Allied Irish Banks, P.L.C. (AIBGY) Q4 2023 Earnings Call Transcript

Allied Irish Banks, P.L.C. (OTCPK:AIBGY) Q4 2023 Earnings Conference Call March 6, 2024 4:00 AM ET

Company Participants

Colin Hunt – Chief Executive Officer

Donal Galvin – Chief Financial Officer

Conference Call Participants

Diarmaid Sheridan – Davy

Chris Cant – Autonomous

Grace Dargan – Barclays

John Cronin – Goodbody

Andrew Stimpson – KBW

Colin Hunt

Good morning and welcome to AIB Group’s Annual Results Presentation. This morning, I will outline some of our key highlights from 2023 and the strategic cycle which is recently concluded. Our CFO, Donal Galvin, will bring us through the 2023 outturn and then we will spend some time outlining our priorities, ambitions and targets for our next cycle to the end of 2026 before we open to the floor for questions.

2023 was the most successful year in the history of AIB. The results we’re reporting this morning reflect not only a supportive economic backdrop and a normalized monetary policy environment, but are also underpinned by the consequences of deliberate management actions taken in recent years to transform and strengthen our business in the interests of all our stakeholders.

Over the past few years, through ambition, determination and delivery, we reshaped our business. We expanded our range of products and services. We integrated new enterprises and portfolios. We opened a record number of new accounts. We dealt conclusively and comprehensively with legacy items which had overshadowed us for so long. We put sustainability at the very heart of our business model. We returned the Group to majority private ownership and we transformed our balance sheet, which is now one of the strongest in Europe.

Our profit in 2023 exceeded €2 billion which equips us to propose total distributions of €1.7 billion while maintaining a robust capital position with a fully loaded CET1 ratio at end of ‘23 of 15.8%, with nonperforming exposures falling below 3% of gross loans. On the back of a very successful 3 years strategy cycle, we are confident in our ability to deliver for our stakeholders over the years ahead, as outlined by our new medium-term targets, with 2026 costs below €2 billion and the cost/income ratio of less than 50%, CET1 target of greater than 14% and return on tangible equity of 15%. Our purpose is empowering people to build a sustainable future. It captures our strategy and our ambition and we already have solid progress to report here.

As 2023 drew to a close, we comfortably exceeded our Climate Action Fund, which has now been tripled to €30 billion by 2030. We’re making good progress and deploying capital to support the transition to a greener future with green lending accounting for 30% of new lending in 2023, while we’re making great strides in reducing our own carbon impact with our virtual Corporate Power Purchase Agreement now live. That agreement will generate electricity equivalent to 80% of the Group’s needs and is an important development in the realization of our carbon neutrality ambition for 2030. Already of a 2019 base, we have reduced our own carbon emissions by 49%.

Our reputation in this space is the foundation for ongoing ESG bond issuance with €5.75 billion raised in ESG bonds already and more to come. Alongside our medium-term financial targets, the performance of our business will be measured by the deployment of our €30 billion Climate Action Fund, a target of more than €6 billion new lending by 2026, to help our customers buy their first home and through a resolute commitment to maintaining inclusion and diversity at Board Executive Committee and management levels across the Group. The Irish government has made good progress in meeting its stated strategic objective of reducing its shareholding in AIB.

Through the combined impact of an ongoing trading plan, accelerated book bills and a directed buyback, the state’s shareholding in our business has fallen from 57% at the end of 2022, to its current level of 39.98%.Thanks to very strong organic capital generation, we are equipped to deliver a 345% increase in total distributions. For 2023, we’re proposing a cash distribution to all our shareholders of €696 million, which is equivalent to €0.266 per share, an increase of over 300% over the 2022 cash dividend. In addition, we have received regulatory approval for further distribution of €1 billion and we are in advanced discussions with the Department of Finance on a directed buyback.

As this proposed distribution exceeds 5% of our market cap, it requires shareholder approval and we intend seeking that required approval at our AGM on the 2nd of May. Successful execution of this proposed distribution would have the effect of reducing the state’s shareholding in AIB by some 6%, leaving the Irish government’s holding in AIB at less than 34% post our proposed directed buyback. Given our confidence in the ability of AIB to continue to deliver strong profitability and organic capital generation, we believe that we have the capacity to announce further significant distributions over the years ahead as we move towards an appropriate CET1 target. This is a management team that proves by doing. Our business is strong and robust and we will keep it that way in the interests of all our stakeholders.

I now hand over to Donal who will bring us through the details of our financial performance in 2023.

Donal Galvin

Thank you very much, Colin. Good morning, everyone. Thank you for joining us. I’m very happy to be able to deliver the details of AIB’s financial performance for 2023, which was a really exceptional year. Our profit after tax was over €2 billion.

We had a return on tangible equity of 25.7% and 190% growth in earnings per share to €0.757.Our total income of €4.7 billion is up 64%. That’s made up of an increase in interest income of around 83% and an increase in other income of around 13%. Our costs are up 10% to €1.826 billion and we ended the year with a cost to income ratio of 39%. Our gross loans was €67 billion, increased by 9% year-on-year. And that’s really made up of 2 components, organic growth or new lending of €12.3 billion and inorganic growth of around €4.7 billion incorporating a lot of the Ulster Bank loan migrations. Asset quality remains very strong. We ended the year with an NPE ratio of less than 3%, which was something that we had targeted for a period of time.

So we’re very happy with that. And we have a really strong funding position. Throughout the year, our customer accounts increased by around €2.4 billion to end the year at €104.8 billion. We issued €2.4 billion of MREL bonds to exceed our ratio of 29.7% by a couple of percentage points. Our capital is very strong at 15.8% which allows us to propose distributions for 2023 of €1.7 billion at €0.648 per share and that’s up from €381 million in 2022 representing an 82% payout ratio. We’ve decided to split this between a cash dividend of around €700 billion and we’ve received regulatory approval for a share buyback of €1 billion. If we look at the income statement, I don’t really want to repeat myself with respect to some of the key highlights.

I just draw your attentions to the bank levies and regulatory fees. They were €185 million for 2023. Some increased payouts for the domestic Deposit Guarantee Scheme, but we do think for ‘24 and beyond, levies and fees are going to reduce down to a level of around €145 million. Exceptional costs were €150 million for 2023, broadly split in two, €80 million relating to some legacy items which I would have talked to previously and €70 million relating to strategic items, which is really the cost to onboard some of the Ulster Bank assets. Looking at the key financial metrics, all very strong, earnings per share €0.757 and on that supports a dividend per share of €0.648. Exceptional items for 2024, down from ‘23 looks like around €100 million at the moment. In terms of net interest income, really large increase year-on-year, up 83%, I’ll just try and talk you through some of the moving parts here.

On the liability side, increased costs of €519 million, a €186 million of this would be related to paying out interest to depositors and the remainder of around €333 million is really related to more wholesale debt and MREL costs. On the customer loans side, obviously we had an increase as assets are increasing, a benefit of €434 million and [indiscernible] split out here the benefits from assets repricing and also versus the cost of the structural hedging program, which we’ll come on to later. Investment securities and excess balances with the CBI obviously very rate-dependent benefiting from that sharp upward movements in rates, a very strong increase of €520 million and €1.3 billion. So year-to-year, a strong increase in NIM and a really strong interest income performance.

Then on the interest income outlook, a number of different ingredients here. Let me start off by talking through the interest rate outlook as we see it. 2023 really a volatile year, I would say, for interest rates. But we do think that the euro curve is now stabilizing somewhat. As we look to 2024, we imagine an ECB deposit rate of 2.75% with the first cost expected from the ECB in June and then a straight line to that 2.75% level of ‘24. And then as it pertains to our medium-term targets for 2026, we see an ECB deposit rate of 2.25%.

With respect to NII resilience, certainly it helps now that we have better line of sight on the euro rate environment. Obviously, one of the key components in net interest income, it’s going to be in that deposit area and that transition from shorter dated deposits into more longer dated deposits that we would have expected to see happening in 2023. And indeed, we did and how that actually plays out as we go into 2024. So for 2023, the deposit beta was less than 10%. And as we go into 2024, we do imagine that more of our customers are going to move into these term accounts. And we believe that the deposit beta for ‘24 is going to be less than 20%.

I’ll come on to our liability base later, but we really have a very granular type of liability base. Within our overall customer accounts, 92% are in Ireland and 8% are in the UK and 70% of all of our balances in personal and business are less than €1 million. Another key part of the NII outlook and the resilience is around our structural hedge program. We would have talked about this at the half year and we have seen further increases in the structural hedge nominals between ‘22 and ‘23. Obviously, we’ve increased that significantly from €20.6 billion up to €34.3 billion and in sterling from £3.5 billion up to £4.6 billion. So at December ‘23, the exit receive fixed yield was 2.3% in euros and around 2% in sterling and we also saw an increase in our fixed rate assets.

And that’s really driven by customer’s preference of fixed rate mortgages. So you can see an increase from €17.6 billion up to €19.6 billion. There are all fixed rate mortgages that we don’t hedge, so we incorporate these in our thinking around the structural hedge. So if we’re just to look year-on-year, what has happened here, we’ve increased the average life of our euro hedge from 3.7 years up to 4.2 years. You can see the average receive fixed yield on euros is increased from €1.2 billion up to €2 billion. That’s obviously because €6 billion of hedge would have matured throughout 2023 and was replicated with higher levels. In sterling, it’s a much more longer dated, it’s much more formulaic type of approach.

So you will see that change over time, but at a slower rate, I would say, than the euro side. So looking at those deposit betas, looking at the structural hedge program plus the fixed rate assets, we believe that we have significantly extended the duration and really given a lot of resilience to the underlying net interest income. So for 2024, our expectation for NII is going to be greater than €3.65 billion.

In terms of other income column, we would have talked about the enlarged Group and large customer base and we’re really seeing the benefits of it here as we look through all of our customer accounts. So our fees and commissions are up €45 million or 8%. The main movers in that are customer accounts are up 6%.

It’s really just a byproduct of having a larger customer base. Card income is up 31%, more people paying for things through cards as opposed to through cash, which is an ongoing theme. And then customer-related foreign exchange is up around 5%. In other non-interest income items, throughout 2023, we’ve obviously been reflecting the valuation effect of the forward contract of Ulster Bank loans which haven’t yet been onboarded.

So I think for ‘23, we’ll see the end of this particular effect, as all of the assets have now been onboarded onto the balance sheet. But for 2024, we expect other income to be greater than €700 million, really underpinned by that strong fees and commission line would have some upside I would say on the other non-interest income areas which tend to – we tend to get a little bit more clarity on as the year progresses. Costs €1.826 billion, up 10%, head count up 10%. I’m just going to try and run you through some of the main moving parts on this.

Our staff costs were up 16%, large inflationary effect there, an increase in FTEs from onboarding various staff from inorganic activities and indeed managing the onboarding or the welcoming of new customers to the bank. We’ve also incorporated between ‘23 and into ‘24, the costs for health benefits for all of our staff and variable pay for all of our staff, which is a really welcome addition. G&A is up 10% and that really is again driven by inflationary effect from third-party suppliers, etcetera, which are related to just servicing the enlarged group.

Our depreciation costs are pretty stable year-on-year and that’s just a reflection of the fact that we’ve been investing a fairly consistent amount over the last number of years, not increasing it. So that was really just flatlining now over the next number of years. With respect to the FTEs are up 10% through 2023 and you can see the point-to-point analysis here on the left and 2% is this – of this is related to Ulster Bank staff who joined us, along with the customers and the loans and 6% is related to staff really needed to serve the enlarged customer base. So that’s not just Ulster Bank loan acquisitions. And there is a huge surge, I would say, in current accounts opened as 2 of 5 banks left the country.

And indeed, we want to make sure that we’re able to manage these relationships very well in the coming years and then, an additional 2% from the enlarged Group. We’ve invested significantly in our risk management on internal order for our second and third line areas, really to manage the overall enterprise risk of the organization given that it is a little bit larger. For 2024, a number of cost considerations, variable pay, we would have adjusted for around half of that cost in ‘23. That’s going to flow into 2024. And I think I would have provided that number earlier. We do see the inflationary environment now is normalizing.

The last 3 years has been an unusually high inflationary environment. But as we look into ‘24 and indeed beyond, we think that that’s going to normalize quite significantly, obviously in line with ECB monetary policy. Strategic initiatives, Colin would have talked or will talk to later, some of the key strategic initiatives. We will continue to invest approximately €300 million per annum to ensure that we’re able to deliver on all of our strategic objectives. And that is obviously going to have a flow through into the cost base. So for full year 2024, we expect costs to increase by 6% to 7%. For 2023, we had an ECL charge of €172 million, which is a 27 basis points cost of risk, leaving us with a 2.3% ECL cover rate.

Within that, I would say there is two moving parts. We had a large charge of €327 million that’s primarily driven by our forward-looking approach, particularly in sectors such as commercial real estate offices. And then we had write-backs of around €155 million, primarily in the corporate and SME world and these were in the industries in areas which were really negatively impacted by COVID. So bars, restaurants, hotels, really in the leisure space, they had a really strong 2023. So we had a write-back of €155 million. So leaves us with a 27 basis points cost of risk charge. With respect to Stage 2 loans, €7.7 billion, they increased by around €1.6 billion in the year.

Couple of moving parts here as ever, €1.4 billion increase in Property, exposures to €2.8 billion, that’s actually a reduction from the half year. But we’re really where we would have moved all of our CRE office spaces into Stage 2 subject to review. Post that analysis, a large portion of those have moved back to Stage 1, but overall, we’re still keeping a very close eye on that area. We had an increase of €1.2 billion in Mortgages to €2.4 billion and that was on the back of a redeveloped IRB mortgage model. And we had a reduction of around €1 billion in the Corporate and SME portfolio to €2.3 billion and that’s really related to what I talked about earlier for the strong performance in those COVID-impacted sectors.

Overall, we end with a stock of €1.5 billion at the end of the year and that’s a cover rate of around 2.3%. So as we go into 2024, we feel we’re very strongly provided. We have good line of sight on all of the areas that we think there could be variability and are comfortable to guide a cost of risk of between 20 and 30 basis points for 2024 and believe we’ll be at the lower end of that range. On the balance sheet overall, it feels like for ‘23 and into ‘24, we’re going to have a more stable balance sheet. Since COVID, we had initially a liability-driven growth in the balance sheet. And then through ‘22 and ‘23, we had a lot of inorganic asset take on. I think ‘24 and beyond, we’ll have a much more straightforward balance sheet trajectory and I will be able to talk through some of the key parts of that later.

With net loans of €65.5 billion, I’ll just talk through some of the moving parts here. With new lending on the year, €12.3 billion with redemptions of €10.3 billion, so net growth on an organic basis. We had the take on of €4.7 billion of Ulster Bank loans. We had a reduction in our balance sheet of around €1 billion relating to NPEs reductions and repayments and then some other minor movements. So overall, an increase in balance sheet of around 9%. If I look at the different asset classes, the story for 2023, you can see our mortgage lending was down around 13%, primarily driven by the fact that the Irish mortgage market was slightly smaller due to the fact that the switches weren’t as prevalent in the market. In Property, overall, our new lending was down around 26%, reflecting a reduced appetite for new originations, where we’re really just focusing with existing borrowers and helping them refinance on their transactions.

Personal lending very strong, up 23%. We think that this is really an effect of two of five players leaving the market and AIB maintaining its market share, but really strong performance there. And then in Corporate and SME, up 18%. Corporate was strong. I would say SME was as ever fairly flat and the large increase was primarily in our project finance energy portfolio, which continues to grow on an annual basis and will do in the future, but we will talk to that later.

In terms of loan book growth, I think this is important for understanding our trajectory, whether it be on loans or on risk-weighted assets. ‘23 into ‘24, probably see loan growth around 2%. But over the 3-year period of our financial plan, probably see growth more around 3% on a CAGR basis. We do think from ‘24 into ‘25 that we will see the Irish mortgage market come back or increase in size depending on where the ECB rate curve eventually settles. But overall, ‘24, we expect 2% loan growth.

Our funding and capital position is really strong. You can see wholesale funding equity year-on-year, a significant increase. Customer accounts really a big theme, an increase year-on-year in our overall customer accounts. What I’ve tried to do here on the right-hand side is break out the types of deposit products we have and just shine a light on some of the changes. What we have seen in 2023, particularly in the second half, is that increase from shorter-term products into those longer-term products represented here as time. So we do think that that flow into term is going to continue, but I would have given you the guidance earlier on around the deposit betas.

I would have talked about the granular nature of the book, the fact that the bulk of our liabilities is really in the retail and SME space. And I would say, total insured deposits, which represent balances less than €100,000 would be 53% of our overall portfolio. So LDR strong at 63%, LCR 199%, net stable funding ratio 159%, so all very strong metrics.

With respect to capital, we had very strong organic capital generation in 2023, to finish the year with a CET1 of 15.8%. I’m just going to break out the movements year-on-year between equity and RWA movements. So on the equity side, we have 370 basis points organic capital generation. We’ve taken off 130 basis points for the cash dividend, 180 basis points for the buyback and then we had a benefit of around 50 basis points from our deferred tax assets.

Looking at risk-weighted assets, we had an impact of around 120 basis points or €4.1 billion of RWAs. 50 basis points of that related to the tracker mortgage acquisition, around 40 basis points of that related to an approved IRB model implementation and around 50 basis points of that is due to an increase in operational risk, which is really just a byproduct formulaic-wise due to higher income. And we had some other RWA benefits of around 20 basis points that we’re always working on. So overall, CET1 15.8%, comfortably above our SREP of 11.13% and worth noting in the year that we had a small reduction in our P2R from 2.75% down to 2.6% for 2024.

So there are the ‘23 results. I’ll hand it back to Colin.

Colin Hunt

Thank you, Donal. The strategic cycle that concluded at the end of last year was the most successful in our history, which saw us transforming the Group, building a stronger and more resilient base for future development. At the end of 2020, we laid out a plan against a deeply uncertain external backdrop to transform our business through a series of self-help measures by modernizing our ways of working, putting sustainability at the center of our strategy and through ongoing digitalization. This allied with the Group’s capital strength and our own corporate development initiatives positioned us strongly to benefit from unprecedented changes in the Irish banking landscape. Today, our business has transformed with our product suite complete and more customers, 3.3 million in our core markets than ever before.

We’ve grown our performing loan book carefully and prudently through organic activity and targeted acquisitions, while also reducing our non-performing exposures to less than 3% of gross loans. And we’ve delivered a truly exceptional RoTE performance, well ahead of plan in 2023, of more than 25%. These actions, results and developments now present us with an opportunity to look to the future with confidence as we seek to build an ever-stronger AIB.

The Irish economic outlook remains supportive of our business ambitions and plans. Growth in modified domestic demand is expected to hover around the 2% level in real terms over the next 3 years, underpinned by low unemployment and record numbers of people at work. Real disposable income growth is seemed to be supported by an accommodative fiscal position and easing inflation readings. Meanwhile, household balance sheets remain healthy with leverage continuing to moderate with deposit levels remaining elevated. Housing output, a key driver of our mortgage business, continues to build with completions forecast to remain on an upward trajectory over the next 3 years while our own PMIs point to ongoing corporate expansion. The economic outlook augurs well for our ability to generate solid, sustainable profits over the years ahead.

Today, AIB is Ireland’s leading financial services group across all our key business lines with our products and services being delivered to our exceptional customer franchise through multiple brands, which are united by our common purpose. More and more of what we bring to our customer base is delivered through our digital channels, which continue to grow and develop on the back of a multiyear approach to investment and evolving customer preferences with 78% of our key products now sold digitally. At the same time, we will continue to operate the largest branch network of any bank in Ireland, emphasizing our desire to be physically present for our customers when they need us and our embeddedness in the communities which we serve. We will maintain this critical underpinning for our future success through prudent underwriting, appropriate pricing and an ongoing improvement in our delivery capabilities.

Our purpose is to empower people to build a sustainable future and this continues to be underpinned by five strategic pillars. Customer first; simple and efficient; risk and capital; talent and culture; and sustainable communities. We have three strategic priorities for the next cycle, customer first, greening the loan book and operational efficiency. And those priorities will guide the Group as we work to deliver our three medium-term financial targets, not least the North Star of a RoTE of 15%. Focusing on customer first, over the past 5 years, we’ve seen a remarkable increase in the number of people who choose to bank with us, while more and more of our customers are active on our digital platforms. We were delighted to welcome 49% of the flow of customer migrations on foot of the departures of Ulster Bank and KBC, which is a clear reflection of the strength of our multichannel digitally-led approach.

Supported by ongoing investment in data and analytics as well as a broadening of our propositions, we will develop an even greater understanding of our customers and their needs. And that understanding will see us delivering more proactive, seamless banking services to our customers in the way that they want. At the same time, we will continue to green our loan book, building on our well-established and externally recognized ESG credentials. We have existing commitments to become net-neutral in our own business by 2030, while at least 70% of all new lending will be green or transitional in nature by that date. We have established a new business segment, Climate Capital, which will play a central role in our loan book growth over the years ahead and which will enable us to be a market leader in financing energy transition and ESG infrastructure in selected, developed markets and proven technologies. The scale of the opportunity here is unprecedented and it will allow us to continue to be highly selective and disciplined in terms of the risks and projects which we choose to put on our balance sheet. We have the experienced team, the available capital and the track record to make our green ambition a reality over the coming years. Since 2019, we have successfully deployed €11.6 billion to support the transition. And we have, as mentioned earlier, increased our Climate Action Fund to €30 billion.

Our third strategic priority is centered on operational efficiency and resilience. We will continue to invest across our business to ensure that we deliver our products and services quicker, more safely and with less unnecessary complexity. This will have benefits not only in terms of customer experience, but also in terms of our cost to serve and is manifest in our plans for customer delivery, technology, credit management and risk measurement, the agility and flexibility of our operations and, of course, our people strategy. We are already proven by doing in this area and we are now building on an acceleration of the progress we have made to-date and there are two particular initiatives that I would like to update you on this morning.

We’ve been working on our business credit transformation program over the past number of years and we’re now beginning to reap its benefits. By modernizing and digitalizing our credit mechanisms, we are now making data-driven risk-informed credit decisions more quickly and more robustly than ever before. This is clear benefits for our customers, but also for our own operational efficiency as we move away from time-consuming, outdated manual approaches. We ran a pilot for SME lending in the closing weeks of last year and we are now live in the market and very pleased with how this new approach is landing with our customers and our colleagues. Thanks to this transformative investment, credit facilities for SMEs from origination to cash are now delivered in hours rather than weeks.

We’ve also started to develop a next-generation mobile app, an online banking experience for personal customers with further enhancements also planned for our business mobile app, which we launched successfully in 2023. Both will empower customers through greater personalization and self-service within an integrated channel experience. And we’ll deliver those improvements on a phased steady basis throughout this year and next. We’ve been progressively and successfully modernizing our technology over many years now and we’re committed to maintaining that progressive approach over the years ahead with planned investment of €300 million per annum out to the end of ‘26. This investment will allow us to continue to enhance customer experience and loyalty, maintain a secure and resilient platform across our businesses, while exploiting the potential offered by AI to build better, more intuitive, more responsive, more cost-effective and more tailored services for our customers and for our colleagues.

The velocity of change has never been greater and we will ensure that AIB reaps the potential of that change in the interest of all our stakeholders while maintaining the reliable and secure infrastructure that is vital to our safety and our stability. We have delivered an exceptional financial performance in 2023 and we believe that AIB is now more strongly positioned than at any other point in its history. Our achievements to-date supported by the robust Irish economy and a resilient balance sheet provide the platform on which we will build an even stronger AIB over the years ahead, focused on delivering an exceptional customer experience, financing the green transition while driving ever greater operational efficiency and resilience through our business.

We look forward with confidence and ambition and we will deliver for all our stakeholders and we’ll do that progressively and sustainably. We will continue to prove by doing for our customers, our shareholders and the wellbeing of the communities that we serve. That is our way. That’s our track record. And that’s our ongoing commitment.

I’ll go back to Donal now for the financial targets and outlook.

Donal Galvin

Thank you very much, Colin. I’m going to just quickly recap all the guidance for 2024 and then I’m going to walk through some of the medium-term targets in slightly more detail and then we’ll try and open it up for Q&A. So net interest income greater than €3.65 billion, other income greater than €700 million. Cost increases of 6% to 7%, a cost of risk at the lower end of 20 to 30 basis points range. Levies and regulatory fees of €145 million, exceptional cost of €100 million and we expect customer loans to grow by around 2%. So the first of the medium-term targets is a hard cost target of less than €2 billion by 2026 and a cost-to-income ratio less than 50%. We’ve obviously had last 3 years, high inflationary environment, bigger Group. I would say the bulk of the cost increases of 50% have been driven by external factors, which we’ll call inflation and around 50% was related to activities that AIB undertook itself with respect to inorganic activities in introducing health and variable pay. But we do see the inflationary environment normalizing in the coming 3 years. And you can see that one of our strategic objectives from the coming 3 years is to focus on operational efficiencies. And that’s really going to be around driving the efficiencies from the technology spend that we’re continuing to invest in across all of our business lines. At a later stage, probably at the half year, I’ll be able to put a few more KPIs and metrics around that, but we’re confident in this cost guidance for 2026.

Overall, CET1 target, greater than 14%. We’ve obviously increased this by around 50 basis points. This really reflects a prudent approach on behalf of management. We’ve decided to maintain a buffer of around 250 basis points and that would obviously include P2G, etcetera. But we do anticipate moving towards the CET1 target as we return capital to shareholders.

In terms of capital headwinds and tailwinds, really the same as they were at the half year. We have a comprehensive IRB model rollout plan. I’ve got no positive or negative news to update you with there. We have Basel III to implement on the 1st of January 2025. Impact to that isn’t expected to be material. In the space of RWA efficiencies, obviously, we’ve been moving and looking at various efficiencies over the last number of years. But from ‘24 to ‘26, as I would have talked previously, we do want to introduce an SRT program. I’ll look to transact at least two transactions over the coming 3 years. First transaction we’ll look to do in half 2 of 2024, probably going to be in the corporate space.

At a later stage, we want to do something in the mortgage space and really on a go-forward basis, have this program in place so that we can optimize and improve our own capital efficiency.

With respect to sustainable capital returns to shareholders, over the last 3 years we’ve returned around €2.3 billion to shareholders. Payout ratio is increasing year-on-year. As I look at 2024 to 2026, I think it’s important for us to describe our thinking in the return space. So we expect organic capital generation to average around 250 basis points per annum over these 3 years. We target a cash dividend payout ratio at the upper end of 40% to 60% on an annual basis. And we also look at additional distributions in the buyback space for 2023 as we move towards our CET1 medium-term target. The buybacks and payouts above 60% are subject to annual Board approval and obviously subject to regulatory approval as well. It is our intention to grow the cash dividend per share on a sustainable and progressive basis and we’ll take a balanced approach to cash dividends and share buybacks depending on the circumstances in any given year.

So overall, the RoTE target of 15% in 2026, probably the North Star or the main metric, as Colin would have referred to. We believe we have a very resilient income stream. We have a focus on cost discipline. We have a conservative approach to asset quality and we’re going to introduce new RWA optimization strategies. So overall, underpins a 15% target – RoTE target in 2026, which should deliver attractive returns for all of our shareholders.

So thank you very much. I think we’re going to open it up for some Q&A now.

Question-and-Answer Session

A – Colin Hunt

[Operator Instructions] Our first question is from Diarmaid Sheridan of Davy. Good morning, Diarmaid.

Diarmaid Sheridan

Good morning, Colin. Good morning, Donal. Thank you. Couple of questions, if I may. First of all, maybe just in terms of the total distributions and Donal obviously set out the broad way that we need to think about that there. Just in terms of last year, obviously, 82% payout very strong, very strong increase. If you look at the 250 basis points of organic growth, you are talking about, Colin, your comments previously about the risk-weighted assets element, is there anything to stop you getting up towards that 100% payout ratio? Appreciate payout rate is maybe not the right way to think about this, because otherwise, I guess it’s difficult to see how you get down to that greater than 14% level given the very strong starting position of our own capital. And maybe just in terms of the total income outlook, Donal, maybe you could give us maybe some comments in terms of how you see the mix of that progressing out over the next couple of years within the kind of 50% cost-to-income ratio guidance that you have talked to there. Thank you.

Donal Galvin

Okay. I think with respect to the trajectory to the 14.5%, what I have really tried to do is outline a base case around capital trajectories, etcetera. We do plan our capital on an annual basis, payouts, etcetera. So, you should really be thinking about that as an annual event and moving towards 15.8% starting point CET1, towards 14% or greater than 14% by the end of 2026 and then payout ratios are just, I would say, our outcomes. With respect to anything beyond that, we are not ruling anything in. We are not ruling anything out. It’s just really important that we all understand what the base case is for distributions of returns. For the last number of years, we have operated in exactly the same way and we think that that has worked very well and we will continue to do that going forward. I think on the total income split, if you look at the guidance that we gave for 2024, that’s pretty representative, I would say, of what you should expect to see the split going forward. We do think other income is just going to grow pretty much in line with, let’s say, in line with GDP-type of metrics. We have seen a big increase in 2023, expect that to continue. 2024 on interest income, 2025 on interest income, obviously, somewhat rate-dependent, but I would say far more dependent on the liability side, volumes of deposits, deposit beta pass-throughs, which is why I really try to focus on what I think the betas are going to be, what that beta trajectory is going to be. And indeed, as I look forward, what that deposit volume is going to be. So, look, I think that the ‘24 mix is probably a good representative mix.

Colin Hunt

Thanks Donal. Thank you, Diarmaid. We will now go to Chris Cant of Autonomous. Good morning Chris.

Chris Cant

Good morning. Can you hear me, okay?

Colin Hunt

We can hear you loud.

Chris Cant

Hello. Could I just – sorry, there is a bit of a delay. I just wanted to ask about your capital trajectory and guidance and really how you are thinking about this, I guess somewhat philosophically. I think your return on tangible equity target is still struck on a sort of required capital base. So, your target is not reliant on you actually distributing surplus capital off the balance sheet in terms of how that ratio is calculated. And in 2023, the CET1 ratio has come down by 10 basis points during the year. So, we see a big step-up in the distributions. But the CET1 ratio is still some way ahead of your target and your target is increasingly conservative. I mean you have increased to 50 bps despite your Pillar 2 requirement coming down as you flagged during your remarks. So, I am just trying to understand how you are thinking about the pace of getting the surplus capital off the balance sheet. Your loan growth expectation for 2024 is fairly modest. How rapidly do you actually come down to target, because and I guess that’s what investors are looking for and your – but the fact that you continue to have a RoTE target that’s calibrated in a way that doesn’t require you to get the capital off the balance sheet, I guess is a bit of a concern for some. A related question would be around the RWA trajectory. Your nearest domestic peer has talked about Basel IV being a low-single digit billion positive for their RWAs, i.e., reduction in 2025, given you have got higher starting RWAs, should we not expect it to be positive in your case as well? Thank you.

Donal Galvin

Thanks Chris. Look, I think on the return on tangible equity and the methodology that we use, we have tried to be consistent in how we look at that. I mean I couldn’t completely understand the question that you are raising, which is that the return on equity is arguably diluting as the CET1 remains at elevated levels. So, that’s obviously something that we are very mindful of. And I think with respect to the capital trajectory, I would not want you to think that there is any given year when 15.8% moves to 14.5% or 14% or something like that. So, it is going to be over a multiyear period. It is going to be based off an annual analysis ICAP approval with the regulator. But we are confident that we will be able to return capital to shareholders over and above our 40% to 60% payout ratio going forward, if indeed the environment does allow. With respect to 2023, I mean we would have upgraded guidance 2x or 3x. So, the income would have – and the outturn would have probably continued to outperform throughout the year, which is a very positive thing. So, we are certainly not – we are not upset that our CET1 ended at 15.8% on the back of a really, really strong financial performance. But obviously, given the fact that euro curves are normalizing, we are going to get a more stabilized interest rate curve, interest income outlook, which I think overall is going to be good for business. And I think that stable business environment will, in fact enable us to deliver on an annual basis for all shareholders. I think on the RWA trajectory benefits costs of the Basel implementation, a little bit too early to conclude on that. From our perspective, we don’t see any downside. I would not be calling any upside just yet. So, I think that’s our base case. Overall trajectory in RWA is probably safest to look at my loan growth trajectory estimates. And I would align just RWA growth to that, given the growth is going to be in higher RWA areas. And obviously, we need to implement, get our SRT program approved as well and that’s going to be able to help us optimize returns as well. So, look, we are in a very good position with respect to our capital, with respect to the trajectory. And I think the key message from 2023 from our perspective is, is AIB able to pay out a distribution greater than its normalized range? And I think the answer is yes and that’s really what we were trying to answer it for today.

Colin Hunt

Well said, thank you. We are now going to Grace Dargan from Barclays.

Grace Dargan

[Technical Difficulty] And then one on costs. And so I guess just on the structural hedge, appreciate the disclosure and kind of enhancing disclosure as well, that’s helpful. But maybe just to help push on kind of what you are assuming into ‘24 if you would be prepared to comment at all on kind of any income that’s locked in or particularly any change in notional or around the maturities, particularly on that euro hedge? And anything to add to that in ‘24 would be helpful. And then secondly, on costs, I guess noticing that medium-term kind of absolute cost target which is kind of implying sort of low-single digit growth in costs in ‘25, ‘26. And I know the commentary you have given, but I think even with inflation normalizing, you have obviously got continual investment spend required even just to keep kind of pace with technology even before kind of efficiency savings. So, just want to think about and just probe a little bit more on how you are kind of confident in what seems like quite low cost growth potentially implied in the out-year? Thank you.

Donal Galvin

Okay. Grace, thank you very much. I will take the structural hedge question. So, I think the best way to look at this one is if we take the exit yield for euros of 2.3% and we take the total quantum of euros of €34.3 billion, in 2024 we will expect to have €10 billion of hedge maturing and that was at a rate of around 2%, I would say. So, you should assume that that is going to be replaced at hedges with a weighted average life of around 4.2% because we are comfortable where the duration is. And overall, that’s going to drag up the overall yield, fixed yield on the portfolio. And we expect at the end of 2024, to have an exit euro fixed yield of around 245 basis points, 250 basis points. So, that’s how we see that one playing out. So, no increase in quantum, no particular extensions, mature, replace and that should help you understand that one. I think, look, on the cost side, I think you are right, obviously, in what you are saying there. But if you look at the last 3 years, the amount of activity we had to execute to onboard inorganic loans, to onboard 49% of the customers of KBC and Ulster Bank on the liability side, huge effort made to ensure that we could safely manage all of those and we have done a lot. So, as we look to ‘24 to ‘26, we are going to look across all of our business lines and we are going to ensure that we are – with the investment spend, we are able to drive efficiencies and Colin would have talked one of the strategic pillars being operational efficiency. He has given two examples there of automation of business credit, more activity online. So, it’s our job to ensure as more of this activity is moving to the online digital channels that in the background, we are reducing the complexity, we are reducing the products and we will end up reducing the headcount as well. And that’s why I did say at the half year, why we will be able to update you with some more concrete metrics, but that’s certainly what gives us the comfort to be able to deliver or to propose the medium-term target of less than €2 billion.

Colin Hunt

And Grace, it’s also important to note that we are over the hump in terms of rising depreciation charges. And that isn’t going to be a driver of cost inflation across the business in the next number of years in any way comparable to what we have seen over the past 5 years or 6 years, which is a necessary consequence of the very significant increase in investment that we deliberately made. Now, turning to John Cronin in Goodbody. Good morning John.

John Cronin

Good morning. Thanks for taking my questions and thanks for the call. Just a couple, actually, one is on the – a quick one on the year-to-date deposit mix shift experience in terms of that flow in determined, how that is compared with the experience in Q4 or in H2 even. And secondly, look, again, another point of detail on the blended average credit risk weight density on new lending versus stock, so just looking at Slide 18 there. Clearly, the stock of mortgages is not higher than some of our originations segment, so I am just trying to think about how that might evolve over the next couple of years? And then thirdly, as a more of a strategic one just in relation to look – clearly, look, the balance sheet structure has been conducive to strong income generation through the rising environment given the – especially in the context of the lower loan-to-deposit ratio, I hear you on the loan growth over the coming years, but just thinking more broadly on that, how are you thinking about it strategically in terms of are you looking to kind of more normalize that balance sheet structure over time as rates come down with bridging that gap in the loan-to-deposit ratio? Thanks.

Donal Galvin

Hi John. How are you? On the liability side, I would say from June or July of 2023, we definitely saw a marked increase in customers terming out on their liabilities. And I would say that that flow is across both personal and business customers. It’s been remarkably consistent on a monthly basis. So, each month, the back half of 2023, very similar to the first couple of months of 2024, and indeed, we expect to see that continue throughout the year. But overall, that’s why I have given you the guidance for the beta of ‘23 versus ‘24, really to reflect those underlying changes on those movements. So, I think that would be the trajectory that you should expect to continue to see. I think on RWA growth, for it to look at 2023 as the – as an example year, I think the Irish mortgage market was a little bit lower than what we would normally expect it to be. And again, that’s due to the fact that rates increased quite quickly. You had less switches. I do think as rates reduce, stock normalize, then that mortgage market and the switchers are going to return. So, we do expect that that’s going to increase, so then, that will have an effect, obviously, on the overall mix. But as we look to the future, I think one of the key areas of growth is going to be in the Climate Capital area. And that’s – it’s on a IRB-type of model. But for lending purposes, I think you should just assume 90% or 100% risk-weighting. And we believe that we can grow the book and on an accretive basis from that perspective. I think on the asset growth beyond this countryside, I will hand it over to Colin.

Colin Hunt

Yes. Well, the Climate Capital opportunity is amidst – the global opportunity runs to multiple trillions. And our ambition is to be seen in that context. We have a target out there are now of deploying €30 billion in our climate action fund by 2030. That isn’t all going to be exclusively deployed in an Irish context. We are already supporting projects in developed markets, in Europe, in Britain and in North America. We are enjoying marked business success there in terms of being very careful in selecting more projects we are supporting what promoters were supporting. And I expect that we will see further growth in our international portfolio there over the years ahead. But this is very much us having a strong reputation in the market. We are not out there aggressively marketing. The business is pouring in the door on top of us and we are being extraordinarily selective in terms of the actual assets that we choose to put on to our balance sheet. And the assets that we choose to put on to our balance sheet are the ones that have an appropriate balance between the inherent risks and the returns that are available. But I suppose the key point here is that as we deploy that capital internationally, our overriding consideration is ensuring that the assets we choose to put on are strong, are solid and are accretive to our RoTE targets. The next question is from Andrew Stimpson from KBW.

Andrew Stimpson

Good morning. Two questions from me. One on rate sensitivity and then another one on the green lending, please. On the rate sensitivity, it looks like it went higher in the second half than where it was in the first half. And I think most other banks in Europe saw a decrease in the rate sensitivity in the second half. But while yours went down in the first half, it then seemed to rise back to almost where it was in the second half. But you have talked about a greater proportion of fixed-rate mortgages and a larger hedge. So, I am a bit confused on that whether sensitivity went in the opposite direction. So interested, what caused that to increase again and whether there is any plans to reduce that further in 2024, please? And then on the green lending, I appreciate that’s a big push for you and you have been making great progress there already. And can you talk about the pricing there and whether you get any benefit from the supervisors focusing on this area? Is there any lower risk weights that you can then pass on with the lower pricing, or is it just purely an area of structural growth that you are interested in capturing? Thank you.

Donal Galvin

Yes. Look, I think on the sensitivity, we would have imagined that the sensitivity would have reduced throughout the year. We obviously increased a lot of duration, fixed-rate mortgages. The two things happened, I would say, which would have offset that somewhat. Number one, our overall liability base increased with respect to customer accounts. And then number two, we didn’t see the migration into term that we actually would have expected. And as people move from, let’s say, shorter-dated into longer-dated deposit products, that sensitivity naturally would reduce as well. But we do think that that will inevitably happen over time. So, it’s not something that we are going to aggressively push with respect to the overall quantum, our size of our structural hedge program and its duration. We are very happy with that quantum overall. I think on the green lending side, whether there will be any benefits with respect to RWAs or anything like that, we certainly don’t assume that there will be any regulatory benefits. That certainly isn’t our experience, if anything, probably more the opposite in some respects. But who knows what can happen. But our plans for growth in the green lending area are based off existing risk-weighted assets and all required return requirements, should we say, to ensure that they are accretive under the existing rules. We haven’t baked in any potential benefits to ensure that we can justify this growth.

Colin Hunt

And whether there are benefits or not, it’s very, very clear that this is becoming an area of increased focus for regulators. There is an increased focus on climate risks, increased focus on the carbon density of loan books. And whatever about benefits for greening your loan book, I do think it’s not unreasonable to believe that at some point over the course of the next number of years, it will become increasingly prohibitive to have books that aren’t green. So, to a larger extent, this is not only about supporting the transition and ensuring that we have got diversified accretive growth opportunities, but it’s also a defensive move to ensure that we don’t – that our balance sheet and our relationship with the regulator and the way that the regulator views us is as positive and strong as possible. I think we have moved – we have, we have moved well beyond the hour at this stage. So, we are going to finish now due to time constraints, but please do feel free to contact any of the IR team if you have any further questions. And thank you for your time this morning.