Bank of Ireland Group plc ($BIRG)

Welcome to the Bank of Ireland Q1 IMS Analyst Call. Please note that the call will be recorded. [Operator Instructions] I would now like to turn the call over to Chief Executive Officer, Myles O'Grady. Please go ahead.

Thank you, Kavalani, and good morning, everyone, and welcome to Bank of Ireland's Quarter 1 Analyst Call. I'm joined by our CFO, Mark Spain. Quarter 1 marks the opening of the group's new 3-year strategic cycle, and we've made a strong start. Our performance reflects disciplined execution of our new strategy, the breadth of our franchise and the continued resilience of the Irish economy. The group entered 2026 with momentum. Loans grew 5% annualized in quarter 1. Our Irish franchise grew 8%. Deposits were strong at EUR 107 billion and our Wealth and Insurance franchise delivered EUR 1.1 billion of net inflows. Asset quality remains robust, and the business continues to be highly capital generative. The Irish economy continues to demonstrate growth and resilience against an uncertain external backlog. While the group's updated economic forecast points to some changes in headline GDP, our expectations regarding domestic growth rates, employment and house prices are broadly unchanged versus the start of the year. And we remain vigilant should the current geopolitical backdrop persist, mindful of the potential long-term impacts for our customers. Looking ahead, our strategic priorities driving growth in Ireland, optimizing capital allocation and investing for the future are designed to deliver a disciplined top line growth, a step change in operating leverage and accelerating returns. Strong balance sheets across households, corporates and the state underpin our confidence in asset quality and volume growth. And on net interest income, while there is potential upside from higher rate expectations, we retain our guidance at this early stage of the year. And as we conclude quarter 1, the group reaffirms all of the 2026 guidance and financial targets out to 2028, including statutory return on tangible equity building to above 16% and mid- to high teens annual EPS growth. I'm going to hand back now to Kavalani and open the floor to questions. Thank you very much.

[Operator Instructions] Our first question comes from Diarmaid Sheridan.

Two questions, if I may. Firstly, maybe, Mark, just on NII. I wonder if you could just maybe give us a little bit more detail around the areas you talked to in the statement around the pluses and minuses? And how we should think about maybe those going through the next couple of quarters and into year-end and beyond? And then maybe secondly, Myles, maybe just on Wealth and Insurance. Obviously, we have a little bit more detail now around the savings product at this stage is likely to launch. I just wonder in terms of against the backdrop of the wealth strategy that was unveiled recently, how you think about how that plays into the broader strategy that you're looking to?

Yes. Diarmaid, thanks for the questions. Let me take the wealth question, first of all, and then I'll ask Mark to cover the moving parts on NII. So we are very supportive of the government's initiatives to introduce an ISA type product. And of course, this is against a backdrop across Europe of savings and investments union. Our wealth strategy that we expect our wealth assets under management to grow to EUR 75 billion out to 2028. They've grown in the first quarter, net inflow is very strong against a volatile market backdrop of EUR 1.1 billion. And of course, part of that strategy of growing to EUR 75 billion and indeed, a EUR 100 billion by 2030 is developing further our affluent business model. And therefore, it is in that space that potential ISA product that the government is working on, that sits very firmly within our strategy of developing our affluent business. We're very supportive of it.

Diarmaid, on NII and so Q1 performance is very much in line with our expectations. We are reiterating our guidance of around EUR 3.4 billion for 2026 today, very, very confident in that. If we look forward to '27 and '28, we provided an outlook at our full year results on those. So NII growing to greater than EUR 3.6 billion by 2027 and to greater than EUR 3.85 billion by 2028, very much on track. The key drivers over the outer years, but also playing out in Q1, loan and deposit growth, obviously, a very strong performance, particularly in our Irish loan books in Q1. So we're really pleased with that, and also the benefits of the structural hedge. In Q1, Diarmaid, we would have also had the offset of lower interest rates and FX impacts and also the impact of deleveraging portfolio. So they played out, that has left the flat versus Q1 last year. But I'd say overall, the performance in Q1 gives us a very strong confidence in our guidance for the year of around EUR 3.4 billion.

Our next question is from Sanjena Dadawala with UBS.

I wanted to ask about competitive trends. So you've raised term deposit rates a couple of weeks ago. So what's prompted that? Were you losing some business to competition at prior rates? And what has been the customer response to that increase? And also on the mortgage side, where the rate comparison suggests you priced above peers but still maintaining a high market share. How do you think BAWAG's entry changes there?

Sanjena, thank you for the question on competition. I guess, at the broadest level, when we communicated our strategy on the 2nd of March 2028, I spoke about a couple of things. One, firstly, that in setting out our target out to '28 in terms of loan book growth, in terms of deposit book growth, we have factored in that in a growing market that some of that growth could go to an elevated level of competition. So in that context, we remain very comfortable with all of the targets that we have set out. In terms of competitive activity on the ground, obviously, we note the significant transaction. But actually, very little new activity relative to 2025 we've seen in the quarter. The move on our deposit was scheduled and planned. And again, we see a very stable overall deposit base for everyday banking and in fact, very small and marginal flow-to-term mark for quarter 1. And on the mortgage space, again, I spoke earlier about the overall lending book for Bank of Ireland grew by 5%. The Irish book grew by 8%. And within that, of course, it's a strong mortgage performance. Market share is at 41%. So that's a very good performance. And actually looking at some of the expected completions of housing for quarter 1 that points to a growing mortgage market that we expected over the course of this year. So again, very confident around our ability to grow our balance sheet and having captured, we think, the likely impact of increased competition.

Our next question comes from Mike Evison with Autonomous.

I hope this doesn't cross over the previous person's question because I got cut off when I switched as a participant. Just one question on the deposits. So obviously, deposits were slightly down over the quarter. They were flat for retail, and there was a slight contraction in corporate deposits. I just wondered if you could talk a little bit more to the reasons there given the system growth? And then on NII. It looks like NII on an annualized basis is pretty much bang in line with guidance, but you've got lending growth coming through, expecting deposit growth and the hedge to churn through. So I just wondered if you could talk to whether there were any headwinds, which are the reason you haven't sort of said ahead of the guidance? Or are you seeing anything coming through which might act against that, please?

Thanks very much, Mike. Mark, do you want to address this?

Yes, Mike. Deposits in Q1 are very much in line with our expectations and actually typical seasonal trends there. If you look actually over the last couple of years, you'll see deposits flat in Q1 growth over Q2 to Q4. It varies around a bit. So we're -- I mean if we look at April, Mike, I would say, trends playing out in April very much as we expect. So we're feeling good about the year on deposits. On NII, yes, as I said in answer to Diarmaid's question earlier, we're really, really pleased with Q1 and very strong volume trends. As Myles mentioned, our Irish book growing by 8% on an annualized basis in Q1 and strong performance both in mortgages and in our business and corporate lines as well. And that really gives us that really strong confidence in the EUR 3.4 billion for the year. As Myles mentioned in his opening remarks, there's upside potential from higher rates. We're not reflecting that at this stage. It's just too early. We'll come back to that at the interims. But at the interims, also Mike, I think we'll just reflect overall on business performance in H1 on the outlook and bring it all back together. But feeling really, really confident about that circa EUR 3.4 billion for this year.

The next question comes from Denis McGoldrick with Goodbody.

Just two, please, if I may. One, you recorded good growth in your core corporate and commercial book in the quarter. So just wondering if you can give us a sense of the type of new lending that you're seeing there and how sustainable you think that might be. And then secondly, just more generally, are you seeing any impact yet to your customers in relation to the higher energy and fuel costs? And any comments around asset quality more generally, please?

Denis, thank you for those questions. So the Corporate and Commercial business, particularly in the Irish franchise had a very strong quarter 1. I referenced the Irish lending book growing by 8% and Corporate and Commercial were a very strong contributor to that performance. So we're pleased, and you'll see it in the numbers that I've said in the IMS. And again, it's the sectors that we have seen very good progress on last year continues to play out. So agri has been good, manufacturing and retail as well, also professional services areas as well has been another source of good business for Bank of Ireland. On the energy piece, certainly, we haven't seen any real material impact in quarter 1. But of course, this has a longer tail to play out, and that's my point around remaining very vigilant to this. But we enter this, I guess, elevated period of uncertainty from a very strong position. Our overall NPE ratio at 2%, asset quality across the book particularly strong, no areas of vulnerability that I'm seeing over the quarter. And also mindful of course, Mark, on the impairment charge. We took a PMA at the end of last year of EUR 40 million to get ahead of the geopolitical risk. The other interesting data point, Denis, which is that if you look at energy intensity or energy consumption of Ireland relative to European peers as a measure against either GDP or modified GDP, we're relatively low, and that's a function of the energy makeup in Ireland. But certainly, it's an area for careful attention, and we're working closely with our customers as they navigate this period of uncertainty as well. But so far, a very strong quarter and feel comfortable about the overall guidance for the full year.

Next question comes from Seamus Murphy with Carraighill.

So two questions please, again. So let's start with the strategic plan. Can you just remind us of what the reinvestment rate you had assumed in your hedge just for the rolling maturities because obviously, we've had a reasonable movement in rates in the most recent period. So obviously, I presume that's quite a significant upside as we look forward. And secondly, I know it's only a quarter, but RWAs in the quarter were up EUR 600 million. I think for loans we're at EUR 1.5 billion -- sorry, EUR 1.1 billion. So that's kind of an incremental RWA intensity of around 55%. I'm just -- I know you had guided around 25% at the time of your strategic plan. So was there something going on in the quarter? Or is it just -- how should we think about that as we look forward?

Yes. Seamus. On the RWA, so firstly, FX will be in that as well. So just to think about so sterling and the dollar were both slightly stronger versus the end of the year. And then if you look at the breakdown of our lending, you've got about half in corporate where you have higher risk weights, half in mortgages. But just the metric I think you're thinking about is about 25% of organic capital generation invested in RWA, okay? So that's the metric, and that is actually -- we see that playing out actually in this quarter, and we see that playing out over the year as well. On the structural hedge, Seamus, you're right. I mean we talk about the upside potential from higher rates. Obviously, that would feed through in the context of the hedge as the hedge rolls over. So reinvestment yields Q1 right across sort of sterling and euro in the sort of [ 270 ] sort of range and a sort of building to that level is what we assume in the plan. So there's potential upside on that as we go forward if rates -- markets remain where they are.

Our next question is from Jordan Bartlam with Mediobanca.

I have two on net interest income, if I may. The first one, I saw you added a further EUR 3.4 billion volume into the bond portfolio. Just interested, how much more capacity is there to go further on that? Are you still anticipating a further 50 basis point margin uplift on those investments? And then the second question, I just wanted to know if we can have a bit of an update on the portfolio wind-downs? So where are we on the books being delevered? What sort of time frame could we expect for full exits? And how much net interest income headwinds remain from those exits? So those would be my two questions.

Thanks, Jordan. Mark, do you want to go?

I will, yes. So bond portfolio, we've added EUR 3.5 billion in Q1. I'd say that's the bulk of our activity for the year in that, Jordan. We'll obviously continue to keep that under review, the spreads on that about 40 basis points in terms of the wind-down portfolios. Again, we've given the disclosure in the IMS on that. But I would say 3 portfolios there are corporate GB, U.S. LAF and U.S CRE books. Again, all have reduced in Q1, pleased with some of the NPE exits there as well supporting the NPE ratio dropping to 2%. In total over the 3 years, about EUR 110 million or so of NII headwinds between '26 and '28, and a lot of that this year, about EUR 60 million, EUR 70 million of that this year.

Our next question comes from Aman Rakkar with Barclays.

Just to -- so on the mortgage market share, please, the 41% share of gross lending in Q1, it's pretty consistent with the kind of 42% level that you delivered in prior periods, but you kind of pointed us to some kind of market share below that going forward. So I was interested in kind of spot because is there any chance you can give us kind of spot market share like quarter-to-date? How have you been developing your expectations on how that might develop through the course of the year, that would be very helpful. And then secondly, just on the ECLs. Obviously, credit is very benign in the quarter, but you're deferring the update to macroeconomic assumptions to H1, which I understand. I was just interested, Mark, how you're approaching that exercise more broadly, to be honest with you, given the Middle East. I mean, the sense is that actually Ireland has quite a resilient backdrop, right? And you've kind of alluded to that. So you might actually expect a relatively modest impact on ECLs from any exercise that's coming in H1, but would be keen to kind of get your sense of how you're thinking about that, please?

Let me take the mortgage market share question and the outlook for that. And Mark on second question. I mean firstly, I mean you've heard me say before, we don't have a mortgage market share target. It's not the right thing for us to do. But certainly, we've had a very strong quarter 1 performance and again, an average drawdown share of 41%, and it's been broadly consistent over the 3 months that they've been just bobbing above the 40% level. And then my point on this one is that firstly, our outlook for the year remains very strong for this business. This is a book that grew 9% last year. And I referenced earlier in quarter 1, our overall average book grew by 8%. And the mortgage book was a very important clearly component of that. And I guess the headline point really is that, that market share is elevated, but it doesn't need to be that high for us to ensure that we continue to grow our mortgage book over the course of the year and indeed, out to '28 and in support of those targets to grow our book by an average about 4% for the total group for each year out to '28. My point here, Aman, is simply that the biggest source of value for our mortgage business is the fact that the mortgage market, the system mortgages are growing year-on-year, heavily supported by the supply of new homes. In fact, the most recent data that's come out points to a significant increase in housing output this year, possibly above 40,000, and that's very significant. And so yes, the market share of front book is relevant, of course it is. But in terms of the total book, that system growth is really important, and we're very -- we've got a very positive view on that. And indeed, that book growing strongly over the course of '26 and beyond.

Aman, just on the ECLs. So maybe just a couple of data points that we will go through that exercise as we approach the half year. But as Myles mentioned, firstly, I think we've got ahead of this a little bit in a sense of taking the geopolitical PMA of EUR 40 million at the end of last year. So that certainly provides some protection as part of an overall PMA stock of over EUR 100 million. I think the second thing is we published our own updated economic forecast a couple of days ago. If I just look at our forecast for domestic growth in the Irish economy, they're basically the same as our central case back in December. So obviously, we need to see where we are in June, but I think that's sort of a data point that's relevant. And then the third point is if you look at the weightings in our ECL model and you'll see we've got 30% indented to the downside. So again, I'd say some protection there. So obviously, we need to go through the exercise, but certainly, there are some, I'd say, hopefully, helpful data points as we're thinking about it.

[Operator Instructions] Our next question will come from Borja Ramirez with Citi.

I have two, please, and I apologize if this has been answered beforehand. Unfortunately, I got disconnected. So my first question would be if I look at the NII outlook, I do see some positive upside to -- both to consensus but also to your prior guidance of NII. I see NII around 2% to 3% higher than current consensus for the next 3 years. So I would like to ask if you could kind of provide some color. And then my second question would be some competitors have been increasing the hedge of the structural hedge notional. And I would like to ask if this could be a possibility for Bank of Ireland to further benefit from the current higher rate environment?

Borja, in my opening remarks, I made the point that on the net interest income, there is potential upside from higher rate expectations. And I guess in this early part of the year, at the end of quarter 1, we are retaining our guidance but there certainly is upside. And Mark, if you'll take Borja through some of the moving parts.

Yes, absolutely, Borja. I mean I think just going back to the 2nd of the March, that NII trajectory building to greater than EUR 3.6 billion in 2027, greater than EUR 3.85 billion by 2028, and that was based on an ECB rate assumption of 2% this year, and getting to 2.25% in 2028, okay? And in terms of BoE, similarly rate expectations have increased there, they are higher now than they were. But we are early in the year, Borja. So we're also -- an answer to an earlier question, we're also very pleased with Q1 performance in terms of, let's say, what's going on in the ground in the business from a volume perspective. So we will sort of bring all that back together at the interim results. We have had a couple of great set of meetings at that point as well, hopefully a little bit more visibility and provide an update on where we're at. But as I said, really a high conviction in our circa EUR 3.4 billion guidance for 2026. And on the structural hedge, actually, sorry, just to answer on the second question. Yes, the structural hedge, we see growing modestly over the next 3 years, Borja, basically in line with our deposits and our equity. And those are the key drivers of that. We'll always, around the edge of that, we'll always look and examine particularly our deposit base and see if there are opportunities for taking further action, but nothing to report on that today. So we should think about -- I think we gave quite a bit of disclosure on the structural hedge outlook back on the 2nd of March, and I think that remains intact today.

Our next question comes from Fatima Ghaznavi with KBW.

Just a follow-up on the housing market. I know you said that you see increase in completions at the end of the year, and that might expect to drive some acceleration in the Irish retail lending. Just a quick question. Do you expect -- do you normally sort of see some seasonality in this and expect the first quarter to be a bit slower usually? And then also, it looks like your interest rate sensitivity has decreased slightly versus the full year. Could you maybe talk through what the moving parts might be on that?

Fatima, thanks for the questions. I mean on the housing supply, I mean, firstly, the overall message is that we expect that the housing output for 2026 to be higher than 2025. And that's super important in the context of supporting a growing mortgage book. I'd say it's less about seasonality factors and more about the lead time when developers commence projects. And for example, a housing development can take in the region of 12 months to -- from start to finish. If you think about an apartment build, which is a huge part of the solution of solving the housing challenge in Ireland. And again, supporting our mortgage business, that can take up to 2 years. So the data that we watch as well as the completions in a particular point in time. And again, quarter 1 completions year-on-year, very strong, again, indicating housing outputs could break through 40,000 for the full year. The data that we look at typically is around when developers start their work on the ground. And again, that data is also very supportive of a higher level of housing outputs and therefore, supporting growth in the mortgage book this year.

Yes. And Myles, just want to add on that. And Fatima, just going to the seasonality in the mortgage business as well. Fatima, from a mortgage business perspective, Q4 will typically be the strongest quarter and so on and so. On the NII sensitivity, Fatima, no, there's no change. I think we've just given in the statement the sensitivity, 25 bps on euro. But obviously, the NII disclosure we've given overall is across all currencies. So I think if you just look at the euro column back in the slides at the end of the year, you'll see that the numbers are the same.

Our next question comes from Sheel Shah with JPM.

A question on the retail U.K. lending business, please. So your trends were flat. We've seen a lot of U.K. peers and the mortgage market in the U.K. grow a fair amount in the first quarter. So I'm wondering what's going on underneath the hood there? Because clearly, U.K. is in a, let's say, a more challenging situation compared to Ireland. Is there a case of maybe capital allocation being favored in Ireland as opposed to the U.K.? Are the margins and the returns of these mortgages that you're lending out, are they maybe not as attractive at this moment in time? I'm keen to get your thoughts there.

Yes, Sheel. I mean the performance of our U.K. business in the quarter 1 was a strong performance and supportive of the overall group performance. If I could take it back for a moment just to the strategy that we communicated on the 2nd of March, I spoke about the most important pillars of that strategy was driving growth in the Irish franchise, and second of all, optimizing capital allocation. And those 2 objectives play very much to your question. So I'm very comfortable with the capital that we have allocated into our U.K. business. And certainly, there is an opportunity for that book to grow modestly over the next number of years. And we've seen some of that in quarter 1. I mean the U.K. book grew, so it was supportive of the overall group growth of 5%. But it's not a part of the business, certainly, from an organic perspective that we're putting significantly more capital into relative to what we will be doing on the Island of Ireland franchise. So again, nothing of note. The book has performed well. Credit quality is in good shape and performance aligned with expectations and indeed, with our strategy.

Our next question comes from Sanjena Dadawala with UBS.

I thought this time, let me try to squeeze two more in. So 1Q cost growth in line with full year guidance, but wondering if you could provide some color on OpEx and restructuring within that. Are restructuring costs in the year progressing as expected? Are they expected to be fairly linear or front ended? And then maybe on the U.K. motor provision of around EUR 430 million. So unchanged, but is it now incorporating only one scenario that is the FCA final redress scheme? Or are there certain other considerations in that?

Thanks, Sanjena. Mark, do you want to grab both?

Yes. In reverse order, Sanjena. So obviously, we've reviewed the final FCA redress scheme and there's no change in our provision of GBP 374 million relative to where we were in March, and we have aligned with the FCA expectations, for example, an opt-in rates, et cetera, on that. So confident actually now that, that actually should put that matter behind us. In terms of cost growth, again, Sanjena, very much in line with expectations. Obviously, there's hard work on the ground to deliver that. I mean, we have obviously inflation, we're making significant investment. We called that out as part of the strategy, including, for example, in our Wealth business, we're making really good progress in Q1. But to offset that, we're delivering savings as well, and they're playing out as expected in Q1. Our restructuring costs, I'd say, broadly linear over the year, it will be -- it won't be exactly linear. But again, nothing to call out today in that regard. And we're happy with the progress that we're making.

This concludes the Q&A session. I'll now hand back to management for closing remarks.

Thank you very much. I know it's a busy day in the market today. So thank you for your time, and I hope you all have a very good Friday, and look forward to talking to you all in due course. Thank you very much.