The Governor and Company of the Bank of Ireland (NYSE:IRE) Q2 2022 Results Conference Call August 3, 2022 3:30 AM ET
Company Participants
Francesca McDonagh – CEO
Mark Spain – CFO
Conference Call Participants
Diarmaid Sheridan – Davy
John Cronin – Goodbody
Alastair Ryan – Bank of America
Grace Dargan – Barclays
Chris Cant – Autonomous
Ali Woods – Morgan Stanley
Guy Stebbings – Exane BNP Paribas
Francesca McDonagh
Good morning, everyone, and welcome to Bank of Ireland’s Interim Results for 2022. Today, we are announcing a strong business performance, continued progress in the delivery of our strategy and a step change in our business model, supported by organic and inorganic growth opportunities. The key highlights from our H1 results are set out on Slide 5.
We delivered underlying profit before tax of €419 million. Total income was modestly higher. We maintained our cost discipline. Our H1 return on tangible equity was 8.1%, and we remain on track to deliver sustainable RoTE in excess of 10% in the near term. The Irish state has continued to reduce its shareholding in the group.
This holding is now below 3%, and we expect this to fall to 0% this year, making us the first Irish Bank to return to full private ownership.
With Ulster Bank and KBC leaving Island, we are seeing unprecedented structural change in the banking landscape. We have moved swiftly in response opening 145,000 new current and deposit accounts during H1 with more expected over the coming months.
Another key highlight was the completion of the Davy acquisition in June. This is 1 of 2 transformative acquisitions underway this year. Acquiring Davy significantly increases our exposure to Ireland’s attractive wealth sector. We also received clearance from the Irish Competition Authority to purchase KBC’s loan and deposit portfolios and are well on our way to satisfying the remaining completion conditions. We are, of course, mindful of the heightened risk the global economy since we reported our full year results in February.
Despite macroeconomic uncertainty, our asset quality remains reassuringly strong, our NPE ratio has improved since the start of the year, and coverage levels are elevated at 2.5%, remaining above pre-COVID levels. Turning to capital. During H1, the group generated 60 basis points of organic capital. At the end of June, our fully loaded CET1 ratio stood at 15.5%. This is 50 basis points lower than our year-end position and reflects the guided investments of 80 basis points of capital to acquire Davy.
Our refreshed CET1 capital target of in excess of 13.5% accommodates announced increases in countercyclical buffers. We paid a distribution of €104 million in respect of full year 2021 performance, including our first buyback in almost 2 decades. Today, we reaffirm our guidance that distributions will grow from that starting position on a prudent and progressive basis underpinned by the profitability of our improved business model. We will continue to support economic growth across our markets and to invest in our business.
Slide 6 sets out our perspectives on the Irish economy. Ireland has several characteristics that should help mitigate the impacts of any potential global slowdown. These include household and business debt remaining at multiyear lows, a continued buildup in deposits since the pandemic a buoyant labor market, which is essentially at full employment and a business for an environment that acts as a magnet for foreign direct investment. Ireland is forecast to be the EU’s fastest-growing economy for a third successive year in 2022. And as Mark will speak to you later, the group is also positively geared to the rising interest rate environment.
Slide 7 provides an update on our digital transformation. We have seen a 15% increase in our online banking customer base. 88% of our digital traffic is now originated via our mobile app compared to just 62% in 2020 and further enhancements to our app, including the launch of card controls early this year have contributed to improvements in our Net Promoter Score with overall NPS the highest on record. Turning to the next slide. We are making good progress on the execution of our responsible and sustainable business or RSB strategy.
The publication of our inaugural stand-alone RSB report in June significantly enhanced our ESG disclosures. Investors will see from the report the progress we are making across our 3 core pillars: these are enabling all colleagues to thrive, enhancing financial well-being, and supporting the green transition. Our RSB strategy is also delivering commercial outcomes. In Ireland, we are the leading provider of green mortgages, a product we introduced to this market. Green accounted for 48% of our Irish mortgage lending in H1.
We have agreed €1.6 billion of sustainability-linked pricing in our corporate lending commitments, a 14% increase year-to-date. And we are the leading provider of wholesale funding for electric vehicles in the Irish market.
Slide 9 covers our improved U.K. performance. Our U.K. strategy focuses on value over volume, driving a smaller, more profitable balance sheet. At 2.29%, net is risk margin was up 34 basis points year-on-year as a result of this strategic pivot.
The U.K.’s pre-impairment operating contribution increased by around 25% in H1 compared to the same period last year. And our bespoke proposition represented 53% of new mortgage lending, more than double the share is accounted for this time last year. While we still expect further deleveraging of our U.K. balance sheet in H2, the pace will reflect ongoing pricing discipline.
The next slide looks at the significant opportunity we see in wealth and insurance. With a young, affluent and growing population, Ireland is a very attractive market. through our Bank of Ireland wealth offering, our unique New Ireland bancassurance business. And now Davy, we offer solutions across the full spectrum of retail, mass affluent and high net worth segments. The Davy acquisition has essentially doubled the group’s assets under management to nearly €40 billion, making us the #1 provider of wealth management services in Ireland.
We see scope for further growth in earnings from this business in the coming years, diversifying our income and supporting our RoTE ambitions. In Slide 11, we profile our Retail Ireland franchise and the benefits of the KBC transaction. We have seen strong lending trends in H1. New mortgage lending grew by 1/3 and we recorded our first period of organic net growth in SME lending since 2015. The acquisition of the KBC portfolios will further enhance our franchise.
Pro forma, a KBC will increase our total Irish mortgage book by more than 1/3. The low marginal cost of managing these loans and the use of some of our excess liquidity makes the acquisition materially accretive to earnings. We look forward to welcoming these new customers to Bank of Ireland in early 2023. Finally, Slide 12 sets out the exceptional change occurring in Irish Banking and the opportunities we see emerging for Bank of Ireland. More than 0.5 million accounts will need a new banking provider as Ulster Bank and KBC exits the market.
This provides us with a once-in-a-generation customer acquisition opportunity. In response, we are adding over 650 people to help customers open accounts in a safe and efficient way. We have put in place a wide range of first-to-market supports to attract new customers to Bank of Ireland. This includes leading the market with a national campaign, the big move to help customers switch current accounts. As mentioned earlier, this effort is delivering results with 145,000 new current and deposit accounts opened in H1, an increase of around 80% year-on-year.
Including all products, we have opened up 235,000 accounts in the year-to-date. Onboarding these customers has been greatly enabled by the investments we made in our digital capabilities in recent years. 70% of new current account applications have been made digitally completing the application in less than 6 minutes. We expect to see ongoing high demand for new account openings in the months ahead.
Since our Investor Day in 2018, we have maintained a laser-like focus on delivering our strategy. Our strategic execution has helped the group to navigate challenges such as COVID-19 and Brexit, and maximize opportunities, including 2 transformative acquisitions and those arising from structural change in Irish banking. Our cost base is leaner. The performance of the U.K. business has been transformed.
Our overall returns outlook is positive, supported by our acquisitions and the higher interest rate outlook. And we have made significant improvement to the sustainability and profitability of our overall business model to deliver RoTE above 10% in the near term. This is my final results announcement as Group CEO of Bank of Ireland. Bank of Ireland has been in business since 1783. It has been a professional honor and a personal privilege to lead it for the last 5 years.
I would like to thank my colleagues, our customers and investors for their trust and support, and I wish everyone in the Bank of Ireland family the very best for the future.
I will now hand over to Mark to take you through our financial performance in more detail.
Mark Spain
Thank you, Francesca, and good morning, everyone. As Francesca set out, the group has delivered a strong set of results for H1. This includes underlying profit of €419 million, modest growth in total income, excluding valuation items, additional gains and acquisitions. Net lending in Corporate and Retail Ireland of €1 billion with further U.K. deleveraging as planned.
A reduction in our like-for-like costs, a lower NPE ratio of 5.4% and a net credit impairment charge of €47 million incorporating our consideration of the macro uncertainties. A strong capital position and an adjusted RoTE of 8.1%. Slide 16 sets out our P&L and key performance metrics. The key takeaway from this slide is the group’s strong business performance in H1. Net interest income was modestly higher, excluding TLTRO impacts.
Business income increased by 16%, reflecting increased customer activity and recovery from COVID-19 impacts in 2021. This includes an increased contribution from the associates and JV line, helped by the easing of U.K. travel restrictions. And we continue to maintain cost discipline with like-for-like costs 1% lower versus last year.
Additional gains from bond sales and valuation items were broadly neutral, but were a drag on performance versus last year. Slide 17 covers net interest income. As you can see from the walk, our NII in H1 was supported by lower deposit funding costs and FX with TLTRO and higher wholesale funding costs [a drag]. The bond sales, I mentioned, will reduce 2022 net interest income by circa €20 million with the impact skewed to the second half of the year.
TLTRO had a negative accounting impact in H1 but this will more than reverse in H2, producing an expected full year net benefit of circa €19 million. The slide also highlights our maintained pricing discipline. With the loan asset spread widening 11 basis points during H1 to 3.04%. In terms of the outlook for the full year, we have updated our guidance. We now expect net interest income to be modestly higher done in 2021.
Slide 18 provides an update on the group’s sensitivity to rising interest rates. We estimate that a 100 basis point parallel increase in rates would, all else being equal, at €435 million to annualized net interest income. This is significantly higher than the €275 million sensitivity to 100 basis point move that we outlined at our full year results in February. That variance is mainly down to 2 key factors. In February, our sensitivity started at a negative deposit rate of minus 50 basis points.
Today, our sensitivity starts at 0. On top of this, we also have higher central bank balances on our balance sheet. The slide provides a little more color on some of our underlying assumptions. Bearing in mind the terminal ECB rate now looks closer to 1.25%. To note, we are excluding any additional benefit from TLTRO in this sensitivity.
We estimate this could add circa €100 million in aggregate to our net interest income in 2023 and 2024. Turning now to Slide 19 on lending trends. We saw strong growth in new lending during H1, with Retail Ireland of 25% and Corporate of 12%. Across both divisions, net lending was €1 billion higher since December, with good momentum in our Irish mortgage and SME loan books. In the U.K. and in line with our strategy, new lending fell 19% in H1, primarily due to mortgages. The performance also reflected our pricing discipline in volatile market conditions. Overall, the U.K. net loan book deleveraged by €2 billion in H1.
Slide 20 summarizes the drivers of growth in business income. Wealth and Insurance income grew 9%, supported by higher new life business and improved performance on the existing book. Retail Ireland income increased by 30%, reflecting higher current account card fee and FX income and the disruption to activity that was caused by COVID-19 last year. The Retail U.K. fee expense primarily reflects our profit sharing agreement with our key partner in the U.K., with the benefits reflected in net interest income.
And Davy, which is shown separately here contributed an income of €13 million since its acquisition completed at the start of June. Turning now to costs, which is a critical focus for the group. On a like-for-like basis, costs are down 1%. The bridge on Slide 21 shows the €8 million investment we have made as part of our ambition to capture opportunities from the exiting banks in Ireland. We expect further investment of circa €20 million in the second half.
And on the outlook, we expect like-for-like costs to be lower in 2022 than 2021 with a further reduction in the cost base in 2023. Clearly, our reported cost base will reflect the incorporation of Davy and the planned KBC loan books.
As said at the Slide 22, we have booked noncore charges of €84 million. These mainly reflect U.K. restructuring, a further Tracker Mortgage Examination charge and acquisition costs. Turning to asset quality. Slide 23 shows that there was a net impairment charge of €47 million in H1.
This charge reflects loan loss emergence of €106 million largely in our corporate book. This charge is partly offset by IFRS 9 model updates and changes to management adjustments, which amounts to €59 million. Our stock of COVID-19 management adjustment has reduced by €70 million to €62 million. We have made an additional post-model adjustment of €32 million related to the uncertain economic environment as we bring an element of caution to our assessment of recent global economic trends. And we have increased the weighting to downside scenarios in our IFRS 9 models.
Slide 24 provides an overview of our loan book. The book is well diversified by both sector and geography and is predominantly secured and strongly collateralized. More than half of our loan book is accounted for by mortgages in Ireland and the U.K. And the characteristics of these books are very strong. Indeed, more than half of our Irish mortgages were originated since the start of 2015 when the Central Bank’s macro prudential mortgage rules were introduced.
The weighted average LTVs for our Irish and U.K. mortgage books are 53% and 55%, respectively. And the average LTV on our commercial property investment portfolio is 60%. We’ve reduced the risk on our acquisition finance book through the 2021 credit risk transfer transaction.
The NPE ratio at the end of June was 5.4%. We expect a meaningful pickup in the pace of reduction in the group’s NPE ratio in H2. That will be through a combination of organic and inorganic activity.
On Slide 25, it is worth highlighting the strong impairment loss allowance coverage of 2.5% at the end of June. This is unchanged from December and compares to the 1.6% coverage we had at the end of 2019, pre-COVID. The chart at the bottom highlights the main deltas and coverage levels since the end of 2019. Within our coverage, total management adjustments of €352 million remain on the balance sheet, equivalent to 19% of total provisions. We believe we have prudent asset quality coverage in the face of ongoing economic uncertainty.
Slide 26 shows the group has a strong capital position. helped by solid organic capital generation during the first half. Our fully loaded CET1 ratio is 15.5%, and this includes the acquisition of Davy, which had an impact of 80 basis points in our CET1 ratio as guided. RWAs grew by €1 billion during the first half of the year as a consequence of the evolving loan mix. And our target CET1 ratio of greater than 13.5% accommodates recently announced increases in countercyclical buffers in our key markets.
We’ve also accrued for a distribution during H1 at 50% of 2021 distribution levels. The final decision on the magnitude and composition will be taken ahead of the release of our full year results. Turning now to Slide 27. The transformative acquisitions of Davy and the planned KBC portfolios have clear financial benefits for the group. Following completion of the acquisition in June, Davy will make 7 months contribution to the group this year.
In the first 6 months of this calendar year, the overall Davy underlying profit was €12 million, a similar performance is expected in H2. The strength of the Davy franchise is reflected in its strong track record of net wealth inflows, which is set out on the slide. This record continued in the first half, notwithstanding difficult market conditions.
And in respect to KBC, this acquisition will transform the scale of our Irish retail banking business. Our expectations and the financial impacts from KBC remain in line with our previous guidance. That guidance is capital investment of circa 120 basis points, and annualized 2023 benefit to net interest income of circa €160 million. Operating costs of circa €25 million and a pro forma reduction to our reported June 2022 NPE ratio of circa 30 basis points. The financial benefits will reduce over time as the loan portfolio is amortized.
And now turning to the 2022 outlook. On income, excluding acquisitions, we expect to see modestly higher net interest income, higher business income and we assume unchanged additional gains and valuation items versus H1. While reported costs will reflect the inclusion of Davy from the start of June and one-off investments in new customer acquisition, like-for-like costs will continue to reduce.
Turning to asset quality and subject to no material change in the economic conditions or outlook, we retain our prior guidance that we expect the 2022 impairment charge to be lower than 20 basis points. And we expect NPEs to continue to reduce. On capital, we see strong organic capital generation, which supports our growth and investment plans. And as before, distributions are expected to increase on a prudent and progressive basis. In conclusion, Slide 29 provides a recap on the update we are providing to the market today.
H1 has seen a strong business performance. Our net interest income is positively geared to higher interest rates. We are maintaining our rigorous cost discipline. We are vigilant to credit quality risks as reflected in our provisioning approach. The Davy acquisition completed during H1 materially increases our share of the attractive Irish wealth market.
The KBC portfolios acquisition, which we expect to close in Q1 2023 will add meaningful scale to our Irish retail franchise. We are well positioned to welcome new customers from exiting banks in Ireland. And finally, the state shareholding is down to less than 3% with full private ownership in site. All of this leaves the group very much on track to deliver sustainable RoTE of greater than 10% in the near term.
Before we turn to questions, I’d like to thank Francesca for the outstanding contribution she has made to Bank of Ireland over the last 5 years. All of us wish you the very best for the future. We now invite any questions that you may have.
Question-and-Answer Session
Operator
And the first question comes from the line of Diarmaid Sheridan from Davy.
Diarmaid Sheridan
Francesca, Mark. Three, if I may, please. Firstly, around the return on tangible equity trajectory. When we look at acquisitions, the changing market dynamics and the rate of side, which you’ve alluded to, I just wonder if you could provide us maybe with a sense of what you think may be possible in 2023? Secondly, Mark, maybe just around net interest guidance.
Clearly, the modest upside year-on-year in 2022 would indicate relatively strong growth in the second half of the year versus the first half. I just wonder then when we look into 2023, how we should think about annualizing that factoring in some of the updated sensitivities that clearly you’ve provided us with this morning also. And finally, around the cost of risk and in particular, related to the portfolio charge of €106 million. I just wonder in terms of guidance, how we should think about that looking beyond ’22. Clearly, an awful lot of uncertainty there at this point in time if there’s anything that you could help us with on that front, that would be great.
Francesca McDonagh
Thanks, Diarmaid. Thanks for the questions. I’ll comment on the first and the third and then hand over to Mark to a for a bit more detail. So from RoTE perspective, so first half 8.1%, we previously said that we would get to in excess of 10%, and we had that target without any assumption of acquisitions or a change in interest rates. But principally due to the strength of our business model and the actions that we’ve taken in recent years.
And we’ve pulled the levers of cost reduction. We’ve grown our wealth insurance business. We’ve turned around the U.K. and we’ve improved asset quality.
Standing back today, what’s changed? So we have 2 transformative acquisitions. Davy completed. Greenlight from a competition perspective for KBC next year. We’re also seeing once in a generation growth in our customer base from all the structural change we’re seeing in the sector plus we have the income upside from an increasing rate environment.
So that’s really informed our confidence about the near-term guidance with regards to achieving in excess of 10%. And Mark will provide more details. Just on the cost of the third question about cost of risk. So just more broadly, we are not seeing anything in terms of early warning indicators or credit deterioration in any parts of our portfolio that would give us undue cause for concern. But, Mark will provide a bit more on last thing.
Mark Spain
Thanks, Francesca. And maybe just on the first question then on the RoTE piece, I suppose maybe the decision to out the words in the near term to our RoTE guidance was clearly a deliberate one and reflects our confidence and conviction. I would expect our RoTE to improve in the second half. And I think this should leave us in a very strong position going into 2023 when money of the key items Francesca has spoken to really begin to land. And I suppose standing back and live, worked in the bank for quite a long time.
But I’m mindful of the evolving macro environment, obviously, the interest rate expectations are volatile. But from my perspective, it’s hard to think of a time when the bank was better positioned to deliver double-digit RoTE. So just on the NII guidance, then maybe Diarmaid moving on to that. We have upgraded our NII guidance to modestly ahead of 2021. At the full year, we said we’re very broadly in line.
The updated guidance reflects the more positive interest rate environment compared to February. It also reflects the modest income benefit of circa €20 million from TLTRO, which we hadn’t originally anticipated. I would note that the 2022 NII is also impacted by the loss of circa €20 million of net interest income following the bond sales in H1. Obviously, those bond sales give rise to the additional gains of €83 million. And just on the H2 versus H1, then I mean just joining all that up.
If you think about the TLTRO effects, so there’s sort of a circa €20 million charge in the first half, that’s sort of a €50 million swing half-on-half interest rates in the second half versus the first half probably of the order of €60 million and then you’ve got the bond sales impact probably just above €10 million in the second half. So those are probably the key moving parts when we look at the half-on-half.
In terms of cost of risk, maybe Diarmaid take your specific question, but maybe just to stand back, maybe for a second, and how we thought about the provision charge. And we have taken a cautious approach to provisioning, given the evolving macro environment and recognizing that we have — we’re facing elevated inflation levels. We haven’t experienced these levels for quite some time and also we’re exiting from a low interest rate environment. And those factors do present new dynamics. But I suggest that we’re not seeing any evidence of stress in our books and as we talk to our customers.
Just to bring a cautious approach to life, our overall provision coverage level that remains at 2.5%, and that’s elevated versus pre-COVID levels of 1.6%. We have increased the weighting towards downside scenario in our FLI. They’re at 45% now versus 35% at the year-end. I’ll come back to that in a second. We’ve also added a new PMA to deal specifically with economic uncertainty.
And also, finally, I’d note that we’ve retained a COVID-19 PMA of €60 million and that reflect the latent risk primarily in our Irish SME book after Irish government supports withdrawn earlier this year. But to the earlier point, we’re not seeing and we’re now sort of 1 month after the reporting period, not seeing any evidence of that risk emerging since the period end. Just to go back on those downsides scenarios and FLI for a second to 45% versus 35%. So there’s obviously a delta between the assumptions we’re using to set our provisions and our central scenario, which is based on consensus as of the end of June. And you can see that in our slides and slides, I think Slide 23 in our pack, you can see the weighted average macros that we’re using.
And if you look at those weighted average macros, you’ll see one of our key assumptions which drives our provisions is the ROI unemployment rate and the weighted average assumption we use for selling our provisions of 6% in 2022 and 5.9% in 2023. And if I just maybe compare that to the Central Bank Ireland, which has come out since our reporting period in early July, they are projecting on a [indiscernible] To 5.2% for 2022 and 4.8% for 2023. So just to maybe bring that to life.
Just on the portfolio charge itself. So hopefully, that’s just a little bit of context around our thinking on provisioning and the portfolio charge itself arose primarily in our corporate books. It reflects a small number of individual case impacts that I wouldn’t necessarily expect to repeat. And reflecting that on the outlook, we are reiterating our guidance that we expect our impairment charge to be less than 20 basis points for the full year, assuming no material change in economic conditions or outlook I think your question did go forward. We’re obviously not giving guidance today into 2023.
It’s obviously a set of interim results. So we’re not giving that guidance at this point in time. But I would say just more generally [dermal] if I stand back, I would say, if interest rates move up towards higher and more towards more normalized levels. It is reasonable to expect the impairment charge also to move up to more normalized levels. And we’ve spoken previously about a range of 25 to 30 basis points.
So I think it’s that’s not an unreasonable sort of association to make it.
Diarmaid Sheridan
That’s great. And may I just also wish Francesca very best in your next role in the coming months and years. Thank you.
Operator
[Operator Instructions] And the next question comes from the line of John Cronin from Goodbody.
John Cronin
Just to set at the outset as well, Francesca, I’m wishing you the very best in your new role. A few questions from me, please. One is on costs. So clear in terms of the outlook for H2 ’22, but can you talk a little bit more about the cost trajectory into FY ’23 and the levers you have to achieve further cost reduction as previously noted? The second question I have is on the CET1 target.
So you’ve increased staff by 50 basis points to greater than 13.5%. Just wondering how we should be thinking about distribution and potentially capital return in that context? And what should we be thinking about? Does that kind of temper your appetite to distribute in FY ’22? Any kind of guidance or sense of what to expect in terms of numbers there for ’22 and beyond would be helpful.
And then thirdly, just coming back to the rate sensitivity. Look, noting the much improved rate sensitivity disclosure and the closure. But if I would just go back and with a view to trying to compare things on a like-for-like basis across the industry. If you have started that at minus 50%. Would it be fair to kind of go back to the original, I think, 190 for a 100 basis point upward move in the euro context?
Yes, if any comment on that, that would be helpful.
Francesca McDonagh
Thanks, John. Thanks for the questions and your kind comments. Always a pleasure to respond. So I’ll comment on the first 2 and then Mark — I’ll hand over to Mark on rate sensitivity. And just more broadly, given my moves on maybe more forward-looking perspectives.
So from a cost perspective, so like-for-like, we’re 1% down in the first half of this year, if you exclude acquisitions and the investments we’re making in the new current account switching. This 6-month period is our eighth reporting period of underlying cost reduction down and we would have taken €250 million net out since the end of 2017 or this a prior receipt.
So in terms of the levers, they are the same levers that have served us well in the last few years going forward. So that’s the lever of simplifying our organization. And we’ve seen our headcount reduced by about 10% since 2017, and that includes 2% year-on-year in H1. A second key lever is digitization of our business, and we can see that just in terms of, well, satisfaction, but also the increase, we had a 15% increase in our active customer digital base, and that’s a lower cost, more effective, more scalable channel to serve our customers through. And the third is strategic sourcing.
So that’s about third parties, contracts, in-sourcing, outsourcing and I think all of those 3 levers are increasingly relevant in an inflationary environment. We do expect H2 cost to be reduced from H1. Mark will provide maybe a bit more forward-looking focus in 2023 plus.
In terms of capital distribution, Mark may want to comment on capital. But on distribution. So we know — I always say it’s — we know how important distributions are for our shareholders. We have made a technical accrual at midyear, and that is simply a based on 50% of 2021 actual. Our guidance remains that distributions will increase on a prudent and progressive basis based on performance and capital position.
And let me just briefly break that down. So in terms of performance, today, we’re sharing a strong set of results. We have organic capital generation of 60 basis points and a more positive outlook for 2H and that’s as a result of the step change that we’re delivering in our business model. Plus we’re seeing upside from the 2 acquisitions, a structural change in the sector and an increasing rate environment. And that all supports the progressiveness of our policy.
But there is a prudence in there, and we’re not changing guidance today. It is a decision that will be taken by the Board based on full year performance. It will also reflect external of market conditions where we know the development of uncertainty today. I’ll hand over to Mark.
Mark Spain
Yes. Thanks, Francesca. John, just on the cost maybe just maybe a couple of an obvious points for — Francesca covered obviously very well. But from my perspective, and I’m conscious of the new CFO here, I know the bank very well, but the bank has built a reputation for cost discipline and strategic reduction over recent years. It’s is certainly very important to me that cut doesn’t change during my stewardship as CFO.
So to say that. We’ve obviously given guidance in terms of 2022 that we’re going to be down on a like-for-like basis versus 2021, and we’ve given that guidance into 2023 as well that on the same basis, we expect to be down again. It’s same levers — put in the same levers that we’ve tried and trusted levers that we’ll be using to deliver on that.
I think, John, I think Francesca answered your question in relation to capital and distributions. So as something additional you have there. Just on the rate sensitivity. So maybe just come back to that. And really the — maybe a couple of things — the short answer to your question is if you go back to the previous sensitivity i.e., if you start from a minus 50 basis points starting point, would you end up with a similar sensitivity?
I think the broad answer to that is yes, it’s obviously influenced by the balance sheet makeup given the a static balance sheet and for example, we’ve got higher cash and deposit with the ECB. I think the key thing is — and there are really 2 key reasons why the sensitivity is so much — or so much more significantly higher. So one is the starting point. The sensitivity to slow today’s base the 0 rate starting point in minus 50 in February and we have explained previously that, that first 50 basis points is different to subsequent legs. For example, their deposits on negative interest rates.
And as negative interest rates have moved to 0. We’ve passed that benefit or reverse that charge that we apply to our customers that’s already happened so it’s effectively 100% pass-through on that. You also — your IBOR floored loans. So that’s another reason why that sensitivity changes. And I’d say also the balance sheet is different.
But the short answer to your question is, yes, if you go back, this will be directionally similar. John, I don’t know if you wanted to — sorry, because you had a question, I’m not sure if your question was around the capital guidance as well? Or was it only on the [indiscernible]?
John Cronin
That’s all. But look I appreciate that you haven’t been talking about capital return previously. Anything you could say on that would obviously helpful. My main focus was on [indiscernible].
Mark Spain
Okay. Listen, why don’t I just cover the capital target because maybe if it is part of your questions, maybe somebody else will have it later so we can get to it. But we have increased our target CET1 from greater than 13% to greater than 13.5% and I think we explained in the full year that we are keeping the CET1 target under review in the context of both the PRA and the CBI reviewing capital buffers. And we also explained that point if there was any adjustment, it will be modest. And we’re seeing that modest adjustment today.
The adjustment really reflects 2 events in H1. Firstly, the confirmation by the PRA on the U.K. countercyclical buffer. And secondly, the CBI review of the capital framework with — obviously, the focus there on the Irish countercyclical buffer, how that phased in. So we are changing our capital target now, and that accommodates changes out to 2024.
John Cronin
I’ll come back with one follow-up later, if I can.
Operator
Now we’re going to take our next question. And the next question comes from the line of Alastair Ryan from Bank of America.
Alastair Ryan
Disappointed to remind Francesca, I look at Credit Suisse as well. But I just want to press on the numbers because there’s a lot of flying around. So consensus net interest income for next year, €2.48 billion range of €2.3 billion to €2.7 billion. So if I take your 2021, grow it by 1%, which would be very modest. Add your sensitivity for 1% rates because rates are going up by more than 1.
Add 3/4 of KBC. I get at least €2.8 billion for next year. So above the top of the range. And I appreciate not everybody would put it in their numbers and what have you. And then you’re hoping to grow the bank.
So what’s wrong with that math, please?
Mark Spain
Okay. Yes. Good to talk to you. And I think we’re not obviously were a set of interim results here, and we’re not giving guidance at this stage on 2023, we will obviously give that guidance and at the full year we have tried to be really as helpful as possible and to give the market all the information on the key moving parts as we see them. And I think, Alastair, you’ve captured them well.
So we’ve got 2022 guidance. I think you’ve called out there. We’ve given the NII sensitivity. We’ve given updates in relation to both Davy and KBC. We’ve called out the TLTRO as a separate additional piece.
And then I think there’s the opportunity presented by the exiting banks as well. And Francesca has spoken to that in the presentation, it’s a material commercial opportunity. So I think you have all the moving parts. The macro is evolving. The interest rate outlook remains volatile, and that obviously — that ultimately will impact the outcome, but I think you have hopefully the key building blocks to be able to make your own assessment.
Operator
Now we’re going to take our next question. Please stand by. And the next question comes from the line of Grace Dargan from Barclays.
Grace Dargan
Best of luck Francesca. A couple for me, please. Firstly, I think given the outlook, is there a particular reason why you wouldn’t call out a higher RoTE ambition today? And then secondly, on Davy, just after a little bit of color maybe how you’re thinking about potential synergies going forward and both in terms of timing and amount and appreciate you’re not giving ’23 guidance, but just thinking about going forward with Davy, should we be expecting significant growth from here? Or would you expect it to be more stable kind of as you’re suggesting into H2 as well?
Francesca McDonagh
Thanks, Grace. I’ll turn to Mark on sort of RoTE guidance because it sort of goes beyond my tenure. I can talk to you about Davy and just more body Wealth and Insurance. So we’ve had a step change in our Wealth and Insurance business model. We’ve pulled a number of organic levers in the last few years and the completion of the Davy acquisition put us as by far the market leader in wealth management in Ireland.
And it’s a market that is particularly attractive. So the target market is typically underinvested, it’s under-advised and you’ve got a demographic trend in terms of a young but aging fully employed affluent population. So that all points to very positive sustainable growth for many years to come. It helps diversify our revenue stream, strengthens our business model. And you’ve seen even without Davy, Wealth and Insurance is now 37% of business income and was up 9% year-on-year.
In terms of synergies, so when we looked at Davy, the focus has really been on revenue synergies as opposed to obvious cost synergies. So together, bank and Davy have an AUM of circa €40 billion. 600,000 customers that we would look at offering the high net worth customers in the bank access to Davy because they will have a broader and deeper range of products and services. We would look to extend Davy Select, which is a self-service platform to all of our mass affluent customers in the bank. And obviously, independently of Davy, we’re the only bancassurer in Ireland and we have a penetration of 35% of our customer base, and that customer base is growing for other reasons that we talked about to structural change.
So we are very positive about the outlook and the future growth for Wealth and Insurance strategically. But Mark may want to cover both in a bit more detail.
Mark Spain
Yes. Thanks, Francesca. Maybe just to add on Davy, Grace, we’ve given, I think, on Slide 27 there, we’ve given some of the key highlights or key piece of financial information in relation to Davy. I think the key thing I’d draw your attention to is the chart on the left-hand side of the page, and that’s showing the net fund inflows into Davy’s Wealth business, which is the larger of the businesses in Davy. And that’s a really strong track record.
You can see there the €0.8 billion of net inflows in the first half of this year, and that’s notwithstanding obviously very tough equity market conditions that really demonstrates the strength of that wealth franchise. And that’s before that was obviously all pre-Bank Ireland owning Davy, so this on its own steam. We bring [Bank Barnes] distribution reach that can only power that going forward over time. It doesn’t happen overnight, but I think we’re just, I think, really excited about the opportunity with Davy. It’s just a fantastic business.
So just on the RoTE piece, then just going back to that, and again, I’d probably come back to maybe ask this question previously, it is our interim results. So we’re not giving guidance today beyond this year. But I think as I said earlier, i.e. RoTE 8.1% in the first half. We expect that to improve based on the guidance that we’re giving today into H2, and that really leaves some strong position going into 2023.
Our target and our ambition is to be above 10%. That is — that’s greater than no ceiling in that. So — and we’ve given, I think, hopefully, the key moving parts, which inform our confidence and conviction that we can get there in the near term.
Operator
Now we’re going to take our next question. And the next question comes from the line of Chris Cant from Autonomous.
Chris Cant
If I could just echo the sentiments of others, I wish you all the best in your new role, Francesca.
And then questions, three, please. So on capital, I think your MDA, once the guided countercyclical buffers will be fully in place, will be around 11.5%. Why do you feel the need to run with more than 225 basis points of headroom to MDA on an ongoing basis, please? It seems very high versus many peer banks. And then on revenues, we’ve obviously got quite a complex patch work of qualitative M&A adjusted guidance at the minute.
If I could just try to cut through some of that, please? Ex M&A total revenue consensus for 2022 is €2.9 billion. Am I right in thinking that by the time we crunch through modestly higher NII, higher business income and then adjust for the fact that there’s no expectation for a net positive notable revenue item and the associates and Davy’s line has bounced back quite strongly, and that’s not in consensus. If I think about that total revenue number of €2.9 billion, you’d be expecting consensus to be flat to slightly higher for 2022?
And then finally, on revenues, again, more looking into 2023. Any color on the expected impact of IFRS 17, please? And if not, when should we expect to get this given the transition is in 5 months?
Francesca McDonagh
Thanks, Chris. [indiscernible] say thank you for your comments and hand over to Mark on each of the three question.
Mark Spain
Yes. Chris, just on the capital piece that sort of guidance of greater than 13.5%. Clearly, if you think about the building blocks that you’ve called out, obviously, you’ve got P2G, you’ve got a management buffer on top of that, which is an appropriate management buffer. So I think we’ve taken account of all that. Obviously, we’re at 13%, greater than 13% at the end of the year.
I think at that point to be flagged that given that we knew what was coming on the horizon this year with both the PRA and the CBI, both needing to make decisions that would inform where we got to. So I think our guidance today is entirely — or updated is entirely consistent with the guidance that we gave for the full year.
And so on the revenues, and there are a number of being parts. I think it’s a fast, tried to make it as straightforward as possible, obviously, when we’ve got at coming in for 1 month and then 7 months, I think we need to sort of look at the company ex-Davy although as I said earlier, we’re really excited about what Davy brings. And I think we’ve talked about NII earlier on the call. So our guidance there is that NII will be modestly ahead. And that is to say, an upgrade in guidance relative to where we were the full year where we were broadly in line. So that’s on that piece.
On business income, maybe just go to that for a second and business income and we define business income as including associates and JVs, it effectively ultimately fee income was just a period in different lines of the P&L and that’s why we do that. It is up 16% in H1. There were very strong performances there in Retail Ireland and customer activity, obviously increasing but there were COVID-19 in the first half of last year. We also had a very good performance in our Wealth and Insurance business. That business is typically more H2 basis.
And we had a very strong performance, as you said, in our U.K. retail FX, JV, which is the #1 player in that market as U.K. travel restrictions were lifted. So our guidance is — remains what it was in the full year, so it’s higher versus 2021 but we’re more positive about that today than we were at the full year. So retailer ROI on the one hand, won’t necessarily the same bands in H2 versus H2 last year because we didn’t have the COVID restrictions then.
But as I said, Wealth and Insurance it’s more second half weighted and that U.K. retail effect JV that has performed better than we originally planned at the beginning of the year. So we’re more positive in that regard.
So hopefully, give you — and then the last piece is the additional gains, the valuation items. And obviously, there’s a number of moving parts there with additional gains to talk about the NII impact of that, and then the valuation items, which are really due to market movements were basically minus €3 million at the half year that’s — we always guide, but that’s impossible to project going forward. It depends on market movements. So we’ve just assumed there’s no change in that relative to the half year. So that probably gives you some sense just on the revenues.
On IFRS 17, then, yes, the values — that’s obviously, Chris, as you know, and I know there’s some very good research done by Autonomous on this, but that’s — that accounting standard is an accounting standard, which impact the phasing of profit doesn’t change the economic value of the insurance business or the benefit we have been the only bancassurer in Ireland, but it’s obviously beginning of next year. It’s a complex area. We don’t have quantitative guidance at this point, but we expect to have that by the full year we’re making good progress on our IFRS 17 program, and there is — there are enhanced disclosures in our interim report in relation to that. So — but there’s more to come on that as we work through it.
Chris Cant
If I could just come back on the revenue piece then. In terms of the business income being high, you said 16% up 1H versus 1H, but expecting less growth than that 2H on 2H. So year-over-year, are we talking about business income up high single digit, 10%, that kind of quantum. Is that what you’re trying to convey by [indiscernible]? Just trying to put the pieces together there.
Mark Spain
So maybe to address that question maybe a slightly different way, Chris. I mean if I go back to pre-COVID, when I go back to 2019, I think we’ve always thought this year a good year to get back to 2019 levels as we look across business income. And I think that will be very much our ambition.
Chris Cant
And that’s pre-M&A, yes?
Mark Spain
That’s pre-M&A, correct.
Operator
[Operator Instructions] Now we’re going to take our next question. And the question comes from the line of Ali Woods from Morgan Stanley.
Ali Woods
You kept your cost guidance as it was, though, adding an extra €30 million to bring in those customers from the departing banks. How have you been able to do this given higher inflation? And I know you’re not commenting on guidance really for 2023, but are you able to give us a very high level impact of what you think inflation is going to — how it’s going to impact your costs going forward?
Francesca McDonagh
Okay. Thanks, Ali. I’ll say a few words and then maybe when we talk about the future, pass to Mark. So we have tone this muscle over a number of years. As I mentioned before, it’s our eighth reporting period, we’ve been very considered and strategic in how we’ve taken costs out.
So I’ve always said it’s very easy to take cost out badly. We have been strategic in changing our business model to take out toil for customers in some of our more manual processes, digitize our business, and we have just become more efficient and more effective. We’ve also done that whilst managing our stakeholders, whether that’s shareholders or customers or the states well. And we have — in terms of our pay outlook, we have secured an agreement with our employee representatives for a payroll award of 4% in 2022, and 3.5% next year. We think that’s appropriate, and that gives us an ability to plan ahead.
Maybe Mark wants to comment a little bit more, but the discipline and focus on sort of taking out bad costs, so inefficiency, friction, toil, has become [matures] within the organization, and I see that progress as continuing going forward.
Mark Spain
Yes. Thanks for Francesca. I mean just maybe a couple of the small comments. I mean firstly, just on the €30 million I would say that that’s a one-off investment to onboard. More than 10%, an opportunity related to more than 10% of Irish inhabitants who need to find a new bank. So that’s a really exciting opportunity from a commercial perspective. And so just to highlight that.
The second piece then is in relation to the cost guidance that we are guiding, obviously, 2022 to be lower in 2021 on a like-for-like basis, excluding those costs, and obviously, excluding the impact of acquisitions. We’re also guiding 2023 to be lower in 2022 on the same basis. And the levers, again, that we’re pulling are the ones that we’ve pulled before Francesca outlined them earlier on the call. we still think there’s opportunity. We’re constantly challenging ourselves.
It’s certainly something that’s been really, Francesca shows the model that we’ve well-honed and developed it’s something personally important to me as well.
Operator
Now we’re going to take our next question. Please stand by. And the next question comes from the line of Guy Stebbings from Exane BNP Paribas.
Guy Stebbings
I can echo one word Francesca for your new role. One on capital and one I might try again on costs. So on capital, really RWAs. Just interested if you can give any more color on the uplift in the period driven by mix and how we should be thinking about that going forward? I guess the starting point is fairly conservative risk weight when we compare against peers and other jurisdictions.
So one might be hopeful that you’ll be insulated from further as move in risk weights, but any color there would be useful. And then on costs, I mean I take note of all the comments you’ve made and declining costs next year on a clean basis, but I guess lower as a comment, it’s quite open ended. So I’m not sure if you can help contextualize that a little more is lower kind of trending like 1% this year a sensible sort of base case assumption. I guess if I was to take that sort of run rate, take off the €30 million of investment costs you’re kind of in the ballpark of the 3% decline, including consensus on that basis. But any additional context that would be very helpful.
Francesca McDonagh
Thanks, Guy. I’ll pass to Mark on both.
Mark Spain
Okay. Thanks, Jessica. Guy, just on the RWAs. So there’s a 30 bps investment in H1. That reflects the evolving loan mix.
If you think about the moving parts there and a strong performance in our corporate and Irish SME books, also a little bit of mortgage as well. But those — the first 2 of those, obviously, higher risk weights. We’ve had deleveraging in line with our strategy in the U.K. with lower risk weights and that’s what’s driving that. There’s also some timing aspects I’d say, frontloading.
So I wouldn’t necessarily expect that rate of investments to repeat into H2. And maybe just standing back from the loan book, I may just dive in there for a second. If I look at our loan book ex U.K. in H2, I would say the weighting of growth and we do expect growth in H2 will be more weighted towards our Irish retail business and more towards mortgages. So just to give you a little bit of color on that.
Standing back, I would expect that our RWA density on a portfolio basis to be broadly stable. Irish mortgages, I think we’ve spoken about previously new lending RWAs are a little bit below stock. And obviously, when KBC comes in, again, the risk weightings and that will have overall density on each individual portfolio, probably no material change. So that’s on that. On the cost, just to be clear, so on the cost we’re guiding to be lower year-on-year, excluding acquisitions and excluding the one-off costs in relation to onboarding customers.
And on that basis in H1, we were down 1%, okay? So again, it starts — it’s from that base that you need to look. And again, as I think about 2023 and lacking for a guidance in 2023 today, but it’s lower on that basis in 2023.
Operator
There are no further questions, and I would like to hand the conference over back to our speakers for closing remarks.
Francesca McDonagh
Just very briefly, thank you. Thank you for your time today. And from a personal respective, thanks for your positive engagement and hard work during my 5 years, and I know that will continue well beyond me. I look forward to seeing many of you on the road in the coming days. Thank you very much.
Mark Spain
Thanks, everyone. Good morning.
Operator
That does conclude our conference for today. Thank you for participating. You may all disconnect. Have a nice day.
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