strong first half. In the second half of the year, again, we continue to attract the unit positive sort of coming in. And then we have the dynamic in terms of -- which is a positive dynamic where high network customers have the opportunity to move to Davy and we support that. And we think that's sort of a longer-term opportunity there. So the growth in H2 was offset by that. As we look out in terms of deposits, we're expecting modest growth. So to your question, not expecting no growth next year, we are expecting modest growth in our Irish franchise, but maybe below historic levels, just reflecting some of those dynamics. I think if you look out over the medium term, we expect that to pick up. On the structural hedge, then and how that plays in, so again, our expectation this year, EUR 65 billion and at the end of the year, were between EUR 60 billion and EUR 65 billion. So I wouldn't project that we're going all the way to EUR 60 billion. And as I mentioned in an answer to an earlier question, the flow to term assumption plays directly into that. So deposit growth and the flow to term assumption would influence the size of the hedge in 2024. But that hedge, that will be a key positive factor in our NII development as we go to the back part of 2024 and 2025.

Sorry, I was just going to ask one question I was just really struggling with was the size of the current account balances in Q4 -- sorry, and how much current account balances [ fell ] in Q4?

Seamus, we don't disclose the quarterly breakdown of that book. But to be honest, you can pick it up from a flow to term detail, which you've given on the slide in terms of EUR 800 million or EUR 700 million which moved in the second half of last year to give you a sense of the flow from -- current accounts [indiscernible].

[Operator Instructions] And your next question comes from the line of Chris Cant from Autonomous.

Can I ask you to talk about your levies and charges guidance, please? So I think the guide for 2024 is lower than people were expecting. Just thinking about how that's likely to develop out into 2025 in terms of some of the other regulatory fees dropping away. Should we be expecting that to be down from that EUR 160 million, EUR 165 million level in 2025, please?

Mark, do you want to grab that?

Yes. So I mean, firstly, Chris, in 2023, the DGS was the reason why levy grew a little bit higher than our guidance, and that was just -- came a little bit higher than we thought. But into 2024, obviously, you've got the Irish bank levy, that's been clarified now at EUR 50 million higher to EUR 75 million for next year. We also have the SRS coming out and DGS beginning to moderate in 2024. So that informs our 2024 guidance. Our current expectation with DGS could be a little bit lower again in 2025, with a further clarity on that. But at the moment, probably our best view is that we fall again in 2025 versus 2024 levels.

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

3 questions really. One is, can we go back to this NII guidance for '24, please? Because it's creating huge confusion amongst investors this morning in terms of comparing to our consensus sell-side results. And so 3 things there. I just want to -- sort of doubles the equity. One is on the U.K. personal loans, roughly about EUR 80 million of annualized NII effectively comes out of consensus there. And to the extent that, that loan book is held through the course of '24, that will appear in the noncore segment as an income piece. Obviously, there will be other factors as well in the segment. So maybe clarify if I'm right or wrong on that. And then separately, your -- you're not giving us a deposit base and you've been quite sure in terms of the shift out of -- or into term products you expect over the course of this year. But can you just -- can you give us some color now we're at late February how that's been evolving on year-to-date actually? And then finally, on the -- I think you've completely clear on the average raise that comes about 3.44% for this year, which is obviously a bit below the low consensus expectations in the market as well. So yes, if you have any comments on all of those, that would be helpful. And then I might just come to my second question, if that's okay.

John -- well, Mark, let's take the first question on NII, and then we'll come back to you for your second question, John.

Yes, John, very simply, the answer is yes. So I mean if you think about personal loans in 2023, EUR 80 million in total, the NII last year, of which EUR 25 million was in noncore. So if you think about our reported number, EUR 3,682 million, that excludes EUR 25 million related to personal loans, which is in noncore. So we'd be obviously just over EUR 3.7 billion on an all-in basis, which is probably ahead of the market and has been thinking about it. And then if you think about 2024, then that EUR 80 million of personal loans NII coming out, obviously, some adjustments on the impairment, small adjustments on the cost line from a group perspective, given the amount of capital tied up, it's a business that's generating mid-single digits RoTE. So obviously, we didn't see it halfway for that to get to an acceptable return and so those are the moving parts there.

And John, your second question?

Can we just cover as well the deposits, the shift experience out of -- or into term that you've seen in the year-to-date?

Yes, I can take that, John. So again, I would say, in terms of the first 6 weeks to date, I would say we're within the assumption that we've provided in terms of the flow to term.

And clearly, Mark, on our NII guidance for the year.

Captured in our NII. Sorry, John, to be clear, more positive than slightly more positive than -- it's very early days, so -- but slightly more positive than our assumptions.

Yes. But as you say, you're very successful containing leasing this year, that result. Okay. So the second question is, look, I thought strategically stepping back if your loan-to-deposit ratio was 80%. You've talked a lot about Davy. Is Davy the conduit to strategic management of a loan-to-deposit ratio in a normalized rate backdrop? And I suppose the question is in the context of, I'm making an assumption that you'd probably expect at a higher loan-to-deposit ratio in a normalized rate backdrop? So any color you can give us on that would be helpful. And then I have one more if you can say [indiscernible] it would be helpful. But what kind of scenarios you run on the U.K. motor finance book and what's in a broad range of potential estimates you're raising us? Anything you can help us with there in terms of the FCA investigation, welcome, appreciate if you can't say much.

Okay, John. I mean, let me just take some of that in relation to the Northridge car finance that FCA review. So again, just to reiterate that there was no basis based on the work that we've completed. There was no basis for taking an impairment to the P&L. We have recognized contingent liability. And it really is very early days. And I think by one bank that is pretty much the situation for all of those who are involved. I would say that just 2 points to make is that the book at EUR 2.4 billion is in the region of 2% of the total book. So it's a small component of our overall balance sheet. And secondly, our market share in Northridge is at 2.6%. And maybe that's a helpful data point, John, to model them in every way you would like to, but that's the data points that I think are worth sharing. In relation to our loan-to-deposit ratio, I mean, there isn't necessarily a desired mix. We obviously have a desire to have more of our deposits in term because that offers a more stable funding position even though we are sitting on large amounts of liquidity. But generally, term is better. And also 2 other points to call out, the acquisition of the KBC loan portfolio and the mortgages and deposits that came in there also have an impact on LDR. But overall, a hugely positive impact on business model. And as I referenced earlier, from the daily perspective, we're very pleased to have Davy within the group. We're very pleased now to be able to offer for those customers who wanted a more sophisticated offering in relation to money market funds. And again, that's nice as a short-term solution for those customers. But also, as Mark and I have pointed out, it also offers an opportunity into the medium to longer term to meet the wealth needs of those customers.

And just on the loan-to-deposit ratio, what -- like do you have a medium-term optimal ratio? And would that be above 80% where it resides today just thinking about this? Yes.

No, John. Frankly, we don't have an LDR target.

And your next question comes from the line of Raul Sinha from JPMorgan.

I've just got a couple of follow-ups, if you don't mind. Just on the U.K. motor, I think you very helpfully told us your market share was 2.6% in Northridge. Has that market share been relatively stable over the past decade? Because when we think about this issue, we are trying to work out what market shares might have been historically? Is it fair to assume that the 2.6% or maybe 2% to 3% range is the right number for your business even going back historically? And then I guess the second question I have left is just around the strategic outlook for the U.K. business given the decisions you have made, obviously, on the U.K. personal loan book in December. When we look at deposits versus loans at the group level, I guess that sort of distorts the picture, which is very skewed in the U.K. where, obviously, your loan book is much bigger than your deposit book. So just trying to understand where you think strategically that business moves to over the next cycle? Do you think that you can still focus on growing that business? Or do you think that there might be other businesses you might look at exiting as well?

On the Northridge car finance, so we actually had a very strong year of lending for Northridge, which supports that market share of 2.6%. If you go back over the last number of years, we grew to average that out that's closer to 2% market share. And in relation to our U.K. strategy, I mean, like since 2020, we have successfully executed. You'll have heard use the term before, a value over volume strategy, which essentially targets a more higher-margin loan book, a more efficient funding model and indeed a lower operating cost base. And all of that, when you bring those components together ensures that we are securing the right type of return. And that's very important to us because our capital allocation discipline is hugely important. And therefore, that strategy over recent years has performed very well. I referenced earlier that our U.K. business is performing above the cost of equity. That's an important metric to call out. And of course, we also made the decision to come out of the personal loan market. That decision was underpinned again by a capital allocation discipline to get the right type of critical mass returns from that book would require us to grow it. And we don't believe growing the unsecured lending book against the economic backdrop in the U.K. is the right thing to do. So as we conclude the year, we've got a sterling book of EUR 17.6 billion. We expect that book to now remain stable where we exclude personal loans. And also, I very much expect that, that strong performing RoTEs will continue out over the strategic cycle.

And your next question comes from Borja Ramirez from Citi.

One quick follow-up question, if I may. I think -- and I'm sorry if I may have misunderstood. It may have been mentioned at the beginning of the call that the NII 2025 would be stable compared to 2024. So in the area of EUR 3.4 billion to EUR 3.47 billion. I would like to kindly ask if I understood correctly.

Mark?

Yes. Borja, yes, exactly. In answer to Diarmaid's question at the outset of the call, I said we were working giving formal guidance, my best view today was one of relative stability on NII into 2025 and I called out in answer to the earlier question that the key factors which inform that assessment.

And your final question comes from the line of Jordan Bartlam from Mediobanca.

A quick one on capital return, if possible. You said that you're looking to grow dividend per share, I'm not happy to hold capital by paying out excess and also going to do interim distributions. I just sort of wanted to work out what sort of restrictions there are on the buyback component beyond the broad mandated 10% limit. So most notably, I just wanted to know how much of the restriction is liquidity under the rules of the exchange. So is there much more scope to increase that buyback without hitting those liquidity limits? Or is it near the limit already? That was what I had.

I mean just to make a comment more broadly is that the -- aside from securing regulatory approval for a share buyback, I mean, that is the only formal approval we need. And of course, we've done 3 of those. So far it was a very successful one completed in the back of last year. Mark, on the liquidity question?

Yes, John. So I mean -- so it's great we've got approved share buyback, which is what we've said we wanted to do at the interim stage that will commence very shortly. There are liquidity restrictions imposed by the stock exchange in relation to the shares would be bought back. And when we think about those, we think it will broadly take about 6 months for the EUR 520 million share buyback we got approved. So to give you a sense of the -- on a full year basis, how the flexibility there.

I will now hand the call back to the room for closing remarks.

Okay. Well, thank you very much for everyone on the call. Thank you for the depth and quality of the questions [indiscernible] plenty and we're very happy to receive those and indeed answer them. And if I could just say in conclusion, maybe back to where we started the conversation is that the Bank of Ireland business model, the Bank of Ireland balance sheet is very well-positioned to create value, consistent with what we said a year ago as part of our strategy. And maybe just to close out on a distribution comment, which is that we're very pleased with where we got to in the back of 2023. So the payout ratio of 40% and a buyback, taking the capital down to 14.3%. And to reiterate, it's at that capital level that we feel very happy to run our business. And thank you again for your participation this morning, and hope you have a very good day.

Thank you. Good morning.

Thank you. This concludes today's conference call. Thanks for participating. You may now disconnect.