AIB Group plc (A5G) Earnings Call Transcript

Good morning, ladies and gentlemen. I'm Colin Hunt, CEO of AIB. And on behalf of all my colleagues across the group, I want to welcome you to the presentation of our interim results for 2021. I'll be updating you on the strategic progress we've made in the first 6 months of this year and on our plans for the years ahead. And then Donal Galvin, our CFO, will bring you through the financial details of the performance in the first half. . In December of last year, we presented our plan to transform AIB Group. And we also presented our updated financial targets out to the end of 2023. And today, I am pleased to report that the execution of that transformation plan is proceeding at pace as we prepare AIB for a post-COVID reality. The group is already benefiting from an improving economic outlook. And the outlook is brightening as the vaccination program rolls out at pace. As the Irish banking landscape is reshaped, our strong customer franchise, our national physical presence and our attractive digital offering position us very well for the periods ahead. At the same time, the robustness of the group is underpinned by a very strong capital position, with our CET1 ratio standing at 16.4% at the end of June. We are now well embarked on our strategy, which is being implemented at pace. And I'll update you in some detail in a few moments on that. We're also reporting good cost discipline across the group with total costs down by 1%, notwithstanding a rising depreciation headwind, and we reduced our total headcount by 3% to just over 9,000 FTEs. We've also made good progress on the various inorganic initiatives, which we have already announced to the market. With the Goodbody acquisition, the Great-West LifeCo JV and the purchase of the Ulster Bank Corporate and Commercial loan book, adding to our product and services range, our lending base and our customer numbers. And we continue to make great progress on the imperative of sustainability with our energy and climate action area once again, demonstrating the strongest growth rate across our lending book. Turning now to the economic backdrop. The outlook for growth has improved materially since the start of the year, with the Central Bank expecting the economy to expand by more than 8% this year and by more than 5% in calendar 2022. Improving business sentiment has also been reflected in various PMIs, with those indices now well into expansionary territory for both manufacturing and services. Yesterday, we announced in relation to our own manufacturing index that the new orders component had reached a record high for the third consecutive month. And earlier this morning, we announced that the services PMI, the AIB services PMI reached a high we haven't seen in 2 decades. After a last opening quarter, we've also seen a very strong recovery in terms of output within the construction sector. Very strong performance in terms of commencements in April and May, allow us now to forecast with confidence that we would have 27,000 commencements this year, the best outturn since 2008. And meanwhile, household balance sheets remain in rigorous good health with debt to disposable income levels, roughly half of their post GFC peak. And of course, household deposits continuing to build something that is reflected in the shape of our own balance sheet. Our confidence in the outlook is very much bolstered by the success of the national vaccination program. 72% of Irish adults are now fully vaccinated, 86.5% of Irish adults have now had at least 1 jab. And to borrow a phrase from the CEO of our Health Service Executive, Paul Reid, the pace of vaccine rollout has given us a glide path to some level of normality where we can rebuild society and our economy. We are seeing an improvement in the labor market as the economy reopens. I understand now it was announced yesterday that the number of people receiving the pandemic unemployment payment is at the lowest level since that was introduced at the start of the crisis. And that underlying improvement in economic activity has already been reflected in terms of our own data in terms of card spend. And also, we're seeing some promising developments in our mortgage applications pipeline. So with the COVID emergency beginning to ease, thanks to a successful vaccination program. AIB Group is strongly positioned on foot of our leading personal and business customer franchises. The quality and growing popularity of our digital technology with more and more of our customers now active on those platforms and mobile interactions pushing above 2 million per day on occasions during the first half of this year. At the same time, while we have commenced a process which will see 21 of our branches being amalgamated in the Republic of Ireland in this calendar year, we will retain the largest distribution network across the country and we remain committed to having a strong physical presence in the communities that we serve. Combining that leading customer franchise and the quality and ever increasing functionality of our digital offering, we are well set now to benefit from the impact of the various strategic initiatives that we are heavily engaged in on -- as we seek to improve the quality and range of our products and our services. Turning now to the details of the implementation of our Strategy 2023, which we announced in December of last year. We're pleased to report very good progress. Our plan to take out EUR 230 million in cost is well on track as we transform AIB's operational efficiency and build an ever more sustainable business model. On our branch network, we've already amalgamated 6 branches this year, and we've announced our intention to amalgamate a further 15 branches as we move towards year end. At the same time, we are in ongoing constructive dialogue with An Post with a view to deepening that important 20-year relationship. On our end-to-end credit project, we are making good progress on the centralization, simplification and automation of our credit management processes. And we've already seen a reduction of 25 FTEs in this area in the first half on foot of that initiative. On completion, we expect this project will deliver something on the order of EUR 35 million in savings on an annual basis by end 2023. We're also well advanced on our plans to reshape our working environment. With a new hybrid working model being rolled out from September with staff working between 2 and 3 days per week from the office. We've physically exited 1 of our Dublin office buildings, and we expect to commercially exit that building ahead of year end. On our insourcing project, we have filled over 100 digital data and changed management roles at the competitive sector of the labor market, but we are very much committed to pushing ahead with this initiative, and we are targeting annual cost savings of EUR 35 million here by 2023. In Britain, we previously announced our intention to exit our SME business, when we presented our strategic refresh back in December. We've now moved beyond phase 1 bids there, and we're entering a binding bids phase with a number of interested parties. In Northern Ireland, our moves to improve the operational efficiency of that business will see us closing 8 branches in that market, and we've launched a voluntary severance program on foot of these changes. And finally, we continue to make progress on reducing our NPE legacy. We've had 2 portfolio sales in the first half of the year, and our NPE as a proportion of gross loans 6.5% at the end of the half, very much remain on track, very much remain committed to that 3% target for the end of 2023. In December, we outlined our plan to reduce our cost base to 1 point -- to less than EUR 1.35 billion on an unchanged business basis. And leaving aside the impact of the inorganic initiatives and our costs, we're continuing to target that level. And we are making good steady progress across the various work streams, as I have already highlighted. On the M&A front, we've concluded a commercial agreement with Natwest Group on the acquisition of EUR 4.2 billion in performing corporate and commercial loans from Ulster Bank. That acquisition is now going through regulatory and competition authority clearance, and we expect to see those assets coming on to the group balance sheet through 2022. On Goodbody, we are awaiting final regulatory clearance. We've received clearance from the competition authority, and we're looking forward to welcoming its customers, its staff and their capabilities, products and services into AIB Group. We expect that transaction to complete ahead of year-end, and we're very excited about what our businesses will achieve together over the years ahead. That positions us very, very strongly to address comprehensively all the needs of our growing customer base. And finally, we have concluded an agreement with Great-West LifeCo to establish a joint venture to significantly enhance our product offering in life pensions, savings and investment products. We're going through a regulatory approval process there as well, and we expect to launch those products and that joint venture to market in the second half of next year. Sustainable communities is and remains one of the key strategic pillars of AIB Group. It is central to everything that we do. We continue to make great progress on the E in ESG. We've already made net 0 commitments in relation to own operations and to the future shape of our lending book. We issued EUR 750 million in green bonds in May of this year. We've enhanced the attractiveness of our green product range, our green lending product range, including the launch of a green mortgage offering through Haven, our broker channel. Our Energy Climate Action & Infrastructure team continues to report the highest growth rate in terms of new lending across the group with 40% growth in the first half of this year on a year-on-year basis. We're also making good progress on the S. Today, we have launched a social bond framework, which complements our existing green bond framework. We are committed to supporting the building of new homes, including more than 1,200 social housing homes. We continue to invest in the communities that we serve through AIB Together partnerships, and we remain a key partner of many initiatives, including FoodCloud, which is dedicated to reducing food waste across the country. G, governance is the most important single component of the ESG agenda. And everything else flows from this. It's a key area of focus for our Board. We have a dedicated sustainability subcommittee of the Board, which supervises our work in this vital area. In addition, we have made a number of important external public commitments including as a signatory of the UN Global Compact, and we've recently launched our sustainable lending framework to guide our activity here. So today, we are reporting on a 6-month period in which we executed our plan at pace and with determination. For the second half, as an organization, we are focused on the continued implementation of that transformation plan to drive EUR 230 million in costs out of our business. We're focused on the completion and integration of the various inorganic initiatives already announced. We'll continue to advance our contribution to the sustainability and support all our customers and their transition to a greener, lower carbon future. And we will deliver sustainable profits and in so doing, create real shareholder value and the capacity for future distributions. So as I conclude my remarks before handing over to Donal, the clarity of our plan, our progress on its execution and an improving economic outlook, allow us today to announce revised medium-term targets. Firstly, cost target of less than EUR 1.475 billion, which is our previous target of less than EUR 1.35 billion plus the impact in full of the Goodbody Ulster Bank and Life JV transactions. Secondly, an appropriate capital target for our business for CET1 of greater than 13.5% and a new return on tangible equity target of greater than 9%. These are our new targets to 2023. This is how our progress will be measured. And we are united in our determination to deliver upon them in the interests of all our stakeholders. We have a very clear plan. We are demonstrating our ability to execute with every passing week and we are ambitious and optimistic for the future of our business. Donal?

Okay. Thank you very much, Colin, and good morning, everybody. I'd like to bring you through the financial performance for the first half of 2021, which we feel is a good set of results, in line with expectations and are optimistic for the second half of 2021. AIB had an operating profit of EUR 373 million, which is very much in line with the first half of 2020. This equated to a profit after tax of EUR 274 million, which includes an ECL write-back of EUR 103 million. We have total income of EUR 1.183 million, and that's made up of net interest income of EUR 881 million, which is down 9% and other income of EUR 302 million, which is up 37%. Our costs were EUR 739 million for the first half of the year, down 1%, well managed and in line with expectations. Our FTEs reduced 3% versus June '20 to 9,003 at the end of June 2021. Performing loans of EUR 54.9 billion are broadly stable, and that's including new lending of EUR 4.5 billion, which is up 3% versus the first half of 2020. Our nonperforming exposures were EUR 3.8 billion or 6.5% of gross loans, which decreased by 12.5% in the 6 months. That includes a series of portfolio sales executed in Q1 of around EUR 600 million. Our strong funding position has been compounded by excess liquidity. Customer deposits of EUR 88.3 billion, increased by 8%, and we drew down a further EUR 6 billion of TLTRO at the end of June 2021 to contribute to higher cash balances held at the Central Bank of Ireland of EUR 32 billion. Our ML target is now exceeded after the issuance of EUR 750 million of a green bond in Q2. On our capital fully loaded ratio was 16.4%. And on a transitional basis, it's 19.3%, comfortably ahead of all regulatory requirements. On the income statement, I'm not going to go through all of this line by line because I'm going to break out some of the key items later. For us, obviously, the profit after tax is a key metric of EUR 274 million. I would just draw your attention to the bank levies and regulatory fees, which was EUR 71 million for the first half of the year. Obviously, these are at more elevated levels given the amount of liabilities that are being generated on our balance sheet and deposit guarantee scheme fees which are associated with that. So we think that line for the rest of the year will be around EUR 125 million. And indeed, on a go-forward basis, I would suggest that you use that as the base costs. Net interest income is down 9%, which has improved from the first quarter of the year when it was down 13%. A number of moving parts here as ever. My focus is really around net interest income, and I'll talk through the moving parts now. We obviously had a benefit on the liability side of EUR 65 million. EUR 33 million of that is coming from customer accounts and a negative deposit pricing strategy. EUR 15 million of that is the benefit of the TLTRO, which we drew down in 2020 and booked the benefit in 2021. And EUR 12 million is related to wholesale securities or wholesale debt, which has been refinanced at lower levels. On the flip side, minus EUR 82 million was related to lower customer loans income and that is more, I would say, a loan volume issue than a margin or a rate issue. EUR 41 million is related to investment securities income obviously, as higher-yielding assets mature and we reinvest at lower levels, there is a reduction. And lastly, you can see the impact here of those balances building up at the Central Bank of Ireland, where we had a cost of EUR 28 million for the first half of the year for excess liquidity placed with the Central Bank at lower interest rates. So for the second half of the year, our expectation is that the investment securities drag will dissipate. Customer loans drag will dissipate somewhat as our loan volumes increase. Our cost of liabilities and the improvements that we're making there will continue to improve. At the end of the year 2020, we had around EUR 4 billion on negative rates. At the half year, we had EUR 9 million or EUR 10 billion, which attracted negative rates. Our policy at the time was to charge balances greater than EUR 3 million, and that is where we -- where the EUR 10 billion quantum is related to that. As we go through the second half of the year, we will reduce the threshold of negative rates down to EUR 1 million for all customers, and that will bring an additional EUR 5 billion of customers into scope for negative deposit pricing. As I mentioned previously, we have maximized our TLTRO drawdown capacity from EUR 4 billion, up to EUR 10 billion. The reason for that is we are increasingly confident, needless to say, of reaching all of the new lending criteria. And that will have a benefit that will straddle between '21 and '22, obviously, at the discounted rate. So for net interest income for the year, we would be comfortable to reiterate our guidance of down 5% year-on-year. Other income, EUR 302 million, which is up 37%. I think within this, the key component is the fees and commission line, which is up 10%. And very much showing a -- as the economy reopens, as individuals, businesses learn to live with COVID, reopen, we are obviously seeing that return on the fees and commissions line. So we're very happy with that outturn of EUR 212 million. In the other items or business income lines, we had a strong first half of the year. Within this, we had some revaluation gains on our core Visa share position, which was around EUR 20 million to EUR 25 million. In addition, we have a strategy to invest in various domestically focused venture capital PE funds and returns were very strong in the first half of the year from those funds. But as we go into the second half of the year, I think we wouldn't consider those equity gains to be something that you should consider to be perpetual. But on the fees and commissions line, we do think that there's good momentum there, and we should expect to see a similar performance for the end of the year. So overall, for other income, I would say that our guidance there will be EUR 500 million. We're happy with that. There might be a couple of percent upside to that. And indeed, if when the Goodbody's transaction closes, which is likely to be somewhere late Q3, early Q4, there will be a benefit coming into the fees and commissions line, which will obviously be in addition to the numbers I discussed. Costs down 1%, very much in line with expectations. Factors that are impacting this. You can see the movement in our head count from 9,300, down to 9,000. With all of the initiatives that Colin would have outlined earlier, we would expect to see a continued downward trajectory on that staff cost line. Exceptional items are EUR 191 million, made up of a few items. Legacy restitution costs of EUR 124 million, EUR 25 million of that would relate to our legacy dawn tracker mortgage items. And EUR 100 million of that relates to a provision that the bank made at the first half of the year, and this is to cover a legacy investment fund item, which was sold by the bank between 2002 to 2006 to our high network customer base. And on the back of legal proceedings, we have decided to take a provision to manage this customer group in their entirety. But I would say it's a very tightly defined group of 2,500 customers. The total quantum invested in these funds was GBP 215 million, and we're being conservative to take a provision at the half year, and we will have to look to conclude this before the end of the year. Additional items relate to our strategy implementation program of EUR 44 million. We had exceptional costs related to the inorganic items of EUR 16 million. We had a small loss of EUR 12 million on portfolio sale disposals. So when I look at costs for the year, I think we'll be very much in line with the consensus and our own guidance of EUR 1.5 billion. Again, there will be an impact to that if and when or when the Goodbody's business is brought on to our balance sheet in Q4. And I think for exceptional costs, what I would say is for 2021, there will be approximately EUR 350 million. For 2022, that will be approximately EUR 200 million as all of those restitution costs disappear. And then for 2023, we expect all of these exceptional costs to be de minimis as the restitution items are in the past, and all of our cost takeout programs are concluded. In ECLs, we had a write-back of EUR 103 million with a coverage level of 3.6%. Obviously, from December 2020, we were very -- we felt we were very conservative on forward-looking with our provisioning approach. So what's happened in the last 6 months. You can see on the left-hand side here the movements that have led to this write-back. The economic environment has undoubtedly changed for the better and our expectations are heightened. So we had a small write-back which was related to macroeconomic assumptions. Obviously, the main part of the write-back though is related to recoveries and redemptions. Obviously, when you're -- when you have high provision levels and your customers continue to repay principal and interest, you will naturally just see those redemptions coming through. So we finished the year with a write-back of EUR 103 million or at the half year with EUR 103 million, and that incorporates a post-model adjustment. And what I've tried to do on the right-hand side here is really just look at the ECL stock and try to explain that and break that out a little bit more. So from the end of the year, we had an ECL stock of EUR 2.5 billion, that's reduced down to EUR 2.1 billion. The main area of reduction there was us utilizing ECL stock as we executed portfolio sales in the first half of the year. So of the EUR 500 million of PMAs that remain, I would say that 50% are related to pre-COVID legacy items, and 50% are related to COVID related items. So obviously, as payment breaks mature, then we had a PMAs relating to them, as payment break matures, those PMAs got written back. We are remaining conservative and cautious for the second half of the year. We want to wait and see what the impact is going to be on individuals and on businesses as government supports have been withdrawn. We do think that, that's something that will play out between H2 and H1 and -- but overall, we feel we're very adequately provided at 3.6%. I think for the end of the year, we would expect with the second half of the year, we need to wait and see, obviously, how the environment plays out. And we need to see exactly what the impacts are going to be when those government supports are withdrawn, particularly items like unemployment, but we think there'll probably be a small write-back in the second half of the year, but not as large as it has been for H1. Overall, on the balance sheet, it's quite a similar story to the last number of reporting sessions. We're seeing an increase in our balance sheet, very much driven by the liability side. So you can see our customer accounts from EUR 82 billion up to EUR 88 billion, deposits by banks from EUR 4 billion up to EUR 10 billion, which is very much related to TLTRO. And then on the asset side, naturally with the excess liquidity, you're seeing that being placed back with the Central Bank. So loans to central banks have increased from EUR 27 billion up to EUR 43 billion and the other moving parts around performing loans and nonperforming loans, I'll come on to in a second, but broadly stable. So here's the net loan position. We have new lending of EUR 4.5 billion, redemptions of EUR 4.9 billion, a little bit of FX movement and obviously, a portfolio sale in the first half of the year. Given the improved economic environment and looking at the pipelines for our businesses, we certainly see new lending for the year not being less than our previously guided amount of EUR 10 billion. If I was to go through segments, I would say all segments are performing well. I would say the pipeline is very strong, notwithstanding the fact that parts of the U.K. business we're exiting, Corporate and SME business is overall quite strong. Mortgage market performance this year in the market and for AIB has been strong, and we expect to see that continuing. And the only area where there's probably muted growth is in the consumer lending space, credit cards, personal loans, given the series of lockdowns that have taken place, the ability to spend or the requirement has not been as great obviously, with the buildup of liabilities as well. But overall, very optimistic for the second half of the year in terms of new lending. Nonperforming exposures as a quantum move from EUR 4.3 billion, down to EUR 3.8 billion. Redemptions and flow to NPEs effectively netting off. And then a portfolio sale of EUR 600 million, making the main reduction. Management is very focused on reducing NPEs, believe that 3% target, and we believe we have the ways, means and track record to do that. Funding and capital. Again, just to break out a little bit further, the liability side. The wholesale increase is really driven by TLTRO. And then I would say the deposits increase is evenly split between retail type accounts and corporate SME accounts. Our key liquidity regulatory metrics, LCR, NSFR, very comfortably above all minimums. We've met our MREL target. We have a total quantum of EUR 6.6 billion of MREL eligible debt issued post the EUR 750 million that we executed in Q2 of 2021. TLTRO, as I mentioned, we would have drawn down an additional EUR 6 billion at the end of June, bringing that total quantum to EUR 10 billion. Fully loaded capital, 16.4%, which is up 80 basis points. So I'll just try and break this out a little bit. 110 basis points of this increase is due to capital generation. We took a 30 basis points dividend accrual, which is really a signal from management about the commitment to begin to return capital to shareholders after the COVID year. There was an RWA reduction of 60 basis points and included in that is benefits of SME 501, around 10 basis points, portfolio sale of around 10 basis points and then lower volumes and credit grade movements gave a positive 30 basis points. So all in all, that gives us strong buffers to MDA strap of 10.19%. So that's 6.2% on a fully loaded basis or 19.1% -- or 9.1% on a transitional basis. For the second half of the year, we're going to see strong capital generation, and we think there's a capital tailwind or some additional SME 501 benefit of around 20 basis points. So our capital target revision is now at greater than 13.5%. We feel that, that's the appropriate CET1 target for AIB. And the reasons for that are that our capital stack is now optimized with AT1 and Tier 2 buckets filled. Our SREP P2R reduced from 3% down to 1.69% on the back of that issuance. And that leaves us with a buffer of greater than 3% from SREP to the medium-term target of greater than 13.5%. We think that this more accurately reflects the risk profile of the group but we'll obviously look to explore further RWA efficiency measures as we go forward. With respect to distribution policy, we obviously monitor all regulatory developments and things are becoming a lot clearer in that area. Management's focus has always been for 2021 to return to profitability and to ensure that we're able to implement our existing dividend policy, which would allow for us 40% to 60% dividend payout. So that's obviously a payout in '22 from '21 results. And we'll obviously look at the balance between dividends and buybacks at the appropriate time, which will be early in 2022. What I've tried to do here on the capital slide below is from the existing position of 16.4% to the 2023 hindsight of 13.5%. Look at the main moving parts. I think the inorganic initiatives that Colin has talked to will have an impact of around 180 basis points. We think 10 to 15 basis points of that will be associated with Goodbody in 2021. And the main bulk of it will be related to the onboarding of the Ulster loans, which will happen -- which should happen throughout 2022. We think we'll continue to make RWA efficiencies, will be capital generative and would distribute profits to shareholders. So as Colin mentioned, we've revised our medium-term targets. And there's really 2 main things that have given us the confidence to commit to these new targets. On the organic side, there is undoubtedly an improved economic outlook in our core market. The landscape is changing very quickly and evolving very quickly. We believe that, that will give us further loan book growth and further fee income opportunities over what we would have expected at December when we set these targets. Our CET1 target, as I mentioned, is adjusted to 13.5%, which we feel is appropriate for a bank with our risk profile. And lastly, the inorganic items that Colin would have talked to. If I was to bundle those together, we believe by '23, there will be a revenue impact of around EUR 230 million, an RWA impact of around EUR 5.8 billion, noting that we're dealing with a live book here. And all of these initiatives on a stand-alone basis are RoTE accretive. So obviously, I would say the costs on the CET1 target are inputs to a model to show an RoTE. And we're comfortable committing to this greater than 9% target. Within the costs, I would note that when we look at cost of EUR 1.475 billion, that would exclude regulatory levies. It would exclude exceptionals, but it includes all of the inorganic items that we have talked about. And indeed, the change in cost target from EUR 1.35 billion to EUR 1.475 billion is predominantly driven by the cost of those inorganic items. And in addition, a small amount of EUR 15 million, which we have attributed to further growth, which we believe is forthcoming in the coming years from our core market. So thank you very much, and I shall hand it over to Q&A.

Thanks, Donal. We'll go to the telephone lines now.

[Operator Instructions] And your first question comes from the line of Raul Sinha, JPMorgan.

Thanks very much for the presentation and for the questions. Maybe 2 sort of broader ones and a kind of quick one. Firstly, on the impact of the acquisitions and particularly Ulster, could you give us a sense of the quality of the book as you are seeing it? Just I recognize that the risk-weighted asset density on your portfolio is much higher for the same assets than it was for Natwest. So I was just wondering if there is some scope for optimization and whether the EUR 230 million and the EUR 100 million sort of NII guidance for the Ulster impact sort of includes or look through of any sort of stabilization in that portfolio? Secondly, on Goodbody. I was wondering if you can give us some sense of the top line momentum within that business recently. Obviously, rather than equity businesses have been doing quite well across the sector. So for some of us who are less familiar with in-working it'd be useful to get a sense of how much momentum they're carrying in inside Goodbody. And then just lastly, I wanted to go back to the sort of question around excess capital, noting that the business is very strongly capital generative and you still got a lot of room above your 13.5% sort of new target. So how would you think about further acquisitions? There's been some comments in the press about you looking at further books versus that sort of need to return capital back to shareholders a share price trades?

Thanks, Raul. I'll give some comments in relation to that -- those questions, and I'll let Donal take over then. Look, we obviously have great detail now in relation to the loan book that we're taking over from Ulster. And when you combine that loan book with our existing AIB loan book, we're actually very, very happy with the complexion. It actually looks very, very good from a diversification and risk balance across the group, the enlarged group. In relation to Goodbody, I'm not going to put any metrics on this, but I can say that they have had a very, very good first half of the year, and they are performing well ahead of where we would have expected them to perform. So the acquisition that we made and the that we -- the commercial agreements that we concluded with them are looking very good from our perspective now on the back of a very, very solid performance from our future colleagues and their customers in that business. And lastly, you asked a question in relation to excess capital and future inorganic, so we've been really busy on the inorganic front. Our focus now is very much on integrating the businesses that we are either acquiring or that we are forming in a greenfield way, such as the joint venture with Great-West LifeCo. We are aware that there's market speculation out there. We don't comment on market speculation, good, better and different. And -- but what I can say, we have a strong capital position. We are generating capital at a good pace. This is an evolving banking market, and we remain very alert to the opportunities that may arise as that market evolves. But 2 simple filters to apply to this. Firstly, is it strategically coherent, does it fit with our existing strategy. And secondly, would any future acquisitions be accretive to our enhanced RoTE targets. And they are the 2 lens that we'll apply to every potential opportunity that may or may not arise. Donal?

Yes. Look, we've obviously moved into and closed a transaction with Ulster Bank, we're buying a corporate and business loan book in the middle of a pandemic. So it's not always entirely straightforward. But as Colin said, we're very comfortable with the mix and the makeup. Obviously, as we integrate the portfolio, what will happen is their IFRS 9 PDs and ours will have to be reconciled. But that's going to be a 2022 event. And part of the deal, we're buying our performing loan portfolio. We're not buying NPEs. So we're very comfortable with the discussions around the quality of the loan book.

If I can just follow up. In terms of the risk asset density, there's obviously a gap that mean where your book sits and where that was on notes I was just wondering, does that converge over time? Or do you think that just stays and you look to optimize that over time?

Good question. I think there's 2 parts to it. Okay, there's the on-balance sheet RWAs, which are related to the loans. And we do think that we'll be able to make efficiencies as we implement the SME 501 benefits. But also, as you know, there was a large off-balance sheet part to the transaction. That's really related to larger exposures with larger wholesale accounts. So as we onboard these customers, we'll have to on a case-by-case basis, look at the overall relationships and ensure that we're able to generate sufficient cross-selling opportunities out of these relationships. Indeed, the construct in Ulster was cross-selling, let's say, a Natwest type product. So now that we have the Goodbody's business, we'll be able to look at this on a line-by-line item and see if it stacks up on an overall customer RAROC perspective. So we would definitely expect over time to be able to make RWA efficiencies.

Next question is from Eamonn Hughes from Goodbody.

Questions. Can I maybe just pick up a little bit around so there is 1 short term on medium term around what you're seeing kind of in the underlying mortgage market and also actually on the SME market, I mean, we always got a lot of detail on the mortgage side. And I suppose like there's been a poor take-up on the credit guarantee scheme, but I suppose over the last, say, 2 months or so, what you've been seeing, particularly in terms of maybe application and approval data around SME and as I said also on the mortgage and how you think you could perform into H2 on that side? Also maybe kind of slightly related, are you seeing further kind of accumulation on the deposit side? Or are we starting to see people spend? I mean, Colin, I think you mentioned earlier, around kind of you can see card activity. So maybe some color around how that's been progressing incrementally over the last, let's call it, again, 6 to 8 weeks? And then maybe finally, just on RWAs, Donal, you flagged there maybe in the Q&A, the first question, but also this was in the presentation around RWA efficiencies from here. I mean, some of that might be in relation to the Ulster Bank book as it comes on board. But also, is there something underlying in the business. I mean, historically, the EBS book has been on standardized. Is there anything else that we could think that might help you over the next sort of 2 to 3 years in relation to that sort of RoTE target?

Okay. Thanks, Eamonn. On the short-term outlook in relation to the mortgage market, we have seen a very encouraging momentum in terms of our pipeline, our applications pipeline and our approvals pipeline, and we look forward to that having a material impact on our drawdowns and an do share of the market at the as we move towards the end of the year. And of course, the mortgage market in total will be substantially greater than we would have expected at the start of the year, and we now think it will be somewhat over EUR 10 billion. We are seeing an improvement in SME sentiment. There's no question about that as the economy reopens and that is inevitably going to lead to improved demand for those products. At the moment, we're also seeing mixed patterns across the various SME groups with better performance is coming from the smaller businesses, medium businesses at this stage, but we expect that performance to become closer aligned in the second half of the year. And we haven't yet detected any significant let up in the flow of deposits, notwithstanding the opening, reopening, we've seen of the economy. We have already announced that we are going to move all our customers to a EUR 1 million threshold for the target of negative interest rates, and that will be applied as we move into the fourth quarter of this year. At the moment, negative rates are applied to all business customers with credit balances in excess of EUR 1 million and an all personal customers with credit balances in excess of EUR 3 million, but we will align both those thresholds at EUR 1 million in -- from October onwards.

Yes, so I think on the RWA efficiencies, we are going to be very comprehensive in ensuring that we have available regulatory benefits, particularly in the SME space. So we would have had benefits in '20. We will get benefits in 2021. We don't think that there's any model change benefits coming our way in the short term. I think you can probably expect to see RWA efficiencies as things progress. If the environment pans out as we think it is, those benefits will come in over time. But naturally, as NPEs reduced down towards the 3% ratio, obviously, there will be RWA benefits there as well. And we've reduced our capital target of 13.5%. We've announced a series of inorganic items which will utilize around 180 basis points. So I mean, AIB will become a lot more efficient and proactive in managing its capital going forward.

Diarmaid Sheridan from Davy, your question is next.

A couple of questions, if I may. Firstly, just around the dividend accrual. I wonder if you could just help us, clearly, the regulations require you to make that accrual on the basis of the upper end of your payout. How should we think about that when you come to formulate the final decision towards the end of the year in terms of where that might fit within that range. And then just in terms of the form that, that payout may take. I mean, ultimately, are we looking at this from a perspective of an agreement with your main shareholder in terms of a buyback? Or if that cannot be done at this point? Is it a cash dividend? Secondly, just around the impairment line, and I appreciate your comments, Donal, around the conservatism that you've put in. It just feels like there's still quite a significant amount of post-model adjustments there. So I just wonder, over what time frame we might see those kind of unwind to the extent that the economic outlook that we see today kind of continues to bear? And just finally, on net interest income, please. It looks like we're reaching an inflection point, either some point in this quarter or in the last quarter and momentum on negative rates on new lending coming through in the second half will help that significantly. Just in terms of if we look into 2022 then, those will obviously be still very relevant factors. To what extent are some of those negatives? Are they still something that we need to bear in mind? Or do you see that as being kind of much more a 2021 impact? And having much less of an impact in 2022.