OSB Group Plc (OSB) Earnings Call Transcript & Summary

Well, good morning, everybody, and thank you for taking the time to join the OneSavings Bank 2020 Q1 Trading Update call. Given the current economic circumstances, we have decided to give some additional information and color around the business rather than the usual single page update that we normally do. April and I will spend a few minutes running through the update, and then we'll open up into Q&A for the rest of the call. We'll assume that you've read all the highlights, so we'll run through the additional disclosures. But in summary, I am extremely proud of the resilience that OSB has demonstrated in the current difficult conditions. Our customers are at the heart of everything we do. And we have concentrated on delivering the continuity and quality of service that they expect and deserve from us. We entered the crisis with exceptionally strong capital and liquidity positions, which allowed us to rapidly assist concerned borrowers -- or sorry, borrowers concerned about potential financial difficulty by offering repayment holidays on a self-certified basis. We demonstrated our flexibility by redeploying our employees to meet the large increase in core volumes. We started the year with a strong pipeline of new business and continue to lend to new and existing customers prudently and with a reduced suite of products at lower loan to values. But we have enhanced our underwriting capability to accept desktop valuations due to the inability to actually get and perform physical valuations at the moment. The U.K. and global economies continues to experience unprecedented uncertainty stemming from COVID-19. It is too soon to say what the long-term impact will be on the business. But we entered this period with a strong and secured balance sheet, sensible loan to values and strong risk management capabilities, equipping us well to navigate the current situation. So firstly, turning to operational resilience. The safety of our staff and customers comes first. We currently have over 75% of our employees working from home. And in India, where our main processing units are, we have 85% of our staff working from home. We got off the mark quickly to put the technology in place, knowing that India can at times be slightly more Draconian than the U.K. and lock things down harder and quicker. But we have enabled our staff to be able to work from home via secure IT links into our virtual private network with call recording and all of the safeguards that you would expect us to have in place to make sure that data is protected. We have some employees coming into the office in the U.K. than India but we have plenty of space and, of course, we're observing safe working practices. I'm delighted at how the group has pulled together to look after customers' needs, some of which have changed during the circumstances -- during the crisis, sorry. We've redeployed staff to deal with an increase in call -- calls on repayment holidays. Call volumes have now normalized, although we are actually still seeing higher volumes of calls from savings customers, especially as we're coming through the ISA season. Branches are still open, although footfall has dropped out as people observe the lockdown. And overall, I am incredibly pleased with the resilience that OSB has shown and the service that we're providing to both mortgage and savings customers. On integration, despite the coronavirus, integration is progressing well and to schedule. Our combined teams are working really well together, making use of WebEx and conference calls, et cetera, to work on all of the work streams currently in place with the exception of a couple that we have decided at Board level just to hold for the time being, such as our holdco change and our move to a single banking license. But we'll resume these product -- projects once the market allows us to in terms of opening up and getting staff back to work. So far, the Board and Executive Committee in terms of integration have been done. So the permanent exec committee that's going to run the organization is now in place, as is the Board. We have already started to get some of those revenue synergies that we weren't really allowed to talk about at the point of transaction by combining some of our functions, for example, our now group-wide capital markets function that has already successfully done 3 securitizations in 2020 with 2 profitable deconsolidations earlier in the year. However, we are being prudent, as I said, and just looking to make sure that we plan carefully and cautiously and don't spend more money than we need to at this current time. In terms of new business, we've made it an imperative that we continue to serve our customers, and we've worked hard to ensure that we can do that right across the business. We entered April with a healthy pipeline of new business and concentrated on that pipeline during March and April as well as dealing with as swiftly as possible the request for payment holidays once the scheme was announced. I think the industry was taken a little bit aback because it was announced by the government on TV without prior consultation with the industry, but we've responded well to make sure we can deal with the demand in these areas. We are in the market and lending in all of our core brands, including Kent Reliance, Precise Mortgages and InterBay but, of course, with time criteria. And in the absence of physical valuations, we're using desktop valuations to progress cases. Also, we're supporting existing customers by continuing to accept product transfers, including the OSB Choices program that we already have -- where we already have valuations on file. We are well placed to gear up and put on growth in terms of getting our foot back on the pedal as soon as the market and, in particular, physical valuations restart. In terms of those payment holidays, we have responded rapidly to support customers and grant holidays on a self-certified basis as requested by the U.K. government. The initial demand has now leveled off. At the end of April, we had granted around 24,000 payment holidays, which equates to 26.7% of the group's mortgage book by value. This is a little higher than the earlier numbers you saw reported by some of the high street banks. But especially professional landlords, we think, are exercising prudence. And we are working hard to understand the behavior of our borrowers. To that end, we have done a survey through 2 external organizations of landlord populations to understand why landlords in the buy-to-let market have requested repayment holidays. According to those survey results, only a small percentage of tenants have actually stopped paying their rent, and the majority of landlords are making requests for holidays just for the purposes of prudence rather than actually being in financial difficulty or they are choosing to build liquidity given the uncertainty facing us all. An interesting statistic is that we are actually a landlord in the OSB group, and we have a portfolio of buy-to-let properties where we are actually the receiver of rent. And the interesting statistic -- sorry, that's hard to say -- here is that less than 1% of the tenants in those LPA receiver at properties that we run have actually requested a holiday from their rent. And there's other anecdotal evidence to suggest that the low level of requests amongst tenants is common across the industry. Volumes, of course, from borrowers for holiday requests have now fallen away, and that we are well within normal call volumes and SLAs across the board. Now I'm going to hand over to April to talk about capital liquidity and some other key elements. April?

Thanks, Andy. In addition to operational resilience, it's also crucial to have strong capital and liquidity going into any period of uncertainty in order to continue to support all of our stakeholders. We closed 2019 with a strong CET1 ratio of 16%, which, on a pro forma basis, would have been 17.2% once we remove the 2019 final dividend and also risk-weighted assets relating to the structured asset sales in January. This ratio remained broadly flat in the first quarter, including Q1 profits, which will be verified at interims. We quickly took action to increase our strong liquidity position even further in mid-March as the COVID-19 situation worsened, drawing down an additional GBP 645 million from the Bank of England Index Long-Term Repo scheme. And we ended Q1 with liquidity coverage ratios of 247% and 170% for OSB and CCFS banks, respectively. And our retail savings franchises remained strong with normal levels of inflows, a strong ISA season and strong retention rates as 1- and 2-year bonds mature. We've also applied for an initial allowance of GBP 1.7 billion under the Bank of England's new TFSME scheme which we intend to use to refinance the Index Long-Term Repo, which is a little bit more expensive, and the old TFS scheme which, otherwise, we would have planned to start to repay in earnest this year. Finally, on liquidity, we securitized GBP 1 billion worth of organically originated mortgages under our Canterbury Finance program in March. We retained all of the notes and thereby significantly increased our contingent funding options, either through commercial repo or using the AAA securities as collateral against Bank of England schemes. Importantly, this would be at significantly lower haircuts than if we placed the underlying whole mortgage loan. I'll just move to the net interest margin. Underlying NIM for the first quarter was broadly flat to pro forma underlying NIM for the full year 2019 as expected. However, there are a number of current and potential future drivers of NIM, both positive and negative that I wanted to quickly run through. [ ManEx ] include the impact of the excess liquidity we are currently prudently holding, and that we would expect to start utilizing this as we move through the year. The other main drag is that although we would expect to be able to pass on the full 65 basis point base rate reduction to our retail savers, given the rates we typically pay on easy access on 1- and 2-year bonds, the market this time around has been slow to [ prices in fully ], so it may take a few steps to get there. In partial mitigation, the trending rates in the retail segment market does continue to be downwards. And we have not had to lower our front book pricing on fixed-rate mortgage products post the base rate change. In addition, we will benefit from the new TFSME scheme, as I mentioned earlier. Turning to credit. The group experienced stable credit performance in the first quarter with 3 months plus arrears broadly flat to 2019 year-end, and we have a high-quality secured loan book with sensible loan to values. Andy's already talked about payment holiday, which we do not consider as an automatic transfer into stage 2, in line with the regulatory guidance. It really is too soon to say how borrowers may behave at the end of the holiday or what the macroeconomic impact of the current pandemic will actually be. However, we do receive regular economic scenarios from our third-party economic advisers and have chosen to publish the latest that which we received in April in our release. It's worth noting these are more severe than some of those disclosed by other banks for Q1 because they're April scenarios. But if we were to apply them to our loan book as at the end of the first quarter, instead of the scenarios we used at year-end, it would have the impact of approximately doubling our ECL balance sheet provision versus the balance at year-end of GBP 42.9 million. The outlook remains uncertain, and certain provisions could be required this year if loans move into stage 2 or 3, attracting a lifetime probability instead of a 12-month probability of default. This is all a reflection of IFRS 9 front-loading provisions that we started to stress, which can then be used against any future realized losses without necessarily incurring additional loans charges in the P&L. Thank you. I'll now pass back to Andy.

Thank you, April. Just in closing, I thought I would also touch on 2020 executive remuneration. While OSB has not been one of the banks effectively instructed by the regulator not to accrue 2020 bonuses or cash bonuses for senior staff. As an executive team, both April and I, as the executive directors, and the balance of our executive team thought long and hard about how we should be demonstrably supporting both the business and the U.K. economy at this difficult time. And therefore, we have all voluntarily elected to forgo our 2020 cash bonuses. We've decided that the business will retain half of that cash in the business, and the other half will be donated to charities underwritten at a minimum of GBP 250,000. The charities we've selected are either charities that help with homelessness issues or help by preventing people from finding themselves in a homeless situation such as Shelter, for example, a well-known charity. We've already made -- or we are giving a donation as we speak of GBP 100,000 to Shelter, and our staff charity committees in Kent, Wolverhampton and Hampshire are selecting more local homeless charities to help in those areas. And also in India, we have a strong corporate responsibility program, and we are donating to a hospital that we already support out there who provide dialysis machines or dialysis treatments to people who cannot afford it out in India. And the money that we're donating will enable them to buy an additional 4 dialysis machines. I'd like to finish by taking the opportunity to thank all my colleagues for their resilience, dedication, support and hard work, which have allowed us to continue to provide our customers with the quality service they expect through these difficult times and really keep the engine of the business running. Thank you. That's all from us at this stage, but we now will hand back to the operator so that we can go into Q&A.

[Operator Instructions] The first question comes from the line of Benjamin Toms from RBC.

Firstly, on costs and, secondly, on impairments. On costs, is there any cost flex left in the business? Let's say, if NIM pressure continues and goes into next year as well, do you have any levers that you can pull, noting that you already have a very low cost-to-income ratio? And then, secondly, can you just remind us of your thoughts on how risk might manifest itself in different ways in the buy-to-let versus the residential lending books as we go through the next couple of quarters and we feel some stress?

Okay. Thanks, Ben. I'll talk about costs, and then I'll ask April to talk about sort of risk from an impairment perspective. I mean in terms of cost, you're quite right to point out, both Charter Court and OSB are incredibly low cost-to-income ratio banks. We are efficient organizations already with the cost base, but clearly, we structure our fixed costs around volume and throughput. And in a protracted environment where volumes are not as significant or we can't get back up to volumes that are as significant as we have done in the past, we will have to think about resource levels and structures within the organization to achieve that. We can also think about making more use -- or more rapid use, particularly from a Charter Court perspective of OSB India where, as you know, that does afford us some cost leverage in terms of being able to provide service at a lower cost than you can in the U.K. So I think we have levers that we can pull, accepting that we are already efficient and accepting that actually our desire here, once we come out of lockdown and get valuations going and we get some semblance of normality in the market, is that the refinance market won't go away. The purchase market may be down for some time, but a lot of what we do is refinance business, and we will want to get on that gravy train and putting throughput through the engine of the business as quickly as possible. I'll ask April to talk about impairments.

So on impairments, I mean I think when you look at the -- we've only disclosed payment holiday requests, which aren't necessarily an indication, as we discussed in our opening remarks, of actual financial difficulty, more just people being prudent and taking what they believe was on offer. But the percentage is slightly higher, as you would probably expect, for a residential book versus our buy-to-let book. And certainly, in buy-to-let, our focus on portfolio landlords, we do very detailed underwrite -- specialist underwriting that looks at the sort of the whole house of cards with that buy-to-let borrower. And we know that our portfolio and our landlords can withstand periods of rental void, and we know that their financial situation is robust. So my expectation has always been, going into a stress, that buy-to-let should perform better than resi. But that's my personal view. I don't know, Andy, if you have any additional color you want to add on that.

I think there's definitely evidence in the past of that. And what's interesting is while the estate agency businesses will tell you that from a viewing of new property for purchase perspective or an inquiry of people that are interested in purchasing has completely dried up, actually, there is still activity going on in the rental market where people are choosing to or have to kind of continue to trade up or move premises or move address, et cetera, for the purposes of work and so on and so forth. So we do think that in an environment where demand for purchasing housing may reduce, actually, generally, everyone needs a roof over their head. So the theory is demand for rental property goes up, and we've certainly seen that in prior crises, both late '80s, early '90s and in the global financial crisis as well.

The next question comes from the line of Gary Greenwood from Shore Capital.

I've got 2 questions. So the first one is just on impairments and IFRS 9. So I was listening to a call by Barclays yesterday and they were talking about how they take their forward-looking provision, and that would actually sit on their balance sheet for a while until the economic scenario started to change again. So effectively, it's sort of [ out-of-the-book counting ] in the short term in terms of putting the provision in place and then taking additional charges of write-offs coming through before then releasing it further down the line. I think from what you were saying before, April, it sounded like you expected more along the lines of utilizing any upfront provision as the write-offs came through. So I'm just trying to understand the dynamics because there does seem to be sort of varying interpretations by different lenders in, obviously, what is a fairly new accounting standard. And then on liquidity, I mean, your liquidity ratio sort of stand out, as being very strong, even stronger than some of the peers out there. And I'm just trying to sort of think about that in the context of your access to funding, which, clearly on the deposit side, seems to still be reasonably strong. So was that just a precautionary measure taken on the basis that you were aware that sort of the payment holiday requests were coming through. And obviously, that's turned out to be sort of a reasonable part of the overall book.

Yes. Thanks, Gary. If I tackle the liquidity one first and then hand the complex one of impairments back to April. I mean I always think cash flow, in a banking environment or liquidity, is king. I think whenever you've got a market stress, you want to make sure that you've got more cash onboard than you want to have. I ran a deposit-taking building society through the global financial crisis and saw lots of organizations struggle from the point of view of not being able to access wholesale markets and not being able to bring in sufficient retail funding to repay their wholesale at a rate that was tolerable for them and get themselves into all sorts of problems from a negative net interest margin perspective, et cetera. I'm very attuned to that. Kent Reliance Building Society that OSB was borne out of had that very issue in the global financial crisis. So we moved early on liquidity. As soon as things started to deteriorate, we moved early, bolstered our liquidity ratios. You could argue we've possibly overdone that slightly, but we will make use of that excess liquidity now. And it also enables us to, as April said earlier on retail pricing, to take a couple of bites back in terms of the pricing on the retail book without being concerned that you will lose more balances than you have access to. And clearly, we've got drawn liquidity facilities, but we've also got plenty of collateral either lined up or additional collateral that's being approved at the moment to be able to draw further on things like the TFSME, et cetera, which, of course, is very efficient from a cost perspective in terms of funding. And we'll use that to repay shorter-dated TFS and perhaps replacing retail for growth when we get back on it. So that was the reasoning around liquidity, it's just purely a prudence play. April, on impairments and IFRS 9 releases, et cetera?

Yes. I mean I think we're probably saying the same thing, to be honest. Not that I heard his remarks, which is what I was saying previously, which is the first thing we've done is -- as the other banks have done is change our economic scenarios. But at that stage, we've got the bulk of our book in stage 1, and therefore, our probability of default is only a 12-month horizon. So if we do [ size arrears ] building up, for example, after the payment holiday or subsequently, then people will move into stage 2, and then they'll attract the lifetime probability of default. So you kind of see the increase for the economic scenario, then you see another increase as people move through the stages and go to that lifetime model. But if then that probability of default and those economic scenarios are exactly what happens, you wouldn't take another charge the following year. You'd realize that loss you predicted, and you'd utilize your balance sheet provision. So I suspect we're talking about the same thing, but it's a little bit difficult because I didn't actually hear their specific remarks. Hopefully, that helps.

Yes. Understood, yes, there seems to be a few different ways of skinning the same cat on this. Okay, that's great.

Thanks, Gary.

The next question comes from the line of Ian Gordon from Investec.

Can I have 3, please? Firstly, a slightly pedantic one on TFSME. My working assumption is that it's probably in your interest to defer drawdown until the very end of the drawing period, which I think is April next year, purely to extend the period of virtually free funding out to 2025. Is that a fair assumption? Or are you actually planning to draw down earlier for some reason?

I'll just -- I'll do that one pretty quickly. I mean I think it's fair to say we'll be cautious about when we draw because elongating the repayment profile and having a sensible long-out repayment profile is exactly the right thing to do. And so yes, you're sort of spot-on to a certain extent, not necessarily we won't draw any until the last possible day and draw it all in one day because that gives you a big bullet repayment at the end, but we will be structured about the way we think about doing it yes.

Cool. That's just an -- you answered the question really. Secondly, I just wanted to conceptually ask you on payment holidays because, to my surprise, there's been a reasonable amount of concern expressed by some investors. I mean the way I look at it is you've told us that around 1/4 of your mortgages by value have taken advantage of the 3-month extension. If I simplistically use a 4% gross yield, and if I assume it is just 3 months, that really just adds no more than 0.3% to your loan portfolio, and it, in effect, takes further advance to customers within your risk appetite. So if what you say around impairments is that the impairment impact is assessed as very low, it simply seems to be a positive contribution to earnings rather than anything else. And then my third one, just revisiting impairments. This isn't me fishing for any guidance, but as I understand, it's the ECL guidance you've given us based on your current economic model at, let's call it, GBP 43 billion of impairment. If I overlay that with a [ novel ] less impairment charge, I'm really going to struggle to get to a group impairment charge for full year '20 materially in excess of 40 basis points. That's assuming that your economic model proves to be spot-on. And that just takes us back to the 2009 Paragon experience of a peak impairment of 34 basis points, which still feels, ballpark, a very good guide. Is there anything in that sort of simplistic analysis, which you'd disagree with?

Okay. Thanks, Ian. So payment holidays, I mean, yes, you're quite right. I mean payment holidays, we will run with the FCA-approved methodology, which is effectively -- and also capitalization at the end of the period unless the borrower wants to elect for a different option, which could be bullet repayment or spread over a shorter period of time. I mean my going-in assumption is that 90% plus will want to go with auto capitalization. So yes, it is a further advance within risk appetite and broadly, in the long run, is profitable because we earn more interest on the borrower's loan. So I think you're right on that. In terms of the impairments piece, April?

Yes. I mean I think -- I appreciate you're not trying to push us for guidance. The -- I think the open question really is just how the book will behave and whether or not we will see people and in what proportion going into arrears as we work our way through this year. So I guess that's the known unknown. But which would then, as I said, take us into a lifetime probability of default. There are maybe those that have a higher probability of default anyway over the next 12 months that will move into the lifetime loss model and, therefore, not have such a great impact. Therein hangs the complexity of IFRS 9, and you really need to look loan by loan. But yes, I mean we have very sensible loan to values, as I know you're aware, and that's -- for some of the book, even putting 100% probability of default doesn't necessarily result in an impairment charge even when you assume a [ for sale ] discount. I guess what you can see is we're really loading in expectations of fairly significant HPI drop into the scenarios that we're disclosing to you.

The next question comes from the line of Ed Firth from KBW.

I guess I was going to ask you just if we stand back a little bit from the detail of the numbers today. I guess the history of small banks in severe downturns has always been quite dangerous. And yet, we -- when I look at your numbers, you've got GBP 350 million of pre-provision profit, you've got 17% core Tier 1. I really struggle to see where the sort of real hits are going to come from. So can I ask you just -- what keeps you awake at night? What are the things that you think that are the real stress points, both in your balance sheet and perhaps in the outlook?

I mean it's an interesting question. I mean I guess, I would start with saying, it depends on what kind of small bank you are. So we are a bank that lends -- but clearly, we are a bank that lends fully secured. So the bulk of -- or the -- the majority of our lending is fully secured on property in the U.K. And on that basis, you've got quite a lot of -- lots of solvency baked in, and it's a very different profile from default on an unsecured debt or issues caused by economic recession, et cetera. I mean you sort of said what keep us awake, and I'll ask April to comment. I mean for me, it is this scenario, it's the devastating impact on the U.K. economy, full stop, and we do need to get the economy functioning and growing again, so that we create jobs and have a vibrant economic market for things, like house prices, et cetera. So I worry about the short-term impact on the economy, of a blip in unemployment and the impact on house prices. But in terms of the way our balance sheet is structured, I think it's structured in a resilient way for that. It's quite hard to get a reverse stress test through our sort of ICAP modeling, et cetera, so this bank actually breaks it because it's highly profitable, makes a good return on its loans. The balance sheet spins off lots and lots of income, and you have to really push the economic scenarios to a crazy extent and probably overlay something idiosyncratic as well to get to that point. So I mean, I think you make a good point. It's hard to get to that reverse stress test point. April, did you want to add anything?

Well, [ it's often that ] I always sleep very well at night, but I think that's a clear conscience, clearly. I think coming into such an uncertain situation, I mean, I always think that for a bank, particularly of our nature, liquidity is king. And I worry more about what could happen to impact our liquidity than I do about the capital side because of what Andy just outlined. But -- and I suppose that's why you saw us being incredibly conservative and taking down a lot of liquidity, early doors, because we didn't really know how our savers may act of where they may need the money that they have or their family may need it. So I mean, I guess, the actions we took sort of indicate that liquidity is always something we're very first-of-mind about, but we've taken the necessary action there. And I think we're in an extremely strong position. So I mean, that's the only other thing I would add.

Great. And if the interest environment stays as it is, then, am I right that you're sort of general messaging is that you feel the margin as is, is sort of sustainable level?

Yes. I mean I think that what I was trying to indicate is, right now, our -- some of our balance sheet refinanced sort of immediately through the swap. And I would say LIBOR is still quite dislocated at 3 months and unusually high. I'm sure that won't continue. So some of the balance sheet immediately reset. It takes a little bit longer to reset your back book of easy access savings because you have to give notice. And again, we -- the market is -- I think everybody was sort of drawing in liquidity. People were looking to get a little bit more duration and concentrated on 1- and 2-year bonds. So you know what we pay -- we pay sufficient on all of our savings rates for us to take the 65 basis point cut and still be paying a reasonable rate of interest to our savers. But the market has just been a little bit slow in passing that on, so there's some -- certainly, some short-term drag on net interest margin as a result of that. I'm optimistic in looking at the direction of travel in the retail savings market that, that will start to normalize, so that we'll then get to a sort of a run rate, which is economically broadly neutral. I mean without wanting to completely bore everybody, EIR accounting, so when you recognize income can get a little bit complex as the outlook changes. I can't call whether it's a drag or a positive though, at this stage, but how you recognize interest over the life of a mortgage is very much influenced by your redemption profile -- the expected redemption profile. And when you go into a difficult situation like this, behavior may well change. There may be less refinancing opportunities for borrowers and, therefore, you keep them for longer on your revert rates. But you may see a slowdown on early reductions, which may have had some early repayment charges associated with it. So I mean, it's far too soon to call, but just an awareness that EIR accounting can also make some changes, regardless of what the actual underlying economic situation today is.

Just to add on that point around NIM as well. I mean I also think that the non-bank funded lenders that are our competitors in some of the specialist space are going to find it harder to come out the other side of this quickly because the wholesale funding markets will always lag the ability to keep up with those of us that have access to either Bank of England term funding or the retail market. And OSB is borne out a situation where competition had dwindled as a function of a wholesale crisis and was able to leverage its retail funding to both write mortgages of very high yields. And we haven't put our pricing down on our front-end products from a fixed rate perspective, in line with the base rate card. And I don't see that we will do that. And I think there will be a dampening of competition as markets reopen. And we also managed in -- off the back of the global financial crisis to take a lot of opportunity to acquire portfolios at discounts that other people couldn't hold on to because they didn't have the funding to do that. And I see those potential opportunities coming about, which, in the long run, should be good from a net interest margin perspective. But as April said, there's a little bit of sort of peas on a plate that provides some short-term drag. But I feel that, longer term, the prognosis is pretty good.

The next question comes from the line of John Cronin from Goodbody.

Apologies if I'm covering any ground that you had previously gone through on the call. I was late joining due to an overrun on another company call. So my first question is just kind of looking at the language in the annual report around IRB messaging. And I know that you mentioned a priority for 2020 is the integration of the second-generation models and the development of waiver documentation. Do you currently expect to make the submission or make the application to the PRA in the current calendar year? Or is it too early to say at this point? The sense I get from the language you use is that it's somewhat stronger relative to previous language, and one gets a sense that it's not very far away in terms of application. The second question I have is just to get back to that EIR question again. I appreciate your comment around it being very early days, April, with respect to making any changes, which is understandable at present, I guess. But when I listened to you, Andy and April, around the various comments you make in terms of market dynamics, nonbank lenders falling out, the likelihood of longer balance retention or slower prepayment rates as well, those factors presumably play into a very positive dynamic from an EIR perspective. So I suppose my question is, if you had to revise as of 31st of March, would this have been a positive move? And if so, would it have been material from a capital standpoint? And anything you could help me with there would be great. And then finally, just a quick one on the undrawn commitments and thinking particularly around the GBP 318 million of undrawn commitments with respect to the funding lines to the nonbank lenders at year-end. Can you give us any sense in terms of the level of drawdown that there has been there or what that number is -- and what that number is currently in terms of today's undrawn commitments?

Thanks, John. If I tackle the undrawn commitments one, and then I'll just tackle the complicated one, you always give me a hard time about that. But it is her role to do that, but that's fine. The undrawn commitments, I mean, firstly, all of our facilities and our funding lines, they are uncommitted effectively. So we have the opportunity to say no on a loan-by-loan or drawdown-by-drawdown request. And therefore, as you'd expect on anything that is remotely not directly in our control, we have tightened all the criteria on the funding lines and reduced appetite for LTVs, term spreads, et cetera. And therefore, we are exercising significant caution on looking in -- intimate detail at every request of further drawdown. We have made some, and we have made one or 2 loan extensions where we think it's appropriate, and that the exit route is just delayed as a function of refinancing, not being able to go through because the [ conversion ] process won't work, et cetera. But I wouldn't say we have big appetite to fill up will be the undrawn elements of our sort of noncommitted committed lines as we stand at the moment. We will want to see how the economic picture shapes up. We haven't published a number on it, so I can't give you a number. But I can tell you that the amount of money going out the door to funding lines right now is significantly reduced from the norm, and that's, I'm sure, what you would expect. April, on the IRB and the EIR.

Yes. I mean so we've always been very careful not to give specific time line because, to some extent, it is dependent on conversations with the PRA, their resourcing available. And all that I generally say is that our end goal is to put in the highest possible quality application that will get through the process quickly with the best results and -- but also to do our absolute best to ensure that, that comes through before the new Basel standardized rules. And of course, they have now been officially pushed back 12 months, to start in 2023. So sorry to give you a non-answer there, John, but I'm always quite cautious about giving detailed timetables, particularly when it's not 100% in our control. But I would say that we continue to plow on with the projects as a top priority and have not allowed kind of lockdown and the current situation to derail us from that. What is clear is we're spending a lot of time modeling up different COVID scenarios at the same time. But we've got a big, strong team, a really good suite of external resources and advisers as well to ensure that we kind hit the principals outlined at the beginning of my remarks. And then on to EIR. I think what I was trying to outline -- you're absolutely right on the front book. That's certainly the picture we're portraying. What I was trying to allude to is what happens to our back book, so the loans that we already have. And we will have made assumptions in the past about the expected life, the redemption profile of that back book. And if there are changes in behavior, that we experience as we come through this pandemic situation, we may need to adjust those assumptions, and that could result in a gain or a loss, not economically, it's simply the changing behaviors. And I think we provided quite a bit of disclosure and sensitivity on our annual report in Note 3 as to kind of how those changing behaviors may manifest them through as an adjustment to the EIR and the back book. But you're spot on, on what we're trying to portray about expectation on the front book net interest margins.

The next question comes from the line of Aman Rakkar from Barclays.

Just a couple of points of clarification, please. So just the 2, I guess, headwinds, net interest margin that you guys are talking about, the excess and the buildup in liquidity and impact to the rate cut. I mean just teasing you, if possible, just for a little bit more color, maybe not guidance, but if we think about those 2 headwinds kind of proportionally, is it kind of evenly split that you'd expect the liquidity versus rate cuts? And then, I guess, maybe, could Q2 present a low point for that NIM given the repricing action that might kick in, in the second half of the year? I mean basically, just stopping short of guidance by giving us any help on the shape would be really helpful. Two others. So one was just on capital. Could you just -- when I estimate an MDA for you guys circa 12%, there's a bit of uncertainty about an integration premium that might be added in Pillar 2a. But is that the right kind of ballpark figure for an MDA as of the end of Q1? And then finally was on the mortgage book, perhaps overall or if you can give kind of more granular detail. What's a typical kind of loss given default on an exposure based on the current view of the world? I appreciate uncertainty about house prices, LTVs, collateral values, et cetera, but given what you know about the world right now, what's the typical LGD on your atypical loan?

I'll let our resident genius tackle those 2.

I'll give it my best shot. Okay. So in fact, I think there were 3 weren't there. I think if I talk today, because as I mentioned earlier on NIM, I mentioned earlier that there was a delay in the sort of timing of when the balance sheet resets for the global rate change. I would say at the moment and probably for the next few months, the impact of not having had an opportunity to immediately pass on the full cut to savings is a bigger driver than the excess liquidity. And so it depends a little bit about how you look at the excess liquidity. I mean we drew over GBP 600 million under the Index Long-Term Repo when we were paying base rate plus 17 basis points. So if you should assume that's the cost of the excess liquidity, we then deposit it back with the Bank of England at base. So you're effectively paying 17 basis points, then that's a lower [ impact ]. If you're purist, you would probably say, "Well, actually, look at my overall weighted cost of liquidity. And I could argue that it's retail savings, which were excess." But I'll leave you to decide how you want to model that. But it's the delay of the global rate change, which is the biggest impact. But for parts of our book, which are still LIBOR-linked, and the OSB swap book is still LIBOR-linked, as I mentioned, we do have some offset right now because 3-month LIBOR is particularly high. Although I don't predict personally that's going to stay that way through the rest of the year necessarily. So that's NIM. On capital, I think you were asking for what? Kind of the minimum level we would want to hold, is that correct?

Yes.

Yes. We have -- it is quite complicated to guide that, as you yourself have highlighted because we do have this amortizing fair value uplift, but that's not an unreasonable assumption. And then just given defaults on an exposure, I mean, I guess the difficulty there is that there's no real typical exposure. So if you were to take, I don't know, an average loan-to-value of 68% to 70%, and you would put 100% probability of default, and then you can put in whatever sort of HPI or for sale discount you want to, you'll get to a loss given default. But clearly, the different parts of the book, the resi book in Kent Reliance has much lower loan to values. [ Banks then have to go through with ] have typically been around the 70%. And if you assume 100% probability default, you expect whatever rates [ loans] you want to put in. I'm sorry, that's a real non-answer, but I think it's hard to give a definitive example of an [ LG ] day. But if you have 75% loan-to-value and you have a 25% of in-house prices, you should be able to get out unscathed. But our modeling certainly assumes more conservative than that, and that we have to sort of suffer some sort of short sale discount. In reality, I think we've always said that if we did see a really nasty downturn, certainly, for the Buy-to-Let portfolio, we wouldn't be forced sellers. We'd just become a very large landlord. In residential, of course, you have less remedies because if you -- you can only really repossess if the borrower completely defaults, and then you are in a forced sale situation. Banks will let you have more options, and we would prepare to become a large landlord. I'm sorry, that's a very non-answer, but I hope that answers your question.

We currently have no further questions in the queue. [Operator Instructions]

We have a question on the webcast, if we could just pull that through, please? So the question is, please, could you guide on the provisioning impact in the quarter? Should you not have had the regulatory relief on IFRS 9 in relation to customers taking repayment holidays?

If I [ understood ] that correctly, clearly, I mentioned in my opening remarks that our arrears were broadly stable through the first quarter. And therefore, in the absence of change in the economic scenario, it would have been a very benign Q1 loan loss. Not that we obviously typically report that. I guess I've understood the question correctly, the vast majority of that impact I disclosed is purely the economic scenario, but that it included any BAUs minus loan losses in the first quarter as well. That doubling includes the actual activity. Ordinarily, we would have seen in the first quarter as well as the impacts of the provisions, which is the vast majority there.

Thank you. There are no more questions from the webcast.

We have one more question on the phone lines, and this comes from the line of Robert Sage from Peel Hunt.

I just got a single question, actually, please. I was wondering whether you could just comment a little bit more detail, and I appreciate these are quite small parts of your business, both on Heritable and InterBay. And in particular, I'd be quite interested to know how much of this sort of IFRS 9 overlay provision actually relates to them. I would imagine small, but I'd like a confirmation of that. And just again on this sort of overlay provision that you were talking about, could you sort of give an approximate split between the professional Buy-to-Let book and the residential book?

I don't think we can give a split on that because it's not a number that we've made public. I mean in terms of Heritable, and I presume by InterBay, you mean InterBay Asset Finance because InterBay Commercial is effectively a mortgage lending outfit. Yes, yes. Heritable Development Finance, in good shape, the guys know the developers well. They are developers first, still got schemes progressing because they've managed to -- or they have the materials on site, and they manage to keep their guys working with distancing. And there are sites where they haven't been able to get materials and have just sort of put them into a hold period for a couple of months until the sort of material supply chain reopens. But the guys in Heritable are very, very close to the developers. It's how we work. It's a relationship basis. We don't distribute development finance through brokers. It is -- [ well it is ] on building site, our guys out there with the developers. So the dialogues are very open. And we haven't been flooded with the request for repayment holidays or anything like that from a development finance perspective. So it's in good shape. InterBay Asset Finance, I mean, interestingly, one of our biggest lines, and InterBay Asset Finance is a company that provides several hundred vans for a franchise delivering for Amazon, and they want more money because they want more vans because they're just inundated. We've got some lines out where people have got construction equipment, which is still being used, some which have got things like coaches, which are doing school runs and things like that normally that aren't being used. So we have done 1 or 2 repayment holidays in that book. But it's a very, very small part of the book. So kind of bringing it full circle back to your opening line where you said you presume that a very small part of the macroeconomic overlay would effectively be -- ring fence for InterBay Asset Finance and Heritable, yes, you'd be quite right in that because they're very small parts of the overall book anyway.