OSB Group Plc (OSB) Earnings Call Transcript & Summary

Good morning, all. Thank you for joining us for the OSB Group Half Year Results 2024 Call. My name is Karli, and I'll be the call coordinator for today. [Operator Instructions] I'll now hand over to your host, Andy Golding, Group CEO, to begin. Please go ahead.

Thank you. Good morning, everybody, and thank you for joining OSB's -- OSB Group's 2024 interim results presentation. This morning, we'll take you through the key highlights for the year, an update on our lending and savings franchises, then I'll hand over to Victoria for the financials in detail and return for some progress updates, take you through the outlook and add some additional color. This slide highlights 3 key themes that help summarize our strategy and results in the first half. Firstly, we've been very disciplined in our approach to new lending. We've been focused on maintaining return on equity on new business during a period of high competition against the backdrop of a subdued market in volume terms. During Q2, some lenders have elected to drop pricing to a level below those that deliver our target returns. And as a result, our net loan book growth is now slightly lower than we'd originally guided. This is reflective of our pricing discipline. Our net interest margin reflects the impact felt across the market of lower prevailing spreads on mortgages as products written in prior years reach maturity and fixed term savings recycled on to higher rates in the first half, although that has now stabilized. Our high-quality underwriting and deep credit expertise have contained growth in arrears and contributed to an impairment release in the first half, further demonstrating that our risk-adjusted returns are appropriate. Secondly, we maintain cost discipline and efficiency. Our cost-to-income ratio is broadly in line with our expectations at 34%, whilst the ManEx remains low at 83 basis points, supported by our continued focus on cost and the benefit of our wholly-owned subsidiary, OSB India. Finally, delivering ROE and returning capital to shareholders continues to be our primary objective. The 18% ROE, which together with strong CET1 ratio underpins our ability to return capital to shareholders through a strong interim dividend, and I'm delighted to announce a further share buyback of GBP 50 million. This next slide summarizes our financial highlights for the first half. And whilst I'm pleased to see improvements compared to the prior year, I recognize that the nonrecurrence of the adverse EIR adjustment reported in H1 '23 has a significant impact, which can overshadow other movements. Victoria will explain each of these for you in more detail and the moving parts that contribute towards them. Next, I'll turn to the recent dynamics we've seen in the Buy-to-Let market and a reminder of the attractive fundamental drivers of the professional Buy-to-Let market. As you can see from the chart on the top left, the volume of lending across the market in the first half remained subdued, reflecting affordability pressures following the steep rise in mortgage rates from the end of 2022. Monthly volumes are around half of their peak throughout 2023, and only in recent months that they began to show a modest recovery. The next chart illustrates the competitive dynamics we've seen in the first half. Each of the gray lines representing the implied spread to SONIA of the prices charged by specialist lenders, including fees for a typical 5-year Buy-to-Let limited company mortgage. Our 3 main propositions are highlighted in color. As you can see, a number of lenders have been seeking to take market share as they entered the second quarter and began accepting margins below 2%. In contrast, we've exercised strong discipline in our pricing during the period, which has seen us choose not to write some new business and not to retain some business in the more competitive areas. And while our Kent Reliance brand, which handles more complex Buy-to-Let cases, has largely maintained its volume, our less complex -- sorry, excuse me, less complex offering through Precise has been more impacted. However, over time, whilst Precise will remain a specialist in smaller portfolio Buy-to-Let, we will also inflect Precise further into the specialist residential market in which it has deep expertise as well as growing the volumes through its award-winning bridging franchise. The structural drivers for professional multi-property Buy-to-Let remains strong and give me confidence that volumes will continue to recover and pricing will stabilize, particularly as Bank of England base rate reductions materialize. The lower half of the slide summarizes why this segment continues to be attractive. Fundamental drivers of demand for the private rented accommodation remains strong. For many years, insufficient new homes have been built in the U.K. to meet demand. And while we welcome the new government's commitment to improving this imbalance, it will take many years to recover from the shortfall in building compared to increasing demand over the last 20 years or more. Buyer affordability remains challenging for first-time buyers who are renting for longer and now well into their 30s before buying their first property. These drivers have translated into strong rental values with rental price inflation, most recently at 8.6% in May. The group is positioned to serve the professional landlords who are best placed to meet this demand. And our research demonstrates that tenants have a better experience from professional landlords, who have the scope and experience to be more customer-focused. Larger portfolios give landlords the scale and resilience to manage the impact of unexpected events, such as changes in their borrowing cost and void periods at the end of tenancies, while also planning more strategically for the challenges and opportunities such as meeting potential higher energy efficiency standards and improving properties to improve yield. The next slide summarizes the strengths of our lending franchise and the opportunities that lie ahead. Buy-to-Let is the largest component of our GBP 26 billion loan book, and we target those professional multi-property landlords. We are a significant player in the Buy-to-Let segment of the market, a fourth in overall share. But in terms of specialist lenders, OSB is the clear leader. In May, OSB represented 9% of overall new mortgage flow, and we are able to operate across the spectrum from supporting the relatively simple requirements of a landlord with a small number of properties through to the more complex needs of professional landlord. Supported by improvements in the macroeconomic outlook, the group is now undertaking a cautious reentry into the more cyclical higher-margin subsegments, such as asset finance and residential development finance and building out our commercial and bridge lending offerings. We have long-established capability, customer relationships and experienced teams in these lending segments that we're able to dial up as the outlook improves. As you can see, the market recognizes our success in this area, winning awards this year so far for both our bridging and our commercial propositions. And whilst it takes time to impact the overall net interest margin, this approach will provide a positive contribution to returns in the medium term. Our funding platform continues to deliver to our savings strategy of attract, retain and satisfy. We grew retail deposits by 10% in the first half and opened more than 130,000 new savings accounts, growing our customer base. We successfully retained a maturing fixed rate savings customers at a rate of 90% and 86% in OSB and CCFS, respectively. Net Promoter Scores also remained high at plus 66 in Charter Savings Bank and plus 73 in Kent Reliance. We complement retail savings with our expertise in wholesale markets. The group successfully completed 2 securitizations in the first half, GBP 509 million of Buy-to-Let mortgages in February, as we led the way in reestablishing this market and GBP 330 million of owner-occupied mortgages in May, both saw a strong demand from our growing investor base, which allowed us to achieve attractive pricing. Securitizations, together with deposits have allowed us to continue the paydown of our TFSME borrowings with the Bank of England. I'll now hand over to Victoria to walk you through the financials in more detail.

Thank you, Andy, and good morning, everyone. I'm pleased to present my first results this morning following my appointment as CFO in May. It's certainly been an interesting and busy first few months. I've had the opportunity to meet some of you, and I look forward to meeting more of you and building further relationships over time. So on to the H1 results. I'll start with Slide 7, that summarizes the key dynamics, all presented on an underlying basis that underpin the ROE of 18%. The group delivered an underlying pretax profit of GBP 250 million for the first 6 months of 2024 compared with GBP 117 million in the prior period. The predominant driver of the increase was the nonrecurrence of the adverse EIR adjustments recognized in the first half of 2023, partially offset by lower prevailing spreads from mortgages and deposits. The other positive drivers of pretax profit increase were net loan book growth as well as an impairment credit compared to a charge in the prior period. Underlying net interest income grew by 29% to GBP 362 million, again, due primarily to the nonrecurrence of the adverse EIR adjustment and net loan book growth, particularly in the second half of 2023, leading to underlying net interest margin of 243 basis points, up 40 basis points from the prior period. I will cover more on that later. We maintained our strong focus on cost discipline and efficiency and the admin expenses of GBP 126 million on an underlying basis came broadly in line with our expectations. The 15% increase from the prior period largely reflected the investment in people and operations, including planned spend on the digitalization program to enhance our customer solutions and the new Bank of England levy. The underlying management expense ratio of 83 basis points for the first half was 5 basis points higher than the prior period, but 1 point lower than in the second half of 2023, even after taking into account the new Bank of England levy. The underlying cost-income ratio improved to 34% in the first half, primarily due to the higher income. And excluding the levy, the underlying cost-to-income would have been 33% for the first half. The underlying loan loss ratio improved significantly in the first half, equivalent to a credit to 4 basis points on an annualized basis as we released impairment provisions due to updated more favorable forward-looking macroeconomic scenarios. I'll provide more detail on the key drivers of the impairment credit a bit later. Turning to the income statement. There's a couple of points to highlight here. You'll see that we recognized a net underlying fair value gain on financial instruments of GBP 5 million compared to a GBP 12.1 million loss in the prior period. The key driver behind this change were fair value gains on our pipeline mortgage swaps due to movements in the SONIA forward curve, which will reverse over the life of the swaps. Underlying earnings per share of 46p in the first half increased commensurate with the increase in profit. The next slide summarizes our strong secured balance sheet. The underlying net loan book increased by 1.5% in the first half to GBP 26.1 billion, supported by GBP 1.9 billion of originations, which decreased by 18% from the prior period, reflecting our disciplined approach to new lending. Retail deposits grew by 10% to over GBP 24 billion as at the 30th of June as the group continued to attract new savers. This in turn allowed us to progress with the repayment of our drawings under the Bank of England's TFSME scheme. We have been pleased that the market has so far absorbed the repayment of TFSME without widening spreads as have been previously feared. You can see that MREL debt increased by circa GBP 400 million due to the issuance of senior notes in January. And I'm pleased that we have met our interim MREL requirements of 22.5% of risk-weighted assets plus regulatory buffers ahead of the deadline. Finally, debt securities increased, reflecting 2 securitizations we completed in the period, as Andy mentioned earlier. The credit quality of our loan book remained strong, even though we saw a small increase in 3-month plus arrears in the first half to 1.6%. That's included OSB at 1.9% and CCFS at 1.3%. The increase in arrears was inside our modeled expectations and continue to reflect the impact of higher cost of borrowing on a small group of borrowers. Interest coverage ratios for Buy-to-Let originations strengthened in the period, reflecting that mortgage pricing appears to have passed its peak. Our loan book is secured at sensible loan to values. The weighted average book LTV for the group increased marginally to 66% in the first half from 64% of 2023 year-end, reflecting a reduction in house prices in the period. The new lending LTV remained at 68%, demonstrating the strength of our underwriting and quality of our security. This slide presents the NIM waterfall and dynamics from the December exit rate of 273 basis points where we left you at the preliminary results. Moving from left to right, our fixed rate deposit book continued recycling on to higher prevailing rates in the period, which is expected to be largely complete by the end of 2024. The lending margins in the period were a headwind to NIM as maturing fixed term mortgages continued redeeming or switching on to lower prevailing spreads. As Andy explained earlier, in the second quarter, we stayed disciplined in our pricing and saw increased competitive pressures leading to higher and earlier redemptions in our Precise book and lower income than forecasted on these higher -- historically higher-margin loans. New issuance of MREL qualifying debt diluted NIM by 8 basis points. We are now carrying a total of GBP 950 million of MREL debt on the balance sheet, and the drag on NIM from this issued balance will progressively flatten off as it annualizes. Finally, the other funding bar relates primarily to the cost of our securitization program that has contributed to the repayment of Bank of England TFSME funding. Coming back to EIR, there will be no changes to borrowers' behavioral assumptions in the first half and therefore, the EIR reset charge was minimal. However, as you would expect, we will continue to monitor behavior and we'll be prepared to make an adjustment if needed in the second half. We will maintain our pricing discipline. This may lead to a continued trend of higher and earlier redemptions, particularly in our price -- Precise book, and we've therefore set net interest margin guidance for 2024 as a range between 230 basis points and 240 basis points. The next slide provides a waterfall of the movement in the statutory impairment provision in the first half. As you can see from the chart and moving from left to right, in the first half in line with policy, we updated our IFRS 9 modeling with the latest more favorable forward-looking macroeconomic scenarios. These scenarios showed an improvement from those used at year-end, particularly in respect to house prices and unemployment. This led to a GBP 24.7 million provision release. The release was partially offset by a charge of GBP 1.6 million for model enhancements and post-model adjustments, a GBP 7.5 million charge related to an increase in provision for accounts with arrears of 3 months or more, and a charge of GBP 3.5 million related to changes in the credit profile of borrowers as they transition through modeled IFRS 9 impairment stages. Stage 1 provisions in respect of loan book growth totaled GBP 1.3 million. And finally, the individually assessed provision increases and other balance sheet items amounted to a charge of GBP 3.4 million. You can see that our total coverage ratio has decreased by 3 basis points in the first 6 months but remains more than twice the level it was pre-pandemic at the end of 2019. We will continue to proactively review our forward-looking macroeconomic scenarios and coverage ratios as the outlook evolves. Turning to the capital position, you can see that the group's CET1 ratio remains strong at 16.2% at the end of June. Moving from left to right in the waterfall, the first block shows our strong capital generation from profitability of 1.5%. We utilized 0.3% in the period to support the 1.4% growth in the statutory net loan book. The impact of the declared ordinary dividend -- interim ordinary dividend was 0.5% and other noncash items was 0.2%. Before the effect of the GBP 50 million share repurchase program announced in March, the CET1 would have been 16.6%, and the buyback had a 0.4% impact on the ratio. Today, the Board has announced a new GBP 50 million share buyback to commence on the 6th of September as we continue to return capital to shareholders. Looking forward, we continue to target a CET1 ratio of 14%, but expect to operate above this target as we wait for clarity on the final Basel 3.1 rules, which have recently been delayed. I will now pass back to Andy.

Thank you, Victoria. As Vic already mentioned, we're investing in our tech stack and modernizing the business to build on our already high levels of efficiency and customer service. I wanted to provide a couple of examples to help bring this to life. In H1, with the launch of a dedicated mobile app for intermediaries under the Precise brand, this is a unique offering from a specialist lender and enables brokers to work with us and get updates from us at their convenience. This helps cement our relationship with these important stakeholders, making it easier to do business with us and it complements our dedicated BDM network. We trialed the app with several trusted partners prior to the full launch, and the feedback has been overwhelmingly positive, not just about the smoothness of the app itself, but also the game-changing nature of being able to track and manage cases on the go without needing to log into a traditional lender system. Looking ahead to the second half, we will launch a new savings platform that will take our engagement with customers to the next level, with integrated chat and telephony facilities whilst also enabling customers to complete key account management actions on a self-service basis. There are just 2 -- these are just 2 components of our digitalization program, and we're continuing our development of our services to enable us to meet the future needs of our customers, brokers and the wider stakeholders while delivering further operational efficiencies. So in summary, strong operational performance in the first half, and our results were resilient despite the subdued mortgage market. And to summarize our guidance for the year, based on current market activity and our disciplined approach to lending and retention, the group now expects to deliver underlying net loan book growth of circa 3% for 2024. Underlying net interest margin is expected to be in the range of between 230 basis points and 240 basis points, and the underlying cost-to-income ratio is expected to be circa 36%, commensurate with that NIM guidance. The group is well capitalized, highly liquid and well positioned to successfully leverage our unique multi-brand structure and benefit from the opportunities as they arise. I remain confident in the outlook for the group and our ability to deliver long-term sustainable and attractive returns for our shareholders. With that, we will close and hand over to Q&A. Operator, can I hand over to you to do the questions, please?

[Operator Instructions] Our first question comes from Grace Dargan of Barclays.

Thank you both for taking my questions.

Sorry, Grace. Your line is a little bit crackly. Would you -- Is there a way you could sort of distance yourself from the mic a little bit? It seems that it's distorting.

Is that any better?

That is much better, yes.

Perfect. So firstly, on the NIM, could we just understand a little bit more about the EIR assumptions or what you're assuming within that range of guidance? And are you including any kind of specific EIR adjustments in the lower end, kind of what's the difference between the lower and upper end? That would be helpful. And then secondly, what would prevent NIM expansion from H2 going into 2025?

Thanks, Grace. Vic, do you want to take the first one, and I'll talk about the second one.

Yes. Yes. So I guess on the EIR impact, as we've said, in Q2, we did see some early signs of behavior, but definitely too early to make a judgment on the trend. What we are saying is if in that -- if we do see a persistent reduction in the time borrowers spending on reversion, that would cause us to change our EIR judgment to some extent, this would take us to the lower end of the range. I can't comment on sort of what weighted average life we have seen. I mean, as we published previously, we were on a 5-month weighted average life, and we do publish a sensitivity to a 3-month movement in that. And we're not seeing anything in that range of guidance or that range of movement currently. If towards the higher end of the guidance, that would be if we saw some tempering of the recent observations back towards the norms we saw in late '23 and in Q1 '24, but with no specific trends emerging. It is very much a changing dynamic, and therefore, it is something we will continue to monitor in H2, and hence, why we felt the range of guidance we see the best option for 2024.

Okay. Thanks, Vic. I mean, NIM on -- Grace, on the NIM point around what prevent NIM expansion, I guess we've got a pretty balanced view of things there. We know that currently, there's some competitive pressure, and there's a bit of a lack of volume in the market, but we think as base rate starts to cool off a little, that recovery that we perhaps started to already see in volume terms will continue. So that -- that's beneficial in terms of the competitive dynamic. Clearly, we've got customer behavior on the back book, particularly around Precise that Vic has just talked about. And then on the upside, we do think the macro is now supportive of reentering into some of those more sort of cyclical markets, and we will do that. We will do it cautiously. And it is accretive to NIM. But as I said in the presentation, on a balance sheet of our size, that takes time to have a kind of overarching impact. And I guess the other one, which we don't always have -- or we don't have full control over is the funding cost dynamic. But at the end of the day, funding costs is inside what our expectations are at the moment. TFSME seems to be getting repaid by the market pretty well and pretty substantially without over-impacting prices. But we've seen before the likes of NS&I coming into the market and kind of influencing for short periods of time pricing upwards. So we always keep a strong weather eye for that and endeavor not to be needing to overfund at the points when companies like NS&I are out there in the market looking for big dollops of cash. So I think it's a pretty balanced picture in terms of looking forward on the NIM line.

Our next question comes from Benjamin Toms of RBC.

The first is really a follow-up just on the EIR behavioral assumption of 5 months on the Precise book. I know you've provided sensitivity for that, which is at GBP 66 million, I think, if the numbers move from 5 months to 2 months. But I'm just trying to get a sense from you or an indication of how likely you think it is that, that sensitivity will materialize in full i.e., move from 5 months to 2 months? And over what time frame could we see that change? Secondly, you've updated your cost-to-income ratio for the year to 36%. I just wanted to get some feeling of how confident you are that this cost-to-income ratio is sustainable as we go into 2025, as that ratio has been creeping up over time? And lastly, on your structural hedge, which you've implemented in half 1, GBP 1 billion notional, 50% of equity, with the purpose of the hedge presumably to reduce your interest rate sensitivity. Could you provide some color on how interest rate sensitive -- how your interest rate sensitivity has changed versus year-end 2023, perhaps expressed as an NII sensitivity of 100 basis points downwards parallel shift in the curve?

Thanks, Ben. Vic, that sounds like 3 for you there.

Yes. So on the -- I guess, yes, the -- you will note the sensitivity to the EIR behavior has reduced since year-end. I guess 1 area on that is we do expect that to continue to reduce as the book seasons. As I said before, we are seeing that movement from 5 months to 2 months, the early signs. We do look after a longer period when we evaluate behavior. It is something that moves over time. So I would say I don't see any immediate move from 5 months to 2 months, and it very much depends on the external environment. It is a judgment. We may see that stabilize in H2. We may see it continue over the next couple of years as areas like Choices get established. So no, I mean, at present, it is very much a customer behavior driver with some small acceleration and perhaps over time, we may expect that to slowly creep down to 2 months, but that would be probably over a multiyear period. So that was the first question. On the cost-income ratio, I guess, yes, 36% is driven by really around the income dynamics. I would say when I'm pleased with where the costs have landed in, in H1. We are pretty flat to last year, as guided, excluding the levy, I mean, I do expect a slight increase in spend. And we are in H2, we are continuing to invest, which I think is an imperative to make sure that we are offering the better -- best propositions to our customers and we can scale. What I would say about our cost-income ratio is, yes, it's in the mid-30s, but even with the investment, we are a very efficient bank operating with one of the lowest ManEx and cost-income ratios in the market. So I mean, I think our levels, if they stay around where they are long-term, are still a pretty strong results. Then your first, I guess, what I would say on the structural hedge, yes, we have -- I think the key point on this is it is 50% of equity. We don't hold sort of much interest rate exposure on our equity. We -- it's not the same as the large banks that have the big current account franchises and sort of how that stream to manage. So for us, we don't see it as a big impact on NIM probably going forward in the future, it just protects us from the volatility. So I mean, I guess I haven't got the exposure to the 50 basis points, but I would just say it is a relatively small component of our NIM, and it probably will continue to do in the future and just gives us that protection from the volatility.

Our next question comes from Harry Bartlett of Redburn Atlantic.

First one just on margins in Precise. I guess what do you think the kind of niches for this brand now that will allow you to kind of maintain an element of pricing power? I guess if you -- if we look at some of the larger lenders that you're competing with, they have obviously a funding cost and a capital advantage. So I guess just kind of what do you think stops this being a race to the bottom, has been the case in kind of the resi market? And then I guess in terms of -- obviously, previously, you mentioned you price to achieve a minimum level of return. I just wonder what your thoughts are on this. Does this still apply? Is there a need to refresh this to maybe a sort of lower level of return given the increased competition in the market?

Thanks, Harry. I mean, look, what's the USP of Precise, I mean, Precise is still a very good lender in that portfolio, a smaller portfolio landlord Buy-to-Let market. And I do think that pricing pressure in that market that we've seen in recent months will dissipate, particularly as we perhaps get another 1 or 2 reductions in base rate as we go through 2025. But equally, I also said in the presentation, I mean, Precise is a very good specialist residential lender. And ironically, the ROEs on its residential lending, particularly under Basel 3.1, if it comes in as per the consultation are significantly better than more mainstream Buy-to-Let. So we will continue to look for opportunity to inflect Precise further into the residential market. That includes that specialist slightly off high street near prime residential segment that Precise has deep kind of underwriting expertise in, but also in bridging, Precise is becoming a well-recognized bridge lender these days. We've been quite tight on risk appetite in that particular segment, but we are starting now to see demand for that kind of product coming back as people want to get markets moving again and the margins are very strong in it. And we will -- where we think the risk price returns are appropriate, we will do more in that space. And it has already won an award this year for the offering that we're putting out under bridging, which is why when you're looking at some of the more simplistic cases, actually having an app out to brokers for them to track, update, work out what documentation we need, particularly when something like a bridge where you need to get it done quickly, that is a real game changer in terms of helping us do that. So subject to macroeconomic environment, we'll continue to push that proposition, continue to inflect it further into that specialist resi market. But equally, it will maintain its presence as a Buy-to-Let lender for the slightly less complex portfolio landlord than it historically has dealt with, and I think returns on those will come back as the market dynamic shifts. You also touched on we kind of price to a hurdle. We do. We have a pricing model at the front end for every price of every product that we put on the shelf. We are looking for an ROE return on that. And sometimes that's a higher NIM and sometimes it's a lower NIM because it depends on the capital structure of the product, et cetera. But we think return on equity is king, more so than net interest margin. But for us, that is a discipline that we try and maintain. And we don't want to be writing single-digit ROE business. So we don't take that business on board, if that's what a particular segment presents as a market dynamic. We know what our hurdles are and we price to them. We don't publish the hurdle clearly. But I think ROE will continue to be a key facet in what we do and how we put our product on the shelf.

[Operator Instructions] Our next question comes from Gary Greenwood of Shore Capital.

I've got a couple on NIM and then one on capital, if I can. So first of all, just coming back to the EIR, I mean, the thing that sort of drove down the assumptions last year was a sharp rise in interest rates. Obviously, we were into an environment now where rates are coming down. So I'm just trying to understand why the assumptions would start to reduce again, as I thought, if anything, the risk would have been the other way. So is that really just down to the competitive pressures that you're seeing at the moment? That's the first question. Then second question was just on front back, back book spread, if you could just give us some indication of the differential there given that, that seems to be part of what is causing the margin squeeze? And then last question on capital, I think, sort of helpfully in the past, you've given an indication of a potential impact of Basel 3.1. I was just wondering if there's any update there and also on the IRB application.

Okay, Gary, so your first question around why assumptions would reduce again. I mean, I guess, yes, we -- customers on average have stated that weighted average life of 5 months. I mean I think through second half of last year into Q1, that sort of remained. It is quite hard to determine what factors are that make people change that. And in Q2, there were political macroeconomic uncertainty. We speculate that potentially the calling of a general election created some more decisions. So I mean, I guess I wasn't particularly expecting behavior to extend. And I think then with increased competitive dynamics and prices coming down, people perhaps accepted that, oh look, that's an acceptable rate now. I'll jump on to it rather than thinking look rates are going to come down in a few months, I'll hold and stay on reversion a bit longer before I move. So I mean, I think the -- it isn't a massive step down. And I guess we see everyone moving off sooner first than we do to wait and see sort of what stays in the longer tail. But definitely, as I said earlier, you do expect that this would probably come down over time, but it does very much, it will vary and hence why we have to make a judgment in H2 on that. So your second question on the front book, back book spread. So...

Yes, front book, back book spread.

Yes. I mean as Andy said, we're very much focused on getting -- making sure the front book returns and NIM we're writing is at a good level that's accretive to the long-term. I mean the back book, we do have -- in 2019 and 2020, there was some really high historic margins that will continue to roll down. We did have that small period where we honored our pipeline and a few lower margins in '22, '23. So those dynamics will continue to roll through the book. And hence, we manage that through, but we're very much focused on making sure the front book going in gives us that long-term accretion as well as the diversity. I mean I think that's pretty in line. I think other banks have had similar back book roll off, high margin back book rolling off, and I guess we're dealing with the same as that over the coming years. And then on your -- your question on Basel 3.1. We have been looking at that, I would say, I think previously, we've said that the impact is about 2%. I probably think it's going to come in a bit lower than that. But we are hoping that in September, as has been messaged, that we should get the final rules. I guess that will enable us to do our sort of full review and refresh on that and come up with our longer term capital plan with more certainty. So I think the only update at the minute is probably slightly lower than that 2%. But hopefully, we can work through the numbers within the next month or so.

And any update on the IRB applications?

Nothing really since -- the last since the prelims. I guess we continue in discussion with the regulators. We continue to use it internally. It's good to have those here, but no, nothing to update on that one.

[Operator Instructions] Our next question comes from Edward Firth of KBW.

Yes. I just had 2 questions really. The first one is, is I'm quite struck that this year, we've seen quite a recovery in the vanilla mortgage market, particularly in terms of application volumes and a lot of exciting talk about the sort of second half pickup, which doesn't seem to be coming through in the Buy-to-Let market. And I guess my concern is that successive government now for many years have been trying to make to sort of [ weight the market ], if you like, in favor of people buying houses rather than renting and whether that's stamp duty, whether that's tax deductibility, et cetera. And I'm just wondering, to what extent do you think that these sort of successive policy changes are perhaps now starting to really bite? And that actually, as we look forward from here, the Buy-to-Let market may be somewhat more tempered, sort of structurally more tempered like for some years as buyers become sort of favorably disposed by the tax system and by policies, et cetera. So that was my first question. Should I go on with the other ones as well? Is that easier?

Do you want me to do that one, Ed, and then we'll pick up the second one.

Yes. Why don't you do that?

That one had a few facets to it. So let me see if I can kind of cover them off. I mean the first thing is I'm not sure I necessarily agree that there is a lot of excitement around a big recovery in the vanilla mortgage market. I think, estate agents are talking up the number of people coming in the shop and making inquiries, et cetera. But actually, if you look at cold hard facts and transaction volumes, the market hasn't really kind of got itself back into gear again. And I think it will take a while. And I think the things that do that are the things that restore confidence to the market. So the fact that we've had a recent 25 basis point reduction in base rate, I think that's positive for the market, Buy-to-Let market, by the way, as well as the resi market. And I think if we were to get another one in November or in the early part of next year, that will do another job of helping to instill that confidence because people make bigger decisions when they think the market is going in their favor rather than when they think the market has been going against them. And I think for a while, that has been the flavor. Look, on the -- is buying becoming more straightforward? I mean, I'm afraid post the kind of MCOB requirements, global financial crisis, everything else, mortgage regulation has really made becoming a sort of first-time buyer more and more difficult in terms of the residential space. I mean when I were a lad and that was a long time ago now, Ed, to be fair, you could get 100% mortgage on an interest-only basis and worry about getting a washing machine on [indiscernible] or whoever, you just can't do that anymore. All the affordability hurdles are around a forward payment basis. It's going to be stress tested for rises in interest rates. And all of that regulatory hurdle has basically pushed out the age of the first-time buyer, and that isn't changing. First-time buyers aren't getting younger. If anything, they're continuing to rent for longer. The Buy-to-Let market piece, look, I think we've had an environment where interest rates have been really low for a really long time. So what I would describe, and you've heard me describe before, as the dinner party landlord brigade, if you've got spare cash, putting that into a deposit account earning 75 basis points isn't worth a hill of beans, whereas buying another proxy and renting out your previous one or inheriting Grandma's property and deciding you're going to put a mortgage on it and rent it and use the mortgage to get a deposit for a second one, that looks like a very attractive option, even if you are a higher rate taxpayer on an individual basis. I think that market, that dinner party market is challenged by the current interest rate dynamic, and we have seen some of that stock finding its way back into the market, et cetera. But our specialism is in that professional portfolio landlord segment. They're in it for yield and the yields are pretty good, I have to say, because they have been putting rents up significantly, they have absorbed the additional cost of borrowing that they've had to absorb and are still making a decent return. I think professional landlords have made changes, they've made their portfolios different in some ways. So a bit more student let, a bit more HMO, a bit more blended of commercial, semi-commercial in with mainstream residential. But professional landlords will still, when they see opportunities, expand their portfolios and when borrowing cost comes off a bit, and I predict that it may well do, I think we'll see some of that expansion come back in. And Kent and InterBay particularly are well versed to do that. And for those kind of up to 10 property portfolio landlords, and they are still professionals, Precise will be well placed to help look after them as well. I just think there's been a risk and reward dynamic for that. I've got 1 or 2 property market that's meant some of that has exited, but I think the -- I've got 20 -- 100, 200 property market, they're in it for long-term capital appreciation and wealth creation. And I think that market still works and landlords tell us it does. So that would be my sense of it. So hopefully that covers the points in that one. What was the next one, Ed?

Yes. The next one was just a detail point and then a capital point. On the detail point, I think you said in the past that you saw your through-the-cycle margins at sort of [ 2.70% to 2.80% ]. Is that still a number that we should be thinking about or should we really consign that one to history? That would be -- this in detail point. And then the second thing in terms of capital, I've got the 2% headwind from Basel III. I just want to check, is there any other things we should worry about in the capital story? And if not, am I right in the assumption that, broadly speaking, lower volumes will mean bigger cash returns? And I guess related to that, is the sort of GBP 50 million a half, is that like the maximum buyback you could do sort of mechanically, because there's just not enough shares available? And if so -- do we -- is the special dividend something you would never do or is that something we should think about? How would you think about sort of cash return, I guess in a lower growth environment?

Okay. Thanks. I'll tackle the first part of that and then I'll ask Vic to talk about the capital piece. What I actually said on through-the-cycle margins were, if you look at our historic averages prior to the period of rapidly rising interest rates, we've traded at margins between [ 2.40% and 2.80% ]. That I do think is a relatively normal, stable market position for this organization, accepting that clearly we're now on MREL Bank. So there is a bit of drag from having to carry that MREL. And I think in the medium term, that's the kind of NIM delivery range that a fully secured lender with a low loan-to-value profile and not too much in the way of kind of credit loss baked into the balance sheet, I think that's a very acceptable and tolerable net interest margin. Vic, do you want...

Yes. So, no, I guess on the capital, I mean, I guess no, I don't see that there's anything to worry about. I mean, we do -- we have got that uncertainty over Basel what we have put in per the current consultation paper, and hopefully in the very near future, we will get the clarity on that. I mean I think we have been well capitalized. We will always continue to evaluate growth opportunities versus return. And the Board has made that commitment to return excess capital to shareholders. I mean the lower growth that we -- that has facilitated and assisted with that buyback, and we do very much just look at it at the point in time to make that decision. So special dividends, we did do 1 last year, would always contemplate it in the future, but I think we just need to get through, get Basel, sort of get that clarity that we've been waiting for, for a few years. And then we will relook at everything again and get onto that strategic capital path. But we will always look to return excess and balance that against attractive growth.

Thank you very much. We currently have no further questions, so I'd like to hand back over to Andy Golding.

Thank you very much, operator. I think in closing, obviously, I'd like to say thank you for joining and thank you for the questions. I hope what you've heard in our presentation this morning is that we're endeavoring in some relatively complex market circumstances to do the right thing. We're exercising discipline. We're not gunning after growth for growth sake. We are reentering some of those higher-margin segments because we think the macro is now supportive. We're chunking through the repayment of our TFSME by making use of a blend of retail and wholesale expertise, I think demonstrably managing costs while still investing in the business for the future, so that we can modernize the shop for the long-term benefit of what the shop delivers to its customer base. And that's good for growth, operational efficiency and cost in the long run. And we're planning conservatively and endeavoring to be transparent about trying to take you guys and our owners on the journey with us. So I hope that some of those key points have come across this morning. And once again, thank you very much for joining.

This concludes today's call. Thank you to everyone for joining. You may now disconnect your lines.