Paragon Banking Group PLC (PAG) Earnings Call Transcript & Summary

Okay. So good morning, everyone, and nice to see you all, and welcome to Paragon's 2025 Interim Results Presentation. We'll shortly run through the financial and operational performance and then provide you with our perspective on the outlook, as well as, of course, leaving plenty of time for your questions. Before we get into the detail, let me spend a few minutes looking at the key highlights from the financials and some observations on our strategic delivery and progress. The first 6 months of this financial year have produced another strong financial and operational performance. And as you would be expecting, I am absolutely delighted with these results. Despite high levels of volatility across economies and financial markets, we have delivered good outcomes for our customers and shareholders. We've made excellent progress against our strategic objectives, continued to demonstrate the resilience of our business, as well as the benefits of our diversification strategy and the investments we have made in technology over recent years. In terms of the guidance we set out at the beginning of the year, they are either on target to be met or bettered. And today, we are reconfirming our full year guidance or in some cases, upgrading them. Underlying operating profits increased to GBP 149.4 million with pre-provision profits up 5.2%. Underlying earnings per share up 9.6% and our return on tangible equity increasing to 17.8%. Fundamentally, these results have been achieved through a combination of good loan book growth, resilient margins and a disciplined approach to cost and risk management. Loan book growth itself at 4.9% was in line with the long-term trend. Margins were better than expected with NIM standing at 313 basis points, despite the market volatility and a falling interest rate environment. We now expect that our full year NIM will be greater than 300 basis points. We've always applied rigorous cost management controls, and we are now also benefiting from the investments in technology made in recent years. Our market-leading cost-income ratio has therefore improved further year-on-year, down to 35.2% and absolute costs are, in fact, lower year-on-year with headcount 10% below where it stood 2 years ago. Our high-quality, seasoned loan book continues to demonstrate resilience, and our credit performance remains excellent, reflected in an impairment charge of only 19 basis points. As you can see, our financial performance has been strong, and we remain confident in the outlook. However, I'm equally delighted by the progress achieved in our strategic objectives. Our strategy has always been to be a U.K.-focused specialist bank, seeking to deliver strong, sustainable returns over the long term. This is evidenced by the consistently stable improvement in these charts. The 10-year compound annual loan book growth being 5.4%, operating profits at 8.9%, and with careful capital management, earnings per share has seen a compound annual growth of 12.1%. And alongside a consistent delivery, our return on tangible equity target has been met between 15% and 20% per annum. We are very proud of the performance of our business and the quality of our loan books. They underpin these long-term results and have withstood a multitude of stresses across this period: from Brexit to COVID, with our customers facing the sharpest rise in base rates in modern history across a relatively short period, an ever-changing regulatory landscape and more recently, volatile interest rates alongside, of course, the latest step-up in uncertainty in the geopolitical landscape. Given the uncertain times in which we live, it demonstrates a track record of mitigating volatility wherever possible and seeking to optimize risk-adjusted returns backed by a high-quality loan book through the cycle experience and a deep understanding of the specialist markets in which we operate. And this long-term stable progress has continued in 2025. Looking across our five key strategic pillars, we can see that the growth in the loan book is in line with the long-term trend. In the past, growth has been achieved organically and inorganically via M&A. Whilst there's nothing specific on the horizon, you would expect us and should expect us to continue to follow this strategy, knowing that anything we did would have to meet our tough return and risk hurdles and, of course, make complete sense strategically. We no longer need to refinance old legacy wholesale funding, which has materially reduced the need to raise substantial funding from the savings market, giving us better pricing control and helping with NIM management. 2025 has seen extensive diversification of funding with repo lines, a recently launched Covered bond program and the very exciting launch of Spring. I'll talk about more about this later, as this is not just a new product. It is an important part of our technology digitalization program, delivering a new way to engage and transact with customers. Our digitalization change program itself is not complete, but its progress is evident in improving customer experience, enhanced data and cost efficiency, while supporting our other strategic priorities of growth and diversification. Internal capital generation is a real strength of our business, adding 1.3% to CET1 across the 6 months as are our strong capital ratios supporting our growth ambitions and the further buyback we announced today of GBP 50 million. There's a lot of debate around sustainability. We remain committed to doing the right thing, and we are on target to achieve operational net zero by 2030. Financed emissions are a lot harder to deliver on as ultimately, it's not our decision about when and how to invest. However, we are actively engaged in the various processes and in supporting customers meeting their objectives and ambitions. It's clear that our H1 performance is excellent, and this is a reflection of our long-term disciplined approach to delivering strong and sustainable financial and operational performances, whilst maintaining a low risk appetite and low volatility in our outcomes. And I will now hand over to Richard to look at the period's performance in detail.

Thank you, Nigel, and good morning, everyone. Our financial results for H1 continue the themes I discussed at the 2024 prelim, but there are a few new items which I'll call out as I go through the usual structure of the presentation. I'll start with our income statement, where underlying profits were up 2.1% year-on-year at GBP 149.4 million. Pre-provision profits were up 5.2% at just under GBP 165 million. Total income was GBP 7.4 million higher than we saw in H1 '24 at GBP 254 million. And within this, the average loan book was up 5.2% and NIM was 6 basis points lower, but this latter figure was only marginally down on the H2 '24 level. It's worth remembering that the ongoing share buyback has an adverse impact on absolute profits. This will be around GBP 5 million for the last year. However, the favorable net effect of the buyback resulted in underlying earnings growth of 9.6% compared to the half 1 '24 level. And it is this underlying earnings progression that ultimately drives the full year dividend. I'll talk about the various line items in the next few slides, but I would note that now that although we gave broad disclosures about the scale and nature of our Motor Commissions at the '24 year-end, we've made no provision. The FCA's comments that a redress scheme of some nature is likely, and their focus on the firm's operational readiness to manage a redress scheme together with a trend by wider market participants to make a provision, means we posted a scenario-based accrual of GBP 6.5 million in H1s. Even with this, when included the lower year-on-year fair value charge, our statutory pretax profits were 26.7% higher than the H1 '24 level. On net interest margins, H1 '25 maintains the theme I've discussed over the past few announcements, highlighting a gradual tightening of deposit spreads that arose firstly, as the deposit beta from rate increases reduced, and secondly, as interest rates started to fall. As rates have fallen, asset spreads, which are swapped income over SONIA, have widened as expected, with the mortgage book 11 basis points higher than the H1 '24 level and the commercial book 21 basis points higher. The other support to group NIM comes from the continued structural change in the mix of the portfolio. The loan growth bullets on the slide detail the period end to period end movements. However, it's the average balances that drive income. The average balance of the commercial book rose 11.5% from H1 '24 compared to 4.2% on mortgages, clearly demonstrating this mix effect. My following slide looks at deposit spreads in a little bit more detail. Jumping to the bottom line, you'll see the spot period-end position shows the gradual deposit spread contraction since its peak in September '23. The flexibility in our funding model has allowed us to moderate this impact through adapting the relative scale of fixed rate and variable rate deposits that we choose to attract. The variable portion of the deposits has risen from 34.5% in September '23 to 52.2% now. Our first covered bond issue completed in H1 adds tenor to our overall funding base in a net cost-effective way. On operating costs, I've added a little bit more color to our cost:income chart to show the elements relating to tech spend, other end costs and then other expenses. As a proportion of our income, our expense tech spend, and that's both BAU and the digitalization program has equated to between 5.2% and 5.8% of income across the 5 half year periods since H1 '21, with the current period standing at 5.4%, and this translates to just under GBP 14 million. The tech element is the dark colored stack at the bottom of the chart and includes all the BAU costs, change in development expenses, cyber-related costs and the depreciation of our tech. Below the usual chart, you also see a second one that shows how the value of software intangibles has grown in the balance sheet as we've been progressing this digitalization program. As I mentioned before, we capitalize where we have to. But wherever we have a choice, our strategy is to expense change spend. This close management of projects and cost transparency minimizes the potential for costs to run away themselves and also keeps benefit realization at front of mind at all times. Rather than incurring total costs of around GBP 185 million for the current year, we now expect them to be a little below that level. And this is despite the launch of Spring, ongoing IRB project costs, and the NI hikes that impacted from the beginning of April. The Economic outlook seems to have changed by the hour for the last few months. However, our broad approach remains cautious on GDP and inflation and our severe scenario retains a very material house price adjustment. Importantly for us, our core expectation for base rates sees a gradual reduction down to a terminal rate of 3.5%. Few of our customers are directly impacted by tariffs and the lower rates that stem from the recent economic shocks, both support affordability and increased customer demand in our key property-related markets. So, whilst the immediate impact of market turbulence and rate volatility aren't ideal, we do see the recent developments as a net positive for Paragon in the medium term. Against the backdrop of falling rates, the net free reserve hedge that we put in place when rates peaked provides important margin protection and the position at 31st of March saw the GBP 1.2 billion hedge having an average remaining term of 4 years. The weightings of our various economic scenarios that feed into our IFRS 9 models remain unchanged from their September '24 level. In terms of impairments, at 31st of March, our ECL coverage ratio stood at 47 basis points, which is 1 basis point lower than it was at September. As noted on the slide, scenario weightings and overlays remain high by historical standards and a return to 2018 levels, for example, shown in the bottom table, would see coverage fall to 42 basis points and generate a circa GBP 9 million income statement release. The overlay is slightly reduced in H1, reflecting the reduced flow of new problem accounts from the pre-rate and inflation-rise development finance cohort with more normal in-line performance being seen from the wider book. The higher provision in the period reflects the ongoing workout of loans in that challenging cohort. The overall impairment charge for H1 was 19 basis points compared to 14 basis points in H1 '24 and 18 basis points in H2 '24. My capital movements waterfall demonstrates we've seen little change from the previous trend with buybacks representing 0.6% of CET1, exactly offsetting the net capital generation after dividends and growth requirements for the half year, which left CET1 unchanged from the start of the period at 14.2%. With that CET1 unchanged, the group capital level remains strong. We've got no AT1 issuance. And so we have to cover our full Tier 1 requirements with CET1, meaning our regulatory CET1 requirement grosses up to 10.6%. That's 3.6% below our current level. The capital requirement in the chart represent the levels following our most recent C-SREP, which is the PRA's formal assessment of our capital requirements, and that was completed in the period. We continue to engage with the PRA on our IRB application, but this is a long process, and we'll update you when we have some concrete feedback. We have, however, had our application to join the interim capital regime accepted in the period. The ICR was created to give small firms an extra year to prepare for the implementation of Basel 3.1 changes. The whole 3.1 process, this application and interaction with Pillar 2 will hopefully become clearer as 2025 progresses. My final slide covers capital management. Our interim dividend policy is to pay 50% of the prior year final. So the movement in H1 doesn't run in line with earnings growth. Our full year policy of paying around 40% of full year underlying EPS remains unchanged. In 2015, we started a buyback policy that ran alongside organic and inorganic growth. Since then, we've invested GBP 583 million in this route, taking the share count down from 305 million to 197 million shares across the same period. Today, we've announced a further buyback of up to GBP 50 million to be completed this year. We continue to see the buyback as a strong discipline where we can't otherwise deploy excess funds in our core businesses. However, we do recognize that at higher share prices, the earnings and in turn dividend accretion from this approach will reduce. So we keep the scale of future buybacks under review as we look to optimize overall returns. I'll now hand it back to Nigel. Thank you.

Okay. Thank you, Richard. I now want to run through how our businesses are performing and the outlook for the period ahead. First, we need to look at the context of the environment in which we are trading, as naturally, this creates many layers of influence over the group. Whilst also, I might add, presenting opportunities, all of which can clearly influence our strategy. We are in a period of heightened geopolitical and market volatility, which naturally impacts both confidence and the ability to plan with certainty. However, we have always operated a strategy to achieve low volatility. And as you saw earlier, this has been successfully achieved on a sustained basis. In the current environment, our U.K. focus helps here, but this is also affected by the growth in the domestic economy. Growth rates across the U.K. economy have been subdued for some time. And whilst the economy is showing some modest recovery, it remains far below the levels we all wish for. We do believe interest rates have further to fall, which should continue to support the existing benign credit environment and help to stimulate demand, particularly in geared sectors such as property lending. With 91% of our loan book being property backed with low LTVs and a strong customer profile, we are already well positioned to deal with the geopolitical uncertainty and market volatility mentioned earlier. This, therefore, should present us with opportunities. We have long held the view that consolidation in the banking sector is needed, some of which the sector saw last year, but more may emerge in the future, particularly within the small and mid-tier banking sectors. What is needed for this to happen is a better understanding of where the shifting sands of regulation will settle. The government's growth agenda includes an aspect focused on rebalancing of the regulatory landscape, some of which should emerge in the relatively near future, including the review of MREL thresholds, which itself is expected to conclude in the summer. There is, of course, the Supreme Court decision on Motor Commissions together with the FCA's response as well as a number of government-led initiatives expected to affect the world of conduct risk, including affordability assessments and the role of FOS. The important issue here is the need for certainty and confidence and the need to understand the rules of the game before investments can be made. As always, certainty is crucial. Another key strategic point I want to make is on technology. Our technology change program to date has been largely focused on re-platforming our new origination capabilities, with a drive towards using modern digital architecture, employing extensive API capability and moving as much as possible to the cloud for agility and capability. We have systematically launched a savings capability, enabling our products to be digitally available on third-party platforms. We've re-platformed our development finance business in its entirety, both front and back office. We've re-platformed our SME lending businesses origination system, enabling all applications to be risk rated using 2,900 pieces of customer and other data, through a cloud-based decision engine, where currently 1/3 are auto-decisioned, enabling our experienced underwriters to apply their specialist knowledge of more complex cases. We have just launched to the whole of market a new buy-to-let broker and origination platform, using machine learning, AI and cash flow assessments with optical character recognition, improving speed and productivity. We also added enhanced customer retention functionality, resulting in 70% to 80% of maturing customers to recommit to Paragon for a further term. Our platforms have been built with cyber resilience by design alongside API and cloud-based technologies, where we now have 94% of core systems hosted and much of this technology has been designed to be capable of being replicated across the group. And as I mentioned earlier, we have also just launched Spring, our exciting new digital savings brand. The Spring launched just a few weeks ago and has been designed to remove as much friction from the savings process as possible. It will literally take a few minutes to open an account, and you will then be ready to transact. Using open banking, we are able to link directly to our customers' current account, which is visible and accessible on the same page of the Spring app and where money can be transferred in and out instantly. And naturally, we pay a great rate of interest. There are no tricks, no restrictions, no bonus rates. And in effect, the customer has the benefit of and access to their own current account, but with an excellent interest rate. The technology is outstanding using open banking and extensive cloud-based API functionality and with a state-of-the-art financial crime capability, which gives flexibility, a level of functionality that hasn't been readily available before, and adds significant value to customers. It's estimated that consumers are missing out on over GBP 20 billion per annum of lost interest through these types of accounts. Indeed, the press on its launch described Spring as a game changer of a savings account. As is apparent, this is a great product for Spring's customers, but it also brings great benefits to Paragon. It reaches customers not readily accessible to us through our existing distribution channels with GBP 0.5 trillion of balances sitting in current accounts and easy access accounts of the clearers, the largest savings pool in the U.K., the scale of this opportunity is substantial. Employing digital marketing helps reach new distribution channels and additional points of customer engagement. Spring also provides enhanced pricing control, reducing the need to focus excessively on the Best Buy tables. And its innovative technology and functionality can be employed in various other areas across the group, providing additional opportunities over time. We have launched with just a straightforward easy access account, but we have a full road map of product and functionality enhancements to come that will provide even more customer choice and fully leverage the technology that we've built. I'd now like to touch on the trading performance and cover the outlook. And given that I have just covered Spring, let me start with funding more broadly. For 10 years, our savings business has had to run very hard, supporting good loan book growth, refinancing our liability structure, which was historically focused on the mortgage-backed securities market and more recently, refinancing TFSME funding from the Bank of England. In reality, this job is complete, but it did require growing our savings balances well above its natural market share for an extended number of years, much of which has been done at the more price-sensitive end of the market. Diversification of funding lines is important in establishing and maintaining price control and NIM management. So in addition to change in the demands we place on our savings business line, we have also sought to extend our capability in broader funding channels. Obviously, Spring is an important step here. But in the wholesale market, we launched our inaugural deal in the Covered bond market with a GBP 500 million tranche, which was heavily oversubscribed. Additionally, we've built a range of repo facilities with market participants and noted the change in approach towards demand-led repo market by the Bank of England. With extensive contingent collateral, we are well positioned to use these new funding sources more actively. You have seen how we have been able to manage our NIM well over an extended period of time, and we've added resilience as interest rates fall, including through the structural hedge. The strength of our existing savings franchise has now been extended and will give us better pricing control through a range of platform relationships, the addition of Spring and an enhanced wholesale funding capability will all provide us with the best opportunity to manage our funding costs and optimize NIM. So let me now turn to the lending divisions. Buy-to-let new lending grew strongly in H1, up 25% year-on-year to just over GBP 112 million (sic) [ GBP 812 million. ] With continued strong retention levels, the buy-to-let loan book grew by 4.9% and the so-called new book grew by 10% to over GBP 11 billion. The pipeline is softer, but this is reflective of the volatility created initially by the Autumn budget and its effect on interest rates. The stamp duty window, which closed at the end of March, the wider geopolitical uncertainties that have emerged post the calendar year-end. And during this period, our new origination platform has effectively recalculated the definition of a pipeline loan, resulting in a deflating of the total. Since the period end, the pipeline is up over 12%. However, one thing to always remember, our approach is to prioritize NIM, and we will not chase new business just for the sake of it. Our through-the-cycle experience and low risk appetite continues to deliver outstanding results. Low arrears and low LTVs ensure credit losses are minimal and with only 1.8% of the book above 80% loan-to-value, the book will continue to be highly resilient even if the environment weakens. Affordability remains strong and the pipeline debt service coverage ratio, the ICR, stands at over 211%. It's interesting to note that despite lending a total of GBP 17 billion since the financial crisis, we have only ever written off GBP 1.7 million in buy-to-let lending. Turning now to our Commercial Lending division. Development finance new lending increased by 7.5% year-on-year to GBP 262 million, with the loan book increasing to GBP 877 million. There has been some uncertainty given the volatile path in interest rates since the beginning of our financial year as well as the sector looking for a better understanding of the government's intention to overhaul the planning rules. Despite that, the new business pipeline has been strong, up 44% on a year ago. The undrawn balances, which represents future agreed lending is up 12%. And of course, development finance is our widest margin business. So growth here is definitely supportive of group NIM. Impairments increased in the first half due to the effect of the sharp rise in interest rates across 2022 to 2024, affecting certain customers, in a similar way to the legacy buy-to-let book did last year. The higher charges relate to a subset of loans written at the start of that period, and we expect the credit and impairment performance to revert to normal levels in due course. Lower interest rates and the revised government policy, particularly the latest announcement seeking to support smaller housebuilders, is certainly more encouraging and should increase optimism further. Turning now to SME lending. The SME market is still perhaps surprisingly in recovery mode post-COVID with the weakness in the broader economy, combining with the effect of the various government schemes that effectively prefunded the needs of SMEs for several years ahead. Whilst this is now unwinding, the overall market is still smaller than it was pre-COVID. We have invested in restructuring and re-platforming the business in recent years, transforming our underwriting and service levels. It was therefore pleasing that new lending was 7% up year-on-year, the loan book up over 9% and the credit performance remains excellent. Motor Finance activity was disrupted at the beginning of the period by the Court of Appeal's decision and the subsequent operational requirements for the sector to change the way loans were processed. However, the loan book is up 7.5% with margins ending the period wider compared to the equivalent period last year. Similar to SME, the Motor Finance credit performance has also been excellent. Obviously, we must all wait for the outcome of the legal and regulatory processes, but we have always operated at the prudent end of the market, as you saw with the full commission disclosures last year and the provision taken now. However, we hope that any outcome of the current processes delivers a more level playing field, which itself will be helpful for us. Paragon's Structured Lending loan book grew by 15% year-on-year and with a stronger increase in facility limits and additional customers, we expect further growth to continue. So, in conclusion, the first half of 2025 has delivered another strong financial and operational performance. These results reflect the continued focus of the group to build strong, long-term and sustainable value for shareholders by delivering low risk and low volatility earnings profile whilst building and developing the strength of our franchises. We have consistently delivered strong internal capital, which has supported the growth in the business as well as repatriating capital to shareholders over a long period of time. Including the latest buyback, we have now returned GBP 1.2 billion of capital through dividends and buybacks over the last 10 years, which is broadly in line with our shareholders' funds today, which itself is generating an annualized profit of around GBP 300 million and a return on tangible equity comfortably in the target range of 15% to 20%. Geopolitical and financial market volatility has been an issue in the first half of the year and is likely to be never far from the surface going forward, and we, therefore, remain watchful of it reigniting and its implications. Nevertheless, we are optimistic on the outlook and regard the range of opportunities that may emerge for us as genuinely interesting. Diversification is a core element of our strategic plan. This has been executed well to date and the addition of Spring to the Paragon portfolio is not just a significant benefit to our funding capabilities, but brings a different way of doing business and one that we believe has further opportunities that will emerge across the group over time. We will be watchful of opportunities to continue to build our business through acquisitions, but only, as you would expect, if appropriate. Importantly, clarity on the regulatory landscape will be a crucial first step here. As you can see on the right-hand side of the slide, we are today either reconfirming guidance for the full year or upgrading it. However, our confidence goes well beyond the next 6 months. Our business is in great shape. We have a high-quality customer base, a strong balance sheet and excellent franchises across each of the markets in which we trade. Our technology changes are extensive and have potentially far-reaching implications. There are, of course, challenges that must be dealt with, but these are exciting times, and we look forward optimistically in continuing to build on the success of the last 10 years. So thank you, ladies and gentlemen, and we'll be very happy now to take your questions.

Ben Toms from RBC. First one is on deposits. The spread versus SONIA minus 27 basis points. Where do you think that number ultimately might go to? And is that the right way to think about it, SONIA plus a few basis points? And why do you think you've been so successful at keeping that number down versus peers? Secondly, on RoTE. You removed the word mid from your 2025 RoTE guidance, guidance which you broadly hit in the first half, but you didn't flag that as a change, as an upgrade. I'm just wondering how we should interpret that slight nuance change to guidance. And lastly, a quick one on MREL. If it does get softened the regulation later this year, does that change how you fundamentally run the business? Would you look to start growing faster?

Right. A few questions in that one. But if you do the deposit position, then I'll look at the rest.

Yes. So our view is that as rates decline, the deposit benefit should decline. And the sort of the general direction of travel gets back to something broadly neutral at around a 3.5% rate. However, I think the important thing to your point is that we have lots of levers that we can pull and in Spring, we have another one, which hopefully means that we can, as we've seen in this period, a slight delay the rate at which that additional tightening happens. On the flip side, though, is that as rates come down, and as we've demonstrated on the mortgage -- on the asset side, spreads there ought to widen. There are a number of technical reasons why that happens. We've got the old mortgage book that's running off, which is a tighter spread business than the new one. Actually as a rate for the old book as well, it reprices quarterly. And so when rates are going up, there's a net margin squeeze. When rates coming down, actually, you do a little bit better. So again, that has all factored into the improvement we've seen period-on-period. So, as I said, there are a number of offsets. And I think having that diversified approach in terms of the platforms, our direct traditional business, but then also particularly now Spring gives us plenty of levers to manage there.

Yes. I'd agree there. Optionality is kind of a by-word that you see on the asset side where we want to diversify on the income streams, but that translates as well on the liability side, give you as many levers to pull as possible. And on that, we may have just launched Spring, but we haven't finished our development plans on the liabilities either. In terms of -- I don't read too much into any nuances around mid being in there or not. The one thing which we won't do is change our return on capital guidance until we know where the capital element of that finishes with Basel 3.1, Pillar 2 consultation and of course, IRB. So it's a relatively wide range, I appreciate. But until we get to that point, then it's just we're going to stick to that range, and I wouldn't read too much into whether the mid was in or out. It's there. In terms of MREL, MREL has been a bit of a journey, personal crusade, so I want to try and get these numbers adjusted. We've had extensive engagement with the Bank of England who have been good. They've opened their doors and they've listened also with the treasury, as you would expect. I would expect something will be out before we all kind of break up for summer holidays. And we're hopeful that it will be a meaningful increase. We can't -- it's not in our control, but we hope that there will be a meaningful increase in the thresholds. Would it affect our strategy? Firstly and most importantly, we're not going to do anything that we wouldn't want to do just because of regulatory change. However, what is very evident, what we have made very clear is we don't want to trip into MREL, you just stumble over it through either organic growth or through acquisition. So it certainly means that we will have more latitude in terms of our growth strategy, as a consequence, if it comes through and if it is meaningful.

Sanjena Dadawala from UBS. Two please. First, if you could give more detail on the NIM guidance greater than 3, can mean a number of numbers. So depending on where that lands, second half can still be down 10 to 20 basis points half-on-half versus the 1 basis point in the first half. So if you could talk about those second half dynamics and going into the next year? And second question on impairments, the cost of risk is still high in the first half, we were expecting some unwind. So how to think about what's more to come and maybe some more color on the troubled portfolios and recent developments, please?

I think, if we were thinking of 3.1, one, we have said 3.1, Sanjena, so our view is that greater than 3 is somewhere between those -- that range. It's a mug's job trying to predict your NIM levels to within a couple of basis points. You're quite right, we saw a lower attrition than perhaps we were originally thinking for H1. You still see short-term headwinds, but you also have massive interest rate volatility. And depending on the direction of those moves, we've seen some months where we had a 40 basis point move in swap rates. That can have quite an impact on, a 1 basis point or 2 basis point, easily within your numbers in any period. So we're happy to stick with that sort of somewhere between 3 and 3.1 guidance in terms of NIM. Cost of risk absolutely has been elevated for us, but it's still very low by industry standards. I think the concentration there has been very much on a cohort of development finance loans that we called out at the year-end. Just by way of background, going into that sort of rate increase period, we had somewhere 540, 550 facilities that could have been impacted. 480 plus of those have repaid in full. We've got 30 that are in our, if you like, our monitor pack that are driving the provisions at the moment. And there are around 30 that are left that are fully performing. So there is potential for something to go wrong so we still monitor them closely. But I think on the back of that, you can see that there's a terrible analogy, but the pig is definitely going through the snake in terms of that portfolio. And I'd say that materially, the provisions relating to it are behind us now rather than front.

Gary Greenwood at Shore Capital. I've got three questions, if I can. So the first is on Spring. So just in terms of the rate that you're paying, I think it's about 4.3% on instant access at the moment, which is quite high relative to what you can get elsewhere, which is obviously great for customers. But I'm just wondering how you sort of think about that or justify it from an economic perspective. Obviously, the opportunity for you is accessing those balances, but those balances are quite expensive when you do access them. And then secondly, on Spring, do you see a point in the future where all of your savings products will be on that platform? And if so, what operational savings would you get from that? And that sort of links into a question on NIM. And we sort of covered a few bits of this already. But if you think about your sort of expectation that interest rates end up at sort of around about 3.5%, where do you think NIM would ultimately settle with rates at that level? Would it be around 3% mark or a little bit lower than that? And then just lastly, on the buyback, because you had quite a spike in the share price recently. Is there a point at which the shares get to a level where buybacks are no longer attractive for you and you start to think about other things such as special dividends?

Okay. I think you squeezed four in there, Gary. So Spring, you're right, it's a rate of 4.3%. So the intention is this is not a price-led proposition. It delivers incredible functionality. And it's got so much more about it than just price. And actually, if we were trying to generate significant volume in the easy access market today, 4.3% won't do it. In fact, when we launched, clearly, there have been obviously movements around and movements happen every day. We were ranked outside the top 30 in the U.K. at the point of launch. So you can see it's not a pure price-led proposition. And the distribution and the method of customer engagement and the delivery channels is not to appear on Martin Lewis' Best Buy tables. It's much broader and more focused in a much broader distribution approach than that. You asked a question, would we put -- would one day all of our savings appear on that? No. It's definitely -- we run a diversification strategy and policy. And one of the things, if you put all of your eggs in one basket, then you've just lost your diversification. So, as we kind of highlighted here, over a period of time, we have built more and more on the savings side as an extensive range of products from digital only through to postal accounts through to easy access to term, ISA, non-ISA. And then, we do replicate that through platform relationships. Then of course, obviously, we've added Spring as another channel. And of course, we've now extended our scale of activities in the wholesale markets through the covered bond and repo lines. And of course, there's a good old mortgage-backed securities market. We shouldn't forget that at any time. So the one thing I really do value about the diversification is it gives you optionality. And that optionality gives you better pricing control. If you've got one product line, the market tells you what the price is. If you have got choices, you can, therefore, move your funding sources around to what is the best and optimum position for you. In terms of the NIM, I mean, we're not going to give longer-term guidance. We always give our guidance to sort of beginning of the year and then an update halfway through the year, but to kind of work out where NIM will be when base rates settle down to whatever rate they settle down at, is also going to be subject to where the relationship to the yield curve is, because we've seen recently base rates came down and 1- to 5-year fixed went up. So it's kind of difficult to become too prescriptive about where that should be. We'll always happily do it in a year and 6 months ahead, but kind of not really beyond that. And in terms of the buyback, the buyback, clearly, the economics, the math change with the share price. But even at GBP 9, the buyback is still accretive. And Richard and I probably, it's one of our -- probably the #1 job is capital allocation. So we spend a lot of our time thinking about how and where we should allocate capital. A buyback is a really good discipline, because it sets a benchmark about everything else has to be as good or better than that. But it's also equally important to understand the same dynamic about buybacks as each of our businesses delivers different levels of return on equity. And if you just measured it about purely the maths, the only thing you do in life is one thing, either the product that gives you the best return on equity or the buyback. And in which case, what that doesn't deliver is strategic value to shareholders. So it's a more complicated decision than just simply that. But at GBP 9, the math still works. But whether it's what we do forever in a day, you'll have to wait and see, because there's always choices that we have to make about how and when we use our -- employ our capital. I think I got through all four of them.

It's Portia from Canaccord. I've got two, please. Firstly, on the Motor finance provision, can you just talk us through how you arrived at that number in the context of the commission -- the total commission paid figures that you disclosed at the last set of results? And secondly, Richard, you mentioned a new definition of the mortgage pipeline. Can you just explain what's changed and how we should interpret the period and figures in terms of what should convert in the next quarter and 6 months?

So starting with Motors, we gave our extensive disclosure of the year-end in terms of the amount we've paid and also the mix. We've -- if you look particularly at the Supreme Court case, that's very much focused at the dealers rather than brokers, around 20% of our commissions were through dealers. So when we do our, I call it, Monte Carlo scenario, probably it's not as sophisticated as that, but a lot of scenarios that we take through with the auditors. There are probably more that are focused on that dealership element rather than if not the whole range of potential commissions. But we do cover the whole ambit. So I think that if you're looking at potentially the amount of commission that we -- or the amount of provision we have relative to the amount of business that we've got, you probably want to -- and relative to others, you want to be looking at the dealer broker business mix as well to try to do some of your -- like your benchmarking. Because I think because we're very much underweight on dealer, you would expect a smaller proportion of the absolute value of cases that are being written to be provided in our case as it stands. And that's what's come through from the scenario analysis. In terms of the pipeline, the new system is great. But effectively, it prescreens a number of cases. So if you were going to get 1,000 cases under the old system, all of those would hit the pipeline. What's happening now is that maybe only 850 of them actually get into the pipeline. But you can have a much better conversion rate of those 850, because the ones that were going to just be, if you like, declined within the first week or so aren't coming through at the same level. So it's quite difficult to look at what you've got and then say, well, how much would it have been, because you don't know you've got it, because it hasn't come in. But our estimates are around that 10% to 15% level in terms of the -- if that sort of like-for-like approach with the old pipeline. The other thing though, of course, we had volume being sucked into H1 '25 because of the stamp duty changes. So stuff that would normally have still been in the pipeline at period end is actually completed. So points on the board, if you like, are better than the potential in terms of the -- those loans actually being on the balance sheet. But also since then, the pipeline has grown, I think, it's around 12% up today compared to the end of March. So that, the new system is being well received and generating good flow. I do think some of the historic relationships that you will have seen in terms of -- if I've got X of pipeline, I expect Y to complete in the next quarter. I think we need to probably go through another quarter or 2 to work out exactly how that relationship is going to pan through from what we do.

Do we have any more questions in the room? So we have some online, do we?

Yes. We've got questions from two people on the webcast. The first one is from Dominic Carver at Trinity Bridge. Could you please give us your thoughts on the potential for AT1 issuance?

Do you want to cover that, Richard?

Yes, sure. So well, I mentioned we don't have an AT1 in the stack. It's something that we have -- we've been through the process with the PRA. So we're ready to go if we need to do one. The permissions are included in our AGM approvals every year. I think the just doing an AT1 and sitting on the additional capital is just dilutive. And so one of the things that you would be looking to do is to have a pretty near-term use of that additional capital to want to press the button. So that would be faster than the normal growth rates or potentially something inorganic.

And then second is from Corine Cunningham of Autonomous. Three parts to this one. First, could you please comment on the likely impact of Basel IV? Also, why did your Pillar 2 requirement fall? And thirdly, what preparation can you do to assess the impact of the Renters' Rights Bill?

Okay. You cover the Basel 4, 3.1 and the Pillar 2. I'll do the Renters' Rights.

Yes. Yes. So Basel 4, 3.1, we gave disclosures about what the impact are to at any point in time, the scale of those impact will vary depending on the new business you write, what the LTV is going to be. So we actually disclosed 117 basis points would be the impact based on the half year figures. We're part of the interim capital regime that should buy an additional year in terms of getting having the impact of 3.1 [ bite, ] and clearly, that gives us time to accrete more capital and manage the business accordingly. So it's not something we're particularly losing sleep over. We're more focused on progressing things with the PRA around our IRB accreditation, rather than necessarily worrying about 3.1 because we've got a strong capital base to start with. Sorry, the second question was on Pillar 2. Yes. So I'm not allowed. The PRA would kill me if I explained the constituent elements of Pillar 2. But clearly, that reflects their view of the risk profile of our balance sheet. Sorry, I can't go into more detail on that.

In terms of the Renters' Rights Bill, this is going through Parliament at the moment. It's being backwards and forwards between the Commons and the Lords. And it's not obvious that it's going to make the statute books this year. So it remains to be seen. I'm sure it will. It's a very kind of a different process. And then certainly, the government are trying to essentially codify something that has been a very open interpretation to the eviction process. So currently, you have the ability to evict a tenant for -- it's defined as no fault, like whenever you want, however you want, serve notice and then you can do it. And the government have said that's unfair. But what they've done is they've just replaced it with a very long list of acceptable reasons to evict. And all it kind of essentially means, if you -- if a landlord wants to sell the property or a tenant is not paying their rent or anti-social behavior, kind of the things that -- these are the reasons why you would expect to do that. They're all in there. So in many ways, all it requires the landlord to do is actually have a bit more planning and a bit more preparation in that process rather than it being, oh my God, it's going to kill the rental market. It's not. So the only thing that I think the government needs to make sure they do is there's currently no defined implementation phase for this. So once it hits the statute books, it's then within the Ministry of Housing's ability to set the implementation phase. And they just need to ensure that's a sensible period, because you can guarantee on day 1, neither tenants or landlords will fully know all the rules and to be able to implement it. So as long as they do that, it will be fine. And we'll still have a rental market, which will still be not enough landlords and too many tenants relative to the available number of properties. It's always been like that, and I'm sure it will continue to be like that into the future. Are there any more questions online? That's everything. We have one more from the room.

It's Rob Noble from Deutsche Bank. I just wanted to ask on Spring. How exactly is it marketed? Is it going to open up the pool of potential depositors? Does it eat into your existing deposits? How do you see that actually working?

Yes. So if you imagine our existing depositors, so this is like hugely simplifying. The profile of that -- the average age of our existing deposits is 61. And you can therefore see it falls naturally into the cash rich, time-rich, baby boomer profile. What we are targeting through Spring is a different pool of customers. Firstly, the pool is -- obviously, everyone has got a current account as it were, but a number of people will just leave their surplus cash in an easy access account with their clearers. And it's literally you go, I can move my money from there to there, but the pricing you get, the returns you get are really quite unattractive on a relative basis. What we're trying to do is appeal to people who have got maybe not as much cash as the baby boomers, but still -- will have enough cash, but they probably lack time as it were. So we've simplified a process that makes it easy for people to, a, open an account in literally minutes and to be able to move money from one to the other as if it's almost like an internal account within the clearing bank. So if you open the app, you look at it, top half is Spring, bottom half is a clearing bank. And it's your clearing bank. There's no requirement where we say, you can have this account but you have to open the current account with us. Keep the clearing bank, whichever clearing bank you want, but we can move -- the money can be moved and you'll get -- as you heard earlier, 4.3% is the current deposit rate there. You'll not get that from the clearer, okay? They do lots of wonderful things, but you don't get that type of return. So you're basically getting what looks and feels like an account within a clearing bank account. And that's kind of the technology that we've been able to use has been able to achieve that. The scale, GBP 0.5 trillion, I mean, huge, absolutely huge. And it covers like 55% of the U.K. population. And the estimated value, the lost value is around GBP 20 billion. So we're not going to get all of it, but a relatively small percentage would be a material number for us. So it's a huge opportunity. And we -- as you kind of would see, we're very excited about it. And you guys have all got lots of money. And if you struggle to open the account, give us a call, we'll help you through it. Any more questions? If not, I will very happily wrap this up. So thank you very much for your time this morning. Richard is available to talk to anyone who wants to discuss the numbers in a bit more detail. He set aside time over the next couple of days. And we'll be around here for a little while to come. So if you want to come up and have a chat and we can help you open your Spring account. Thanks very much.