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

Good morning from Dublin, and welcome to our H1 results presentation. In February, I highlighted the Bank of Ireland equity story, notwithstanding the global backdrop, including ongoing trade discussions, we retain our positive outlook to 2027. This is supported by the attractive markets in which we operate, notably our home market. Ireland's resilient and growing economy underpins balance sheet growth and we remain highly focused on efficiency. All of this underlines our confidence in maintaining strong returns with expected RoTE in excess of 17% by 2027, supporting business model investment and sustainable shareholder returns. We have a highly capital-generative business model. Turning to our H1 results. As we progress the final year of our current strategic cycle, we are executing well against all of our targets, and this is delivering tangible commercial benefits. We have grown Irish loans and deposits and today, we are upgrading our NII outlook. We have also grown wealth assets under management. Together, these contribute to our PBT of EUR 0.7 billion. We've maintained our focus on efficiency with a 48% cost-to-income ratio. We have a strong CET1 ratio of 16%, and we have declared a dividend of EUR 0.25 in respect of H1 performance and reaffirm our guidance of a progressive full year dividend per share. The EUR 590 million share buyback announced earlier this year is ongoing with circa 80% deployed to date. Since the start of 2023, the group has returned $2.6 billion to shareholders through a series of buybacks and dividends equating to circa 22% of market cap and reducing the group's share count by 11%. Our medium-term outlook supports further capital returns. Slide 7 provides an overview of progress under each of our 3 strategic pillars. We are building stronger relationships with more than 4 million customers, and this is delivering improvements in customer satisfaction. And our drive to make Bank of Ireland simpler to do business with is helping grow our active digital users, which supports a material reduction in complaints. A simpler business is, of course, also about efficiency, which supports our circa EUR 2 billion cost outlook to 2027. We continue to target efficiency, including customer journeys, targeted insourcing, organizational redesign and artificial intelligence. Our work on AI continues as we assess the considerable opportunity this technology presents to identify the value pools where we can best put it to work. And under our third strategic pillar, we have grown our sustainable finance portfolios by 24%. Moving to Slide 8. Ireland is among the best performing advanced economies. Output and the employment growth is well above the Eurozone average. We are, of course, vigilant to the evolving external backdrop, particularly around global trade. Against this backdrop, Ireland's economic position offers reassurance. We have strong private and public sector finances, robust demographics and a diversified economy. We also see record employment growing retail sales and housing output increasing notably up 35% year-on-year in quarter 2. Multinationals account for 11% of total employment, spread across more than 1,800 companies operating in a range of sectors. Many of these companies are long established and embedded in the Irish economy, undertaking financial and professional services, advanced manufacturing and research and development. We expect Irish GDP growth of 8% this year, which includes domestic growth of 2.9%. These economic dynamics in combination with the group's strong execution are contributing to the excellent performance of our Irish mortgage book that you see on Slide 9. The book grew at an annualized rate of 6%, the second consecutive year, the book has grown at this pace. Bank of Ireland is the #1 provider of new mortgages in Ireland since quarter 4 of 2022, and our market share of new lending was 40%. Achieving this outcome while maintaining strong risk and pricing discipline has been supported by product innovation and significant investment in customer service. The mortgage business is integral to the group's medium-term growth prospects. Our Everyday Banking franchise that's current accounts and deposits is seeing positive momentum. Customer balances increased at an annualized rate of 5% and flow to term was EUR 1.1 billion lower than last year, in line with expectations. We continue to innovate and have recently launched 2 new propositions coming to Ireland, a bespoke account opening service, which supports customers relocating here and SmartStart, which meets the banking needs of our 7- to 15-year-old customers. And later this year, the rollout of a major upgrade to our mobile app will commence, offering increased functionality and enhanced user experience. Our differentiated Wealth and Insurance franchise continues to deliver with assets under management of EUR 55.6 billion. This equates to an annualized growth rate of 3%, with strong inflows of EUR 1.2 billion. Against the backdrop of volatile markets, I'm very pleased with this performance. The growth in AUM is also a key driver of the 8% increase in fee income for this business. The favorable demographics in Ireland in combination with the significant opportunity in wealth creation are key parts of a structural and resilient growth story for our Wealth and Insurance business. That opportunity is underpinned by the group's position as Ireland's #1 wealth provider via our Davy and New Ireland Assurance businesses. Wealth and Insurance offers long-term, capital-light diversified income and we see it being the key driver of overall fee income growth into the medium term. Turning now to Slide 12 on our Corporate and Commercial division. This was a solid first half for our Irish Corporate franchise with the loan book up 3%. Within this Irish book is EUR 1.3 billion of funding, supporting the construction of close to 25,000 homes. To further drive momentum, we recently announced an increased ambition to support the development of 30,000 homes. This ambition is grounded in strong commercial discipline, while also responsibly supporting this critical sector for Ireland. By deepening our corporate customer relationships, we've also increased fee income by 11%. As previously guided, we are continuing to run down a number of lower returning international portfolios. And moving to credit quality. Our Ireland book continues to perform well. We have increased coverage on our U.S. acquisition finance book, preemptively capturing potential risk, which is reflected in our impairment charge. Our Retail U.K. division is producing attractive and sustainable returns, generating RoTE of circa 15%. During H1, both lending and deposits grew, while headline PBT here was lower. This is driven by a normalization of the impairment charge in the current period compared to a net write-back last year. And the NPE ratio also improved by 20 basis points. Slide 14 sets out our targets for the current strategic horizon spanning 2023 to 2025. We reiterate our 15% full year RoTE target and the guidance for a progressive full year dividend per share is maintained. And mindful of our strong capital position and in line with our policy, the group will give further consideration to distributions at our full year results. Our unique business model, the attractive markets in which we operate and the focused delivery of our strategy underpin our unchanged guidance for 2025 and our positive outlook to 2027. I will now pass over to Mark to bring you through our financial performance in more detail.

Thanks, Myles, and good morning, everyone. There are 3 key financial takeaways from these results. Firstly, we've delivered a good performance in H1 with strong Irish loan and deposit growth while maintaining cost discipline. Secondly, we are reaffirming our key guidance for 2025, a RoTE of circa 15% and capital generation of 250 to 270 basis points. And finally, our H1 performance puts us well on track to deliver on our outlook for 2027 and deliver a RoTE of greater than 17% in that year. The income statement on Slide 19 demonstrates resilient income and an ongoing focus on efficiency. We've also declared an interim dividend of EUR 0.25 per share, a payout ratio of 40%, in line with last year. Moving to Slide 20. Our NII performance in H1 was better than we originally expected, supported by strong business momentum, especially in Ireland. We've also meaningfully increased the size of our bond portfolio to capture higher income with further growth expected in H2. We are upgrading our full year NII guidance from greater than EUR 3.25 billion to around EUR 3.3 billion. The key positive factors driving our NII performance this year, Irish loan and deposit growth, the structural hedge and the larger bond portfolio, will continue to support our NII growth into 2026 and 2027. We now see 2027 NII being higher than EUR 3.5 billion, reflecting the momentum we are seeing and the actions we are taking. We had strong lending growth in Ireland in H1, where we delivered an excellent performance in mortgages. The contraction you see in our International Corporate portfolios primarily reflects the planned rundown in our GB corporate book. Looking ahead, we continue to see growth in net lending of around 2% for the full year, with Ireland growing by around 5%. Our differentiated Wealth and Insurance business turned in another strong performance in H1. Against the backdrop of volatile markets, net inflows were resilient at EUR 1.2 billion, which equates to around 4% annualized of opening AUM. This helped AUM to close the half at a record EUR 55.6 billion. Looking ahead, we expect to see AUM growth of around 5% for the year, supported by inflows and market growth. And the structural drivers for this division remain very much intact, supporting our medium-term annual growth expectation of 7% to 8%. Our deposit franchise saw further growth in H1, up 2% to EUR 105 billion. There was particularly good momentum in Irish Everyday Banking balances with a strong Q2. Flow-to-term moderated to EUR 1.1 billion in H1 and from EUR 1.9 billion in H2 of last year, in line with our expectations, and we see this moderation continuing. For the full year, we announced the overall deposits growing by around 3%, up from 2% previously. Slide 24 provides an update on our structural hedge. Average volumes are modestly higher in H1, and we see this trend continuing in H2. The hedge yield continues to grow, but still remains well below current market rates. This upside is a key driver of our positive NII outlook over the next number of years. Turning now to business income. H1 saw growth of 4% and in line with our expectations. This was driven by a strong performance in our wealth business. Associates income was lower with this down to the non-recurrence of gains in the prior year period. For the full year, we expect growth from total business income, including JVs and associates of around 5%, unchanged from our view earlier in the year. As Myles said, we have a clear focus on efficiency. Operating expenses were 3% higher in H1 with a cost income ratio of 48%. This is primarily driven by higher staff costs, a function of tight labor market conditions. Our operating expense guidance for the year is unchanged at 3%, and we reiterate our outlook for costs to be around EUR 2 billion at 2027. Levies and regulatory charges are substantially booked in H1 and we expect them to be around EUR 130 million for the full year. Non-core items were EUR 83 million in H1. The majority of this is down to investment in restructuring, including redundancy costs as we evolve our business model in line with our strategy. We expect a broadly similar quantum of non-core items in H2. This is an acceleration of spend relative to our guidance in February, with total expected restructuring costs over the 3 years to 2027, materially unchanged. This investment is directly linked to our outlook for operating expenses of around EUR 2 billion in 2026 and 2027. On U.K. Motor Finance, there is no change to our provision in H1. We expect further clarity on this in the second half. Asset quality remained robust in H1 despite the uncertain global economic backdrop. Our NPE ratio was 2.6%, up 40 basis points year-to-date, but close to multiyear lows. Our overall provision coverage is higher at 1.4% in June. We expect the NPE ratio to reduce modestly in H2, reflecting management actions. We've taken EUR 137 million impairment charge for H1, equivalent to 33 basis points annualized. This compares to our guidance of low to mid-20s back in February. The H1 charge comprises 2 elements: 23 basis points reflects net portfolio experience. The biggest driver of this was our U.K. acquisition finance book with a charge in that book partly offset by credit insurance protection; The balance of 10 basis points related to additional management adjustments to capture updated model assumptions and PMAs that reflect the changed environment since the start of the year. We now expect the full year charge to be around 30 basis points. If I stand back from the detail, the key takeaway is that our overall asset quality is in good shape and our customers are navigating the changing environment very well. Turning now to Slide 30 and capital. We finished the half with a CET1 ratio of 16%. The building blocks for this, the Basel IV benefit of 115 basis points, organic capital generation of 110 basis points, the dividend accrual and investment in RWA growth. Our full year guidance is unchanged. We continue to expect 250 to 270 basis points of organic capital generation. The higher capital generation in H2 is mainly explained by timing issues around levies and movements on intangibles. Slide 31 recaps on all of our full year guidance with RoTE of around 15% expected. Our closing slide here sets out the building blocks that produced our positive medium-term outlook, underpinning confidence in our RoTE building to in excess of 17% in 2027. Thank you for your interest in Bank of Ireland. Our Chief Sustainability and Investor Relations Officer, Eamonn Hughes, will now take us through the Q&A.

Thank you, Mark. [Operator Instructions] It looks like our first question will come from Diarmaid Sheridan from Davy.

A couple of questions, if I may. Maybe just firstly on the impairment charge. Mark, how should we think about the SRTs and how they interact with either changes in the credit quality in the acquisition finance portfolio or when you put provisions on? Just trying to understand how the dynamics there work? And if there's any implications for risk-weighted assets? Or is that protection kind of fully there, to the extent that the SRTs are there? Maybe just secondly then on net interest income and the guidance that you've provided and looking out to 2026 and 2027. To what extent should we expect those additional liquid assets that you've put on and the hedge to be kind of key drivers of what you're indicating this morning in terms of that upside that you've talked to? And then finally, maybe, Myles, when you talk to distributions and the target CET1 level I guess, firstly, is that likely to be something that is a kind of a multiyear to get down towards the -- just above 14%? And secondly, is there anything stopping you from at a total level of distribution greater than 100% of earnings in any given year?

Okay. Diarmaid, let me take the broad capital distribution question. I'll ask Mark to take impairment and that NII profile. On capital distribution, Diarmaid, consistent with our approach since 2022, our objective clearly is a progressive full year DPS and an assessment of surplus capital returns at year-end. And as I referenced in my narrative earlier, in terms of track record, the group has returned EUR 2.6 billion in dividends and cash and buybacks. So hopefully, a track record demonstrates that we understand shareholder distributions are integral to the Bank of Ireland equity story. Clearly, we have a very strong capital position at the half year with the CET1 is 16%. That's going to grow out over the course of the second half of the year. And we will think about that in the context of a target capital ratio to be above 14%. Mark?

Yes. So maybe to stand back on asset quality overall. I'd say Diarmaid, we're in very, very good shape. Our NPE ratio is 2.6% at H1, that's close to multiyear lows. As I look across our portfolios overall and our customers are really weathering, I'd say, the evolving environment very well. And on the CRT question, which I think relates to U.S. acquisition finance in the first half. So I mentioned in the presentation, EUR 97 million of our charge in H1 relates to portfolio experience that reflects, I'd say, largely the U.S. acquisition finance, offset by the benefit of the CRT protection in place. Maybe to step back from that. So we've got CRT protection in place over about 70% of the U.S. acquisition finance book. That's an integral part of our risk management framework and is designed to protect the group if there is adverse credit experience. And if we think about what's happening in H1, it's doing exactly what it should do, it's providing a partial offset against the loss experience in the book. I would emphasize that does not represent actual losses have hit at this stage. So that's effectively a mark-to-market. And again, as we work through that if the Stage 3 ECL which drives that were to unwind the recoverable assets would reduce in line with that. Maybe turning to NII, Diarmaid, I mean, I think there really -- that's a real story of I'd say, positive momentum in the context of NII, and that NII trajectory is obviously a key building block into our overall outlook of RoTE growing to greater than 17% by 2027. If we look at maybe the key building blocks there, really some good momentum there, that strong Irish loan deposit growth in H1, so 5% annualized growth there. The structural hedge is playing out as we expected, maybe a little bit better than that in terms of the reinvestment yields. And also, we've increased our bond portfolio in H1 as well from EUR 9 billion to around EUR 15 billion, and there's further to go on that. Those factors are supporting our upgraded NII outlook. So we've upgraded our outlook this year to around EUR 3.3 billion from EUR 3.25 billion previously. We expect NII to grow next year to greater than EUR 3.3 billion. And in 2027 now, we now expect NII to be greater than EUR 3.5 billion compared to EUR 3.5 billion previously. And if I look at where consensus is today, I don't think that consensus is probably fully captured that.

Our next question comes from Sanjena Dadawala in UBS.

Can I have 2 follow-ups from the previous discussion? And then I have a question on non-core. So maybe on the impairment charge, when we look at the CRT benefit within, is it possible to break out because 23 basis points driven by U.S. acquisition finance still seems large, if part of it is covered? And then on the guidance implied second half charge of 27 basis points, that's still higher than the low to mid-20s that we were expecting before. So what are you seeing in terms of expectations for the second half, which has that charge still higher than a mid-20s kind of thing? And then the second follow-up on distribution, should we expect the consideration to the greater than 14% target at the end of each year, especially given the current excess position or could it be more phased? And then my question on non-core charges, it's about a 50% increase for this year. Wondering what's the total restructuring budget, if you could give us a sense? And then what do we now expect for 2026, which was supposed to be again 100 to 125 before? And then more importantly, what benefits you're seeing from these investments in the future?

Thank you very much for that, Sanjena. Let me comment more broadly on the impairment charge and also capital distributions and then hand to Mark on some of the details, both for H2 impairment and indeed non-core. And on impairment, overall, Mark would have called this out, asset quality remains very healthy. The best measure clearly overall is our group nonperforming exposure. That's at 2% of total book, close to multiyear lows. And when I look across the portfolios across our group loan book, I mean, customers are in good shape. Our impairment in the U.S. is higher, and I regard that very much as a preemptive measure to capture potential risk. So this is getting ahead of, I guess, the potential problem in getting our arms around and Mark talked about the realized losses versus what we've taken at half year. And the work we've done here is what you would expect us to do particularly given the U.S. dynamics throughout quarter 2. And on capital distributions, again, Sanjena, our objective here is a progressive DPS. That's very important to us. and also the return of surplus capital. And we will consider that in the context of where that capital is at, at the end of the year relative to a target to be above 14%. It is as straightforward as that.

Yes. And Sanjena, looking at our guidance for the year, our outlook for the year of circa 30 basis points. If you go back to our H1 charge, 2 elements to it. So the net portfolio loss activity on the one hand and also the further adjustments we've made, which are really an additional P&A and also increasing our weightings to the downside. That really reflects our judgment as of June as to the change in the environment. We will review that again at the end of the year. But if you look at our guidance for the year, we're effectively assuming no change in that. So that continues and portfolio loss activity similar to the first half in H2. And if I maybe go out into 2026 and 2027, we see a normalized cost of risk somewhere in the mid-20s. On non-core, really, the biggest driver of non-core, as I mentioned in the presentation, is relating to restructuring charges. And in terms of that, we see some acceleration, but I'd say the overall envelope materially unchanged. And those costs, they include voluntary redundancy costs and other restructuring costs are directly linked to our outlook for having costs flat at around EUR 2 billion in 2026 and 2027.

Is there more to come in '26 and '27?

Yes. It'll be -- that's similar to what I said in February. So it's sort of a 3-year program, Sanjena. So we'd expect something similar next year and then materially lower in 2027.

I guess, Sanjena, that plays in very much to our cost target of EUR 2 billion by 2027. And Mark referenced redundancies, I said before that I expect that we will be a smaller and leaner organization by '27. Headcount will reduce over the course of the second half of this year. And that includes 260 voluntary redundancy expected before year-end and most likely more in '26 as well. Thanks, Sanjena.

Okay. Our next question comes from Grace Dargan in Barclays.

Maybe I could start with one on the deposit performance, which has been really strong. Maybe you could be a little bit more granular around the kind of Retail, Corporate and the geographic split and the mix within the deposits as well as how that's outperformed and what you're expecting in H2 and next year in particular? And then secondly, can I just ask a couple of clarifications? So on NII, you said maybe further to go on the bond portfolio. Do you have a sense of how much you're looking to grow that book? And then finally, can I just confirm, did you say you were looking for similar restructuring charges in '26 on '25? Or did I just mishear that?

Grace, thank you for that. I mean on the broad answer to your deposit question, firstly, very pleased that, that deposit book has grown at an annualized rate of 5%. Of course, at the same time, as on our Wealth business, we've seen our AUM at the highest level ever, including net inflows of EUR 1.2 billion as well. So both parts of that product offering, the deposit offering plus the more sophisticated wealth offering working well. Mark, over to you on some of the details.

And Grace, if you look at the underlying -- or the individual businesses, it's really our Irish Retail business or Everyday Banking, those current accounts and deposits, which have grown in the first half of the year, very strong Q2 there, and that's one of the reasons why we're increasing our guidance in terms of deposit growth for the full year to be around 3% now given that Q2 performance. I'd say also just the flow-to-term term playing out very much as we expected. So it's reduced from EUR 1.9 billion second half of last year to EUR 1.1 billion in the first half of this year, and we expect further reduction in moderation in the second half of the year. We're seeing that on the ground. Shall I go on to maybe the bond portfolio, Grace. So I'd say further to go there, maybe something similar, so up about EUR 5 billion, EUR 6 billion, and we're working actively in that, we see an economic opportunity there, and that's going to support that really positive NII and outlook that we've given this morning. And on restructuring costs, correct, similar -- in the broadly similar ballpark next year and then materially lower in 2027.

Okay. Our next question is from Borja Ramirez from Citibank.

I have 2 questions. Firstly, I think on the cost side, I think I don't know why, but consensus does not seem to fully incorporate your cost savings. So I think there seems to be some upside to consensus estimates. That would be my first question. And then my second question would be on the NII sensitivity, if you could kindly provide a bit more details on the developments compared to the second half. And also if you have any actions to decrease the sensitivity to rates.

Thank you, Borja, I mean on costs, the key message that's most important for me to communicate is that we remain on track with our cost target of EUR 2 billion by 2027. We are in an inflationary environment. So the team are working hard across the organization to secure efficiencies. I think we can see that in our headline numbers overall. We go back to last year, costs increased by 6%. This year, we're guiding 3%. So that work is coming through in terms of limiting the impact of inflation, deploying a range of interventions, some example, digitizing our customer journeys. We launched a new business loan platform linked to that, really working hard with our third parties to secure a greater value from them, working on our organizational design overall, but also in-sourcing cheaper and better, frankly, engineers for our technology change programs. And I referenced AI as well, that's an important component. And overall, I mean essentially half the cost of Bank of Ireland is people costs. So we do know that, of course, while we continue to invest in our people, overall head count will reduce between now and '27 with some of those departures occurring in the second half of this year. Mark, on NII sensitivity?

Yes. And just to add Borja, you're right in terms of the consensus, there is a gap, but obviously we're reiterating our outlook this morning. So on the NII sensitivity, key factors there versus the year-end, Borja, the increase in the structural hedge, which reduces sensitivity. And also on the upside, we've reflected also our experience of pass-throughs as we've gone through the cycle. So those are the 2 key moving parts. I noted on the call this morning, that we expect the structural hedge to continue to modestly increase as we go forward in line with our expectations on deposit growth.

Our next question is from Sheel Shah and JPM.

2 questions from me, please. Firstly, I'm looking at your mortgage market share, they've held at 40% consistently for the last few years actually. And I'm wondering around the competitive dynamics in the Irish market. Would you expect these mortgage market shares to be held here at 40%? Or do you expect it to maybe drop over the coming quarters? And then secondly, again, on the mortgage side, I'm looking at some data points you provided around the mortgage to insurance penetration, 6 out of 10 take out of new life assurance policy, 4 out of 10 take out a general insurance policy. What's the upside to this? Where do you think mortgage insurance penetration could go towards. Is that something that you're -- that you see as a growth prospect?

Thank you for that, Sheel. I mean the part of the fundamental pillar clearly of the Bank of Ireland equity story is the growth in Irish loans and our home market, supported by a very strong economy, but also supported by structural opportunities such as the mortgage market in particular. So the biggest factor that drives value for Bank of Ireland in the mortgage market is the fact that the mortgage market itself in size is increasing. So that's largely driven by the increased supply of new homes that has come into the market and Bank of Ireland's position in relation to that. That's one of the reasons why the book has grown by 6% last year and 6% on an annualized basis so far this year. In the context of competition, I think -- I mean, I've said it before, I do feel, given that Ireland is an attractive market, that competition is going to increase. I think we can see that both from traditional banks, but also from some of the neo banks. We're well positioned to compete. Strong risk and pricing discipline, we'll always maintain that. But the combination of a physical footprint plus our digital offering is really important. And in the mortgage space, we're seeing that come through. And so it's not so much, Sheel, that I have -- that we have a mortgage market share target. It's an outcome of everything that we do. And again, value really comes from that size of market growing and that pricing discipline really important in the context of protecting the value of the total book and not just flows of share. But I do think out to the medium term, a more normalized share is probably in the low to mid-30s. We're comfortable with that. The book will grow at that rate. I go back a number of years where the market share was in the region of just 20%, 21%. And on the cross-sell, I mean one of the reasons why we talk about Bank of Ireland having a differentiated business model, it is because of that Wealth and Insurance division from New Ireland Assurance but also from Davy. And that rate of cross-sell, 6 customers, mortgage customers taking a life product for taking a home insurance. It's been pretty stable out over the last number of years, we'll, of course, want to do more in that space. One factor that we have to think about, of course, as the broker market and the mortgage market becomes more dominant, that can have an impact on that cross-sell. But again, consistent solid performance. And actually, I know it's not the question you asked, but there are many other areas in our Wealth business, particularly on the insurance side, the pension side, which does offer upside as well. Thank you for that.

[Operator Instructions] Our next question, we're going to go now to Andrew Stimpson and KBW.