Bank of Ireland Group plc (BIRG) Earnings Call Transcript

Good morning, everyone. I'm Eamonn Hughes, Investor Relations Officer, and you're all very welcome to Bank of Ireland's H1 2026 Results Presentation. You will shortly hear from our CEO, Myles O'Grady; and CFO, Mark Spain, about our performance since the start of the year. And then we'll open the floor to questions. So over to you, Myles.

Thanks, Eamonn, and good morning, everyone. I'm pleased to report a profit before tax of EUR 960 million, driving EPS growth of 36% and returns of 14.4%. We are meeting or beating all strategic targets, growing loans and deposits and wealth assets under management. All of this supports upgraded guidance for this year and reaffirms a positive outlook to 2028. On Slide 5, I summarized our updated 3-year strategy. And as a quick reminder, we are driving growth in Ireland, optimizing capital allocation and investing for the future, all of which drive growth, create operating leverage and substantially improve returns. Turning to the macro environment. Ireland is a highly attractive market, and we have an unrivaled position as Ireland's National Champion Bank. Ireland benefits from being an open economy, but there are also some risks. And while the team and I remain alert to the uncertain geopolitical backdrop, the Irish economy is resilient. We expect the domestic economy to grow on average of 2% to 3% out to 2028, and the U.K. economy is also forecast to grow. Favorable demographics are also very supportive, whether that's growth in population or household wealth. Bank of Ireland's business model is uniquely positioned to both drive and benefit from this backdrop, supporting much needed homebuilding, vital infrastructure investment and financial security and wealth creation for our customers. The strength of the Bank of Ireland franchise is translating into growth in total customer volumes. Put simply, more customers are choosing Bank of Ireland. Deposits, loans and assets under management had a combined growth of 6%. And I expect that momentum to continue driving sustainable balance sheet growth and value creation. We see examples of this excellent momentum in H1. In an evolving competitive environment, the Irish loan book grew by 7%, while everyday banking deposits grew by 3%. Wealth AUM, an important source of growing fee income, increased by 18%. And this strong franchise performance is driving a reported return on tangible equity of 14.4% and supports the $0.39 dividend per share we announced today, up 56% year-on-year. Turning now to Slide 9 and the first of our divisional performances. Supported by Ireland's resilient economy, Retail Ireland continues to perform very strongly. Everyday Banking delivered 4% growth in new product opening and customer experience continues to improve, supported by digital investment. This includes our new mobile app, the busiest, most important touch point for our customers, bringing greater functionality and improved user experience. Turning to the mortgage business, where we continue to hold a market-leading position. The Irish mortgage book grew 6% during H1, and this growth was underpinned by strong pricing and risk discipline. This book growth also offers valuable cross-sell opportunities for life and general insurance, and we continue to innovate. As an example, we rolled out a new trade-down mortgage proposition, which will help to improve the supply of secondhand homes in the market. Supported by the annual demand for housing units and the increasing supply of homes, I expect this book to grow by 5% on average over the coming years, a key source of value creation for the group. We are seeing great momentum in our wealth business. AUM grew to a new all-time high of EUR 65.5 billion, and that's up 18%, supported by net inflows of EUR 1.6 billion. Ireland's strong demographics offer a structural growth opportunity for our two leading brands, Davy Wealth and New Ireland Assurance. Meeting the financial needs of our mass affluent, high net worth and life protection customers is a strategic priority for Bank of Ireland. It's the engine of capital-light fee income growth for the group. And I am pleased that we are so well positioned to meet this important customer need. Turning to Slide 12 and our Retail U.K. division continues to perform well. Total income increased by 8%, while the lending book reduced by 2%, margins improved 8 basis points both of which reflect our disciplined strategy, which is focused on optimizing returns over volume. Our Corporate and Commercial business enjoyed a good H1 as Ireland's #1 commercial lender. A notable highlight was the 14% increase in Irish lending, a key strategic outcome driving growth in Ireland. And against an uncertain geopolitical backdrop and accelerated international deleveraging, I'm pleased to report strengthening asset quality with the NPE ratio falling to 3.8%. This overall outcome is a great example of optimizing capital while growing our Irish franchise. During H1, we delivered a number of important product and service enhancements. There are many examples set out on Slide 14, all of which point to a relentless focus on investing for the future. I referenced our new mobile app earlier, while Zippay, the industry-led peer-to-peer payments platform launched in March. We've also introduced payment enhancements in the U.K. and a new brand platform, right with you. This represents our focus on supporting our customers through every step and stage of their financial lives. And there is more to come. As we set out in March, we are investing around EUR 1.5 billion to strengthen the relationship with our customers and strongly position the group in an evolving competitive market. Focus areas include product and service enhancements for consumers and businesses in Ireland, a new U.K. savings platform, Irish savings and investment account propositions in wealth and insurance and improving digital capabilities in corporate and commercial. In March, I set out our plan to 2028 to create significant operating leverage of circa 600 basis points. And we've laid the groundwork for this, and the H1 scorecard is positive. Growing income faster than costs has improved the cost-to-income ratio by 0.8%, supported by securing EUR 41 million of cost efficiencies and a reduction in FTE of 2% and there's more to come. We will continue to transform our operating model, streamline customer processes and secure more value from our supplier partnerships. And I look forward to sharing more progress on this important work over the course of the strategic cycle. Creating that operating leverage is supported by a range of AI-enabled initiatives, some of which are set out on Slide 16. We've laid strong enterprise AI foundations and established a scalable AI platform. We are seeing early value being achieved in areas such as easier customer onboarding and KYC, faster software development and reduced contact center handoffs as some examples. And we have more to do here. We are working hard on a number of priority AI initiatives that will deliver further value. And alongside this value creation, we continue to invest in new cybersecurity to address emerging AI frontier model risk. We are 2 quarters into our 12-quarter strategy. Ireland is a highly attractive market driving quality growth. We have an unrivaled position as Ireland's National Champion Bank. We've upgraded guidance, and I reaffirm our target for 2028 and continued momentum to 2030. And let me pause here for a moment. Bank of Ireland continues to be a highly capital-generative business. This makes it possible for us to grow our balance sheet, invest in our operating model and reward our shareholders. And while the environment continues to evolve, at Bank of Ireland, we have a winning strategy, and we are executing strongly against it. Thank you. I'll now hand over to Mark.

Thanks, Miles, and good morning, everyone. As Myles said, we've made a strong start to our new strategic cycle. We especially see this in momentum in our Irish businesses, a growing NII with added resilience and materially higher returns with a statutory ROTE of 14.4%. Today, we are upgrading our full year guidance for net interest income, asset quality, ROTE and capital generation. Our performance and our positive outlook underline our conviction on delivering a ROTE of greater than 16% in 2028. Slide 21 sets out our key financial metrics. Total income was up 7%. We retained cost discipline, and we had a strong asset quality outturn. Our interim dividend per share is up 56%. This is in line with our new distribution policy and is a clear indication of confidence in our prospects. Slide 22 focuses on our NII, which shows continuing momentum. In the first half, NII grew 2% with balance sheet growth and structural hedge rollovers more than offsetting the impact of lower rates and planned deleveraging. Interest rate expectations are now higher than when we announced our strategy, and our structural hedge is larger. Reflecting these changes, we now expect NII of around EUR 3.5 billion for 2026, up from EUR 3.4 billion previously. The same factors support an upgraded outlook for '27 and 2028. We now expect net interest income of around EUR 3.75 billion and greater than EUR 3.95 billion, respectively. This revised guidance assumes an ECB rate of 2.5% from the end of this year to end 2028, noting that current rate expectations are higher but volatile. If I stand back, I've spoken at previous results presentations about the drivers of our NII trajectory being Irish balance sheet growth and the structural hedging decisions we have taken. We are seeing these factors play out now, both in terms of our H1 performance and our positive and upgraded outlook. Our loan book grew by EUR 1.5 billion, up 4% Ireland grew 7% with strong performances in mortgages and commercial lending. In the U.K., we continued our focus on value over volume, responding agilely to dynamic market conditions. And planned deleveraging in selected international corporate portfolios has progressed well in the first half. For FY '26, we continue to expect around 4% growth in our loan book. Customer deposits continue to grow with group volumes up 2%. Our Irish Everyday Banking franchise is a key driver of this growth. This has continued to perform well in an evolving competitive landscape. For the full year, we continue to expect deposit growth of around 3%. Turning to the structural hedge. Average volumes are modestly higher in the first half. Rollovers in addition to swaps were done at an average yield of 2.79%, more than double the rate on maturing yields. This rollover dynamic will continue to be a key driver of NII over this strategic cycle. The average yield for H1 was 2.01%, up 17 basis points year-on-year, while the exit yield was 2.09%. In July, we increased the size of the hedge by EUR 8 billion. This decision enhances our NII resilience. As a result, the sensitivity of our NII to interest rates has reduced by approximately 1/3. We grew fee income by 6% -- this was driven by our market-leading wealth and insurance franchises and supported by investment gains in Corporate and Commercial. I also note the positive impact from valuation items, which we don't budget for. For the full year, we continue to expect total fee income growth of around 4%. Total costs were up 2%, in line with our expectations. The moving parts here are inflation and investments, partly offset by efficiencies and lower restructuring costs. Our efficiency initiatives are delivering with savings equivalent to around 4% of H1 costs achieved. For the full year, we continue to expect total costs, which includes restructuring of around EUR 2.2 billion, up around 2% from last year's outturn. Notwithstanding the uncertain geopolitical backdrop, our asset quality is strong, with the NPE ratio improving to 2% at end June from 2.2% in December. The impairment charge was EUR 32 million, reflecting an excellent performance across our portfolios. Our updated full year cost of risk guidance is mid- to high teens basis points, reflecting a balanced view for H2 in the context of the evolving external environment. This is an improvement on our previous guidance of low to mid-20s basis points. Our business model is highly capital generative with 135 basis points of organic capital generated in the first half. After taking RWA investment and dividends into account, our CET1 ratio was 15.5% -- we have declared a dividend of $0.39, equivalent to half of our H1 earnings. And we are progressing the 530 million buyback announced in March with more than 40% now executed. For the full year, we see capital generation of around 270 basis points, up from circa 250 basis points previously. And we expect RWA investments to consume around 25% of this. Our objective remains to operate at around the CET1 guidance of around 14.5%. Slide 30 recaps on our guidance for FY '26. At the heart of this is our expectation for statutory RoTE of greater than 14%. This is a meaningful upgrade on our previous guidance of 12.5%. We also expect EPS growth of greater than 35% this year. And looking further ahead, our '26 performance and our positive outlook both enhance our conviction on delivering a ROTE of greater than 16% in 2028. Thank you for your time this morning, and we'll now turn to questions.

[Operator Instructions] It looks like our first question comes from Sanjena in UBS.

Two questions from me, please. The first on -- so basically, if you could provide more color on the credit performance in the period and the 8 basis points, what it would look like excluding the insurance credit and recovery? And how are you thinking about developments into the second half and next year? And second, if you could talk about some of the customer initiatives in more detail, the launch of Pay, how the take-up has been the new mobile banking app, what are the changes and what function were missing and have been added? And any other examples that basically how you're competing with the new banks?

Thank you for those questions. I'll ask Mark to take the credit quality question. And I'll cover the significant improvements that we're making to our retail franchise in terms of product services and related technology investments. I mean, firstly, Sanjeno (sic) [ Sanjena ] we've committed in the region of EUR 1.5 billion to invest in our business model over the next 3 years. And we're on a kind of relentless path now of delivering great improvements. We saw last year SEPA Instant Payment, peer-to-peer payments in quarter 1 and the communication now of the rollout of our mobile app, which we announced yesterday. Our app at its heart will be faster and easier to use. It's a native app, which means its response time will be better. New functionality includes a greater visibility of content and balances, easier to scroll, less clicks, but also importantly, been able to stay within app to progress start to apply for other products, particularly in the deposit space. I'm thinking about our Smart Start, our Super Saver, our mortgage Saver products, you've been able to do that from within app. But importantly, it also allows us to deploy greater upgrades more easily. And I'm thinking about as we develop our wealth affluent product over the course of this year and be able to access that from our app is important as well. And with more to come as well, where we'll be investing in the corporate and commercial space in the context of making it easier for our customers to manage our operational finances. I mentioned the wealth investment, but also in the U.K., a new savings platform out over the strategic cycle. So investments across the breadth of our franchise, it's a key pillar of our overall strategy, and it supports our outlook out to '28. And Mark, on asset quality, over to you.

Yes. Thanks, Myles. Yes, we've had a really strong outturn in asset quality in the first half. Sanjena, our NPE ratio at 2%. That's at multiyear lows. If you look at our Stage 2 volumes also down versus December as well. And if I look across our portfolios overall, our customers are in good shape and are weathering the uncertain geopolitical environment very, very well. So that's contributed to the H1 charge of 8 basis points -- maybe if I just go to our full year guidance first, and I'll come back on the credit insurance. So if you recall back in March, our guidance for the full year was in the low to mid-20s. And in the context of the environment that we're in, we've simply for our full year guidance, we've taken that guidance, the full year guidance and apply that to the second half and added that to our first half outturn. That's what leads to the mid- to high teens. We think that's a balanced approach in the context of the environment that we're in. But I'd say what we're seeing on the ground is that our customers are in really, really good shape. And just specifically on the credit insurance, so the credit insurance, EUR 30 million benefit in the first half in the impairment charge, Sanjena. And that's really the mechanics of credit insurance mechanism working out. By that, I mean that the bank takes a reduced first loss over time. but the actually underlying credit quality in relation to the insured portfolios is stable relative to where it was in December.

And would you be able to quantify the recoveries because there's a mention of some recoveries.

Yes.

Just trying to get a sense of the underlying that's in the first half.

Yes, exactly. So this is separate to the credit insurance. Yes, we've had -- I mean, we've had the benefit of recoveries in the first half, primarily in our corporate portfolios, about EUR 30 million, Sanjena. And that really reflects, I would say, really good work on the ground by our teams in relation to optimizing positions on NPEs.

Our next question comes from Diarmaid in Davy.

Myles and Mark. Two questions, if I may. Firstly, just a very strong activity level in the first half, particularly in Q2. I just wonder within that context, it's not showing much by way of signs of competition impacting at this point. If you have any observations of what you're seeing on the ground, that would be very helpful. And secondly, just around risk-weighted assets, I guess, as we look at outside of kind of normal lending dynamics, what are you seeing or what are you thinking about in terms of risk-weighted asset initiatives on SRT, CRTs and any other model kind of refreshes that you're expecting to come through going forward? That would be helpful.

I'll ask Mark to take the RWA-related question. And I'll take the start to the year, Diarmaid. We've had a very a good start to our news strategy. We've hit the ground running. I would characterize as we've created an engine that's firing on all cylinders and generating a very strong performance. And for sure, in an evolving competitive backdrop, in H1, we have retained our #1 position for mortgages, our #1 position for wealth. We've seen deposits grow by 3%. And of course, we remain the largest commercial lender in the marketplace as well. So we're performing very strongly. And I should say to you as well that when we think about our performance out over the next 3 years, the biggest source of growth for Bank of Ireland is going to be the overall market growing. And we're very well positioned, whether that's a mortgage market, whether that's the wealth business, we're particularly well positioned for that. And when we set our targets, we assume that our growth is a little less than the overall market growth. So that's a pragmatic view on how competition may evolve. But no real change in H1 in the context of significant change in competition. We had a very strong performance indeed.

Yes, so on RWA, playing out really exactly as we planned. So if you recall back in March, we guided for RWA to account for around 25% of our capital generation. You see that in H1. That's our expectation for the full year. And if I think out over 3 years, that's how it will play out as well. Specifically then on CRTs, Diarmaid, we're very experienced users of CRTs. They're an important part of our risk and capital management toolkit. And typically, we'll have about 4 or 5 transactions live at any one point in time. We'll typically do a new one every 12 to 18 months. So I expect our next CRT transaction to be in the first half of next year.

Thanks, Mark. And anything on any model refreshes that we should be thinking about going through?

No. So Diarmaid, there's nothing to call there. And again, the 25% investment in RWA, that's how I think about it. There's always moving parts under the hood, but actually, there's nothing material to call out.

We'll go next to Mike in Autonomous.

Yes. So 2 questions from me. So firstly, deposit growth obviously recovered in the quarter. It looks like it's about 3% annualized now. I just wanted to ask, you called out the savings and investment account as an opportunity in the presentation. I just wanted to know what you're seeing sort of in terms of competition on the ground now as we've seen sort of some international players coming to the market and how you see that progressing and particularly around that sort of savings and investment account and the potential opportunity and risks there, please, particularly given obviously a 77% loan-to-deposit ratio. That's a key focus. And then just a slight technical point on the hedging that's been put on about -- I think it's about EUR 8 billion in July. Has that been done sort of in line with the original hedge? Anything been done to the duration there? Just want to understand a bit more about what you've got on there, please.

Mike, Mark grab the hedging question, and let me take the deposit and the savings and investment account. I mean, firstly, we're very pleased with the performance of our deposit book, Everyday banking balances up by 3%. So that structural dynamic and that household wealth piece around deposit balances growing in the Irish market and our franchise is well positioned to benefit from that and hence, the growth. I'm very supportive of the savings and investment account. And just to put that into context, we have a unique wealth business in the Irish franchise. It's underpinned by 2 very strong brands, New Ireland and Assurance for Life and Protection and Davy Wealth as Ireland's leading wealth provider. We've seen our AUM grow to all-time high of EUR 65.5 billion. And our strategy, of course, is to build on that very strong performance and in particular, to grow our affluent and our mass affluent wealth business. So in many ways, we're entirely aligned with this government initiative. It also offers an opportunity to really deepen and expand our franchise over time. And I'm very comfortable with more than 4 million customers. We have 2.5 million retail customers. And so I want them to have a current account, a deposit account, an investment account and indeed a mortgage over time as well. So I'm comfortable with the economics that will play out as we build this affluent business on the back of that savings and investment account. And again, I'd point to the fact that as part of our guidance out to '28, and we've seen it in H1, that expectation that each year, both deposits and wealth AUM will grow. Mark, on the hedge rate...

Yes, on the hedge and maybe, Mike, maybe to link it to an overall theme and one of the themes this morning is our enhanced conviction on achieving returns of greater than 16% in 2028 and the sustainability of those returns as well beyond that. And the hedge very much plays into that. So the work we've done in the first half of the year was looking at the performance of our -- and the behaviors of our deposit base over the last cycle. And when we did that work, that supported an increase in the hedge by EUR 8 billion. We put that on at 2.96%, same duration as the hedge -- existing hedge of 3.5 years. And I suppose one way of thinking about that is a reflection of our confidence in our deposit base and Myles has spoken to the growth that we've seen that we expect there as well. And just as an output from that as well, obviously, our sensitivity to rates reduced by about...

Our next question comes from Sheel in JPM.

Hopefully you can hear me. Two questions from my side, please. One to follow up on the hedge, please. You can see the EUR 8 billion or so hedge balance increase gives your sort of notional hedge balance sitting at around EUR 75 billion or so. Is there more scope to improve or increase this hedge further when you're thinking about maybe some of the savings accounts that you're holding? Or do you think you're fully hedged out at this point? And then secondly, can I just ask with regards to investments, is there anything in the external environment, whether it's the pace of AI change, the pace of fiber developments or anything that may make you reconsider some investments that you're making, either change the quantum of investments through the plan or change either the pace of investments through the plan? I'd be interested to hear your thoughts there.

Sheel, I mean let me take the investment question first and then Mark, over to you on Sheel's Hedge question. Sheel, we have communicated an investment of EUR 1.5 billion over the next 3 years. And of course, that spend is captured within our cost target guidance and also within our strategic objective to take our cost-income ratio to the mid-40s. And when I look at that overall spend, it's nicely balanced between making sure that we are going after a very strong operational resilience backdrop. That's hugely important in the context of cyber threats in the context of protecting our customers from fraud. The other part of that spend, and I would have called out some of these when talking to Sanjena earlier in her question, it's a broad area of digital investments that are really designed to make sure that we are supporting our customers and their needs for the future while also protecting our franchise. And those two work very well together. And of course, they support our target to improve ROTE by 16%. I mean one of the things that I'm encouraged by is that this level of strong performance, I mean, the fact that we have upgraded our guidance on net interest income and on capital generation is that there is capacity if we need to, for the right investments to alter that investment profile. And no, there's no plans to do that, but we have the capacity to do it. Always very clear, though, that our objective to secure returns above 16% and to keep our cost-income ratio in the mid -- to get to the mid-40s, that they're an absolute imperative. But we do remain agile. Things can change. We can reprioritize. That is often the case, but we're making very good progress against that investment spend.

Great. So on the hedge, you should regard the EUR 8 billion increase, it takes usually about EUR 77 billion point in time now. That's the material increase. And from here, the hedge really will grow in line with deposits. That's the material intervention. And maybe, Sheel, just maybe to add on just because I think probably the dynamic of the hedge, and I think you understand this is that hedge today exiting at 2.09% in -- or just over 2.09% in H1. It's that stock flow dynamic that hedge repricing to market, that's a key driver of our NII expectations and growing to greater than EUR 3.95 billion by 2028, which is obviously within a stone throw of 4.

Great. If I can have one quick follow-up. You've also increased the Eurobond portfolio in the half. Is there more appetite there? -- assets continue to be attractive. So is there more scope there as well?