Close Brothers Group plc (CBG) Earnings Call Transcript & Summary

So I think we should -- we can begin. Good morning, and welcome to the presentation of our 2020 first half results. Mike Morgan, our Group Finance Director, will be taking you through our financial performance, and I'll then provide an update on the group and our strategy and outlook. Also with us today are Adrian Sainsbury, the Managing Director of our Lending businesses; Martin Andrew, the Chief Executive of Asset Management; and Phillip Yarrow, the Chief Executive of Winterflood. And as usual, we'll be happy to take your questions after the formal presentation. As I mentioned, we do have people phoning in, we do have people on web, and so we'll be taking questions from them as well. The group maintained strong returns and profitability in the first half, during a period of low activity in the U.K. economy, while staying true to our disciplined approach and commitment to investing through the cycle. A decline in profits in our Banking division was partially offset by an improved performance in Asset Management and Winterflood, resulting in a 9% reduction in group adjusted operating profit year-on-year. Our equity base continued to grow with an increased CET1 ratio of 13.4%. Despite the decline in profits and growing equity base, our return on opening equity remained strong at 13.6%, and we're pleased to be increasing the interim dividend by 3% to 22.7p. Performance in the Banking division reflected lower SME business activity in the first half and some normalization of bad debts across our businesses along with our ongoing investment in a number of multiyear strategic projects. Asset Management continued its good momentum with strong net inflows at 12% annualized, and Winterflood benefited from a recovery in investor appetite following the U.K. general election. In the current uncertain period, our specialized and disciplined model continues to serve us well, and we continue with our long-term investments to protect, to improve and to extend our business model. This leaves us well positioned to make the most of our resilience and any opportunities that a shift in the trading environment may bring. I'll now hand over to Mike, who will take you through the first half performance in more detail.

Thank you, Preben, and good morning, everyone. As Preben said, we delivered strong returns in the first half of 2020 in a period of lower activity in the U.K. economy. As a result, in banking, our loan book remained broadly flat in the period with growth of 3.2% year-on-year. Our strong net interest margin was broadly stable in the last financial year at 7.8% and reflected our continued pricing discipline. The bad debt ratio increased to 0.9%, reflecting some normalization of bad debts from historically low levels, and a small number of new individual provisions in Commercial and Property. Both the Asset Management division and Winterflood performed well and benefited from a recovery in investor sentiment following the U.K. election. As a result, adjusted earnings per share reduced 9% in the period to 63.8p, and we generated a strong return on opening equity of 13.6% and return on average tangible equity of 16%. Our CET1 capital ratio increased to 13.4%, with the leverage ratio also increasing to 11.3%. We are pleased to declare a 3% increase in the interim dividend per share to 22.7p, in line with our progressive dividend policy. Looking now at the income statement. Income was up 3% to GBP 420 million, with all 3 divisions achieving growth on the prior year. Expenses increased 4% to GBP 258 million, reflecting the continued investment in Banking and Asset Management. While the credit quality of our book remained strong, impairment losses increased by GBP 15 million from historically low levels to GBP 37 million. The effective tax rate reduced to 24%, reflecting a reduction in the U.K. corporation tax rate. All else equal, we expect the effective tax rate for the full year 2020 to be around 23%, and we delivered GBP 95 million of profit attributable to shareholders, 9% down on the prior year. Moving on to segmental performance. In the Banking division, profit reduced 12% to GBP 115 million, reflecting modest income growth combined with normalizing bad debts and ongoing investment. Profit in commercial reduced 19% as loan book growth and a strong NIM were offset by an increase in individual provisions. Profit in Retail decreased 7%. This reflects a broadly stable loan book and some normalization in bad debts relative to historically low levels, and Property reduced 9% as we experienced high repayments in the loan book and increased bad debts due to individual provisions. Profit in the Asset Management division increased by 17% to GBP 13 million, reflecting higher income and continued investment to support the long-term growth of the business. Profit in Winterflood increased by 14%, reflecting a recovery in trading volumes following the U.K. general election. Overall, adjusted operating profit reduced 9% to GBP 126 million with reduced profit in Banking, partly offset by an improvement in Asset Management and Winterflood. Our balance sheet remains simple and transparent, and the majority of our assets and liabilities relate to our lending activities. We have maintained a prudent level of funding, well in excess of the loan book at GBP 9.8 billion. We continue to borrow long and lend short with the average maturity of funding at 18 months, ahead of the loan book at 14 months. We maintained a prudent liquidity position with GBP 1.3 billion of treasury assets at 31st of January 2020, with the majority held with the Bank of England. Our funding base is well diversified and includes access to both retail and nonretail deposits as well as secured and unsecured wholesale funding. Despite mixed market conditions, our credit ratings remained strong and stable with the banking subsidiary rated Aa3 by Moody's. Our average cost of funding was flat on the prior year at 1.7% as we continue to further optimize and diversify our funding base. Our customer deposit platform supports continued growth and diversification of our funding sources. It has already allowed us to extend our range of deposit products with the launch of notice accounts for our retail, pension and SME customers. Our online portal launched last December has proven popular with retail depositors, and we have a suite of new savings products to come during 2020. This helped us to increase our retail deposits by 15% in the period to GBP 2.5 billion. Our capital position strengthened further in the period given our strong capital generation and stable loan book. This has allowed us to maintain capital ratios comfortably ahead of regulatory requirements. Our CET1 capital increased 3% to GBP 1.2 billion, reflecting continued profitability. Risk-weighted assets remained broadly flat at GBP 9 billion, principally reflecting the loan book. As a result, the CET1 ratio increased to 13.4%. The total capital ratio also increased to 15.5%, and our leverage ratio increased to 11.3%. The U.K. countercyclical buffer is expected to increase to 2% from December, and the PRA is consulting on a counterbalancing reduction of Pillar 2A requirements. If implemented in the current form, we do not expect a material impact on our capital position. Our strong capital base provides good headroom of 440 basis points to the minimum Common Equity Tier 1 capital requirement of 9%. Overall, we have a strong capital base, and we remain committed to building capital to maximize long-term flexibility. We're also on track towards our IRB application, which will further strengthen and optimize our capital position. We take a prudent approach to managing our financial resources and remain comfortable with our current levels of capital, liquidity and funding. Moving on to the Banking division. We achieved income growth of 1% to GBP 306 million, reflecting modest loan book growth year-on-year. The net interest margin declined on the prior year to 7.8%, reflecting lower fee income due to low activity levels and loan book mix, while we maintained our pricing discipline. Expenses grew 3% to GBP 154 million, reflecting the continued investment in the business. The cost increase was primarily driven by our strategic multiyear investments to protect, improve and extend our business. The bad debt ratio increased to 0.9% as we have seen some normalization of impairments from historically low levels and a small number of new individual provisions in Property and Commercial. We are confident that the overall credit quality of the book remains strong and the bad debt ratio remains low relative to historical levels. This reflects our disciplined and prudent lending criteria. The overall increase of 3% in Banking costs was primarily driven by investment. Excluding investment costs, other operating expenses remained broadly flat on the prior year, reflecting our continued focus on improving operational efficiency. Investing through the cycle is a long-term strategic priority for the group, and we are currently undertaking a number of multiyear investment programs. In 2020, investment spend will be skewed towards the second half of the year, reflecting the timing of depreciation and ramp-up of our investment programs. As a result, total costs are expected to increase by circa 6% in 2020, in line with the growth seen in 2019. We continue to look for tactical improvements, such as the review and consolidation of our London office footprint. This is the reason we are hosting this meeting at an alternative venue today. This constant focus on becoming more efficient is an important part of our cost discipline and allows us to create further investment capacity. Overall, the loan book remained broadly flat at GBP 7.6 billion, reflecting a softer demand environment, driven by the economic and political uncertainty in the U.K. The Commercial loan book increased 2% overall. The Asset Finance loan book increased 5%, supported by growth in specialist sectors, such as energy and contract hire. Invoice and Specialty Finance decreased 3% with growth in Novitas offset by a decline in the core Invoice Finance book. The Retail loan book saw a marginal decline in the period. The Premium loan book grew 1%, as growth in personal lines was partly offset by a slight reduction in commercial lines. Premium continues to be well positioned competitively, following the completion of the transformation program. The U.K. Motor Finance book continued to grow, benefiting from recent investments, and we continue to see growth opportunities in the U.K. used car finance market. This was offset by a contraction in the Irish book. And the Property loan book declined by 4% in the first half, reflecting a high level of repayments, which more than offset new business. This is partly driven by a high level of sales generated in the market segment in which we lend, allowing our customers to repay their loans quickly. While we have seen slightly softer activity for developers and associated lower drawdowns, our pipeline remains strong within undrawn commitments at high levels. There also remains growth opportunities in regional locations and good demand from expanded offerings, including from our new bridging finance office in Manchester. The overall performance of the Banking division reflects the diversity of our businesses and different market dynamics faced by each segment. So let's look at the key metrics across the Banking division. The net interest margin reduced 30 basis points to 7.8%, mainly driven by Commercial. The decrease reflects lower fee income in Commercial and Property and changes in business mix in Commercial and Premium. The Banking bad debt ratio increased to 0.9% from historically low levels. This primarily reflects a small number of individual provisions in Commercial and Property as well as some normalization of bad debt in Motor. The expense/income ratio remained flat at 50% due to our strong cost discipline and continued investment in the business. While the ratio remained flat in Commercial and Retail, it increased to 28% in Property, reflecting the opening of our new Manchester bridging finance office and marginally lower income. Moving on to Asset Management, which delivered a strong performance in the period with adjusted operating profit up 17% to GBP 13 million. We continue to see strong momentum in the division with annualized net inflows up 12%. Managed assets increased 8% to GBP 12.7 billion, reflecting net inflows as well as positive market movements. Operating income was up 12%, driven by strong growth in investment management fees. Overall, the revenue margin remained broadly stable at 95 basis points. Expenses increased 11% to GBP 53 million, driven by continued hiring of advisers and portfolio managers, investment in technology and higher variable staff costs. Overall, the operating margin improved to 19%. And finally, Winterflood, which delivered an improved performance since the U.K. election. The division continued to deliver strongly -- strong trading profitability with no loss days in challenging trading conditions. This reflects the expertise of our traders and strict risk management of trading positions. Income increased 5% to GBP 48 million, reflecting a significant increase in trading volumes in late December and January with average bargains per day up 6% on the prior year. Expenses increased 2% to GBP 37 million, reflecting higher variable costs. Overall, Winterflood delivered an operating profit of GBP 11 million, up 14% on the prior year and return on equity remains strong at 22%. In a challenging environment, I'm pleased with the discipline and consistency in the application of our model demonstrated by these results. I will now hand over to Preben. Thank you.

Thank you, Mike. Our purpose is to help the people and businesses of Britain thrive over the long term. Continuing to deliver on this purpose means investing to enhance our services, extend our reach and adopt new technologies to prepare for the future. It means building on our expertise to continue delivering strong returns and to maintain our long-term resilience. It means helping our customers and partners adapt to new trends and supporting the next-generation and the small businesses of Britain. And it means thinking sustainably in all we do, which is embedded in our strategy and in our culture and reflected in the talent and diversity of our employees and through our high levels of customer satisfaction. As a business that focuses on the long term, acting sustainably is integral to our strategy and culture and forms a fundamental part of our purpose. As part of this focus, we remain on track to achieve the series of targets we set ourselves during the last year. Over 30% of our senior managers are female, and we regularly receive strong customer satisfaction scores across our businesses. We continue to encourage good levels of payroll giving, and our head office now sends 0 waste to landfill, while our fleet and vehicle emissions continue to reduce, well on the way to achieving our 20% target. We work with an increasing number of partners to help focus our efforts and continually look for opportunities to make a lasting positive impact for people, communities and the environment. Our broad range and number of businesses across the U.K. bring us diversity and resilience. We have 3 separate divisions in Banking, Asset Management and Securities, each with a distinct product offering and customer base. And within Banking, we have 5 primary business lines, each of which contains multiple specialist lending businesses in distinct markets. This diversity gives us resilience in difficult markets and also creates opportunities for us to benefit from increases in demand or through structural growth. We have a distinct lending model focused on long-term discipline, which has supported strong returns and profitability over many years. Here, we illustrate how our loan book has performed through the cycle with faster growth in periods of low credit supply and slower growth in more competitive market conditions. In all market conditions, we maintain the disciplined application of our lending standards, protecting our margins and invest for the future through the cycle. Our long track record shows that we have consistently delivered strong returns and support from our customers and maintained our progressive dividend across a wide range of market conditions. And as demonstrated over a number of cycles, we do not change our approach. After the dot-com bubble and the global financial crisis, you can see that we were well placed to lean in and generate strong growth in the periods following. In the benign environment of more recent years, our growth has been moderating, reflecting the high supply of credit at this stage in the cycle, with active competition present across our businesses. During the first half of this year, growth slowed further as heightened macroeconomic and political uncertainty in the U.K. led to low levels of economic activity. And since the period end, this uncertainty has been further heightened by concerns over the coronavirus. In this current uncertain environment, we have a lot of confidence in our proven and resilient business model, which is deeply embedded in our organization. Our lending is prudent, predominantly secured and diversified across sectors, across asset classes and geographies within the U.K. We operate with prudent levels of funding, capital and liquidity. We lend at high margins, and we have a very experienced team, many of whom have been through previous downturns with extensive capability in underwriting, but also in collections and recovery. And we're small enough and flexible enough to make decisions quickly and reallocate resources to the areas they're most needed. Over the last year, we have dedicated significant time and resource to preparing and planning for the possibility of a significant downturn in market conditions. This has included developing detailed playbooks and running simulation exercises at the business level to ensure that we remain resilient and can react quickly as the external environment changes. Asset Management's vertically-integrated model and long-term diversified investment proposition leaves it well positioned to maintain its structural growth potential, although performance is inevitably linked to fluctuations in market levels. Winterflood has a long track record of resilient trading in very challenging conditions, and as today's results show, benefits immediately from any uptick in trading activity. So we have the resources, we have the experience, and we're well prepared to navigate this challenging external environment and ultimately, make the most of any opportunities that it may create. Investing for the future is a key part of our strategy, and we continuously seek to identify new opportunities, whether it be expanding our offering into new products or locations, exploring new markets and responding to changing consumer behavior or incorporating new technologies and capabilities. Our strategic objective throughout is to increase the value of our business for the long term by intentionally investing through the cycle, even when trading conditions may be challenging, and focusing on ways to protect, improve and extend our model. We undertake a process of strict challenge and prioritization for all our prospective investment programs. We require our business initiatives to deliver clear financial benefits and expect many of our projects to deliver material improvements in operational efficiency or resilience, improved capital efficiency or strengthen funding. Some examples of the investments currently underway in our businesses include our transformation programs in Motor and Asset Finance, aimed at enhancing sales effectiveness, customer propositions and operational efficiencies, and the expansion of our Property Finance offering into U.K. regional markets. And in Asset Management, we continue to grow our asset base through front office hires and investing in systems and technology. We also remain on track with our preparations for using the IRB approach to optimize our capital flexibility and continue to make significant investment in our cybersecurity and resilience to ensure we protect our business and our clients. Our new customer deposit platform has already begun to attract new retail depositors and will optimize our diversity and cost of funding longer term. And investments in our data centers and cloud computing will allow us to reduce the cost of our IT footprint in the long term. Our commitment to maintaining this investment is a key differentiator of our model in the long term and ensures we are able to protect our business and lean in when the opportunity arises. The Asset Management division is a good example of a business where we've invested significantly over a number of years and is now a well-established player in a market with ongoing structural growth opportunity. We have an attractive vertically integrated offering and a strong reputation. Our multichannel distribution approach has supported good net inflow rates over several years now, and this allows us to steadily grow our managed assets and build the profit contribution of the division over time. Ongoing investment in people and technology continues to enhance our operating efficiency and improve our client experiences, ensuring we maintain our strong reputation in the wealth management market and attract new portfolio managers, advisers and clients. We also continue to enhance our offerings in response to growing environmental, social and governance teams, and our offering now includes a range of socially responsible investment portfolios. And finally, Winterflood, which is an example of a business with strong downside resilience and the benefit of upside optionality. Winterflood's profits in the first half reflected low retail investor activity and trading volumes at the beginning of the period, but they did experience an immediate benefit from the increase in positive market sentiment and activity following the U.K. general election. The increased volatility of financial markets in recent weeks has resulted in a further significant increase in trading volumes. The business continues to make good progress in expanding its relationship with institutional clients and continues to grow its presence in the U.S. market. And Winterflood Business Services, which provides outsourced dealing and custody services for asset managers in the U.K., continues to develop its client base with assets under administration now exceeding GBP 4 billion. Winterflood remains a long-established leader in market-making and continues to focus on maximizing its trading opportunities. But clearly, as a daily trading business, it's sensitive to financial market conditions. It remains well positioned to manage downside risk while making the most of any trading opportunities. With an uncertain outlook for the U.K. economy, we remained focused on maintaining the discipline of our business model and on our readiness to respond as market conditions change. While it's too early to assess the impact of the coronavirus on the U.K. economy, the Banking division continues to apply our disciplined model, maintaining our pricing and underwriting standards, while progressing with a range of strategic multiyear investment programs for the long term. Asset Management, while clearly sensitive to market levels, continues to focus on its long-term growth potential through organic new business, selective hiring and exploring infill acquisitions. And Winterflood remains in a market-leading position, benefiting from a sharp increase in volume since the period end and continues to maximize its trading opportunities. Going forward, our experience and strategic discipline mean we're well equipped to navigate challenging market conditions. Our diverse portfolio of businesses provide resilience and leave us well positioned to continue serving our customers and clients and to make the most of any opportunities that changes in the market environment may bring. Thank you, and we'll now be happy to take any questions you may have. We'll start with questions in the room, and then we'll move on to questions that have come to us over the phone. Yes. Could you, by the way, just identify yourself and your institution as usual?

It's Robert Sage from Peel Hunt. I've got a couple of questions around the asset quality of the group. It was really, when I was reading your trading update in January, I think that you mentioned that the bad debt ratio at that stage for the first 5 months, it was about 0.8%. And today, you're saying, for the 6 months, it was 0.9%, which obviously means that there was a tick-up in January, but because you showed this numbers to 1 decimal place, it's kind of difficult to sort of get a feel for the magnitude of that. So I was wondering whether you could provide some commentary about the scale of the increase in the bad debt charge in January relative to the first 5 months' run rate. Secondly, on a connected basis. I was wondering whether you could comment in terms of whether there's been any significant changes in terms of risk buckets. I don't know, I mean, for example, Stage 1, Stage 2, Stage 3 under IFRS 9 or whether it's sort of broadly stable. And thirdly, I was wondering whether you could give any sort of feel for where you think the trend in the bad debt ratio might be heading in the second half of the year. Is it sort of further normalization?

Can I take the last one of those, perhaps? And then, Mike, if you could address the January question and also the risk buckets under IFRS 9. We did see an uptick. We say that, that's really from 2 things: one is some normalization in the retail side of the business, particularly in Motor. And bear in mind, the long-term range is really 0.6%, which is an absolute bottom that we've seen right up to 2.6%, with the 10-year average probably at 1.2%. So we're still below our average for bad debt. So there was some normalization, particularly in the Motor side. And then on the Commercial side and in Property, as we mentioned, there were a few cases of individual bad debts, but we don't really think that there's any connection of those dots. There's no kind of trend that's emerging as a result of those things. And so therefore, again, as we look today, we don't know what conditions will be as a result of the coronavirus. But as we look today, we look at our arrears, we look at our experience, we don't really see that trend continuing. There's no reason to read kind of the change from 0.6% to 0.9% and extrapolate further. But that does depend on conditions, and whether what we're all going through now ends up being a V-shape or a U-shape or whatever, which we can't obviously tell. But Mike, do you want to answer the specific question?

Yes, to put some specific metrics about that, you will have heard in my commentary that we have seen a GBP 15 million uplift on bad debt, so from GBP 22 million to GBP 37 million, so really small numbers on a loan book of GBP 7.6 billion. So to move from 0.8% to 0.9% really needs a very little amount to just tip that over. So I think it's important to remember that we're talking about relatively small numbers here, so that would be the explanation there. In terms of Stage 1, 2 and 3, well, you'll be familiar that the vast majority of the book is in Stage 1, with, obviously, other balances in Stage 2 and then a relatively small amount in Stage 3. We've seen a little uptick into Stage 3 over the 6 months, predominantly in Commercial and Property. It is important to remember that 90% of our book is secured. So the vast majority of those going into Stage 3, we don't expect to see losses coming through. And as Preben said, we're comfortable with the level of bad debts and where they are at the moment in terms of where we are in the cycle, and we're very comfortable about the level of arrears that we're seeing in the book, and there is nothing for us to suggest that there's a stress in any sense at all.

It's Ian White from Autonomous. Two questions from me, please, both related to the Property Development business. So first of all, I just wanted to understand the rate sensitivity dynamics within that business. Previously, you saw a headwind when rates rose. If we do get a Bank of England rate cut in the near term, can we basically assume there is a sort of symmetric impact there in terms of upside if we do see base rate cuts? That'd be question one, please. And just the second part, I'd like to understand perhaps a bit more about the dynamics within the front book on the new lending within Property Development, and thanks for the extra detail you provided there. And kind of put simply, are you seeing market share erosion in terms of the new drawdowns in the areas where the business currently operate? And if so, what levers can you pull in order to mitigate that? Obviously, pricing would be one, but are there other things that we should think about in terms of restoring market share there, if indeed that is a fair description of what's happening?

Can I again just start with some kind of broader comments? And then, Mike, if you can pick up some specifics.

Yes.

I think it's important to say that we never target growth as a firm and nor do we ever target market share. What we do is to stick by our return criteria and our credit quality criteria, and the other 2 are simply outputs of that. We have a very significant market share in Property Development financing, particularly in that sub-GBP 10 million category. And that continues to be the case. So that remains a competitive field, but we have, as I mentioned, a significant market share and a significant market presence. So I think what you should read into the first half is a lot of repayments, which are actually quite a good thing because the things that are being built by our developing -- developer clients are being sold, and by the way, sold at prices that are right at the expected levels at the outset, and a little bit more caution in terms of new developments at the kind of replacement end, if you like, so that the -- that's why you see more repayments than drawdowns. However, these things are also timing. They are quite lumpy. And that's why the comment was made about the kind of the undrawn committed book, which is still in a very healthy position. So that's kind of the overarching comments. If you want to make any specific comments on the floors.

Yes, Ian, you're absolutely right. The simple answer is, yes. It obviously eats into the income as we move up because we have floors in the property contracts, so those are set at 1%. So to the extent that we go down, we're able to broaden our margin, to the extent we move up until 1%, we aren't able to pass those on. Therefore, we have to absorb them. So currently, all things being equal, at 75 basis points, if we had another 25 basis points increase, we would have to absorb that, and then we could pass that on. As you say, though, it's more likely at the moment I suspect that it may go down, in which case that would be able to help us widen the margin.

Ian Gordon from Investec. Can I have two, one on funding, one on capital? On funding, you were fairly light user of TFS. Assuming that we get a bit more largesse from the authorities, would you be a bit more opportunistic this time around? And then secondly, on capital. I know it's only a marginal change. But clearly, you slightly slowed the pace of dividend progression, so that was a deliberate decision to bolster your pace of capital growth. And your outlook statement signals in the very near term, no material step-up in loan growth. So are you, a, just being prudent; or b, building up the stock of capital to take advantage of potential opportunities in the medium term; or c, is there anything else at play? And I'll just throw in the fact that you, in your remarks, you commented that there's an expectation of the countercyclical buffer rising in December. That's not my expectation.

Yes. So just on that, I think we may well see them reverse that decision. I think the important thing on the countercyclical buffer is that the mitigation that they were going to bring through was going to largely make that immaterial for us anyway. So actually, you could say that them dropping that, given that it was not going to have a material impact, isn't going to have a material impact either. But we, too, wouldn't be surprised to see them decide to delay the imposition of the increase in the countercyclical buffer. Just on the whole sort of topic of capital. If you take a kind of broader, higher altitude view of that. We think it's very important that we maintain a lot of strategic optionality in terms of our capital base. The highest and best use of our capital base is to be there to finance loan growth when it arrives, and we can't anticipate when that will be. But we always want to be in a position to take advantage of that and those conditions, and we're also a very prudent organization. Those are the things that are really kind of driving the fact that we are very relaxed about seeing our capital levels tick up. And then with respect to the dividend, we've never cut the dividend in 35 years, that's important to us. We like to keep it moving forward to the extent that we can, and it's simply a kind of nuanced interplay between dividend cover, the rate of progression of the dividend, and how we feel about signaling our confidence in the business, which is why we wanted to continue it moving forward. It's very nuanced as between kind of 0.5p moving up and not. So I wouldn't read too much into that.

I think onto the funding point on TFS. Clearly, we will look at that. The most important thing for us is to have diversity of funding and not be overly reliant on one source. We also need to look at our needs at that particular time from a demand perspective. We've got a balance of around about GBP 0.5 billion with them at the moment. And we're very comfortable with it at that level. So if it does come back onto the table, then I'm sure we will use it, but we will determine at the time what the appropriate level to hold is.

Portia Patel from Canaccord. I've got 2 questions, please, both on Banking. Firstly, on the investment program. How many years should we expect to see cost inflation of the order of around 6% that we've seen last year and that you're guiding for this year? And secondly, I just wondered if you could provide some context on the Irish Motor book, which seems to be struggling. I seem to remember that was an area of growth for you in the past. So just some color there would be helpful.

Mike, do you want to take the investment?

Yes. So as you know, our philosophy is to invest in our business through the cycle. You've heard us make this point today, and we've made it in the past. It is important for us to do that. Our business model allows us to do that, and our margins allow us to do that. And we will continue to invest in the business. We cannot be dogmatic, though. And over the long term, we have to make sure that income and costs are in line. At the moment, our E/I ratio at 50% we're very comfortable with. And we may see that go up a little bit, we may see it go down a little bit. But over the long term, we recognize that cost and income growth needs to be, as I say, commensurate. What we want to avoid is, once we started an investment, to stop -- stopping and starting investment, we think is absolutely the wrong thing to do. So the important point for us is to make sure that when we are looking at potential investments that are coming on to the stocks, that we have a rigorous process in place around those, and we do. And we are currently looking at a number of things that would be very interesting for our businesses going forward. What we then have to do is hold those up against what we think the business is going to do in terms of income growth, and we will assess that. So we will see the growth of 6% coming through this year, and then we will need to take a view on next year where we want to position that based on how we think the business is going to perform. But we recognize in the long term, those 2 metrics need to be more in line than perhaps they are just at the moment.

So on the Irish Motor book, that, as you know, is a relationship that we have with an organization there. It was an opportunity that we saw a number of years ago because there was a significant credit contraction in terms of supply in Ireland, and so we were able to capitalize on that quickly by going into that partnership. It's a fixed contract in terms of term. And there was a period when it grew very significantly, and that offset some softness in the U.K. The U.K. is several times larger, obviously, than the Irish book. And now we're seeing the reverse happening where we're seeing a comeback in the U.K. business. And in fact, we're recording growth in that U.K. business for the first time for about 3 years, actually. And that is quite usefully offsetting the credit cycle in terms of supply catching up with us in Ireland, so that's not a problem. Overall, it's a small proportion of our business. And clearly, what we're experiencing, as I say, is some growth returning to the U.K. side, which is much bigger. Other questions here? Yes?

It's Shailesh Raikundlia from Panmure Gordon. Actually, just one question on just competition and just generally, the credit cycle. I mean, you obviously talk about the fact that the economic backdrop is getting worse in a way. At the same time, you're sort of implying that there's a huge amount of competition in the market, particularly your markets, in the banking side. I'm just trying to get a sense of where you think we will be in a year's time, 18 months' time in terms of the economy, but more importantly, your loan growth?

So we don't know where we're going to be in a year's time or 18 months' time, I think it's quite difficult to see where we're going to be in a week's time. I think that the important thing for us is looking at the controllable factors that we have. So we say it until we're blue in the face, and we really mean it, this is a very resilient model, and we are very experienced at managing the kinds of difficult conditions that we may be entering right now. That is very good news. We practice, we simulate, we're ready, and that is very good news. We have that slide, which shows that over long periods and long cycles, we go through hyper growth periods and slower growth periods as a function of the supply of credit. If you look at our very long-term rolling averages of growth, they're quite interesting. We did this exercise, I think, back in September, and we -- if we look at 30 years of the bank, and we look at 10-year rolling growth rates, which we can obviously measure for 20 years since we have 30 years of data, the 10-year rolling growth rate of our bank is double digit. And that gives you a sense of our presence in the U.K. banking landscape and opportunity over a very, very long period of time. And that's because we're local, because we're specialists, because we're expert, because we don't leave the pitch, we're very consistent, we have very high repeat business levels. Those are the things that we rely on and perpetuate. So we can't possibly predict when that cycle turns. But we can say that we're ready for it when it turns. No questions, and I think there are no questions over the phone or on the webcast. So unless there are anything -- any other questions from here. Thank you very much. Thank you.