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

Good morning, ladies and gentlemen. We will now listen to the Bank of Ireland's interim results announcement presented today by the CEO, Myles O'Grady; and CFO, Mark Spain, followed by Q&A.

Good morning, and thank you for joining us. Today, we are reporting our half year performance. The theme is strategic delivery and sustainable returns. We are midway through our 3-year strategic cycle and making excellent progress. This is demonstrated by continued growth in Irish loans and new customers and assets under management. Our performance is also well supported by the interest rate environment. This translates into profitability of EUR 1.1 billion, that's up 5% year-on-year. And notably, a return on tangible equity of 18.9%. This performance supports upgraded earnings guidance for the year. Our business model continues to be highly capital generative, 170 basis points in H1. And today, we are announcing an interim dividend of EUR 352 million. This is an important component of our full-year objectives, which are progressive dividends and the return of surplus capital. Slide 6 gives a flavor of economic conditions in Ireland, which account for 3/4 of our profits. The Irish market continues to be highly attractive and a source of growth. Full employment supports asset quality, and the pickup in credit formation is underpinned by strong fundamentals in terms of demographics, robust household and business balance sheets, and increased housing supply. Turning to Slide 7. Our Retail Ireland franchise delivered another very strong performance. Our high-quality mortgage book continued to grow, supported by increased supply of new homes and market dynamics. This is enabling us to capture value in a growing market. And our deposit base remained robust, supporting balance sheet growth and higher income, including increased fee income of 3%. We recently announced the creation of a new Wealth and Insurance division. This is made up of our wholly owned subsidiaries, Davy, specializing in wealth and capital markets; and New Ireland, focused on life and protection. These businesses performed very well in H1. Net inflows to Davy and New Ireland grew by 84%, EUR 2.1 billion in total. This reflects the strength of our unique position. Today, total AUM exceeds EUR 50 billion, the highest level ever. In turn, this has increased business income by 6%, outperforming economic growth. Our leading New Ireland and Davy brands are a valuable source of future growth and a more resilient revenue model. On Slide 9, we're reporting annualized net lending growth of 5% in our Irish business and corporate lending books. Given the global macro backdrop, we have maintained a measured approach to our international corporate and property books, with these reducing at a 3% annualized rate. During H1, we completed a strategic refresh of our Retail UK business. We see long-term value in this market. We continue to focus on higher-return mortgages, asset finance lending and a full-service retail bank in Northern Ireland. The U.K. market is an important part of our group, making a strong contribution to overall profitability with an underlying PBT of GBP 167 million, a 43% increase year-on-year. Slide 10 sets at the heart of our strategy, which is to build stronger relationships, a simpler business and a more sustainable company. As we grow our new customer base, we continue to improve and deepen those relationships. We are achieving better outcomes for customers with materially lower complaints. And we continue to focus on practical, meaningful ESG interventions. We've grown sustainable lending by 24% and remain the leading provider of green mortgages. We've also retained our position as #1 for financial wellbeing in Ireland. This is especially positive to see as we reach the halfway point in our strategic cycle with further progress expected. Turning to Slide 11. Bank of Ireland's equity story is one of enduring and strong organic capital generation. This continued in the first half of 2024, with 170 basis points generated and the full year outturn likely to be in the region of 310 to 320 basis points, an upgrade from our previous guidance. This capital supports loan book growth, allows us to invest in our business and reward shareholders. Mark will provide more details on this later. Last year's results supported total distributions of EUR 1.15 billion, 3x more than 2022 and 11x higher than 2021. This year, as previously signaled, we are announcing interim distributions of EUR 352 million. Subject to all necessary approvals, our objective for the full year is to distribute down to CET1 guidance of greater than 14%. We will do this through a combination of progressive DPS on earnings and the return of surplus capital via a share buyback. Slide 12 demonstrates consistent delivery of our medium-term financial targets, return on tangible equity, cost-to-income ratio and distributions. This underlines the theme for today's presentation that I called out earlier, excellent strategic delivery generating sustainable returns. Slide 13 provides a summary of the Bank of Ireland investment case. Our strategy is clear, and we are consistently executing well against it. We are meeting or beating all of our targets. We have a differentiated business model, operating in highly attractive markets. And notwithstanding global uncertainties, Ireland continues to be a successful dynamic economy with very supportive demographics. And our international businesses are highly complementary. Bringing all this together results in continued strong value creation and sustainable returns. Before concluding, I'd like to thank our customers for their business and their trust, my colleagues for their commitment and our shareholders for their support. I'll now hand over to Mark to take us through the strong financial performance.

Thank you, Myles. As set out in Slide 17, today we're announcing a strong performance for H1. Key highlights include higher profits, further growth in our loan book and the reduction in our NPE ratio of 2.9%, now below the milestone 3% level. A particular call-out is the ongoing strength of our capital generation of 170 basis points. Supported by this performance, we are upgrading our outlook for the full year. The key drivers of this upgrade are lower expected levies and impairment charge. Slide 18 details the building blocks of our performance. Net interest income is 2% higher on a like-for-like basis. Total business income is up 6%, with Wealth a key driver. OpEx has performed in line with our guidance. And our impairment charge is materially lower, reflecting both the improved macro and better loan loss experience. All of these factors are contributing to the 5% growth in PBT. ROTE remains very strong at 18.9%. Slide 19 shows components of NII in the first half. Performance in the period is driven by growth in liquid asset income and lending income, more than offsetting higher funding costs. In our Q1 IMS in April, we refreshed our NII guidance range to capture updated interest rate expectations. We now see the full year coming in at circa EUR 3.55 billion, at the top end of that guidance. In February, I noted that we expected NII to be broadly stable in 2025. That view remains unchanged. The structural hedge is a key component in our expectations for NII. Slide 20 shows volumes and yields have evolved as expected, driven by depositor behavior and reinvestment yields, respectively. We expect the hedge size in H2 to be in line with H1. The gross yield, which is materially below current swap rates, will continue to build over the coming years. On Slide 21, we can see our customer deposit base, with total balances stable in the period. There was a EUR 1.3 billion flow to term in the first half, which was within our expectations, with similar volumes expected for H2. We expect our total customer balances will continue to be stable in the second half of the year. This reflects the positive macro dynamics that Myles spoke to earlier, our ongoing commercial pricing discipline and customer behavior. Our net lending saw good growth in H1, in line with our strategy. Our lending in Ireland grew 4% annualized or EUR 1 billion. Our U.K. loan book also grew in the first half after a number of years of strategic deleveraging. We expect broadly flat net lending volumes in H2, with net loan growth in Ireland offset by the exit of U.K. personal loans and the rundown of U.K. corporate. Slide 23 shows business income growing by 6%. Wealth and Insurance income is a key highlight, supported by higher AUM, particularly in Davy. We continue -- for the full year, we continue to expect mid-single-digit growth in business income. The EUR 54 million increase in operating expenses you see on Slide 24 comprises net growth and additional investment. This investment is designed to drive future efficiencies. For the full year, we see 5% to 6% growth in OpEx, in line with the mid-single-digit guidance we provided back in February. We continue to see non-core items similar to the prior year. And we now see levies coming in at EUR 125 million to EUR 130 million, below previous guidance of EUR 160 million to EUR 165 million. We had an excellent H1 from an asset quality perspective, reflecting our high-quality diversified loan book. Our NPE ratio reduced to 2.9% and Stage 2 loans reduced by 13% or EUR 1.6 billion. We have continued to maintain coverage levels at 1.5% of loans. Slide 26 shows we've had a strong H1 asset quality outturn. The impairment charge is EUR 50 million or 12 basis points. The improved macro drove releases. The underlying portfolio activity charge was an annualized 25 basis points. We expect a similar portfolio charge in the second half, leading to an expected full year outturn of the order of 20 basis points. This is a significant upgrade to our previous guidance of a charge in the low 30s. Moving now to Slide 27 on our capital position. Organic capital generation was an excellent 170 basis points. This was augmented by a 10 basis point net RWA benefit as our CRT transaction offset investment in lending. The interim dividend of EUR 0.35 per share we are announcing today equates to 70 basis points of capital and a 40% payout ratio. And after deducting this interim dividend, our capital ratios still remain very healthy. Our CET1 ratio was 15.4%. On the outlook, we are upgrading our guidance for the full year capital generation to 310 to 320 basis points from the previous 260 to 280 basis points range. On Basel IV, we expect its implementation next year to result in an RWA reduction of up to 5%. And as Myles has said, our objective remains to distribute down to our CET1 guidance of greater than 14%. Slide 28 recaps on all of our 2024 financial guidance. This has clearly been a very good half, and we're expecting a further strong performance in H2, resulting in a ROTE ahead of last year. Bank of Ireland is firmly on track to meet or beat all of its financial targets over our strategic horizon, and is well positioned to continue to deliver attractive returns beyond this. Thank you for all of your support, and we will now open the call to questions.

[Operator Instructions] The questions come from the line of Diarmaid Sheridan from Davy.

Mark, maybe, firstly, around net interest income. Thank you for the kind of fairly specific guidance for 2024, EUR 3.55 billion. When you talk to 2025 being broadly stable, how should we kind of interpret that? And maybe if you could talk through some of the moving parts in terms of some of the pluses and some of the minuses as we look into maybe the second half of this year, but also into 2025 there, please? And then secondly, maybe a very strong H1 ROTE outturn as both of you have kind of pointed out. If I take your full year guidance, that's kind of implying second half of the year is kind of low to mid 16 percentage points. So maybe, again, if you could talk through some of the moving parts there, but also looking into 2025 relative to your current circa 15% target. And maybe if you have any perspective even beyond 2025 on that 15% would be very appreciated.

I'll offer some comments on the ROTE performance and then hand over to Mark. I mean what we are seeing and what we've signaled previously is that the business model continues to be highly capital generative and we see that in upgraded guidance on capital generation this year of between 310 and 320 basis points. And of course, that translates into an upgraded guidance on ROTE of 17.3%. And I know Mark will offer more details on the drivers for that. But also, we expect that next year our ROTE to outperform against our target to be in the region of 15%. So it's a very strong business performance, generating capital, which, of course, also supports our distributions as well. Mark, over to you.

Yes. Thanks, Myles. And maybe, Diarmaid, just let me expand a little bit on the ROTE piece and then come back to the NII question. So if I look at maybe the H2 versus H1, which is part of your question and the key tailwind there is lower levies in H2 versus H1. Against that, based on our guidance, NII. Slightly lower impairment, will normalize to circa 25 basis points. OpEx, non-core and modest RWA growth will factor as well. But all in all, our upgraded guidance of greater than last year's outturn of 17.3% is a material upgrade from our prior expectations for this year. And then if I look into 2025, really the moving parts there is that broadly stable NII, which I'll come back to, ongoing fee income growth, offset by OpEx growth and investments, where we're investing at an elevated level. Those are the key factors behind our confidence for exceeding our target next year, and there are supportive factors beyond next year as well. Then maybe just turning to the NII in 2025. Really, the key message here, Diarmaid, is one of NII resilience as rates go lower. And if I look behind that, really, there are 3 positive factors which support that resilience. So firstly, we've got that lending growth coming through driven from Ireland. And we've called out in the presentation, Irish mortgage is continuing to perform really, really strongly. Business lending also contributing. That's very much in line with the strategy that we set out 18 months ago. So it's great to see that strategy being delivered upon and coming through in the numbers. So that will be one supportive factor. The second supportive factor is the benefit from the structural hedge. And you'll see in the presentation today that the average receive rate on the fixed leg of the structural hedge is about 1.70% this year. 7-year swaps are currently north of 2.50%. So that's a real positive factor for us over the next number of years. And thirdly, deposit growth in line with economic growth, which is what we've typically seen in Ireland over many years. So these factors are obviously going to be positive in 2025. There will also be positive factors beyond 2025 as well. Against that, obviously, rates lower is the key headwind, as it is for all banks. And rates, we expect to be on average about 80 basis points lower in 2025. So we assume an ECB deposit rate of 2.75% at the end of 2025. The locked-in value of the structural hedge, of course, provides protection against that factor. We've also made the decision in the first half to run down our GB corporate book. That's a ROTE-positive decision, but we estimate it impacts 2025 NII by about EUR 30 million to EUR 40 million. If I bring all that together and if I look at consensus for 2025, I believe that consensus has actually all those moving parts already captured. And clearly, this NII stability is a key component in our confidence that our ROTE will exceed our circa 15% target next year.

The questions come from the line of Sanjena Dadawala from UBS.

Two, please. So the first on the interim dividend, EUR 0.35, above expectations. Just want to clarify, when it compares to consensus for the full year, EUR 0.60, EUR 0.65, it implies a lower final dividend than the interim. So just wanted to know your thoughts in the context of a progressive dividend policy? Do you see that as an issue? And then the second question, on Slide 11, you say that about 20% of organic capital for RWA investment, which suggests higher loan growth than I gather from your comments. And then does that mean effectively guiding to 80% total payout if -- unless you move closer to the CET1 target?

I'll take the question on dividends and pass to Mark on RWA. So I guess to kind of frame the answer overall for full year distribution Sanjena, our objective is to distribute to CET1 guidance of above 14%. And there are 2 components to that. Firstly, a progressive DPS on earnings. We had a good start on that with an interim distribution of EUR 352 million. To relate that back, that's 40% of H1 profit after tax. I think that's how generally you should think about interim distributions going forward. And of course, more broadly then, the return of surplus capital and, again, to that point of our objective to distribute the CET1 guidance of greater than 14%. Mark on RWA?

Yes. Thanks, Sanjena. Yes, just to equate to your question, what we typically expect is that we'll invest about 20% of our organic capital in RWA. That's through a combination of loan growth. Obviously, things like op risk RWA, et cetera, as well, will feature in that. If I just look at the first half of this year, you'll see our RWAs were actually down in the first half of this year, but we had sort of 20 bps investment in RWA more than offset by a CRT transaction, which we completed in June. If I think about the second half of this year, that CRT benefits would begin to amortize in line with the loan book. We also have op risk RWA really coming through in the second half, and we've got underlying loan growth as well. So that will flip in the second half. So I'd expect investments in RWA this year to be somewhere around 60 to 70 basis points. So hopefully that helps in terms of squaring the circle.

The questions come from the line of Grace Dargan from Barclays.

The first one, maybe could you give us a bit more color on the difference in margin between, say, a typical term savings product and the savings wealth products? So I guess I'm particularly thinking about that growth in AUM, which seems to kind of be bypassing some term migration and then funding the difference potentially in income there. And then secondly, just thinking about there was a Dear CEO letter on motor finance in Ireland. Would be really interested to hear your thoughts. Do you think that kind of situation could develop in a similar way to the U.K.? And what risk do you see for yourselves?

Great. Grace, thank you. And so to your first question, from a deposit offering, we have a range of products available to our customers up to and including 3%. And at the same time, we know that some of our customers prefer a money market fund. We're very pleased to offer that product as part of our Davy offering. And with the offer on that product, I would say, is generally consistent with that rate of up to 3% on our deposit base. In relation to your question, I think I alluded to the motor car finance review by the FCA in the U.K. From our perspective, we are a small player in that market, small market shares. And whilst it's an important part of our business model for the U.K., generally I would describe it as not being material in the overall context of our overall business model. We're currently, as are all market participants, sharing information and there's certainly no read-across to the Irish market.

Apologies. Maybe I've misunderstood your answer. But I guess it was in relation specifically to the Dear CEO letter from the Central Bank of Ireland that I was referring to.

Yes. I'm sorry. Sorry, Grace, I should have been clear on that. So that Dear CEO letter was simply a request for sharing of information. And there is no read-across from what's happening in the U.K. to the Irish market.

The questions come from the line of Chris Hallam from Goldman Sachs.

Just 2 quick questions from me. So first, Mark, I think you said earlier you're assuming 2.75% year-end ECB policy rate for 2025. And I guess the most recent market expectations are probably around 50 basis points below that. So I mean, obviously, these things can move around quite quickly. But I just wanted to check that all we need to do is take the sensitivity you give on Slide 20, so about EUR 60 million or EUR 65 million haircut to that sort of EUR 3.55 billion in 2025? Or whether there's anything else that we need to consider? I know there's quite a long footnote, right, on that sensitivity. But anything you want to emphasize. And then the second question on OpEx. Just if I look at Slide 24, the split between investment-related spending growth and sort of underlying net growth in OpEx, how would you expect that to look next year or in the medium term, particularly when we think about consensus expectations for OpEx growth to be slowing to around 3% per annum? Is that something you're still comfortable with given the investments you've been doing and the progress you've been making?

Thank you, Chris. I'll offer a comment on the operating costs more broadly and then hand over to Mark. I mean Bank of Ireland over recent years has built up strong capability in terms of cost discipline. It's really important that we maintain that, and that's certainly our absolute focus. So we are pivoting from a period of cost reduction there to efficiency. And what we're seeing in the numbers and in the guidance that the market is offering, first of all, our ability, I would say successfully, to deal with inflationary pressures, but also in the context of the value that the model is creating. And of course, always in the context of our guidance and our targets on ROTE and cost-to-income ratio to be below 50% is to invest for the future as well to ensure we maintain that long-term efficiency. Mark, over to you.

Yes. And maybe, Chris, just to pick up on the cost piece. So as we called out in the slide, as you say, the split there between, what I'll call, BAU, inflation, investment efficiencies and also the additional investments we're making to future-proof the business model when we're generating attractive returns. And we do see those factors continuing into next year. Obviously, the inflationary environment based on the rate environment is expected to be less of a headwind, but we will continue to invest next year to drive those future benefits as well. And just on your question on the NII and the rate piece. As you say, the rate environment has been volatile. And if I go back 10 days ago, I think we're probably spot on. So it is moving around a little bit. But I'd also note that particular end points are important, but the averages through the year are actually what's more important. And the delta probably isn't, I think, what you suggest. But ultimately, the NII sensitivity that we provided, that's a good guide to think about that.

[Operator Instructions] The questions come from the line of Andrew Stimpson from KBW.

So first question on loan growth, please. You've had a very good start to the year there. But then I was surprised to see that the outlook for the second half is flat. I appreciate you've got the U.K. book coming off there. So I was just wondering if you could remind us on the timing and the quantum there? And then just checking, you'd presumably would be more optimistic heading into 2025 and presumably beyond, with the Irish growth remaining? Or whether you were thinking that the Irish growth was going to slow into the second half and beyond? And then on the net interest income sensitivity, that number is unchanged again. I think that's unchanged since the first half of 2023. So I'm just wondering how come that's so stable. I mean it's good in a way, it means we have to update our spreadsheets less, I suppose. But I'm just -- I suppose those numbers tended to move around quite a lot. And as you said, the rate environment has been volatile. So just wondering how come that's so stable, and whether there were lots of moving parts within that?

Andrew, thank you for that. I'll take the loan growth question and Mark will come back on the NII sensitivity, mindful, of course, that Mark's guidance on NII as a strong performer overall. On loan book growth, Andrew, when we brought our refresh strategy to the market, I guess almost 18 months ago now, we were very clear on where the sources of value creation were going to come for Bank of Ireland. One component of that was very much loan book growth in the Irish market, and we've seen that. So the loan book last year, just to remember, grew by 23%. Very strong. This year, the loan book has grown by 4%. And we're seeing that across different portfolios in Ireland. So for example, the mortgage book grew by 4%. And net lending on our SME and Corporate business in Ireland, that grew by 5%. So a very strong performance. And therefore, halfway through our strategic cycle, thinking about the remainder out to the end of '25, I mean, there are other positive factors as well, but certainly Irish loan book growth will continue to be a feature of driving value. And plays actually into your question in some ways on NII, where one of the positive factors that's supporting a relatively stable outlook for NII is a growing loan book. Mark, over to you.

Yes. Just Andrew, on the NII sensitivity. So on that, really the key point there is that the starting point in terms of interest rates hasn't changed. The structural hedge size is broadly the same, if I look over the last couple of reporting periods as well. So the key moving parts in terms of the inputs to that NII sensitivity are unchanged. Clearly, as rates go lower or higher, that does affect the delta. But there hasn't been any material changes to the key inputs.