AIB Group plc (OTCPK:AIBSF) Q2 2022 Earnings Conference Call July 29, 2022 4:00 AM ET
Company Participants
Colin Hunt – Chief Executive Officer
Donal Galvin – Chief Financial Officer
Conference Call Participants
Grace Dargan – Barclays
Diarmaid Sheridan – Davy
Chris Cant – Autonomous
Raul Sinha – J.P. Morgan
John Cronin – Goodbody
Colin Hunt
Good morning. And welcome to the presentation of our Financial Results for the First Six Months of 2022. As usual, I will spend a few minutes on the execution of our strategy before I hand over to our CFO, Donal Galvin, who will bring us through the financial details and then as usual, we will have time for questions.
Clearly, geopolitical tensions, increasing inflation pressures, tightening monetary policy and deterioration growth outlooks, have combined to create a more uncertain and volatile business environment.
But against that difficult and challenging backdrop, we have continued to make progress on the implementation of our strategy and we are announcing a solid financial performance in the first six months.
While growth in the Irish economy would be dampened compared to expectations at the start of the year, we are still expecting a rate expansion of between 5% and 5% in 2022, and that buoyancy is reflected in €5.4 billion of new lending in the first six months of this year, representing an increase of 20% on the prior year period.
Our green lending continued to grow in line with our strategic ambition and it represented 23% of new lending in the first half. While we also significantly increased new account openings as Ulster Bank and KBC customers seek a new banking relationship.
This solid performance in terms of lending activity together with an ECL right back under pin our PBT outturn for the first half of €537 million. Meanwhile, we continue to benefit from a very strong capital position, but the Group CET1 ratio standing at 15.3% at in June, and importantly, this outturn fully accounts for the capital impact of the acquisition of the Ulster Bank corporate and commercial loan book.
We have now migrated the first two customer trenches and some €650 million of associated loans to AIB, with €180 million reflected in the end June loan book outturn. We continued to implement our transformation plan, which is designed to future proof the cost base of the organization and put us on a path to deliver sustainable returns into the future.
Good progress was also made on legacy items, with a €400 million loan portfolio sale effectively resolving the issue of long dated NPEs, which now stand at 0.6% of gross loans. While the overall level of NPEs stood at 4.2% at in June. We are well on track to reach our NPE target for next year of circa 3% of gross loans.
The CBI’s enforcement actions regarding tracker mortgages are now concluded, representing another key step forward in resolving the issues in the past. Meanwhile, we continue to set the pace for sustainability in our financial services, with highlights including establishing Science-based targets for 75% of our lending portfolio, issuing our first social bond and our third green bond and we were very pleased to see our progress on this important agenda being recognized externally with Sustainalytics now ranking us in the top 5% of over 1000 banks globally.
Turning to the domestic economy, while forecasts are moderating on the back of global developments and higher inflation pressures, the outlook remains relatively positive with modified domestic demand expected to grow by some 4% in real terms on average over the period to the end of 2024.
And the strength of the domestic economy and the extraordinary post-COVID rebound are neatly reflected in the labor market. Unemployment is now below 5%, while the total numbers of work in Ireland are higher than any time in the country’s history.
Reflecting the same aggravating factors which are evident across the world, Irish inflation is at levels not seen in decades and it’s having distortionary and confidence sapping impacts on households and businesses.
That said, PMIs for both manufacturing and services. They have moderated somewhat, but they remain in expansionary territory. So the Irish economy enters this period of market uncertainty in a position of strength, with personal and business balance sheets in good health, as highlighted here on the slides with household deposits at all time highs and leverage levels at multi-decade lows.
At the start of December 2020, we set out a revised strategic ambition for the business to the end of 2023 and we are now at the halfway point on that plans implementation. The strategy is designed to simplify, strengthen and streamline our Group in the interest of all our stakeholders, and we made good steady progress again in the first six months of this year.
With effectively resolved the issue of legacy NPEs for once and for all. We continued to advance our cost savings plan in an evolving inflation environment. We plugged product and service gaps particularly in savings, investment and capital markets. We are now on an asset growth trajectory driven by organic activity and inorganic initiatives. And we are successfully recruiting new customers, as the Irish banking landscape goes through a period of unprecedented change.
We have a clear path now to the end of 2023 to reshape our business to deliver sustainable returns into the medium-term and we will afford the provost report over the course of the coming quarters.
Staying with NPEs, we have a very strong track record built over many years. While NPEs increase as a percentage of gross loans in 2020 on foot of COVID impacts, they have now resumed a downward trajectory, and crucially came under the 5% threshold in the first half of 2022.
Importantly, from a go-forward perspective, the issue of long dated NPEs is now effectively resolved and we have a clear roadmap to our 3% target for end 2023 with associated benefits in terms of both cost and capital.
In terms of our transformation plan, we enhanced our longstanding agreement with An Post across 920 locations nationwide, increasing customer choice and complementing our own network. We have also significantly enhanced the range of digital account opening solutions in the first half to assist customers migrating to AIB.
On end-to-end credits, good progress is being made on customer, staff and core banking system changes with phase delivery underway. While the rollout of the future target operating model will commence in this half, we are running somewhat behind plan as we reprioritize projects to allow us to maximize the opportunities arising from the departure of KBC and Ulster Bank. This is a very important project to improve both our credit operations and our customer service, and we look forward to reporting on further progress here over the coming quarters.
Our future of work project is now complete with our property footprint reshaped and resized, while our hybrid working model is now implemented. On the change delivery workstream over 350 digital data and change specialist roles have now been insourced and we remain on track for our 2023 deliverables.
The U.K. Transformation Program is now successfully concluded with our exit of GB SME complete, a decision which is validated not just in terms of cost savings, but also increased concerns about the outlook for the British economy.
And finally, on legacy simplification, as I said already. Legacy NPEs effectively now addressed with headcount in our Financial Solutions Group have since 2017, while our ZBB cost management approach is embedded across our business.
So on new lending, we had a strong performance in the first half, up by €5.4 billion or plus 20% in the comparable period in 2021. We had particularly strong performances for mortgages, up 4 — 45% year-on-year for the Group, 59% in the Republic of Ireland, with property lending up 54% on the same basis.
Our Personal Lending was ahead by 16% as post-COVID consumption made its impact. Overall in Corporate and SME there’s mixed performance with strong domestic corporate lending offset by ongoing weak demand for credit from SMEs weighing on the overall outturn, while in the U.K., new lending was 41% lower, reflecting both our exit from SME lending in Britain and the lean towards increased caution in that market.
We continue to retain leading market shares in key products as highlighted on the slide here. Mortgage market share of 31% in the first half and that’s likely to move higher in the second half as the momentum we are seeing in applications flows through to actual drawdowns.
On the inorganic side, we are well embarked on our strategy of positioning AIB as a complete Financial Services Group. Goodbody is now fully part of the Group and adds materially to our products and wealth management and capital markets. We are making good progress in our JV with Great-West LifeCo, which will add to our product suite in life, pensions, savings and investments, and we expect to see that new offering being launched to market ahead of your end.
Our partnership with Ulster Bank is going well and we were delighted to welcome new customers and staff to AIB. We are adopting a multi-tranche approach to loan migration. We have now completed two migrations successfully. We are on track to complete the migrations in the first quarter of next year.
In the first half, we also reached agreement with NatWest on the acquisition of Ulster Bank’s performing tracker mortgage portfolio involving 47,000 customers and €5.7 billion in loans. We are currently going through the necessary regulatory approvals for this transaction and we expect the economic interest to transfer to us in the second half, with physical migration to a third-party servicing platform expected in May of next year, and as previously disclosed, the acquisition was priced at 95.15% of par value.
We have seen a significant increase in new account openings this year as KPC and Ulster Bank customers look for a new banking relationship. We have seen more than a doubling of accounts open today AIB in the first half of the year, representing an estimated 47% market share of migration customers. Our success in this area is driven both by the quality of our digital offering and the fact that we are physically present in 95% of the locations, which KBC and Ulster are leaving.
We now expect our customer base to exceed 3 million when all migrations are complete, an increase of over 10% on the position just four years ago and our leading digital propositions are accommodating significant growth in peak daily digital transactions, which reached 2.9 million in 2021 and you are doubling from the 2017 outturn. 74% of our personal customers are now digitally active, while daily average usage of the AIB mobile app has increased by 15% year-on-year.
Our ability to meet the digital needs of our customers is underpinned by significant investment in technology going back 10 years. We have taken a modular approach to technology transformation, which is seen as focusing in different periods on different priorities. We now have a modern digital and customer focused IT infrastructure.
Through this strategic cycle and the next, we will continue to invest up to €300 million per annum to enhance customer experience and efficiency, while simplifying our technology and modernizing our platforms.
Some recent improvements include upgrades to our two largest transaction processing systems, which will help us to seamlessly scale the growth we are experiencing today in digital transactions, while focusing on cybersecurity and resilience capabilities.
We are now running the most modern mainframe architecture globally and we are doing so in a way which is aligned to our sustainability ambitions, with our primary data centers now operating off green energy.
On the sustainability front, we continue to set the pace domestically. In terms of rolling operations, we have reduced our CO2 emissions by 70% of 2009 base and we are making real progress in supporting our customers on the transition to a greener future with €5.9 billion deployed in green lending since 2019.
This represents an area of huge opportunity for the Group and we expect it to become an ever more meaningful part of our business over the years ahead. On the liability side, we have raised €3.5 billion to-date from ESG bonds over four separate issuances and we were the 19th Bank globally to issue bonds in both the social and green space.
So, in concluding, we are alert to the changing banking landscape and operation environment, with the interest rate cycle turning, inflation pressures evidence, heightened geopolitical risks and global macroeconomic uncertainty.
Against this backdrop, our priorities for the next six months are growing our loan book sustainably and responsibly, welcoming new customers to the Group, implementing our transformation plan at pace, while maintaining our credit and cost discipline, and embedding our various inorganic initiatives.
Given the changing banking landscape and the evolving operating environment, our medium-term targets are under review and we will update the market in due course. We see upside potential to our RoTE targets with the significant momentum we are seeing an income offset to some degree by cost inflation. Our strategy is working and we look forward to delivering sustainable returns in the interests of all our stakeholders over the years ahead. Donal?
Donal Galvin
Thank you very much, Colin, and good morning, everyone. For the first half of 2022, we have seen a strong underlying business performance and have delivered a solid profit outturn. That’s really due to four things; an accelerating net interest income and good cost control; a growing loan book; continued strong capital unfunded position; and from an asset quality perspective, non-performing exposures are significantly reduced and our provision coverage remains conservative.
On the income statement, with a profit after-tax of €477 million, it’s really just two things that I’d like to draw your attention to here; our total income is up 8% and just specifically looking at the bank levies and regulatory fees, there are €101 million, mainly growth here based off liabilities and guarantee scheme fees attached to that and we see those fees being around €150 million for the end of the year.
Our net interest income, €895 million, which is up 2%, cost of liabilities are a benefit of 2 basis points, investment securities up 2 basis points. It’s really just the impact of reinvestment at higher rates. Customer loans are flat, representing small growth in the balance sheet, but asset pricing remaining very consistent. I say most importantly, the cost of excess liquidity and that drag been only €3 million. Within that, there’s obviously an enduring cost to the euro balances, which is €20 million, offset more or less by the uplift in U.K. rates and the benefit there of €17 million.
If I can just remind you of the guidance that we gave on the 3rd of March with respect to our rate expectations and outlook, we had imagined an ECB deposit rate of negative 50 basis points at the 3rd of March and a Bank of England rate of 1%. The guidance for full year 2022 will be 10% or up 10% and that’s imagining a year end rate in ECB land of 1% and a Bank of England rate of 2.75%.
Overall, net interest sensitivities, again I want to show effectively the impact on the balance sheet over time of the change of liabilities and the impact that that is having on our sensitivities. So for the half year, we have a sensitivity to 100 basis points increase in rates of €369 million. Euro sensitivities has really primarily been driven by that steady increase in liabilities. Notwithstanding the fact that we were expecting to see a reduction post the COVID era, it’s actually continuing to grow especially with the changing market environment.
And I was would have talked about previously, we look at our interest rate management from three perspectives. We look at our managed rate books, which is really swapped based. So we are already beginning to see these impacts. We look at official rate portfolios, which is really based off ECB balances and assets such as tracker mortgages. And then, lastly, we have our managed rate portfolios, which would be things like variable mortgage rates and customer deposit pricing and liabilities.
Other income is €379 million, which is up 26% and that includes €33 million for Goodbodys. Net fees and commissions of €286 million are up €74 million or 35%. So what we have seen really in the first half of the year is a very strong rebound in activity in the retail and business level. So customer accounts have increased, card related income have increased and then business activity has increased. So we are seeing increases from foreign exchange.
There are some other items impacting other income, gains from equity investments, which we typically have and there’s maybe just one item here that I would call out, which is particularly non-recurring in nature and that’s €26 million when we specked of the forward contract to acquire the corporate and commercial loans from Ulster Bank. But, overall, very strong momentum in the business and we see a year-end outturn of €700 million for our other income.
Costs were €782 million, up 6%, but an underlying increase of 1%, if we are to incorporate Goodbodys. This reflects the wage agreement, which we would have agreed with our unions, which is 10% over a three-year period, inflationary pressures and costs onboard new customers from KBC and Ulster Bank, which Colin would have alluded to in his earlier part.
Costs are expected to land at €1.6 billion for full year 2022, which is around €50 million higher than what we would have previously expected. I would say two-thirds of that amount would be related to the temporary onboarding of staff to facilitate the onboarding of as many customers from KBC and Ulster Bank as we are able to achieve and the remainder would be general inflationary pressures which we are seeing in the environment.
Exceptional costs are €168 million for the half year and I have really tried to split these into two categories, legacy and strategy. The strategy items would really just be the continuation of our strategic costs takeover plans, also including one-off inorganic acquisition costs. And then the legacy items would include things such as the tracker fine and the conclusion of that and the difference between the prior guidance of €250 million and current guidance of €300 million for exceptionals is related to an adjustment for a Belfry Property Fund, which we now think we have provided for in full.
So on a go-forward basis, we think that the exceptional costs will be very much related to the strategic items, that Colin would have referred to an overall for the year costs we expect to be €1.6 billion.
We have an ECL right back for the first half of the year of €309 million and there’s a number of moving parts here. We have a couple of non-recurring items. One large one being a provision released on the sale of an NPE book of around €100 million. We have seen continued repayments and redemptions from customers who had been impacted by COVID. And we have unwound a number of those COVID-related NPEs related to individual or businesses, as things have normalized and as all of these customers emerge.
The second half of the year, visibility is a little bit uncertain and so we are going to maintain our guidance of a small charge for the year. The items which will be coming our way in the second half of the year will be three-folds.
Number one, I think, the underlying cost of risk for business as usual will be around 25 basis points in line with what it was in the first half of the year. We will be onboarding all of the Ulster corporate and commercial assets. So there will be a day one ECL impact of up to €100 million, just depending on the timing. And in Q3 and Q4, we are likely to make an adjustment for some cost of living effects. So we have a little bit more work to do there, but given the uncertain environment, we felt it was prudent to maintain our existing guidance on a small charge for the year. But, overall, I would say the environment and the asset quality remains strong.
Balance sheet wise, you can see the overall balance sheets increased from €128 billion to €132 billion, very much liability driven. You can see deposits increasing from €93 billion to €96 billion. We actually see by the end of the year, this trend continuing up to around €100 billion, as we continue to onboard and welcome customers from KBC and Ulster Bank.
The balances that we hold with Central Banks have continued to grow. With the ECB we have a balance of €38.1 billion, which is inclusive effectively of €10 billion of TLTRO and we also have €5.6 billion on deposit with the Bank of England.
Loan book growth strong in H1, we are beginning to see that growth that I would have talked about in quarter one. So, overall, up €800 million. That really is across all of our core segments. The only area where we would see some weakness versus expectation is in the U.K. business. But that is as much a view on the U.K. environment as it is around business growth.
Previously, I would have guided 5% CAGR from now to 2024 and that would have been excluding the inorganic items. If I now include the inorganics and the Ulster corporate loans and the tracker book, which is expected to come onto our balance sheet in 2023. We see an overall compounded asset growth of 8% per annum. And if I was to break that down on an annualized basis, it will be something like 6% 2022, 13% or 14% for 2023 and then 6% in 2024, and obviously, that lumpy amount in the middle of 2023 being reflective of the onboarding of the Ulster tracker portfolio.
Non-performing exposures 4.2%, less than that 5% target we had a number of reporting seasons ago, declined by 22%, very focused on getting to the new target of 3%. Legacy NPEs are effectively addressed and they have been reduced to €300 million. And the remainder is really COVID impacted sectors where we will continue to work with all of our customers, I would say it’s really in sectors that we feel should be resolvable in a fairly mutually beneficial manner in the corporate business space, et cetera and so we will drive towards that target.
On funding and capital, very strong liquidity metrics in terms of MREL, we have met our MREL targets. We have issued €5.4 billion of eligible MREL securities. We executed a €1 billion social bond and a €750 million green bond in the first half of the year. And on a go-forward basis, given the higher balance sheet that we see, we think we will be doing two or three benchmark issuances per annum.
And I would have mentioned previously, we have maintained our TLTRO balance of €10 billion. Overall capital position remains strong. If I was just to walk you here from the year-end position of 16.6%, we have had strong profitability, 90 basis points. Calendar provisioning write-back really linked to that NPE sale of 10 basis points. We have a small charge on investment securities of 20 basis points given the changing rate environment.
We have a 20 basis point charge for the €91 million buyback that we did earlier this year. And we have taken on board the full CET1 charge of 130 basis points for the Ulster corporate and commercial portfolio. That leaves us a position of 15.9% and then effectively a regulatory dividend deduction of 60 basis points brings us to 15.3% at the half year.
On the outlook for capital, obviously, our SREP P2R, we would have updated you that I had reduced by 25 basis points to 2.75% from 3%. This countercyclical buffer changes in the U.K. and Ireland, 0.5% for ROI potentially increasing to 1.5% in 2024. And in the U.K., the countercyclical buffer has increased from 1% to 2%.
Overall, that’s a buffer of 3% from SREP to our target CET1 of 13.5%. And as I look to the future, the main moving parts that I can see, inorganic initiatives, up around 70 basis points charge, primarily the Ulster tracker book. Profit generation, we see as being continuing — with continuing strength. We will continue to focus on generating RWA efficiencies across our entire balance sheet.
We will have a small charge for organic RWA growth, which I have talked about previously. And then we will have distributions to our shareholders, and we have our CET1 ratio of 13.5%. As I would have talked about previously with respect to capital return, our focus for 2022 has very much been to close out on all of the inorganic items that we have talked about, not just agree to transact, but get formal regulatory approval and get the assets onto our balance sheet.
So our focus will be on ensuring that we have a strong return for 2022 as we can deliver, and we will use our normal distribution policy payout range of 40% to 60%. Throughout 2023, as more certainty becomes clearer in the environment, we will look to move towards that 13.5% CET1 target.
So just to wrap up all of the guidance that I gave you for 2022, NII is expected to grow 10%. Other income will be around €700 million. Costs are expected to be €1.6 billion. For cost of risk, we expect a small charge Reg fees a €150 million, exceptional costs of €300 million and loan growth for 2022 or 5% to 6%. So Colin would have alluded to the fact that we are going to take away our medium-term targets and have a look at those.
This is really due to the evolving environment that AIB is looking at. We have two banks exiting our domestic market. That is going to give us growth opportunity and customer acquisition opportunity. We have a rising interest rate environment, particularly in our core euro market, but we have inflationary pressures and we have uncertainty.
But overall, the benefits on the growth and the rates will outweigh any of the headwinds, so we see upside potential to the 9% RoTE target. So we will be able to enhance shareholder value and deliver more sustainable returns.
Thank you very much.
Question-and-Answer Session
A – Colin Hunt
Thank you, Donal, for bringing us through the numbers. We are now going to go to the phone lines for questions, and I understand our first question is from Grace Dargan in Barclays. Over to you, Grace.
Grace Dargan
So maybe you could just give a little bit more color so what’s your assumptions on TLTRO repayment in that sensitivity and around your managed margins? I know you talked about that previously. And then secondly on other income there’s, obviously a few moving parts in H1. I know you have called out €26 million? I think now particularly you have got better oversight of good body post completion. Is QH 2022 was good implied run rate kind of going into 2023 and beyond or should we be thinking about other drivers there as well? Thank you.
Donal Galvin
Hi. Thank you very much, Grace. On TLTRO, we obviously have maintained our TLTRO balances, but in the interest income guidance I haven’t incorporated any potential benefits for how that could be treated or not by the ECB. So we will await the next ECB meeting in September for an update there.
I think on other income, the best way to think about it is really the — the reason I drew attention to the — let’s say, the forward contract with Ulster, is that’s probably the main one that we see is nonrecurring. So I would exclude that on anything on a go-forward basis. And I think the rest we would see as being reasonably consistent.
Colin Hunt
Thanks, Donal. Next question is from Diarmaid Sheridan in Davy. Over to you, Diarmaid.
Diarmaid Sheridan
On the medium-term targets obviously, you have given us a couple of pieces there to think about the updated rate sensitivity the higher compound loan growth, et cetera, and some of the costs. So I suppose when you think then in terms of the impairment line, obviously, you said maybe there’s a little bit that will need to be reflected into the second half of the year around cost of living? But as we look through that beyond into 2023, I suppose what, like would we still expect a, 30 basis points kind of through the cycle charges being normal? Just trying to size how the various different impacts will flow through into ultimate profitability and return dispose. And then secondly, maybe just on the dividend and distribution comments, Donal. I mean, if I picked you up correctly, are you indicating this to the extent that you have everything completed through back end of this year and maybe early next year that you are in a position at that point to look to return surplus capital and start moving to the 13.5% ratio by during 2023 or do we have to wait until the end of 2023? Look, I know it’s a timing point but it’s somewhat important. And then just finally, if I may just on mortgage pricing, I suppose, to what extent do you think you can stay at kind of current levels just given the increase in base rates, the increase in market funding cost? Is that something that you will have to reflect and just curious around timing there? Thank you.
Colin Hunt
Thank you, Diarmaid. I will just kick off with some commentary on mortgage pricing and then I will hand over to Donal for the other questions that you raised this morning. We have had an exceptionally strong mortgage performance of 59%, 31% in market share. We see what’s coming through in terms of applications. We are performing very, very well in this space and we have a strategy of having a complete product suite and having a competitive product suite.
We reacted to the first 0.5% increase in interest rates. The first increase in efficient ECB interest rates in 11 years by choosing not to pass on where we manage the portfolio, not to pass on to other variable our fixed rate products. And but obviously, we are expecting to see further interest rate increases over the course of the next number of quarters.
And the timing of that is uncertain, but it looks like we will be having further rate increases in September. And as we see those official rate increases coming through, we will be considering the appropriate pricing for all our products right the way across the mortgage suite.
And we will keep that pricing under review on a very, very regular basis. We have an ambition, a continuing ambition to be Ireland’s largest provider of mortgages, and we will continue to maintain a competitive position, cognizant of official interest rates.
Donal Galvin
On the other items, I am quickly going to shoot back. I think I neglected to answer a question from Grace around managed rates assumptions in our sensitivities. And it is a static analysis that we do, but there’s loads of moving parts in it. But I would say, for the sake of simplicity, what we use is a 50% pass-through assumption on deposits and on variable mortgages. So that’s that.
On the dividend, I have tried to be as consistent here as I possibly can be and said that throughout 2023 or at the end of 2023 we will look to move towards that 13.5% target. And the speed at which we review that and update the market, I expect will be largely driven by the environment in which we are operating in.
With respect to the targets for 2023 look, I think asset growth. I have been really clear on what my expectations are for the future from an organic and an inorganic perspective. And indeed, we are seeing those amounts coming through.
On the rate side, I think it really depends on your own view on interest rates. The bulk of our portfolio on sensitivity is to official rates and market rates as opposed to managed rates. So it’s quite formulaic and a last stroke nearly all of those benefits will flow through. That’s from the rates perspective.
Obviously, there’s associated headwinds. MREL issuance has increased costs, et cetera, et cetera. But I am going to let you figure out what that is going to be. In terms of costs overall, we have had this year the unusual activity with respect to the leaving banks, the cost increase of €50 million, really predicated around bringing in 700 people to help us acquire all of these customers.
I don’t expect that to go beyond Q1 2023. We do have a lot of other of the strategic items, which will be coming through and the benefits flowing through in 2023. But obviously, we have an inflationary environment and is, as permanent as a transitory, et cetera, we will wait and see. I mean, we do obviously believe that it will normalize over time, but we don’t think that there will be huge upward cost pressure, anything like the actual headline rate of costs.
Cost of risk is a very interesting one, 25 basis points for the first half of the year, and that’s again what we see for the second half of the year, really strong recovery post COVID. I think — the macro environment, Colin, would have outlined for Republic of Ireland being quite strong now and into the future. But obviously, if other large economies in the world slow down, it’s going to have an impact on Ireland at some point in time.
We don’t see it currently, but who is to know what’s going to happen in those years ahead. But if you run the numbers on the asset growth and if you run the numbers around whatever rate environment that you want to see, you are going to see jaws that are kind of, I would say, grown or moving in different directions at a markedly different pace. So as we go into 2023, we really think that we will have a strong trajectory from the asset side and the rate side.
Diarmaid Sheridan
That’s great. Thank you.
Operator
[Operator Instructions] Thank you.
Colin Hunt
The next question is from Chris Cant of Autonomous. Chris, good morning.
Chris Cant
Just wanted to come back on two change you mentioned during the discussion, please. So on the Ulster Commercial book, you said that there would be a €100 million or up to €100 million a day one impact from that. Has that changed your view of the kind of combined capital impact across ECL and RWAs for that portfolio? Just I didn’t read, I guess, it was a split of the ECL versus RWAs, but it does feel a little high, the €100 million figure. So is it that the capital cost of that transaction might now be higher than you previously guided, please? And then on the other thing you mentioned around the three-year pay deal you have done with your union staff members. Do you now feel you have got visibility on the staff cost component of your cost base or at least reasonable visibility given the sort of pay escalation component, not necessarily the headcount? And how much pressure are you seeing then in the kind of general administrative costs, excluding the amortization and depreciation? I am just trying to think about breaking down your cost base, if you kind of know the pay schedule for the next three years and the amortization of appreciation is really just a function of past investments is the bit of the puzzle we are missing then is the G&A costs? Thank you.
Colin Hunt
Thanks so much indeed. I will just refer to the pay deal that we concluded earlier this year. That went — that’s a three-year pay deal. We were very eager to provide our staff with certainty in relation to the evolution of pay for non-managerial grades over the course of the next number of years. We were very eager to do a three-year deal, given the array of uncertainties that are out there, we concluded that.
It went to ballot in May, and it was passed and it involves a pay increase in 2022 of 4%, a pay increase in 2023 of 3% and a pay increase next year — in the following year of 3% as well. And it also involved, of course, a lift in entry level salaries. We are very, very happy to have been able to conclude that deal and very happy that, that deal was passed by ballot by our workforce in May of this year.
Donal Galvin
Yes. On the Ulster position, what I would say is we have incorporated in other income, a one-off gain of €26 million, which really represents a revaluation of the transaction and its impact. So I think that’s the reflection for whether — how we feel about this being good or bad.
Look, we obviously bought a portfolio in the middle of a pandemic. And now we are looking to onboard it. So I would say that the credit quality is improving, so better than what we would have imagined.
So then to your question of €100 million seems quite high. I am obviously being conservative on that number, up to €100 million because the quantum and the timing of all of those assets is, not entirely certain.
And effectively, when we onboard assets in similar grades, similar sectors, we are going to have to reconcile them to our own grades, on our own ECL levels. And I would say, for some sectors, we would have elevated Stage 2 cover, et cetera, et cetera.
And I don’t see this as being problematic really at all. It’s just going to be an onboarding item. And once they are on board, I will be able to describe it a lot better, but it certainly isn’t a number that I was trying to disclose as being something in any way that was troublesome because that’s certainly not the case.
Chris Cant
Okay. Thanks. And on the sort of pressures you are seeing on the general and admin costs, could you give us a sense of what you are feeling there in terms of the inflationary pressure?
Donal Galvin
Yes. I mean that’s — I would say that the three-year deal, 10% we think represents fair value. As we look forward, we have got a strange environment in banking in Ireland. We have a couple of incumbent banks who need to scale up to onboard assets and customers. We have exiting banks who have scaled up to off-board the same customers. So I would say there is excess capacity in the system overall. But everything is running at quite a high level.
So that’s all we believe is going to play out in the second half of the year. The impact on the cost or the increase in the costs that you are seeing is definitely that G&A impact that you talk about, whether it be for the resources to help us onboard or everyday items, paint, lighting and heating for branches, getting bills for data centers, et cetera. So small amounts everywhere you are seeing seeping in.
But I don’t think that, that incrementally increases every year. I mean it depends on your own view on some of these things as well. We probably think that we have or will be in or around these levels at worst and are more likely to subside going into 2023 and into 2024.
Colin Hunt
Okay. Thank you, Donal. Our next question is from Raul Sinha at J.P. Morgan.
Raul Sinha
Yes. Thanks very much for taking my questions. I have got two, one for Colin and one for Donal, actually. I guess the broader point I wanted to ask about was this is going to be a second — you are flagging a second upgrade to your targets very substantial in the context of medium-term improvements that you have already delivered and there is a lot changing inside the [Audio Gap] Bank, as well as in Ireland? But the reason for sort of waiting before you tell us about what the new medium-term trajectory looks like for returns, can I check if that relates to any externality that you might be waiting for in terms of clarity from the regulatory side or perhaps clarity in terms of the rate environment or is it just economic uncertainty? So just to understand what are the sort of external inputs that you might be waiting for a little bit more clarity on if there are any, in terms of updating us on the medium-term trajectory as it looks like going forward? And the second one for Donal, just on capital when we look at the moving parts from here, obviously, you have got the kind of cyclical buffers coming in on the MDA. I also note that in the notes there’s a comment on Basel IV operational risk RWA inflation. I was just wondering if you might be able to throw some light on what that might be in terms of numbers. And how you would think to — how you think about the resilience of the capital target against some of the pressures you are seeing on the MDA side, especially as you think about 2024? Thank you.
Colin Hunt
Okay. Thanks so much, Raul. In relation to the delay in upgrading the targets for this — there’s two elements to it. One is we are dealing with a very, very fast evolving environment at the moment.
But the primary driver of this is that we don’t drive sort of ideally at these numbers. These numbers are built on fact, they are built on science, they are built on hard forecasts for the future evolution of our business.
And we are currently in the process of upgrading internally or updating internally our own outlook. That has to go through various levels of governance. We will consider it over the course of the next number of months. It has to go through various machines internally before it produces the numbers that we can communicate with you. We want to communicate them with you once we have validated them.
Once we have clarity in relation to the future P&L and balance sheet shape of the organization, absolute clarity and it has been through appropriate governance. There’s absolutely nothing in the way of external considerations here. This is an internal AIB process once it concludes. Once we have science and hard facts behind our new targets, we will communicate them with you.
Donal Galvin
Yes. Just to follow-on from that. I mean, the acquisition of the Ulster Tracker portfolio with an associated cost in and of itself would have been in addition to the medium-term target. Was there any point in changing that?
What we didn’t want to do that without changing the others. Obviously, the main return for us is the 9% target. And an amount of that is obviously going to be getting very firm on your view on interest rates as well.
So we are very comfortable with asset growth, rate impacts, ability to manage costs. But when we do deliver the numbers, we just want to be absolutely certain that we are going to be able to deliver them to our shareholders.
With respect to the capital targets and the capital items, Basel, anything from up risk relating to Basel is not actually going to, we believe, be significant or if it’s a surprise, it will be a surprise for everyone.
And certainly, nothing worrisome from an AIB perspective, with respect to overall, let’s say, modeling updates and decisioning from the ECB, nothing positive or negative, really to update you with.
When I mentioned RWA efficiencies, what I am really talking about there is certainly in the short-term, just ensuring that we have taken or utilized benefits of any derogations such as SME 501, but then obviously, as we go into 2023 and beyond, and I think I would have talked about previously looking at more securitization technology, SRTs to try to make some efficiencies overall.
But we still have a large amount of external assets to on board and the focus is going to be to onboard them as efficiently and as safely as possible so we generate the growth and returns, and then we can look to optimize that, I would say, in the future.
Raul Sinha
Great. Thank you.
Operator
[Operator Instructions] Thank you.
Colin Hunt
The next question is from John Cronin in Goodbody. Good morning, John.
John Cronin
Colin, good morning. Donal, thanks for taking my questions. Just a few from me, please one is on ECL. And again, just on the €309 million write-back in H1, as I see you are guiding and you have covered that in your presentation to a full year charge with the approximate €100 million day one ECL charge. I mean look, I guess what I am grappling with a little bit is the conservatism around that, given the very high stock of PMAs? Do you feel, I guess, on balance as well as the very high provisions taken in FY 2020, do you feel on balance look this is — you are being pretty careful here in the context of the economic uncertainties. And then my second question is on deposits. So how would you expect deposits to evolve in H2? I saw they were down Q1, but up strongly in Q2. So some guidance there would be helpful, if you could? Thank you.
Colin Hunt
Our general approach to ECLs has been consistently conservative, cautious and forward-looking. And that very much underpinned the decisions we made in 2020 in relation to ECLs. We are dealing with a very uncertain environment and we deliberately adopt an ongoing conservative stance.
The ECL movement we saw in the first half of the year, Donal has explained the facts driving that movement. We are though, continuing to grapple with uncertainty in relation to inflation, in relation to growth globally, in relation to the evolution of monetary policy. And it is right and appropriate given the fog that is out there that we continue to adopt a very conservative and cautious stance on ECLs. It’s the right thing to do from a medium-term management perspective, Donal?
Donal Galvin
Yes. On deposits, like, I would have mentioned, grew really strongly throughout COVID. And we would have expected naturally for these deposits to be spent, but they have continued to grow actually and we believe they will towards the end of the year continue to grow even faster.
And that is really due to the fact that all of the KBC and Ulster Bank customers are looking for a new current account home, new credit cards, new overdrafts, et cetera. And we are very focused on ensuring that we are able to offer a compelling product and onboard as many of these customers as we can.
Indeed, the actual number, I would have mentioned earlier, was liabilities, deposits going from €96 billion, up towards €100 billion. So that would be in corporation what I would see the existing organic growth in the AIB customer base as well as some of these onboarded customers as well.
Colin Hunt
Thanks so much indeed, Donal. That brings us to a halt this morning. But can I say thank you to you all for joining us today. I know that this is a really, really busy results day. So I am very grateful to you for the opportunity to present our results as we approach the very end of July.
Can I wish you all a pleasant summer and a pleasant break. And we look forward to being back in touch with you formally ahead of year-end with a revision to our medium-term targets. Thank you.
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