Permanent TSB Group Holdings plc (PTSB) Earnings Call Transcript & Summary

Good morning, and welcome to the 2022 interim results presentation. I'm going to give a short presentation on the progress the bank has made in the first half of 2022, and our Interim CFO, Declan Norgrove, will provide more detail on the financial performance. And after that, Declan and myself will be more than happy to take questions. So we're going to move to Slide 4, which is a summary of our performance. The first half of 2022 saw some significant milestone achievements on our transformational journey for -- on the transformational journey for Permanent TSB with the approval from the Competition and Consumer Protection Commission, or the CCPC, coupled with the bank's shareholder approval to complete the acquisition of approximately EUR 7.6 billion of Ulster Bank retail, SME and asset finance business in the Republic of Ireland. While the transaction is still subject to regulatory approval, we are on course to complete it across quarter 4 of this year and into quarter 1 of next year. Performance in the first half sees the bank competing very strongly, bringing real innovation to the market, introducing new customer offerings and attracting new customers to the bank. The bank has reported an underlying loss of EUR 2 million, and that's an improvement when compared to the underlying loss of EUR 4 million in the prior period. Total new lending in the first half of 2022 amounted to EUR 1 billion, an increase of 22% year-on-year and an increase of 74% when you compare to the first half of 2020. And this increase largely reflects a strong performance in mortgage lending, building on the momentum of 2021 as the prior pandemic-related uncertainly caused a fall off on mortgage activity. Our mortgage market share remains strong at 16.3%, and we're also pleased to report a very strong performance in SME lending, where we continued to grow. We are continuing to attract tens of thousands of new customers to Permanent TSB, opening 70,000 new current and deposit accounts throughout the first half of the year. And that's an increase of around 130% when you compare it to the same period last year. Net interest income was EUR 155 million in the first 6 months, representing a 2% uplift compared to the first half of 2021. When you exclude the cost of holding additional excess liquidity, the bank's underlying net interest margin was 1.74%, and that's increased from 1.72% in the prior year, so an increase of 2 basis points year-on-year. Operating expense excluding exceptional and other nonrecurring cost were EUR 189 million, which is 12% higher versus the prior period. And we signaled this earlier in the year that our cost would increase by this level. We continue to maintain tight cost control over the administration cost -- administrative cost base. However, we have accelerated our planned investment in technology, driving higher investment cost together with a rising depreciation charge as we pay for investment in the business. Payroll cost have increased through wage inflation, and the bank's investment in resourcing with total staff numbers increasing with -- by a net of 160 staff in the first half of the year. Our NPL ratio is reduced to 5.2%, and that's a decrease of 30 basis points from 5.5% at the end of 2021. And nonperforming loans themselves have reduced by EUR 46 million to EUR 771 million at the end of June. The bank continues to actually manage the NPL portfolio, and we expect the NPL ratio to reduce below 4% following the completion of the transaction with NatWest. In June 2022, the bank issued EUR 300 million of senior preferred notes, and we remain above our management and regulatory MREL requirements. All capital ratios remain above the management and regulatory minimum, with the common equity Tier 1 capital ratio at 14.7%, and that's in line with the reported level at the end of December '21. If I just turn to Slide 5. This relates to the economic -- the macroeconomic position of Ireland. House price growth has been a feature of the Irish housing market over the last several years, and in particular during COVID-19 due to the stalling of supply and an increase in demand helped by record levels of savings. This growth is expected to ease in 2022 to around a 5% increase in house prices and moderating further to around 4% in the following year. Consumer prices in June, that's measured by the consumer price index, recorded a 9.6% annual increase. But this is expected to reduce to around 7.8% by the end of '22 and easing to a more normalized 3.7% in 2023. The rapid increase has mainly been driven by increase in fuel costs, transport and housing cost. And last week's announcement of a 50 basis point increase in ECB rates is aimed at curbing the growing levels of inflation. The ECB rate is expected to reach 100 basis points before the end of the year and rising to at least 1.75% in 2023. If we look at the labor market, it continues to recover with the unemployment reducing to 4.3% for 2022. And based on current macroeconomic forecast, we're seeing a slight increase in 2023. But we should also mention that employment levels in Ireland have reached a record 2.3 million this year, which is the highest level of employment ever recorded. So it's very strong in that respect. Wage inflation pressure has intensified during the year as unemployment rates return to pre-pandemic levels and with the cost of living also increasing. And investment rebound is due to be -- to the expected growth in housing completions after the flat trend from 2019 to 2021, and indeed, a return to business investment growth after the uncertainties of the pandemic period. A surge in housing starts since the end of the lockdown points to rising completions over the coming years. A total of 20,400 were completed in 2021, and they're expected to be around 25,000 in 2022, and indeed, further increases expected in 2023. Mortgage approvals have continued above pre-COVID levels over recent months, with a surge in remortgaging and top-up approvals as low levels of supply affect the level of housing purchases. If we turn now to the next slide, which is around our balance sheet growth and how we've grown certain aspects of our lending portfolio. We've continued to support our customers in 2022 with a total new lending of over EUR 1 billion in the first half of the year, and that represents a compound growth rate of 32% in the last 3 years. So a very strong growth in that respect. Mortgage drawdowns in the Irish market have surged during the year with an increase of 27% year-on-year, and new mortgage lending in Permanent TSB has reached over EUR 900 million, which is a 21% increase versus last year. Our mortgage market share is at 16.3%. However, we've seen a significant strong pipeline of applications in the last number of months. So we can see a fairly positive and buoyant second half of the year when it comes to drawdowns. We're also pleased to have recently announced changes to our mortgage Permanent offering to continue to be competitive in the market. We launched the inaugural green mortgage product, which offers discounts of 20 basis points and 5-year fixed rates for both new and existing mortgages on homes with a building energy rating from A1 to B3. And in the month of June alone, over 20% of our mortgage drawdowns were in the green mortgage product. And secondly, we reduced our interest rate for new customers on our 4-year fixed rate product by 20 basis points at a rate of 205 basis points or with -- and that's with regard to an LTV of less than 80%. And we've seen that this is extremely popular, with the applications in June alone accounting for 30% of all applications. And we've seen momentum in both of those products, as I mentioned. We continue to manage our product offering carefully, maintaining price discipline and credit underwriting standards. If we have a look at SME lending, and this is a key growth area for us in the business banking space. Our lending in the first half was EUR 70 million, which is a 67% increase compared to last year and a significant growth over the last number of years. We continue to partner with the Strategic Banking Corporation of Ireland, lending to its Future Growth Loan Scheme that launched in late 2020 and the Brexit Impact Loan Scheme, which launched this year. We also recently announced ambitious plans to scale up our SME lending with the launch of a EUR 1 billion SME lending fund, which we aim to deploy over the next 3 years. And this is also a bank transaction, when complete, will add significant momentum to our SME growth plans by adding the Ulster Bank asset finance business and indeed the micro SME business, which will add to our existing portfolio of product offering. And our pipeline in this area -- our pipeline in SME lending is extremely strong. So again, we expect a buoyant second half of the year and into next year as well by way of our growth trajectory here. New consumer lending was EUR 50 million, which is an increase of 6% year-on-year. It's a modest impact, but it has been impacted by the slowdown in demand over the last 2 years. And that's primarily driven by higher levels of household deposits and the impact of COVID-19. However, we are happy to see the progress in our digital adoption here, where 77% of new term lending is through our direct channel. If we just look at our strategy on Page 7. As part of the bank's operating rhythm, our strategies are refreshed on an annual basis, allowing us flexibility and adaptability to meet market changes. The work done to date has solidified our strategy and supports Permanent TSB as a key player in an evolving marketplace. Our business model is based on a business with great people and great technology, where we'll have a digital first solution for customers needs together with a nationwide presence. The bank strategy builds on solid and strong foundations that have been laid in recent years, and it provides a direct focus over the coming years on our strategic areas such as customer journeys and experience, digital platforms, and most importantly, cybersecurity and resilience with regard to how we operate our business. It also ensures that the bank is positioned strategically to make the most of the opportunity presented by the exit of Ulster Bank and KBC from the market both through the acquisition of certain elements of the Ulster Bank business and taking organic growth opportunities. When executing the bank strategy -- when executed, the bank strategy will support the delivery of the bank's purpose and ambition. And our purpose remains the same, which is around working hard every day to build trust with our customers and to highlight that we are a community of people who serve the community of customers we have. And we will do this by building a sustainable organization that is transparent and fair with customers. The bank's strategic division has been developed with our customers at its heart and in consideration of all stakeholders, that is our colleagues, our shareholders, our investors, our regulator, and indeed, the broader Irish community. And to achieve our ambition, we'll be focused on a number of key priorities, including increasing trust, advocacy and loyalty with our customers; enhancing our digital capability; embedding an open, inclusive, risk aware, a growth culture; and simplifying our business. And we believe by focusing on doing the right things, that we've no doubt that we will build a successful and a profitable bank that we can all be proud of. If we just move to the next slide, which really shows some of the progress we're making across these strategic priorities. And personal service will remain at the heart of everything we do. However, as both customer and colleagues experiences have changed so profoundly, digital is playing an ever increasing role in our service offering and our future ways of working. There's no doubt that our branch network will need to continue to evolve to adapt to the changing needs of customers. But we are committed to maintaining a nationwide network with a presence in communities across Ireland to ensure that we can support our customers with the big financial decisions of their lives. The ongoing focus the bank has is on customer loyalty, trust and digital innovation, and this has enabled the bank to achieve a top 2 position in relationship NPS again this year. And indeed, we're striving for the top spot. We are competing very strongly, bringing real innovation to the market. And as part of this, we can see that over 45% of customers coming through our mortgage channel are new to the bank. And that's up 3% year-on-year. So we are collecting new customers in that respect. Customers now want the ability to interact with us at a time and a place that works for them and through the optimal channel of their choice. And so far, we've seen 65 million logins in our digital channels. That's an increase of 14% year-on-year. We have over 577 (sic) [ 577k ] digital active customers, and that's up 5% year-on-year. And indeed, we've had 54 million contactless payments made by our customers, and that's up 20%. So you can see there's momentum in those digital channels and momentum across those channels by way of that interaction. We continue to have a well-established relationship with our mortgage intermediary partners, and we've maintained our share of that market at 23% for the first half. Our partnership with CreditLogic allows our customers to complete their entire mortgage application process online through a special app designed for exceptional ease of use and security. And this new line-based application process and service launched this year, and it's proving really popular, not only with our customers, but also with our staff who are facing customers and indeed interacting with them with regard to their mortgage application. We've also further expanded our SME and payments offering with Worldpay, and we continue to build out our SME service offering through our partnerships with the SBCI, which has proven successful up to the June 2022. We will continue to expand that. Growing our customer base is of great importance to us. In the first half of this year, we've increased our customer base by around 9% and we look forward to the end of 2024, where our ambition is to grow further. And indeed, we have an ambition to get to 1.4 million customers at that -- by the end of 2024. And the momentum is strong in that respect. The exit of 2 competitors from the Irish market is resulting in a significant increase in new customers moving their bank relationship to Permanent TSB. And as referenced earlier, we've opened 70,000 new current and deposit accounts in the first half. And that's an increase of around 130% versus last year. And this growth has been enabled by a range of initiatives put in place to support customer switching, including the launch last year of our digital current account, which facilitates new and existing customers to open a new current account through the app in less than 10 minutes. And in June alone, around 70% of our new current accounts opened in June were through this channel. And this is for single-only customers. But in September, we'll be launching a joint account digital offering, i.e., that joint account customers can use the digital channel in order to open their account. As I say, that will be coming before the end of September. We've also seen, just to say, that our accounts opening month-on-month are increasing. So the accounts -- number of accounts we've opened in July is higher than what we opened in June. So there's momentum building in that respect. We've also launched a dedicated online hub to support customers who need to switch from another financial institution. This hub allows customers to identify what product combinations are relevant to their individual needs and circumstances. And once identified, the customers are then provided with a step-by-step guidance to support them in navigating their switching journey. We've also introduced a number of mobile and pop-up branches in various parts of the country and special facilities in our branches as part of our outreach to customers of the departing banks. These various initiatives are set up to support customers in opening an account with Permanent TSB and to begin their switching journey. The bank is currently undergoing a significant recruitment drive to ensure we have adequate capacity and capability to manage the increase in demand from new current and deposit account holders. And as a result, we've now over 700 branch customer advisers and 230 colleagues in our customer contact center to ensure continuity of service for both existing and new bank customers. And staff from Permanent TSB are also now present in more than half of Ulster Bank branches, with more to come in the second half of the year. And the role of our staff is to facilitate Ulster Bank customers who want to switch their banking services to a new bank ahead of the planned departure of Ulster Bank in the Irish market. If we just move to the next slide, which is around how we're building a sustainable future for the bank and indeed to transform it. We are a bank that is deeply committed to the personal service that we offer to our customers, but we never lose sight of the fact that as our customers' needs and their ways of doing business with us change, we need to be ready to adapt and give them what they want, whether that's in person, by phone or online. And that means we must strive to offer customers the best of both worlds in modern banking combined with outstanding personal service in branches and contact centers with the best digital banking services available in the market. And following the investment in technology over the last number of years, we now have a full suite of personal banking products available end-to-end and online. As mentioned, our new digital current account facilitated 70% of current account openings in June, and that's increasing month-on-month. 87% of term loan applications have been online, and that's an increase year-on-year. And following the soft launch of our digital mortgage application journey in quarter 3 of last year, we've now received EUR 67 million of mortgage applications, which 80% of those are in the first half of this year, offering our customers an alternative channel for their mortgage application journey. So this is a direct channel facilitated by CreditLogic, where we can take a direct mortgage application and bring it through end-to-end. And you will see that momentum building over time. These new service offerings allow us to support our customers further, allowing them to bank in a way that's more convenient, flexible and secure. And we look forward to building on this momentum with further digital rollouts planned between now and 2024, including the introduction of the next generation of our mobile app and online banking portal, which will give our customers a new scalable and resilient digital servicing platform for their everyday needs. And launching in the second half of this year, this will enable 45 essential servicing journeys on the new platform, which will be both by way of desktop and by way of mobile apps. So really exciting for us that we're going to upgrade and change our front-end digital engagement with our customers, both on the desktop application, and as I say, on the mobile app. And there'll be more to come as we get into 2023. And a major focus for us throughout the pandemic and beyond remains that our critical IT systems are monitored, protected and proactively managed to ensure that the mission-critical processes of the bank continue to operate without issues, building operational resilience into our everyday banking offer. And we will continue to focus on these critical areas, further developing and enhancing cybersecurity and cloud centers of excellence. If we just turn to our colleagues, and it's about empowering our colleagues. And since the onset of the pandemic, Permanent TSB has worked at a pace to adapt to and embrace new ways of working and we're committed to create an environment for our colleagues which is safe, supported and connected. Our smarter working initiative is particularly noteworthy because it offers a range of options that colleagues can tailor to suit their individual circumstances. And this is evident because we won the CIPD award for flexible and hybrid working this year as a recognition of our approach in our engagement with our colleagues. Through initiatives such as Every Voice Counts, our form for collecting and applying feedback to at the bank, and the Living As Leaders program, which is around fostering better leadership at all levels, and indeed, our intensive engagement with and support for the Irish banking culture, we're demonstrating the importance of our culture and how serious we are about making it better and improving it on a continuous basis. And through this, we've partnered with LIFT to sponsor Changing Futures For The Better, which is a school initiative that reaches out to thousands of children around the country, around -- those children developing their own leadership skills and their own way of behavior within their environment they're in. We've also supported our colleagues through our DICE group, and DICE is our diversity, inclusion, culture and ethnicity group. And within the bank today, we have 54 different nationalities working in the bank, and that has increasing on a continuous basis. So it's important that we provide that cultural inclusion and cultural diversity and welcome all different cultures into the bank. And through this -- and a recognition of this as we were awarded the Silver Accreditation as being Investors in Diversity. And that infers that we've been benchmarked against other bodies and other companies and have both embedded inclusive practices throughout the organization as well as developing and fostering a sense of fairness and belonging amongst our colleagues. And we're committed to further evolving the culture of the bank to ensure we're delivering on the purpose of working hard every day to build trust with our customers. Really, really important that we're trust, and trust means delivery and it means fairness with customers. And indeed, we believe, over time, that development of trust will drive our business forward. The planned acquisition of EUR 7.6 billion of Ulster Bank retail, SME and asset finance activities will be a transformational deal and achievement for the bank. In the past month, the bank has received the approval of the Competition and Consumer Protection Commission along with the bank shareholders' approval. However, the bank -- the transaction does remain subject to regulatory approval. And you'll see, again, just to remind us all, what this deal means to us. It means a 40% increase in our mortgage book. It means a 200% increase in SME lending, but we've got significant momentum in our SME lending today. It's an increase of 30% in our branch network. We'll have up to about 100 branches across the country with nationwide coverage. And particularly, the 25 branches that we're acquiring are in the areas that we believe there's both opportunity and an importance with regard to brand recognition. And indeed, we have between 400 and 450 new Ulster Bank staff joining us by way of increasing the capability and capacity of the bank in order to move forward. And the migration of the mortgage assets remain on track for quarter 4, with the SME and asset finance -- assets, including the branches migrating in quarter 1 of next year. But we will complete this no later than June 2023. So the next 9 months to a year, we'll be very busy by way of migration and combining the 2 businesses. But it will also be very busy by way of the organic growth we have in the organization, whether it's opening new current accounts, whether it's increasing our mortgage book or increasing our SME business. So it's quite active, quite busy, but I believe we're demonstrating it by way of our balance sheet growth and our customer growth. And as I always say, the numbers never lie in that respect. So I'll just move on to what we're doing around sustainability. So we continue to do business in a responsible way, and we have a commitment to this by way of launching our first sustainability strategy in 2021. And that strategy is based on 4 pillars. It's around addressing climate change and supporting the transition to a low carbon economy. It's around increasing the bank's social and community impact. It's about enhancing our culture and investing in our people. And indeed, it's about championing small business and creating an organization that's fit for the future. And the bank has achieved a number of sustainability strategic initiatives in the first half. We've launched a Scholarship Programme on Responsible and Sustainable Finance with the Institute of Bankers and a Think Before You Print campaign, which is around reducing and saving over 16 million pages of paper across the head office and all retail locations. We recognize our environmental impact, and we're mindful that making a positive contribution to the economy through the consideration of environmental issues is fundamental to running our business in a responsible and sustainable way. And a key feature of the bank's sustainability strategy is the Green Mortgage, which was launched in April of this year. And indeed, we'll expand that product -- green product range over the coming months and years ahead in order to support our customers through the transition that they have to make. In total, the bank has made over EUR 0.5 million of financial contributions to Irish community organizations in the first half of the year. And we also made a EUR 250,000 donation to UNICEF Ireland and the Irish Red Cross to support the Ukrainian relief efforts. In March of this year, we were unveiled as a title sponsor for both the Olympic and Irish Paralympic teams for the Paris 2024 games. And we're the first ever title sponsor to partner both organizations in an Olympic cycle. And our community ethos is the key differentiator for Permanent TSB. And like us and the Olympic and Paralympics, they are grounded in communities across the country. And we believe that we will focus now in the building up to 2024 and to champion our athletes and capture the ability of the games to raise the spirits of the nation. We'll be investing a multimillion euro sum to secure and promote Team Ireland in the coming 2.5 years. But we see us with the Olympic movement as being a winning combination. And let's hope we're going to be winning in 2024 as well. So over the coming years, the new strategy will result in a wide range of tangible initiatives to enhance the bank's sustainability. We will launch a range of sustainable finance products, which I've also mentioned, and we will set science-based emission reduction targets by 2024 in line with the Paris Agreement and the latest inter-government panel on climate change findings. So thank you very much for your time, and I'll hand you over now to Declan Norgrove, who will bring you to the detail. And then I'll be back to talk about our medium-term targets later on. So thank you very much.

Thank you, Eamonn, and good morning, everyone. I will cover the financial performance of the bank. So the bank, as Eamonn said, has experienced significant customer growth, which has translated into strong new lending and transactional activity in the first half of the year. I'm pleased to report that all income streams have increased when compared to the prior year and a strong pipeline of activity positions us well moving into the second half of the year. As previously guided, operating expenses in 2022 will be higher than 2021 as we ensure we're in a position to maximize the opportunity presented in the market from the exit of Ulster Bank and KBC. We also invest in our people and our services, and we absorb the impact which inflation is having on our business. We'll look at net interest income in more detail on the next slide. However, it has improved by 2% when compared to the prior year. Fees and commissions income of EUR 19 million is at 11% of total income and is 27% or EUR 4 million higher than the prior year. Transactional activity has increased gradually following the removal of all COVID-19 restrictions at the start of the year, resulting in more favorable fees and commissions income compared to June 2021. Net other income is EUR 4 million at the half year, and this has been primarily driven by increased income on treasury assets. So overall, total operating income has increased by 7% year-on-year to EUR 178 million. Underlying operating expenses have increased by 12% or EUR 17 million due to the acceleration of investments in the bank's digital transformation program, higher staff numbers, wage inflation pressures and increased depreciation costs. Regulatory charges have also increased, totaling EUR 25 million in the first half of the year. This increase is driven by higher deposit guarantee scheme and single resolution fund fees associated with higher deposit balances. We have recorded a net impairment release of EUR 9 million versus a release of EUR 1 million at the year-end 2021. This release reflects the H1 strong macroeconomics while maintaining a prudential level of provisions given the high inflation environment. Under IFRS 9, the bank is required to look forward and estimate future expected credit losses based on a range of potential outcomes using multiple economic scenarios. Exceptional costs are EUR 34 million and can be broken down as follows: EUR 35 million of costs relating to the Ulster Bank transaction, EUR 6 million of net provisions for noncore items, and these are partially offset by EUR 7 million of deleveraging gains. These gains relate to the release of provisions previously held for legacy deleveraging transactions. Moving on to net interest income. Net interest income increased by 2% to EUR 155 million. This increase was driven by the organic growth of the performing loan book, reduced cost of funding for deposits, and is partially offset by lower income on nonperforming loans and the cost of excess liquidity. Net interest margin decreased from 150 basis points at June 2021 to 141 basis points at June 2022. The cost of holding on average EUR 3.2 billion of excess liquidity had a significant impact on net interest margin. If we exclude the cost of excess liquidity, approximately EUR 8 million, the underlying net interest margin is 174 basis points. And this underlying margin is 2 basis points higher than in H1 2021 due to a slight increase in the yield on lending assets. The total yield on assets was 151 basis points, a 12 basis point reduction when compared to the same period in 2021. This reduction in total yield on assets was primarily due to the cost of excess liquidity. We continue to actively manage the cost of funds, which were an additional reduction of 4 basis points year-on-year to 10 basis points at June 22. This reduction was achieved primarily through rate reductions applied to customer deposits. As we continue to manage excess liquidity, we expect the 2022 NIM to be in the mid-140s basis points. We will continue to hold excess liquidity as we prepare to fund the acquisition of loan portfolios from Ulster Bank expected later this year and in quarter 1 of next year. Our total home loan performing book is EUR 12.4 billion at H1 2022. This was 5% higher than the year-end 2021 as a result of new lending volumes outpacing repayments. This increase is reflective of a strong lending performance as we remain competitive within the mortgage market in Ireland. June was the highest month year-to-date for both mortgage applications and drawdowns. The pipeline also remains strong and is 15% higher than the same period in 2021. The bank has written EUR 920 million of new mortgage business year-to-date. That's EUR 17 million higher year-on-year. The average yield on new mortgage business is 2.66%, and it has reduced by 5 basis points year-on-year, driven by the competitive pricing of the bank's green mortgage product and the 4-year fixed rate only product. 21% of mortgage drawdowns in June 2022 were for green mortgage products, supporting our sustainable strategy. This product offers a 20 basis points discount on 5-year fixed rates for both new and existing customers. In addition, we announced a 20 basis points reduction to the 4-year fixed rate only product. Tracker mortgages now account for 33% of the home loan performing book. That's down from 35% at year-end. Our fixed rate mortgages account for 53% of the home loan performing book. This increase from 48% at the year-end 2021 is partially reflective of our fixed rate green mortgage and reduced 4-year fixed rate products, which have performed strongly since their launch. Variable rate mortgages consisting of both standard and managed variable rate products made up the balance of 14% of performing home loan book. This has continued to reduce, down from 17% at the year-end. As Eamonn mentioned, the SME loan book has grown 61% year-on-year, with the pace of new lending exceeding outflows. New business performed very strongly with new lending of EUR 70 million, up 67% year-on-year. SME mortgages totaled 60% of the SME book at June, with lending growth in this sector increasing by 173% year-on-year. A EUR 32 million loan fund is available through SBCI Brexit Impact Loan Scheme in 2022. 23% of this is drawn to date, and the remainder is expected to further boost new lending. Just moving on to operating expenses. Total operating expenses, of EUR 164 million have increased by EUR 17 million or 12% in the year. Underlying operating expenses before depreciation, amortization and regulatory charges, what we refer to as our addressable costs, were EUR 140 million to June 2022, EUR 16 million or 13% higher than June 2021. The increase in total operating expenses of 12% has led to an increase in the cost-income ratio of 4 percentage points to 92%. Regulatory costs are 19% higher due to higher DGS and SRF fees associated with the growth in deposit balances. If we look on the right-hand side of the slide, we can see a cost walk showing the primary movers within the underlying operating expenses. Increased staff numbers, coupled with inflationary pressures, has resulted in a EUR 5 million higher resourcing and wage inflation year-to-date. We continue to invest in our technology and investment spend with a EUR 6 million increase to this cost year-on-year required to maintain our operational resilience. Depreciation in H1 2022 was 8% higher than the equivalent period last year as the bank pays for higher investments made in recent years. And other costs have increased by EUR 4 million year-on-year, driven primarily by higher fraud costs and cash handling fees. Cost management will remain a key area of focus for the bank, with total full year 2022 costs expected to reach 14% higher than prior year as we continue to invest in technology and resilience and begin to integrate Ulster Bank colleagues following the proposed NatWest transaction, while also absorbing inflationary impacts. On the impairment side, the bank has recognized an impairment release of EUR 9 million for the year, equating to a minus 13 basis points cost of risk. The release is a further improvement on the EUR 1 million release that we reported at December 2021. Provision stock has reduced by EUR 18 million since the year-end, largely driven by a EUR 17 million reduction to post model adjustment stock, which reflects the benefits of cures and closures, together with stronger overall macroeconomics for the first 6 months of 2022. Within the closing provision stock of EUR 586 million at the end of June is a conservative EUR 101 million post model adjustment provision, which will ensure that the bank is adequately provided for in the event of any deterioration in asset quality. The table on the right-hand side also shows the forecast macroeconomic projections for full year 2022 across the base upside and downside scenarios, which informed the IFRS 9 model run for the half year. Moving on to asset quality. Nonperforming loan book remained reasonably in line with the full year 2021. We had a reduction of EUR 40 million to EUR 771 million. The nonperforming loan ratio is 5.2% -- at 5.2% is 30 basis points lower than the previous year-end position. Further reducing the NPL -- this NPL ratio is a focus of ours in the medium term, and we expect it will be below 4% following the completion of the proposed Ulster Bank transaction. Stage 1 balances have increased by EUR 200 million since the year-end 2021. This increase can be attributed to the strong new lending year-to-date 2022, marginally offset by paydowns. As you will see from the table on the right-hand side of the slide, our total asset quality and level of provision coverage of 3.9% has reduced by 20 basis points since full year of 2021. With an expected credit loss of EUR 280 million on EUR 771 million of Stage 3 nonperforming assets, we have an overall Stage 3 ECL coverage ratio of 35%, which we believe is appropriate. On funding -- moving on to funding and liquidity. Current account balances have increased by EUR 900 million or 13% in the first half of 2022, which is the main driver of the customer deposits increase since December of 2021. Retail deposits have also improved, increasing by EUR 300 million or 3% since the year-end. Conversely, corporate deposits have reduced by EUR 200 million or 15% in the same period. The average volume of excess liquidity held with the CBI was EUR 3.2 billion, and this was subject to a negative 50 basis points interest rate. The MREL ratio of 29% is comfortably above management and regulatory requirements following the EUR 300 million senior undersecured issuance in June of 2022. The liquidity coverage ratio was 315% at June 2022, an increase from 274% at year-end 2021. As you can see from the table on the bottom right, at June 2022, both our liquidity coverage ratio and NSFR are materially ahead of European bank averages. Just moving on to capital. Our regulatory capital ratios remain comfortably above the regulatory minimum requirements. The CET ratio on a fully loaded basis is 14.7%, a reduction from 15.1% compared to the December of 2021. This is driven primarily by the 6-month loss after tax this year, was mainly due to the exceptional items related to the Ulster Bank transaction. And that has impacted the ratio by a negative 40 basis points. We've also seen a net reduction in our risk-weighted assets in the period. The management CET1 fully loaded target remains at 14%. So just to summarize. The bank has shown growth in many key areas. Total new lending of EUR 1 billion is 22% higher year-on-year, leaving the mortgage market share at 16.3%. PTSB are clearly positioned as the #3 mortgage provider in Ireland. On an overall book level, the home loan mortgage book grew 5% year-on-year, while the SME loan book grew 61% in the same period. Operating income increased 7%, with fees and commissions also increasing by 27% in the year, and this contributed to noninterest income making up 13% of total income. The net interest margin fell to 141 basis points. However, this was severely impacted by the cost of holding on average of EUR 3.2 billion excess liquidity at a negative 50 basis points. The underlying NIM is a healthier 174 basis points. The accelerated investment in digital infrastructure, coupled with the higher cost inflation has resulted in a 12% year-on-year increase in operating expenses. As we prepare for taking opportunity in the marketplaces, we must also invest in key demand areas. At the same time, the bank is continuing to make underlying cost savings to help pay for these investments. The NPL ratio has reduced to 5.2%. While protecting capital, we are committed to continue reducing the NPL ratio to low single digits in the medium term. The NPL ratio will be lower -- will be less than 4% following the completion of the Ulster Bank transaction. The EUR 9 million impairment release demonstrates the bank's asset quality and a more favorable macroeconomic environment in the first half of 2022. The bank forecasts a return to profitability for full year 2022 onwards, supported by organic growth and the net accounting gains on the Ulster Bank transaction. The bank is well positioned to continue its strong lending performance in 2022 with significant pipelines in all of our key lending products. The minimum management CET1 ratio on a fully loaded basis will be 14%, while the leverage ratio will be 6%. I'll now hand you back to our CEO, Eamonn Crowley, for medium-term outlook and concluding remarks. Thank you.

Thanks, Declan. So I think these results -- from my perspective, these results more than -- and any previous results we have, has really given you a clear indication of where this bank is heading. So if you look at mortgage drawdowns -- I'm going to repeat some things, but they're important because it really emphasizes where we're heading as an organization. Mortgage drawdowns up 20%, but we have a very strong pipeline of applications coming through. And naturally, mortgages will continue to be the core of what we offer and we will continue to be very competitive in this area and drive growth. So really strong applications coming through in recent months. SME lending, it's up 67% year-on-year. But we, again, have a very strong pipeline of activity in SME, and we'll see a stronger second half and indeed good momentum into next year. But we are competing in business banking and we are investing in our business banking offer. Our customers are up 9%. But again, we're seeing an increase in customers opening accounts with us on a monthly basis, and that momentum is continuing. But strong growth in that respect. Deposit funding went over EUR 20 billion. This is -- customer deposit funding went over EUR 20 billion. And again, it's accelerating. So we have sufficient resources -- funding resources to close the Ulster Bank mortgage and SME and asset finance business as we're building our funding base. And indeed, our capital levels remain strong. And I have to remind everyone that we're able to do the Ulster Bank deal with NatWest without asking for any additional capital from our shareholders. So again, I think that's clearly highlighted by the fact that we had 99.9% support for that transaction at our recent EGM, at which we had a turnout in the -- of nearly 90% of our shareholders. Our digital activities are increasing, and we've demonstrated our investment in this area and the fact that we're on the cusp of launching a new digital front end for customers. And we'll be able to build on that platform as we move into next year and beyond by way of what we can offer. The Ulster Bank transaction itself is proceeding. We've completed and -- successfully completed a number of key approvals and we're working hard in the background around ensuring that migration happens over the next 6 months, but definitely by the end of June next year. And indeed -- like when you couple all this together and including the fact that we believe we have a conservative provisioning position, as outlined by Declan already -- when you couple all this together, we're very well positioned to compete in the market to take on new customers and to grow our business over the next number of years. And when we look at our forecast and look at our medium-term goals, we're putting forward here in 2025, we believe we can reach a 10% ROE. And indeed, as we push on over the next year or 2, past 2025, to increase that up to around 12% and beyond. Why? Because there's momentum in the Permanent TSB franchise. The Ulster Bank add on will really turbocharge both our P&L but also our customer base. And we can see momentum in our business to get to that level of return, which is -- I'd suggest, from my perspective, it will take a lot of work, but it's impressive from where we've come from as an organization and how we've developed over recent years. So that's our medium-term outlook. If we were to look at that -- at the last set of results, we can see momentum in that. Why? Because we've underlying momentum in our business. And indeed, with the change in interest rates and the approach by the ECB, we don't have a negative carry-in excess cash. It should dissipate. And that's been somewhat of a lag on our performance over recent periods naturally because of the level of excess cash we have. So the position is positive. The outlook is positive. All the building blocks are there by way of growth. And I think this set of results that we put forward today for the half year really should demonstrate to you how the organization is building and in the areas where we play. And I have to just remind everyone that our ambition is to be the best retail and small business bank in Ireland. That doesn't mean the biggest. It doesn't mean the most profitable. But it definitely means one that customers will advocate for us and encourage other customers to come and say, "Save them. Go and talk to Permanent TSB and see how they can look after your needs," whether it's for a mortgage; whether it's for an SME loan, secured or unsecured; whether it's for a term loan by way of personal finance; or indeed opening a current account. And we have the best rated current account by [ Bankers.ie ], an independent organization who looks at current accounts. We have the best rated current accounts in the market. And we believe that, that is something we can build not only our customer base on, but indeed the wider balance sheet and performance going forward. So thank you very much for your time, and we are happy now to take questions that may arise. So thank you.

John? Do you have a microphone, yes, for John?

3 questions from me, if I can. One is on NII, one on costs and one on asset quality. On NII, I suppose 2 things. One, I'm trying to understand a little better why you've downgraded guidance for the full year given the ECB has now moved by 50 basis points. Is it because you're anticipating a greater level of deposit balances effectively than you had been assuming coming into the -- for the second half period relative to prior expectations? And another one on NIM would be your -- or NII rather, would be in relation to your full year -- you previously guidance interest rate sensitivity around EUR 10 million or maybe a little bit more of revenue uplift in response to a 25 bps rate move. Would you continue to guide consistent with that previous guidance? Will I stop there? Or will I keep going on the...

Let's stop there. Declan, you want to pick up…

Yes. On the net interest margin, we are -- we will see it continued to be impacted by the excess liquidity for a period of the rest of the year. Although that will shift now with the increase in the ECB interest rates. It's really to look at our underlying NIM, and our underlying NIM is 174 basis points. If you exclude the impact of the excess liquidity, and that's increased by 2 basis points period-on-period. And I also -- through the guidance that Eamonn has given, you can see a sharp increase in our net interest margin now as we move forward, impacted by the deep increases in the ECB rates, but also impacted by the growth in our business and the acquisition of the Ulster Bank portfolios as well. So we're seeing momentum in the net interest margin underlying number, and we will see that continue on into 2023 and beyond. So we have quite a strong net interest margin in the medium-term outlook. From the guidance on the interest rates, I would say that a 50 basis points increase on the tracker mortgage portfolio would generate in the region of an additional EUR 27 million in income for the organization. We also got the benefit of not having the excess liquidity cost going forward. So as I said, it was EUR 8 million for a half year. So on an annualized basis, that will be EUR 16 million. So we won't have that on a go-forward basis either. So both of those will benefit in terms of the increase in the ECB rates that we've seen with the first 50 basis points, but then as we're projecting forward, going up to around 175 basis points and beyond in terms of our interest income.

And I'll just add. Naturally, we'll have plenty of moving parts in the second half of the year, not only the interest rate environment itself, but also the Ulster Bank transaction. And we're hoping and expecting to migrate 7 -- or sorry, EUR 6 billion of mortgage assets and excess of that sometime in the quarter. So that's going to start moving our net interest margin as well. And indeed, when we look at the mix of business coming in from Ulster, the asset finance business and the SME business have a higher yield given the nature of those assets. So there will be movement in our net interest margin. And we have a tendency to under promise and over perform. So you never know. It could be better than we think in that respect.

Great. Can I just come back to one point on that?

Yes.

So the previously guided EUR 10 million uplift in revenues -- or maybe a little bit more than I think you said, that looks -- but I take your comments on board around the tracker mortgages and I take your comments on the excess liquidity on board. It looks at first glance like that is too conservative. Would that be a fair assessment?

Well, I think, overall, we were guiding a higher increase in our income going forward, and it was driven by a combination of the interest rate movements, but also the acquisition of the mortgage portfolio. So I think, overall, looking forward, we were guiding up our income overall being up by EUR 150 million to EUR 180 million. So we see that being quite significant in terms of the medium outlook for the bank, in terms of having organic growth and profitability at quite a significant level for this organization as we move forward. So I think it would be higher than that, John, in terms of EUR 10 million, yes.

Yes, if you take the impact of negative rates, the negative carry is EUR 8 million in the first half alone. It was EUR 11 million last year. It is a negative rate. And excess cash sensitivity or not, it's kind of an unusual situation. We'll get back to some normality. But it's fair to say we might -- as the balance sheet moves, you could argue that, that number is somewhat conservative. But that's our nature.

Very good. Second question on costs. I looked just very quickly on the tax spend. Look, it's one area which is, I guess, notoriously unpredictable in terms of costs involved, especially given the upcoming integration. I mean, 14% year-on-year growth, it looks pretty conservative given the 1H or the first half performance. But beyond that, I mean, the risk of downgrades to consensus on the cost line because of higher tax spend, particularly, do you see that as a kind of a significant risk factor or not at this point?

I think as we guided at the year-end, our depreciation charge will increase this year and next, in particular, given the level of EUR 150 million and excess of that investment in the technology side of it. We have hastened that spend this year, which is, hence, the costs are going up. And the reason for that is because it's a key enabler of the acquisition of the Ulster Bank portfolios. As Eamonn mentioned earlier, we have a current account out there that's working. We want to introduce a joint current account. We're looking to get that out in September before the surge in terms of what happens in the market with customer acquisitions from both Ulster Bank and KBC. So we have accelerated the investment. We do see our costs going up on the depreciation line. And then we'll settle down to a more normal level of investment and maintenance of the technology side then as we go forward.

So it's just -- like we don't have any material technology investment planned at this moment. We have invested, and we're still at it, up to EUR 150 million, was the number, in order to replace our digital front end. We're on the cusp of launching that for desktop in the not too distant future. And I know it's been a significant investment. Why? Because we need the flexibility and capability to offer our customers a better digital engagement. It's adequate today. It does what it says in the [ team ]. But we need to be able to enhance it. But we don't have a material IT spend, like our current core mainframes, which are doing what they should do. So it's no big spend at this moment. It's around the edges.

And finally, just on asset quality. Look -- when I look at your Stage 2 coverage, it's enormous compared to peer banks -- we track this across Europe as well -- at over 10%. So I suppose -- look, 2 sub questions there. A, is that where most of the PMAs lie or relate to? And then secondly, why do you feel you have to hold such a high level of provision coverage on the Stage 2 loans?

Well, I'll let Declan answer the first part of that by way of the PMA coverage. But if you look at our history, we've done a lot of deleveraging over recent years. We've effectively deleveraged the equivalent of the Ulster Bank were acquiring. But that deleveraging was in the main and NPL book, and now we're actually acquiring a higher-yielding performing book. If you look at our deleveraging, we're basically deleveraging that book value. So our provisioning has proven that we carry an adequate provision coverage in order to manage that moving part -- moving parts. And you could argue it's being conservative, but it also has protected us from a capital point of view, and there's been no surprises. So it is a strong coverage. And we actually have to see how the current environment plays out. But as we progress forward, we will -- you can see that we've released EUR 9 million this year, and we'll see if that proves to be too conservative in due course. But we're happy with it. Do you want to talk about the PMA?

Yes. I think the PMA overall at the level we're holding it at -- so some of that is for historic reasons. There is a number of customers in there who are now paying again, but they're in a probationary type period. So we're still holding provisions against that. And we are conservative, I would say, in terms of holding provisions for the uncertainty of the current inflationary environment. We haven't seen any effect come through from that in our arrears or anything like that or default rates. So we are holding for a certain amount of uncertainty within the -- we've released some of it this year, in the half year. Likely, we'll release a bit more again in the second half of the year. But it's something we're just keeping an eye on. But overall, I would say our provisioning is conservative.

And if I go back, just again, a couple of reporting periods. Time flies. Maybe it's a couple of years now. But we had indicated to the market a pre-crisis book that was interest-only, et cetera. And we've dealt all of that. That book has now been managed and outputted effectively. So I think we have a proven track record of being able to balance some of the pre-crisis risks that are now dissipating together with a provision level that makes sense. And I think we're -- personally, I think we're better outside of the line than been underprovided or having some questions about our ability to cover that book. That's the way I would say it. And now we'll check if there's any questions from the phone line.

[Operator Instructions] We'll take our first question from Diarmaid Sheridan of Davy.

Maybe one question on the here and now to looking further out in terms of the medium-term outlook and targets that you've provided. But firstly, on the competitive dynamic, how would you kind of characterize at this point? Clearly, we've seen a very large increase in remortgaging activity going on. Do you think that's something that looks real? Or is that something where there is an increase over a few quarters reflecting higher rates and higher -- with the exits coming through the market, too?

Sorry, keep going.

Sorry, Eamonn.

Yes, it's okay.

No, just in terms of the medium-term target. And thank you very much for the additional guidance there. Just in terms of what growth you would look to assume a part of that to enable those types of targets to be achieved? And finally, and related to that, if you get to 10% -- if you're tracking towards that in the coming years, at what point will you be in a position to talk to the regulators about resuming distributions? Obviously, quite an important part. If you're getting towards those types of return metrics, organic capital generation should be quite strong, you should be in a position to do so. So just curious on your thoughts on that, please.

Okay. So with regard to the first question, there's no doubt we've seen a significant increase in switch or remortgaging type activity. The BPFI numbers have showed -- I think it was up 74% year-on-year. And there's no doubt that the nonbank lenders have been playing in this space, have been targeting this space. And it appears they've been reasonably successful in filling that gap. The question is how many times will people -- or customers remortgage their exposure, and is this more of a temporary phenomenon or matter than something that is more long term. Our experience in recent months has been that our application volumes have been increasing quite attractively. But there's no doubt that in the earlier part of the year, those applications were lower than we would have wanted them to be. So our position is we'll continue to be competitive. I think over the longer term, both our funding profile, but even -- indeed, even other banks' funding profile provides the customers with a more stable mortgage pricing outlook. And in that respect -- I think we are positioned strongly in that respect and we'll see what comes through. So we're not concerned about it. We're happy with our performance. We're happy with our growth, and we can see a good pipeline there. And on the targets. The targets -- we expect a growing mortgage market. We're not at this moment targeting that our percentage or our market share of that market will increase significantly. Actually, it's just the benefit we'll have from that growing market. On the SME side, we're coming from a low base, but we've got strong momentum. We would like to be able to fill the space where Ulster left by way of their market share. But we have to actually prove ourselves to customers that we can meet their needs. So there's not -- we're not being extremely aggressive on the business banking side, but we have -- from where we're coming from, we -- and the EUR 1 billion that we mentioned, which is effectively we would like to achieve EUR 1 billion in lending -- new lending into the SME market over the next 3 years. And you can see momentum in that -- you will be able to see momentum in that over a 3-year period. And we'll also have the asset finance business, which will allow us to add an additional product range on, which, again, we believe will be more attractive than what we can offer today. And then lastly, it's around customer numbers. So we'll have more current account customers. We'll have more fee income. And indeed, the ability to offer more products to those customers in due course. So it's a mixture of a number of different things. It's not overly aggressive, we believe. And naturally, then, the interest rate environment in some way will assist because of the negative carry that banks have been experiencing and the fact that we'll have a kind of a normalization of what a bank balance sheet looks like. And then lastly, on dividends. There is -- we still maintain a dividend blocker from the regulator. Obviously, that is part of our annual engagement with the regulator. But it's clear from both our forecast and from the Ulster bank transaction and where we're heading, we're now becoming a more sustainable organization by way of profitability, by way of balance sheet, by way of positioning in the market. And I would suggest becoming a more normalized and sustainable bank means that we should become a bank that's able to pay dividends in due course based on those returns on equity. And on that basis -- that provides a good basis for an engagement with the regulator. But naturally, that's something we have to engage on and keep -- we'll keep the market up to date in due course. But the future in that respect, I'd suggest, looks brighter than it has done before because of the transformation in our business. Any further questions?

There are no further questions on the line. That concludes today's conference call. Thank you, everyone, for joining, and have a nice day.

Okay. Well, thanks very much, everybody, and take care. Thank you.