OSB Group Plc (OSB) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to OSB Group 2022 Full Year Results. My name is Glenn, and I will be your moderator for today's call. [Operator Instructions] I will now turn over to your host, Andy Golding, CEO of OSB Group to begin. Andy, please go ahead.

Thank you. Good morning, everyone, and welcome to OSB Group's 2022 preliminary results and thank you for joining the call today. We had originally intended to hold a good old-fashioned in-person meeting, but the train strike situation meant that take-up was minimal. Anyway, hopefully, you'll find our results as usual, or somewhat more reliable than public transport. I'm going to start by covering the key highlights in terms of the performance for the year and an overview of the group. April will then take you through some more detail in terms of the numbers, and you'll then hear a little more from me on how our lending and savings franchises have performed, followed by the outlook before we open up to Q&A. I'm delighted that we have had a record year for profit before tax, up 13%, whilst retaining our class-leading 24% return on equity. This performance was supported by an improved net interest margin, strong loan book growth and good customer outcomes, all of this demonstrating the strength of our strategy and business model. Our lending franchise continues to perform strongly with originations accelerating, particularly during the second half, to deliver 12% growth in our loan book for the year. We continued our relaunch of products during 2022, progressively expanding our criteria towards prepandemic levels, including reintroduction of broader LTVs and an increasing number of mortgage products on the shelf. All of this is underpinned by our underwriting expertise and strong risk management capability. Credit performance remains consistently strong with 3 months arrears stable compared to last year. However, a deteriorating macroeconomic outlook, together with a post-model adjustment for the growing cost of living and borrowing cost concerns, led to an increase in our impairment provision. Capital remains strong, and April will cover more around our capital management framework later in the presentation. Although I will add that we remain well positioned for strong capital generation and are committed to returning excess capital to shareholders, and I'm therefore delighted that we have announced a new upsized GBP 150 million share buyback program, as well as a special dividend. As we announced at the half year, the group intends to target a CET1 ratio of 14% once the capital stack has been fully optimized through Tier 2 and MREL issuance. And April will talk more about this later. Looking ahead, we have a somewhat more sanguine outlook for 2023 than we did a few months ago. And we're still excited by the opportunities in our core markets. I'll cover more on the outlook towards the end of the presentation. The following 2 slides contain both our statutory and our underlying financial performance. However, I'm going to hand over to April to talk you through the numbers in a little more depth.

Thank you, Andy, and good morning, everyone. I'm delighted that we maintain the exceptionally strong underlying return on equity of 24% in 2022. Our profitability strengthened significantly with underlying profit before tax increasing by 13% versus the prior year to a record GBP 591 million. We grew underlying net interest income by 18% due primarily to growth in the net loan book and a strengthened net interest margin, which was up 21 basis points to 303 basis points on an underlying basis, primarily due to the beneficial impact of rising base rates. More on that later. We have continued to maintain our strong focus on cost discipline and efficiency. As previously guided, our underlying cost-to-income ratio increased marginally by 1 percentage point to 25%, reflecting the anticipated return to a more normalized level of spend post-pandemic, inflationary headwinds and planned investments in the business, and that included refreshing and upgrading our technology infrastructure post-integration. This was moderated by strong income generation in the year, including a sizable net fair value gain on hedging activities, which I'll come to a little bit later. The underlying management expense ratio of 80 basis points was 10 basis points higher than in the prior period, reflecting that higher level of spend. Looking ahead, we expect our underlying cost-to-income ratio to increase to around 29% in 2023 due to those significant fair value gains from hedging activities in 2022 as well as continuing inflationary headwinds and the full year impact of hiring we did last year, as well as some further planned investments in the business to deliver further efficiencies and also meet the evolving needs of our customers. We recognized an underlying loan loss equivalent to a ratio of 14 basis points in 2022 as the economic outlook worsened. And I'll provide more detail on the key drivers a little bit later. Turning to the income statement, you'll see that we recognized net underlying fair value gains on financial instruments of GBP 48.5 million, more than double the prior period. These are noncash gains, which amortize back to profit and loss over the life of the hedges with the largest driver being gains on unmatched mortgage pipeline swaps due to the step-up in swap pricing following the September mini budget. Also on this slide, you can see underlying earnings per share of 99.6p increased by 15%, which is commensurate with the increase in profit after tax. Turning to the balance sheet, this summarizes our strong secure balance sheet. We delivered GBP 5.8 billion of gross new lending in 2022, which is up 29% on the prior year as we returned, as Andy mentioned, to prepandemic criteria in our core buy-to-let and residential subsegments, and also cautiously, we launched additional commercial and bridging products. This, together with our continued focus on retention, drove a 12% increase in the net loan book to GBP 23.6 billion. Retail deposits grew by 13% to GBP 19.8 billion at the end of the year as the group continued to attract new savers. We remain predominantly retail funded, but we do have diversification provided by Bank of England funding schemes, as well as securitization. We drew down around GBP 300 million under the index long-term repo scheme during the year, and our drawings under the TFSME scheme remained unchanged at GBP 4.2 billion. The credit quality of our loan book remains very strong, with 3-month plus arrears stable for the group at 1.1%. And at the segment level, that included OSB at 1.2% and CCFS at 0.9%. Our loan book remains secured at very sensible loan to value. The weighted average book loan to value for the group fell to 60% up from 62% in the prior year, supported by house price appreciation. And the new lending loan to value increased slightly to 71% from 69% in 2021, reflecting that return to prepandemic lending criteria. The next slide is NIM. It shows our NIM waterfall, where you can see the high-level drivers behind that strength on NIM. So as I mentioned earlier, NIM increased to 303 basis points from 282 basis points in the prior year, again, primarily due to the benefit of base rate rises. But if I go through the chart, the retail funding spread benefited from delays in the market passing base rate rises on to savers in full, especially in the first half of the year, and that includes the back book of our Easy Access savings. The cost of new retail funds also benefited from widening swap spreads, and the fact that all of those rises had not been passed on. On the other hand, there were also delays in mortgage pricing, reflecting the rate rises and the widening swap spreads in full. This was partially mitigated by an expectation of higher reversionary income following the end of the sixth period due to the higher base rate index, partially offset by an expectation that customers would spend less time on this higher rate before refinancing. And the other primarily relates to the benefit of increased average funding from Bank of England and also from our own equity, as well as favorable swap margin calls, which increase liquidity. The underlying NIM for 2023 is expected to be broadly flat to 2022 after the expected impact of planned Tier 2 and MREL qualifying debt issuance albeit the exact quantum of the debt issuance drag will, of course, be subject to market conditions. Turning to the next slide on impairments. This provides our usual waterfall explaining the movement in the statutory impairment provision during the year, and I'll talk you through this. And if we move from left to right, house price appreciation over the course of the year outperformed our modeled assumptions, which led to a release of around GBP 10 million. Modeling and staging enhancements reduced by around GBP 8 million, and that largely reflects the decrease in pandemic-related risks. These movements were offset by an GBP 11.6 million increase to reflect the adoption of those more severe forward-looking macroeconomic scenarios, and you can find those at the very end of the presentation materials. A GBP 13.3 million increase for post model adjustments, and that's primarily to account for the rising cost of living and borrowing concerns, the significant increase in the size of our loan book this year together with profile changes, led to a further increase in the provision of around GBP 15 million. And finally, the other bar includes items such as changes to individually assessed provisions. Looking at our coverage ratio, you can see that the total coverage ratio increased by 7 basis points in the year and remains more than twice the level it was pre-pandemic at the end of 2019 as geopolitical inflationary and cost of living concerns have replaced pandemic-related concerns. Looking in a little bit more detail, you can see the increase in stage 2 balances. This is primarily due to accounts which are not in arrears, but which we have assessed as being more likely to be impacted by the worsening economic outlook, including the rising cost of living and borrowing. We will continue to proactively review our forward-looking economic scenarios and the coverage ratios as the outlook evolves. Next slide is capital. So looking at our capital position, you can see the group's CET1 and total capital ratios remained strong at 18.3% and 19.7%, respectively, at the end of the year. Again, going from left to right in the waterfall, which explains the movement in the CET1 ratio, you can see our very strong capital generation from profitability of 4.8%. We utilized 2.8% to support the significant 12% growth in the net loan book during the year. Total ordinary dividends reduced it by 1.5 percentage points, which reflects a 30% payout ratio in line with the prior year and consistent with our stated desire to deliver a progressive dividend per share. You can also see the dilutive impact as we continue to amortize the fair value uplift on CCFS' net assets at combination, as well as the IFRS 9 capital add-backs. This takes the CET1 ratio to 20% before the distribution of additional capital. 100 million share repurchase program was completed in November, and you can see also the effect of the GBP 50 million special dividend we announced today. Looking ahead to 2023, we've also announced a further 150 million share repurchase program, which will commence tomorrow, subject to market conditions, which is equivalent to approximately 1.4% of CET1. The Board remains committed to returning excess capital to shareholders and the GBP 150 million share repurchase, combined with the 2022 ordinary and special dividends represents a total cash return to shareholders of GBP 332 million and demonstrates our commitment to return excess capital to shareholders in an efficient way. As we discussed at the half year, the group intends to target a CET1 ratio of 14%, once the capital stack has been fully optimized through Tier 2 and MREL eligible debt issuance over the next 2 years. We note the PRA's recently published consultation paper on the implementation of Basel 3.1. We will be responding to that paper by the end of the month and await confirmation of the final rules, which we expect to be available by the end of this year. We've estimated the impact on our 31st of December 2022 CET1 ratio to be a reduction of up to 2 percentage points, should the proposed rules be implemented as drafted in the consultation paper and prior to us receiving IRB accreditation. As previously guided, we have sufficient capital to support the temporary increase should this occur. The group continues to advance towards IRB accreditation with progress made throughout the year. We've completed a comprehensive self-assessment exercise to validate our level of compliance. Preapplication discussions have been held with the PRA, and we are now actively engaging with them regarding a module 1 submission date. I'll now pass back to Andy, who will give an update on our lending and funding franchises.

Thank you, April. Our lending franchises are a story of doing the right thing for our customers, driving retention and delivering growth whilst maintaining our position at the forefront of the market. Originations in our core subsegments, buy-to-let and residential have been encouraging, both in terms of the significant volume increase and also the quality of those applications. Commercial has performed particularly well, too, reporting a near tripling of originations following our renewed focus in that subsegment. The group has delivered this improvement despite the strong prior year comparison, which as you know, was boosted by the stamp duty holiday. Average interest coverage ratios for new originations were 207% and 191% for OSB and CCFS respectively, and our LTVs remain sensible in all segments. Professionalization of the buy-to-let market continued, with 86% of OSB buy-to-let completions by professional landlords in the period, a transition that continues to play to our strength. I'm proud that we supported our customers and broking partners by honoring both the offered and the pre-offered pipeline in the wake of the September mini budget. This provided stability during an uncertain time and underlined our long-term commitment to the market. Actions such as these enhance our reputation for service, which continues to be recognized in industry rewards. Our funding platform continues also to serve us well. Our retail savings strategy of attract, retain and satisfy saw over 190,000 new savings accounts opened across our brands, which is more than twice the number opened in the prior year. We also retained 94% and 88% of maturing deposits with OSB and CCFS, respectively. Net Promoter Scores remained higher at over plus 60 in each brand, although they were somewhat impacted by the exceptional volume of new account openings and the [ out-of-season ] that materialized once rate rises increase the attractiveness of these products again. However, I'm pleased that process improvements we quickly implemented are now showing a return to the exceptionally high 2021 levels. We continue to enjoy Bank of England funding through TFSME and the index long-term repo scheme. The group's collateral position continues to improve as well. And in the summer, we completed a GBP 1.3 billion fully retained securitization of buy-to-let mortgages, predominantly for use as collateral with the bank. Before concluding, I want to take a moment to reflect on the progress we've made during the year, in delivering for our customers and our vision to maintain our leadership position in the specialist lending market over the next decade. As you can see on the left-hand side, we've taken a series of actions this year that demonstrate that we are continuing to place the customer at the heart of what we do. I mentioned earlier how we supported customers through the period of uncertainty following the mini budget. We also published our landlord leaders research to understand our customers, their aspirations and their approach to sustainability. This has led to the formation of a Community Forum, the launch of a GBP 50 million property improvement fund and practical help for customers who are yet to incorporate. We've also continued to launch new products, including those that help landlords meet future EPC requirements. And all of this continues to help to consolidate our position as the customer's lender of choice and the leader in our chosen market. However, we are not content to stand still. Looking to the right, you can see an overview of the actions we will be taking to keep the bank future ready. We will use the time when the market does not provide double-digit growth opportunities to enhance our capabilities. These enhancements will range from leveraging digital solutions to support our deep underwriting expertise, to improving the experience of both brokers and customers through the creation of new customer journeys. And these are medium-term objectives to ensure that OSB retains its leadership position in the market, and we'll, of course, keep you updated as we progress. So in summary, a strong performance across all key metrics in the year. Our high-quality secured lending book continues to perform well with arrears flat to last year, high interest coverage ratio is maintained and a reduction in the LTV on our back book. Looking ahead, the U.K. mortgage market as a whole is forecast to be subdued in 2023 with a particular reduction in expected purchase activity. The buy-to-let segment is also predicted to see a reduction in lending, following a strong 2022. However, once part-time landlords may be more sellers and buyers in the year ahead, professional landlords who comprise the majority of the group's lending, remain active buyers and are looking favorably at opportunities supported by continued strong tenant demand and rental growth. We remain, of course, cognizant of the uncertain macroeconomic outlook and the potential impact of the higher cost of living and borrowing on the mortgage market and its affordability. However, we are building a healthy pipeline of new business and have a proven track record of retaining customers, attracting new ones and working with high-quality borrowers. Based on current application volumes, we are targeting underlying net loan book growth of circa 5% for 2023. And as we look at current pricing and funding costs, we're expecting the net interest margin to be broadly flat year-on-year even after the impact of the anticipated debt issuance. And we expect the cost-to-income ratio to rise to circa 29% this year. The group has a proven track record of delivering strong results with a clear strategy and a robust risk management framework. We have consistently demonstrated our resilience, which allows us to look to the future with optimism. Our latest set of results underline the quality of our business model and the strength of the OSB Group's balance sheet. Thank you for listening, and the operator will now open up to Q&A.

[Operator Instructions] We have our first question comes from Benjamin Toms from RBC.

The first one on guidance, please. If I stack up your various bits of guidance, it sounds like there are some tailwinds and some headwinds to ROE in 2023. In terms of the tailwinds, flat NIM and some loan growth should mean a better NII, and I guess the nature of IFRS 9 and the sizable management overlay should mean that cost of risk is lower this year and the large buyback should bring down the E in the ROE. And in terms of headwinds, you're likely to get repeat, I guess, of the fair value gains, and cost growth will probably be higher I expect than NII. I guess my question, if you stack all this together, do you get to a position where ROE is probably slightly down year-over-year, but still mainly above the 20% mark? And then secondly, on capital, you've guided that your expected impact of Basel 3.1 is up to 2 percentage points of capital. I accept that there may or may not be a timing difference between the implementation of Basel 3.1 and the bank receiving IRB approval. But do you expect that the benefit from the latter should largely neutralize the headwind from the former? And as you go back to the regulatory response to the rules laid out in the consultation, what areas you're most hopeful may eventually get repealed or watered down? And do you think the events over the last week in the U.S. could impact the willingness of the regulators to write back and implement softer regulation than initially laid out on U.K. banks?

Thanks, Ben. April, I think they're probably mostly ones that you want to comment. On that basis, well the consultation, if you want, but I think guidance for directional travel and IRB and 3.1 versus IRB.

No, I'm happy to take this. If I start with ROE, I think that was a very good summary, Ben, actually. And sort of included in our cost guidance is the sort of full year impact of the people we hired last year, it was a big hiring year for us. I mean clearly, wage inflation and other inflation will continue. Clearly, inflation is expected to moderate, but not go backwards. And we continue to invest in the business. I think we've always invested in the business within the sort of economies of scale that our double-digit growth has generated. But I think, as Andy outlined, we're totally committed in a very strong position to continue to spend that and invest for the future and even in a year where perhaps we're guiding single-digit growth. But yes, I think you've picked up the sort of positives and drags very effectively there in your summary. Turning to Basel 3.1, I mean the reason we sort of guided up to 2% is that some of the complexity and the rules that they've published we actually in common with every bank has some data gaps just to explain that. And we've assumed, obviously, where we have data gaps, we can't take advantage of favorable treatments. But there were quite a few surprises in the consultation paper. I think I previously talked about a kind of a worst case and a mid-case theoretically with you guys. And I think we probably ended up closer to the worst case than our mid case. And I think the areas will be particularly focused on is -- asking for a transition period for standardized banks who are too big to take advantage of the strong and simple regime just in the way that IRB banks have been given a 5-year transition. So that will be an area that we will be, maybe idiosyncratically, including in our response. I think that's very reasonable because there's a large buy-to-let lender clearly. The significant increase in risk weights is largely coming from buy-to-let for us. We have a nice offset from our resi book, very low LTV resi book, so that's giving us a nice offset. And the loss of indexing, which is available with the IRB, but not apparently for standardized is another area of low being. Perhaps commercial where it's underpinned at 100%, sort of flowed at a 100% risk weight for mortgages, but 75% if you're lending unsecured to the same business. So these are few areas there on the risk weight. So I think the obvious thing the whole industry through U.K. finance is making clear. If you don't announce the final rules until the end of the year, you can't possibly expect everyone to make the necessary system changes by 1st January '25. I'm hearing that they're trying to align to Europe and the U.S. and if the Europe and the U.S. take longer to implement, they will too. And I don't think the U.S. has got a consultation paper out yet, just to put that into perspective. So that's kind of the sort of key areas of perhaps interest. I mean what they did is platinum play, the actual CRR. Are the events of the last few days going to change that? I'm not sure. I mean this is the PRA, not the Bank of England Resolution Authority. I think we'll have to see how this all plays out and whether or not there's a positive or negative sort of connotations. I think what happens with Silicon Valley Bank is sort of very different regulatory regime to what we already have in the U.K. If anyone has any questions, of course, happy to answer those later, but it's hard to see a parallel situation for ourselves. I guess, does that sort of answer all your various strands?

Our next question comes from Grace Dargan from Barclays.

A couple from me, if I can. So firstly, around landlord affordability, obviously, you've had quite a stable ICR. But what are you seeing year-to-date? Has that stayed stable at the start of the year? And I guess noting the rental increases that you think landlords have been able to pass on, maybe could you give us a sense of kind of the average net rental yields, the landlords seeing on properties? And then maybe just finally, comments around the professional landlord demand are really helpful. Do you think there is a widening gap of affordability between professional and how much are landlords? And It'd be interesting to get your take on that.

Thanks, Grace. I'll tackle those 2. I mean, landlord affordability, I think, when in the sort of aftermath of the mini budget when swap rates sort of skyrocketed, we were looking where on the whole mortgage market was looking at where you might price fixed rates, not just for residential, but for buy-to-let, and thinking [indiscernible] rents are going to have to go up a fair bit before those loans create the kind of yield that either meets your interest coverage ratio hurdle, which is typically a minimum of 125 for a limited company structure and 140, 145 for a sole name. However, obviously, as we know, swap rates have come off. And while there is for borrowers that are maturing from 5-year fixed rates that they took out 5 years ago today, there is an affordability shock. Of course, they've had several years now of quite strong rental increases. And across the U.K., rents have gone up, anything from sort of 10% to 20% in some areas where property is in demand. And landlords at the moment are facing a situation where they don't have to take offers on their properties because there's so much tenant demand, particularly in decent quality stock. But actually, they are able to hold out for those higher rents and get the tenancies field very, very quickly. So with what we now think is the direction of travel in terms of Bank of England base rate, what we think the impact of that is on swap rates. We think affordability is still there. It will preclude some from sort of new deals who want to really highly gear those new deals. And for a while, we'll have a bit of a dampening effect on the purchase market as we touched on earlier. But the prognosis for affordability looks good. Obviously, you'd expect us to slice and dice our book and make sure we talk as deals mature and people could afford the next yield of loan. Lenders also do things for product construct. So you're put on a larger arrangement fee onto a loan, which is capitalized over the term of the loan to keep the pay rate within tolerances and more manageable. And of course, we will all have products that offer borrowers that sort of facility if they want to do it. The affordability piece between professional and amateur, I mean there's a bit of an affordability dynamic between residential and rent. The gap is closing back down again. For a while, it was cheaper to buy than it was to rent, and that gap has really closed. Cost of mortgages for first-time buyers is pretty strong, pretty high. And of course, they've got to come up with a sizable deposit because there aren't really any high LTV well-priced first-time buyer products on the market, and therefore, rental is enjoying a very, very strong demand as a function of that. We just think professional landlords with multiple properties have a spread of risk. It's interesting, Ben asked a question about the consultation. I mean one of the points I will continue to make to the regulator is I do not understand why they think there's a higher risk weight requirement for a multi-property landlord versus a single property landlord because actually having a spread of risk, i.e., not all your eggs in one basket, means that you can have tenants changing at different times across the portfolio. You can have maintenance requirements on some properties at different times in the portfolio. It's not like all the bills come at once on a single day where if you haven't got a tenant paying, you've got a problem because you still want to pay the mortgage. So we just think the market will continue to professionalize. We think that's the way to go. I think that's a better outcome for tenants as well because professional landlords sort of know what they're doing. They understand upcoming legislation, they're already making moves to drive the energy efficiency of their properties upward because they know it's potentially like we will have to have higher EPC ratings. And that's why we continue to back that population. So we think the affordability dynamic looks okay. Does that answer your question, Grace?

It does. Maybe I could just press you if you do have any comment around the net rental yield you're seeing at the moment.

It's massively different according to geography. I mean anything from 4% -- I mean, on HMOs, and student accommodation, you can see yields sort of 9%. And of course, remember that professional landlords aren't only in it for a quick income buck. They're also in it for the longer-term capital appreciation. So they're factoring longer-term CapEx -- capital appreciation, sorry, into their yield calculation. But rental yields have been growing over the last few years, and I say it is wildly dependent on geography and supply and demand.

Our next question comes from Edward Firth as from KBW.

I'm going to just pin you back to the whole capital and MREL thing just because it seems we've got quite a lot of moving parts over the next 12, 18 months. So just in terms of the -- firstly, the Basel 3.1, they're up to minus 2%. Is that the total impact you expect from the total implementation of Basel 3.1, or is that just the initial impact, and then there will be a later one, because as I understand that the rollout has the credit coming in later. So that's my first question.

Well, let me get one very quickly, if that's okay. There's no transitional arrangement if you're a standardized bank. That's a total 1 day it's 1 figure and the next day, it's 2 percentage points off the CET1 ratio. But only if it's implemented as written in the consultation paper and prior to obtaining IRB accreditation. And as I mentioned in my prepared remarks, we've got the capital satisfied in case that happened, and so a temporary thing only. But yes, that's how it works.

Perfect. And for the IRB, could you just update us on where we are with that? And have you given any sort of guidance or any help you can give us in terms of -- is it equal and opposite, is it more, is it less? Just some sort of -- because it's been going for quite a while now, and I would imagine you're beginning to get some clarity.

Well, I mean, I can certainly -- I'm not going to tell you what's in our models, but I mean -- to some extent, we can model it out. If you go through the process of the accreditation, whether the regulator agrees with all of our models, of course, or whether they want to put some initial output floors on it. So I think it certainly mitigates all of the impacts of Basel 3.1. Whether we get more benefit beyond then, of course, is a question for where the consultation lands and therefore, where the IRB underpins lag. Yes, that is -- it will [ mitigate ] in term, yes.

Great. And then the other question was about for MREL and funding. I mean I guess it's a particular focus at the moment given what's going on in the market. Is it possible to give us some idea, and I guess I could go through every single instrument work it all out, but I'm sure you have it in your head. As we look over the next 12 months, how much MREL do you have to issue, and how much do you want to issue, I guess? So in terms of your planning, you've obviously got a plan in there in terms of the GBP 150 million buyback. Do you have to issue a certain amount of MREL in order to deliver that? And how much do you have to deliver to refinance the existing MREL instruments? So some sort of idea of what sort of dynamics are around that would be helpful. And then the second question is, I guess, we're still quite a way away, but you've got quite a lot of TFSME, I think, in your balance sheet. As we roll up towards that, could you replace all that with retail funding if you chose? I mean, how should we expect the balance sheet to move? At the moment, you're slightly long asset loans to deposits. Could you -- do you think you could feasibly bring your retail deposits up to match your loans if you needed to, rather than having to rely on the wholesale market?

Some very good questions there, Ed. I'm afraid I'm not really going to answer your first question. I mean, I think you understand that in the markets, to try and give an expectation of quantum timing and even cost is probably something that would be inappropriate and you can speculate on.

Can you highlight on what you're running off, though?

Nothing, we don't have any [indiscernible]. But as soon as we sort of see an opportunity in the market and we start to issue, of course, we'll give an update. I mean, perhaps all I could guide you towards is, we have somewhere in the appendices, given our capital requirement and our current capital resources charts for kind of a fully optimized balance sheet. And our interim MREL requirement from July '24 is 18% of risk-weighted assets. We have the regulatory buffer, the countercyclical and the conservation buffer on top of that. So you're kind of looking at 22.5%. And I think you would expect us to have a bit of a broad buffer on top of that. And we've given you our capital resources -- total capital resources at the moment. You can take off the share repurchase. And I think it should -- think about growth in your model, you should be able to kind of get there. But what I don't want to do is, particularly as an issuer, is give out to the market exactly what we want to issue when, if that makes sense. I'm sort of closing the question a little bit, but hopefully, sort of this allows [indiscernible]. And if you wanted to have any questions, obviously, reach out to the IR team as well, if you want to socialize it with them. On TFSME, I think the whole industry has a bit of a cliff event on October '25, and we are planning to start repaying early. So probably from next year, we'll start to look for opportunities to repay. And right now, the cost of retail funds is super favorable. Well, perhaps before the swap spreads came in, we were able to raise a mix of retail funds that may be SONIA minus 30%, minus 40%. So it makes sense to actually then repay Bank of England funding at SONIA, a base rate. So we might do a little bit of that opportunistically, which is fairly neutral, I think, to NIM and clearly beneficial to the bottom line. Our primary intention is to use wholesale markets, but we want to stay general repayment. But if at the point of time that we're planning to repay, the wholesale market pricing doesn't look compelling, then we'll use retail funds. So I guess you might see us using a combination. If wholesale markets return to nice liquidity, we would plan to use mostly securitization. So that -- I think if there was a real dislocation in the wholesale markets, we would expect the Bank of England to extend the deadline to be frank. And I think it was -- one of you asked me earlier about whether I felt the -- what has happened over the last few days might impact how the regulator here thinks about resolvability, and I think watching very carefully a cliff event for the whole industry. And in those circumstances wanting to take out positive action earlier, maybe that might be a benefit coming out from the learnings of the last few days. But hopefully, that's a fairly fulsome answer...

[Operator Instructions] We have our next question comes from James Invine from Societe Generale.

I've got a couple, please. The first is a follow-up to Grace's question about ICR. I hear what you say about the fact that anybody refinancing in 2022 has enjoyed 5 years' worth of rental growth and so on. But I guess the same would also have applied to anybody refinancing in 2021 as well. So I'm just -- I can't quite square the circle, how in '22 versus '21 your new business LTV has stayed basically the same, but your interest coverage ratios have gone up despite the fact that, obviously, we had much higher rates during 2022. So I was wondering if you could just help us what work that went out, please. *And then the second question is on your origination, the buy-to-let 3.8 billion. I was just wondering if you'd be willing to split that, please, into origination from new to group customers. And how much of it came from deepening penetration with existing customers. Just kind of when we're thinking about how those lines evolve in '23 and beyond?

Yes, okay. Thanks, James. Both good questions. I mean, we continue to enjoy high ICRs. We typically always have done. Because we're in that professional market where you've got borrowers that have got a blend within their portfolio. So they might have some multi-occupancy properties, they might have, but a student, they might have a bit of semi-commercial, so a couple of flats above the corner shop type territory because of professional landlords being a bit more savvy about looking for the yield, and also having equity across a portfolio that means they can tinker with their LTVs accordingly. We are not seeing -- I mean you do see the odd loan that is kind of coming through. It's only just scraping your minimum requirement for ICR. But we continue to see a good, strong portfolio of interest coverage ratio across the piece. And a deal that's refinancing today that was written 5 years ago, there has been quite a chunk of rental increase during that period of time, which sort of moves the ICR forward. It depends on how much equity they were moving, et cetera. The newest group or existing, I mean, clearly, we quote our retention numbers. We work very hard at not throwing business off the back of the truck. The majority of our originations are not necessarily new customers to group but new loans. So some of it is existing customers, refinancing in from other providers as the deals come to maturity. Some of it is existing customers expanding their portfolio, but a good ramp of it is also customers newly coming to group who haven't had exposure with us before. But as their sort of portfolio grows or the deals come to maturity with lenders they've used in the past, their brokers are saying this lender will do a service that is appropriate for what you're looking for. We don't -- I don't think we publish a number, but exactly on existing customers bring in new deals to us, but we work out hard on both sides of the equation. So we do, do a good chunk of business with existing borrowers. And actually, I've said this before at our senior credit committee where we look at all of our larger exposures to sanction those. If we have a borrower that's an existing borrower, and we like them and they've got a good track record and the evidence suggests they've got good stock and they know what they're doing. We don't do committed facilities, but we do give a -- we're minded to do more indication and what that does is it means for both the broker and the borrower and that they know as that individual expands the portfolio, they've got a lender that's very happy to listen to the next part of their business expansion plan and that again definitely yields for us. We've always done that, and I think it's wholly appropriate that we continue that.

Can I just ask as a follow-up to the first one. What proportion of your new business is HMO? And what was it last year, please?

We don't disclose that one on this meeting.

[Operator Instructions] We have our next question comes from John Cronin from Goodbody.

Andy, April, pretty update for the -- pretty reassuring guidance for '23 on margin, particularly for me. But just a couple of questions on capital. So look, the first one is, and this has been asked before I appreciate, but why aren't you returning more capital? I guess in an interrelated way, can you just remind us again why you're targeting at 14% CET1? I look at Barclays, a global systemically important institution, they're targeting 13% to 14%. So what is it that you're not calling out here? Is there something the Board is afraid of in terms of capital return? And my second question is on IRB and probably a bit more strategic. I guess, first of all, look, we've been talking about it for the best part of 5 years. You still haven't submitted the margin at 1 application. Your competitors are arguably getting closer. I mean from a competitive position, you could be in a very difficult situation in the relative near term, if another bank, one of your key periods does obtain IRB accreditation and is then converted with the ability to underprice relative to where you sit for the same return. Just wondering how worried are you about it? And would you think -- would you push back against me, if I was to say that the reality is you're years away from it yourselves? And then thirdly, look very micro point plus and nothing that's presenting me with any concern. But in the past, Charter Court did, I think, at the end of 2017, disclosed that their uninsured deposits -- or sorry, their insured deposits were 97% of deposit balances. Just in terms of housekeeping, can you give us an updated number gives a broad sense of the proportion of insured versus uninsured?

Okay. So let's take the capital. There's nothing that we haven't publicly said about capital. I think it's looking for the most efficient way to return capital as we goes through the journey of optimizing the stack. There were lots of factors as to how the Board decided on 14%. It felt appropriate given the uncertainties in the outlook that we've already discussed at some length today, and we still feel that's appropriate. And that's the right level to get to when we have a fully optimized capital stack. And I think we've disclosed, and we've discussed every aspect positive and negative potential on our CET1 ratio. So there's no concern that I'm not sharing with you. You know me, I'm always a plain speaker. And we decided to do a special because we were constrained on how much share repurchase we could announce because [ GBP 150 million ] was the maximum amount any of the investment banks would do for us given the liquidity in our shares. And we thought we wanted to return a bit more. And therefore, we put the special on as well. And I think they demonstrate that we're willing to use all tools available to us. But I think, by far the most efficient way of returning excess capital is share repurchase. And if we do that over a couple of years as we optimize the capital stack, I think that probably the right thing for us to do for our shareholders to be frank. And of course, we need regulatory approval for some of these actions. And it has to be done at the same time as we're issuing Tier 2 and reissuing MREL. So there's really nothing else hidden there, John. And at the moment, the Board feels they're comfortable with 14% being the right target, given the economic outlook and given these uncertainties that unfortunately still prevail from a timing perspective between Basel and IRB. IRB, look, we're waiting for a date. There are limited resources at the regulator. They focus on the new models for the existing IRB as some of our competitors who perhaps started the journey slightly earlier than us. But because we're submitting a bit later, we're in the position that we are materially compliant. And therefore and we've also had the advantage of hearing, not directly, but through the advisers, the kind of challenges that the regulator has made on sort of the big bank and the current application people on the models, things like cyclicality, use of Bureau data. And we're able to work on that alongside those people. So resources to one side, I would expect a faster run through the application process as a result of being in a much stronger position when this module 1 goes in. I appreciate that's probably what I told you at interims, but we really are at the point where we're discussing dates and hopeful that the regulator will find the resources for us. I think you also asked about insured deposits, didn't you? It's broadly in a similar place. I mean, maybe a percentage or so, plus or minus. The vast majority of our deposits are insured. And the vast majority of what we do is retail. We've got some very small corporate style deposits. We don't actually disclose that number, but it's not materially as you think.

John, I think -- I mean I would just add on this. You specifically asked the question about competitive disadvantage, and are we sweating that? Look, we're already at a competitive disadvantage. There's tons of IRB banks and tons of banks that have got significantly cheaper funding than us. But in the marketplace in which we operate, you need to [ want out ] a really detailed understanding of the market. You need to understand how to price for risk. You need to have balance sheet scale in order to have consistency of offering, and you need to have the operational capacity to deliver a service proposition that means that borrowers and brokers want to use you. We have never -- I mean, I think I could probably say Kent Reliance has always been as one of our big buy-to-let brands, probably the most expensive buy-to-let lender in the market, but we've never struggled to grow it. So I'm not particularly concerned that if we have a short overlap period, we're going to find an inability to write business. But if the overlap period materializes, so be it, but we'll find a way to pick through it. We've never been...

Perhaps -- just apologies, I forgot that question, John. I perhaps just add that because we are a specialist lender, the difference between the IRB models and the current standardized are nothing like as broad as the original IRBs. The big bank, mainstream, low LTV, prime borrower, there's a big difference between the IRB and the current 35% standardized. But when you start getting into the more specialist markets that we're in, that differential is much tighter. And therefore, I think it's that temporary step up, and we wouldn't change pricing for a temporary step-up should that -- should Basel come in before IRB accreditation.

[Operator Instructions] Our next question comes from Aman Rakkar from Barclays.

Just 2 quick questions on. One is, if the Bank of England were to hike base rate from here, is that -- are you positively geared to rate hikes from here given your expectations around pass-through and the way it impacts your NIM? Is that a potential source of upside that we should think about? Or do you think...

Looking at the market expectation, there isn't really today an expectation of rate rises. So I definitely haven't baked in any future benefit from delays in passing that on into the guidance. So if there were further rate rises in the market, didn't pass that on in full to savers then yes, there is potentially some upside. But at the moment, there isn't the expectation of that. But if rates go up a lot higher, there might be a little bit more of the book where we think they might struggle to meet the ICR hurdles. But I think even after the sort of the mini budget, there were still big proportions of the book that could have afforded the financing shock. But I mean I'm just drawing your attention back to the impairment provisions. When I mentioned we had post-model adjustments, we have about GBP 13 million and that was really deep dive into every part of our book to see who we thought was most likely to be impacted by cost of living or cost of borrowing concerns, and that's everything from, obviously, knowing your residential borrowers. But if it's a buy-to-let landlord, using ONS data in the post code of the property to work out the income decile of the people likely to rent it and what sort of affordability shocks they are facing. And looking at, as Andy mentioned, maybe people in the past where we did land at 125 ICR, what rent increases have been seen in that area of the country, what do we think going forward when they come up to refinancing. So it's a really deep, deep dive and a huge piece of work to come up with that sort of 13 million figure because what we did is we moved people into a lifetime loss Stage 2 rather than a 12-month horizon in Stage 1. All forward-looking, of course, but I hope that gives you a sense of scale as well.

That's really helpful. I guess the second question was just around, I think when we spoke post [indiscernible], when swap rates are blowing out and there was a real concern around the demand within your customer base and buy-to-let more broadly. And there was a suggestion, I think that you'd be able to kind of potentially repackage the manner in which you charge interest on your customers. So kind of amortizing a chunk of the interest cost as an upfront fee and putting it into the life of the loan as a potential way of keeping the kind of monthly borrowing cost down for your customers. Are you having to do any of that?

Well, we -- I mean, especially buy-to-let lending always had a relatively chunky fee that ranges from anything between 1% to typically 2.5%. We do have a couple of products on the shelf where the fees are at 3% and not just the pay rate down slightly. We have been asked occasionally, and I mean, occasionally, like a handful of times by a borrower to structure a deal in a particular way because they would -- they've got plenty of LTV coverage, they'd like to amortize maybe a 6% fee over the 5-year life of the loan and keep the pay rate lower because they're investing and doing works and making product improvement, et cetera. But we haven't seen a wholesale need to really manufacture products with super high fees versus super low pay rates. But it is a structural place you can go to and subject to the LTV on the portfolio or the particular loan being good enough. Landlords will go for that if it means that their cash flow is maintained while they're still considering sort of future CapEx. And then growing the rent on the property over the period of the loan. So it happens from time to time.

Are you positively surprised by the resiliency of your customers, the kind of demand that's coming through?

No, I don't think I am. I think because we are in the professional landlord market and because these guys are -- they're savvy operators, I mean, I know a number of the really big buy-to-let lenders in the U.K. personally. And they have had so many kind of problems to deal with, and they found a way around it, and they've tweaked their business models. And I've talked before about a borrower that owns big chunks of West London, significant chunks of West London. And over the years, he's added and changed his business model to kind of have a sort of food in the fridge model, if you like, where it's targeted at professionals. It's a lovely property. The broadband's fired up, the bills are all in. The thing is absolutely stunning in terms of the way it's furnished. You literally rock up, hang your clothes in the wardrobe, stick a bottle of Sauvignon blanc in the fridge and you're good to go. And he charges significantly more than an unfurnished slightly grossy standard rent for that property and is finding a way to generate yield. Landlords all have the pros, all have their idiosyncrasies about the way in which they leverage their particular skilled portfolio and sort of geographic area to keep that going. So we're not surprised about the resilience because we target high-quality borrowers and have been working with them over the last decade or so. Operator, we have probably time for one more because we are at time. If there is one more on the line.

[Operator Instructions]

Okay. If we don't have any further, it is 10:30. I'd like to thank everybody for joining this morning. And I hope you all have a good day, whether you've managed to get into London or not get into London or whatever. And we look forward to speaking to you all again soon. Thank you very much, everyone.

Thanks, everyone.

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.