AIB Group plc

Good morning and welcome to the presentation of our interim results for 2023. As usual, I'll spend a few moments reflecting on the highlights of the first half. We'll give an overview of the economic landscape as we see it, as well as provide an update on our strategic development before I hand over to Donal, our CFO, who will bring us through the financial details and then we'll have some time for questions. As we move through the closing phase of the three-year transformation plan that we announced in December 2020, we're very pleased with how AIB Group is performing. We've overseen considerable positive change at AIB in terms of the strength of our customer franchise, the range of the products and the services that we present to market, the efficiency of our operations, and the quality of our balance sheet. At the outset, I want to thank my colleagues across the group for the energy and professionalism they invested in our transformation plan. that they brought to the task of onboarding migrating customers and seizing the once-in-a-lifetime opportunity presented by the imminent departures of Ulster Bank and KBC from our core market. Our group is in vigorous good health. Against a resilient economic backdrop, we're reporting organic growth in our lending book and continued deposit inflows on the liability side of the balance sheet. With a larger customer base in our core market than ever before, more assets at work and a normalised monetary policy environment, we're reporting a very strong financial performance for the first six months of this year with profit after tax of 854 million euro. Given the performance to date this year and the momentum we see in our business, We're again upgrading our guidance for 2023, with net interest income expected now to exceed €3.6 billion, with the expected ROTI tipping above the 20% mark. This performance is firmly underpinned by continuing conservatism in how we run the business. We're cautious and forward-looking in our underwriting. We're rational in our pricing and we're prudent in our provisioning. We've no doubt that this is the correct approach today and for the long term and it is supported by very strong capital and liquidity positions with a CET1 of 15.7% reported at the end of June. Now, as I said already, we are nearing the end of our current strategic cycle and the group is in a position of great strength. as we complete our product suite, migrate the great majority of the Ulster Bank portfolio acquisitions, while advancing the digitalisation of our business with clear benefits for customers, for risk management and for efficiency. We're also pleased with the progress in the broad ESG agenda in the first half of the year, with the strong performance by our renewable energy lenders being counterbalanced by a significant and deliberate pullback in new commercial property lending. Our leadership in the ESG area was recognised by our peers earlier this year in the most impressive financial institution ESG bond issuer award by Global Capital. In addition, a key milestone in the group's strategic evolution was reached at the end of June with AIB returning to majority private ownership. So I think it's only fair for us to regard the first six months of this year as very successful across a multitude of fronts. Turning now to the economy, while we are expecting a moderation in the pace of growth, the real rate of expansion in modified domestic demand is forecast to remain comfortably in positive territory. This confidence is underpinned by employment levels pushing to fresh all-time highs, a rate of unemployment of 3.8%, healthy household and business balance sheets, and a savings ratio of 14%. Households and businesses will also be supported by the ongoing fall in the rate of consumer price inflation, with a forecast of 2.8% penciled in for 2024. We do recognise and take account of the headwinds from the uncertain global environment and the sustained tightening of monetary policy, which are reflected in a softening in our own manufacturing PMI readings. We remain positive about the resilience of the domestic economy and we will continue to be a leading provider of capital to support economic, social and environmental progress while maintaining robust credit discipline. We're now closing out on our 2021-2023 strategic plan with 12 planned initiatives concluding successfully in the first seven months of this year. The scale of that plan's ambition required significant collaboration and effort right the way across the organisation over the last number of years. I am pleased to report that the majority of transformation project activity is now behind us, with the migration of the bulk of Ulster Bank's tracker mortgage book taking place successfully last weekend. The group is now very well positioned and is poised to deliver a strong and sustainable performance over the years ahead. 2023 has been a busy year on the product front with years of planning and careful execution manifesting in an enhanced suite of customer propositions. Airbnb Life, our JV with Great West Life Co., is now live in the market and we are pleased with its performance and look forward to it making a material contribution to the group over the medium and long terms. And highlighting the quality of the integration of GoodBuddy, we launched GoodBuddy Private, which significantly enhances the wealth proposition available to our customers. Meanwhile, we have just launched our AIB Business App, which allows us to align the mobile experiences enjoyed by both our personal and our business customers. We will continue to invest in new propositions to support our customers and to enhance our operational efficiency. On the inorganics front, the Ulster Bank portfolio acquisitions and migrations are now substantially complete. On a combined basis, these transactions introduced over 45,000 new customers to AIB Group, with associated drawn balances in excess of €8 billion. We also welcomed 227 ex-Ulster Bank employees to AIB, who will work to service our expanded customer base. And together with our existing franchise, these acquisitions position AIB as Ireland's leading corporate, business and personal bank. They add materially to our performing balance sheet today, as well as our prospects for sustained, strong growth in the years ahead. From an organic lending perspective, headline new lending growth of 2% masks quite significant differences in the performances of our various business sectors. New mortgage lending was broadly flat, with the market adjusting to lower switcher activity and to a varying speed of interest rate changes across the competitive landscape, while personal lending increased by some 29%. Property lending was down by 20%, reflecting a conservative and risk-conscious disposition towards that sector, while new business lending was ahead by 12%, with particularly strong performances reported by both our corporate banking and our energy, climate action and infrastructure teams. Reflecting the quality of our customer franchise and our underwriting discipline, our balance sheet is very resilient. Mortgages remain the largest part of our lending book, accounting for some 50% of loan exposures, with an increased appetite for our fixed rate offerings, pushing that share of the portfolio to 62% today. And around 60% of mortgages have been underwritten since the introduction of the Central Bank of Ireland's macroprudential rules in 2015. And the book is characterised by relatively low LTVs in terms of both flow and stock. In our commercial real estate book, over 40% is residential in nature with offices and retail assets accounting for 25% and 16% respectively. In line with our conservative and forward-looking approach to asset quality, we have increased CRE Stage 2 assets by 2.3 billion, and we remain cautious on new lending opportunities in this space, at least in the near term. Meanwhile, we have made further progress in reducing non-performing exposures, which stood at 3.3% of gross loans at the end of June. Legacy pre-COVID NPEs now stand at 0.3% of gross loans, highlighting the huge progress made over many years in strengthening the quality of our balance sheet. And it's worth recalling that in the aftermath of the global financial crisis, NPEs at AIB reached 30% of gross loans. Sustainability is core to our mission and will continue to play a central role in our strategic development as we prepare to enter our next planning cycle. Supporting all our customers in their transition to a lower carbon future creates significant opportunities for remunerative and risk-conscious capital deployment, both domestically and in selected international markets. We continue to make progress towards meeting the ambitious 2030 targets we've set ourselves, not only in terms of lending, but also in relation to our own emissions as a business. And we're looking forward to the autumn energisation of our first solar farm in Wexford under our corporate power purchase agreement with NTR, which is key to our own net zero ambitions. We remain the leading ESG issuer domestically, and our peer-recognised leadership in this space is creating new advisory opportunities for the group. We were delighted with the further reduction in the state's shareholding in June, which returned AIB to majority private ownership. And we, taking into account the partial relaxation of government remuneration restrictions, have updated our remuneration policies to provide healthcare for our colleagues from next year, and a variable remuneration scheme of up to €20,000 to be paid next year on foot of this year's performance. And accruals for this scheme are reflected in our costs outturn for the first half. So we have delivered on our commitment to transform the group. More customers, more lending, more products and services. These are the underpinnings of our performance. To ongoing and sustained investment in our digital infrastructure, we will continue to enhance the quality of our customer experience and the operational efficiency of the group. And of course, we remain disciplined in our underwriting and rational in our pricing because that's in the best long-term interests of our customers and our shareholders. While the 2023 performance of AIB will be regarded as truly exceptional with a roti above 20%, we are very confident in the ability of our franchise and our business to generate very strong returns over the years ahead. The capital that we expect to generate will be deployed to invest in our business, both organically as well as potentially through small earnings accretive bolt-on acquisitions, should such opportunities arise, while being very firmly committed to delivering progressive returns to our shareholders. The group is now in its most robust position in decades and we're committed to building on that strength in the interests of all the stakeholders that we serve. We've had an exceptionally strong start to this year and we're set to deliver superior returns over the years ahead. Having restored AIB, we will invest all our energies in ensuring the group remains sustainably strong for decades to come and we look forward to updating you on our plans for the next phase of the group's development and our medium-term targets to 2026 when we close out this year. I'll hand over to Donal now.

Thank you very much and good morning everyone. We obviously finished 2022 with a very strong trajectory, so I'm going to run through the financial highlights for the first half of the year. We had a profit after tax of €854 million, total income of €2.2 billion, and that was made up of interest income up 98% and other income up 15%. Our costs were €897 million, which is up 15%, and the amount of employees in AIB rose to just over 10,000 staff. That gives us a cost-income ratio for the half-year of 41%. Our gross loans are now 62.8 billion euros, which is an increase of 3% from the end of the year. That's made up of two parts. Firstly, organic growth of 2% in the underlying business, which Colin would have talked to. And in addition, we onboarded some additional Ulster corporate loans of 700 million euros. The tracker portfolio, which Colin alluded to, was executed in July or onboarded in July at around 80%. So that's not included in those numbers. Our asset quality remains very strong, and our ECL coverage is at 2.6%, with an MPE ratio of 3.3%. Our funding position is very strong. We saw a slight increase in customer accounts in the first half of the year, and overall, all of our liquidity ratios are very strong. And given the strong underlying performance, our CET1 fully loaded ratio is 15.7%. In terms of the income statement, there's nothing really here that I won't touch on a little bit later, other than to run through some of the key financial metrics here. A net interest margin, 2.94%. A return on tangible equity, 21.5%. And earnings per share for the first half of the year, 31 cents. In terms of net interest income, obviously a huge number of moving parts here, given the speed at which rates have moved. just if I was to break these down into the main blocks, our liability costs would have increased up to €273 million. That's broken down into pay costs on deposits of around €77 million and then €196 million really on wholesale liabilities where we hedge all of our issuance. In terms of customer loans, there's obviously a benefit there of 33 basis points, and that's on a net basis. The underlying customer loans were up around 81 basis points, and a structural hedge is incorporated here, and that's minus 48 basis points. There's a strong benefit from our investment securities of €258 million. Our strategy has always been to asset swap all of our bonds, so this really sees the impact of the rising rate environment. And indeed, on the balances held with the central bank, there's a benefit of 116 basis points, or €695 million. Overall, our guidance for 2023, we're happy to upgrade it from 3.3 to greater than 3.6 billion euros and a net interest margin of greater than 2.9%. I think this slide is a really important one, just to really give a sense of the underlying factors that are going to impact NII for 2023 and indeed into 2024. We've assumed an ECB deposit rate of 375 at the end of the year, and we've also assumed a Bank of England rate of 5.5%. The other key ingredients into this, I would say, is loan growth and loan growth assumptions, which I will touch on later. But overall, we see 10% growth in 2023 and around 3% growth per annum on an organic basis going forward. In terms of deposits, what we're seeing in terms of flows or movements from current accounts into more term deposits or term deposit accounts, in the first half of the year, our deposit beta would have been less than 10%, though we have been introducing more and more liability products for our customers, and we are beginning to see customers slowly transition into these products. And by the end of the year, we probably see an exit deposit beta of just under 30%. But then as I look into 2024, we think that we'll be able to manage it and hold it in or around that level. Another key part of the interest income equation is related to our structural hedge. Obviously, I would have talked to this at the end of the year about our plan to term out duration and increase the quantum of the hedge. So what I've tried to do here is break down the half year and show the quantum and the average yield for euros and sterling and where I see the exit yields and the exit quantums for the end of 2023. So obviously at the end of 2022, our quantum was around €20 billion. This has increased to €32.2 billion. We do see that increasing to €33.1 billion. But there's a lot going on underneath the surface here. As we go into 2024, we think that the duration, particularly in euros, we want to maintain at or above 4.3 years. The yield is obviously going to continue to increase as we continue to reinvest at higher yields. And the decay that we see... in 2024 is around 10 billion euros. And that's obviously going to be replaced with more hedges that are at the money. So overall, like I would have said, we wanted to slowly extend the duration of the hedge. And you can see with the older swaps maturing, being restruck at higher levels, as we go forward, that is going to provide a lot of support in a changing interest rate environment. Very strong other income, particularly on fees and income, fees and commissions. Probably two areas that I would draw your attention to. Number one is the impact from the forward contract from the tracker portfolio. And that was around 125, 126 million euros in the first half of the year. Obviously, as that transaction matures and comes on our balance sheet, that will come out of other income and into interest income. But really the driving force behind the fees and commission and the trajectory that we're seeing there, it's generated from the increase in new accounts and new customers, where we have 635 new customers, which Colin would have alluded to. So we do see really strong trajectory coming into the second half of the year. And overall for this year, we see other income around €780 million. Costs are €897 million, which is up 15%. Two main areas here, I would say on the staff side, we're seeing and have seen salary inflation from 2022 into 2023. We've increased our headcount by around just over 1,000 people. And we've also included an allowance for variable pay, which Colin would have alluded to, in 2023 of around €30 million. And that will be for the full year. Overall, in G&A expenses, we're seeing inflationary pressures coming through here, not per se from an AIB perspective, but from external suppliers. And obviously, we have an expanded product range, an expanded number of customers that we need to manage. Exceptional costs, 130 million euros, legacy items and strategic items, which we believe are primarily concluded now. So we'll maintain our guidance for the full year on exceptionals. And as we look to the future with respect to positive things or headwinds, we obviously have a larger customer base. And we need to manage those. We need to onboard all of the inorganic initiatives, which we have effectively concluded in July. The inflationary environment, though still there and reducing, is having an impact. And like I said, there will be an impact in 23 and 24 from variable pay and insurance. But we do obviously have the benefits from our transformation program still accruing. So our full-year costs are expected to be circa 1.8 billion euros with a cost-income ratio in the low 40s. In terms of ECL, small charge for the first half of the year, maintained our cover rates at similar levels to the end of the year. I think that the credit story, as I would say or see it, is retail consumer portfolios are remaining very resilient, notwithstanding the fact that rates have moved and net disposable income have changed. or reduced. We're keeping a close eye on this, but certainly very few signs of deterioration to date. On the positive side, the businesses or the industries and sectors that were most heavily hit by COVID or impacted by COVID, they've all rebounded very strongly. So we're talking leisure, hotels, etc., and we're seeing really strong performance in that area. And then the one area where I would say we're pretty focused on is specific areas in the real estate world, and more specifically in the office space or in the residential investment space. And in the first half of the year, we would have moved around €2.3 billion of assets from Stage 1 to Stage 2 in these sectors. Obviously, this is a yield impact on valuations, tighter interest rate cover ratios, but this is just a prudent, forward-looking approach. Our overall LTV in our commercial real estate portfolios are around 54%, but we're just being cautious and very focused on that particular area. But for full year 2023, maintain guidance here. 30, 40 basis points through the cycle and more likely to be at the lower end of that range for 2023. In terms of balance sheet, not really too much changing overall at the half year. The larger change will take place in Q3 as we see the impact of the Ulster Tracker portfolio come on board. But overall for the half year, €45.5 billion held with central banks, €31.2 at the ECB and around €4 billion with the Bank of England. Loan book movement overall, we've seen 3% increase in the first half of the year. And for the full year, we see that being greater than 10%, which is slightly more than what we would have imagined at the last quarter. Our funding position remains very strong. Loan to deposit ratio 59%, LCR 164, NSFR 158. And you can see that the largest part of our liability base is in our retail banking franchise. It is in customer deposits. And within those customer deposits, around 53% of those will be covered by various guarantee schemes. So very strong from a liquidity perspective. And from the MRL perspective, our ratio is 31.4, and that's in excess of our requirements. The CE2-1 outturn is very strong, 15.7%. That's a 5.1% buffer to our head of SHREP and a 5.9% ahead of SHREP on a transitional basis. A few moving parts within that, obviously really strong financial performance, so 150 basis points of capital generation. 40 basis points charged for the buyback that was executed in 2023, a 50 basis points reduction for the acquisition of the Ulster Tracker portfolio, and we've made 100 basis points charged with respect to a dividend, which is at the upper end of our policy payout range, and there's a 40 basis points impact for RWAs for redeveloped and approved models in the mortgage and corporate space. We did make some efficiencies at 20 basis points, which is part of BAU, but overall a really strong outturn in CET1. So I'm going to wrap it up now. Guidance for the year, just to pull it all together. We see net interest income greater than 3.6 billion euros. Net interest margin greater than 2.9%. Other income around 780 million euros. Cost of 1.8 billion euros. Cost of risk at the lower end of the 30 to 40 basis point range. And a ROTI of circa 20%. When we're to think about distributions, no significant change here from what we've talked about before. Obviously, the focus for us has really been on business performance, organic capital generation. being mindful of all regulatory developments, and really driving that performance for 2023. So in 2024, from 23's profits, we will look to pay ordinary distributions, utilising our normal dividend policy, and consider additional distributions to move from our CET1 towards our medium-term target. As we move to our next strategic cycle, with a continued focus on creating shareholder value and sustainable returns, we will review our medium-term targets and update these in due course. Thank you very much.

Thank you, Donal. And now we're going to go to the lines for some questions. Our first question this morning is from Raoul Sinha at JPM. Good morning, Raoul.