Bank of Ireland's CEO Discusses Preliminary Q4 2012 Results - Earnings Call Transcript

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Bank of Ireland (NYSE:IRE)

Q4 2012 Preliminary Earnings Call

March 4, 2013 4:00 AM ET

Executives

Richie Boucher – Group CEO

Andrew Keating – Group CFO

Analysts

Eamonn Hughes – Goodbody

John Mullane – Cantor Fitzgerald

Omar Keenan – Nomura

David Lock – Deutsche Bank

Vincent Hung – Autonomous

Richie Boucher

Good morning everyone. Welcome to our preliminary results presentation for the year ended 31st December 2012, and thank you for those who have joined us here in Dublin and those who are joining us by way of conference call and webcast. I’m going to do a short presentation, following which Andrew Keating, our CFO, will do a more detailed run through of the numbers. And then myself and Andrew will help with the questions-and-answers.

During 2012, Bank of Ireland made good progress against our strategic objectives as we enhanced our core franchises and started to rebuild profitability within a restructured robust balance sheet in what was another challenging year for the group. Actions we have taken began to have a positive financial impact in the second half of 2012, giving us good momentum coming into 2013.

During 2012, we continued our progress of deleveraging the group’s balance sheet. We completed €10.6 billion of asset divestments ahead of schedule and well within the discounts assumed as part of the 2011 PCAR. In addition, redemptions and repayments remain in line with our expectations.

The deleveraging, along with good growth and deposits, contributed to a strengthening of our loan-to-deposit ratio to 123%. We have completed the asset disposal component of our deleveraging initiatives, have improved our funding position, and have reduced the group’s utilization of wholesale funding by €15 billion. That is excluding the IRBC transaction during 2012.

In addition, we successfully re-accessed funding markets across the capital structure. Our core Tier 1 capital ratio of 14.4% remains robust, reflecting the impact of the reduction in RWAs of €10 billion in 2012.

We are awaiting the authorities’ finalization of the Basel III regulations. Based on our interpretation of the draft regulations, the group’s pro forma common equity Tier 1 ratio, including the 2009 preference shares is estimated at 8.5% as of December 31, 2012. Andrew will give an update on how we see Basel III impacting on our regulatory capital and capital ratios.

Total operating income for the year ended 31st December 2012 was 9% lower than the prior year. The reduction in operating income arose from both a €10 billion reduction in the group’s average interest-earning assets and a reduction in the net interest margin before ELG costs from 1.33% to 1.25%. This is partially offset by a 14% reduction in ELG fees.

The lower net interest margin reflected the relatively high cost of customer deposits, particularly in the first half of the year and the continuing negative impact of historically low official interest rates on earnings from certain group’s assets. Rebuilding the net interest margin is one of the group’s key priorities. Prior to and during 2012, the group took a number of actions, including the re-pricing of assets and liabilities to improve the net interest margin.

The benefits from these actions began to manifest themselves in an improvement in the group’s net interest margin to 1.34% in the second half of 2012. Our operating costs remain in line with 2011. Lower stock costs were offset by investments in our core franchises, higher regulatory fees and the impact of foreign exchange rates.

Following agreement on revised redundancy terms with key stakeholders, we recommenced our voluntary redundancy program with circa 1,200 people departing the group in 2012, primarily in the last quarter. We remain focused on further cost reductions as we restructure the group and regrettably, the number of people we employ will continue to come down.

Impairment charges and loans and advances to customers remain elevated at €1.7 billion. However, this was €0.2 billion or 11% lower than 2011. We remain focused on proactively managing the credit quality of our portfolios. Our corporate and unsecured consumer loan books and our UK mortgage books continue to perform satisfactorily. We are seeing some stabilization in Irish commercial real estate and then the Irish SME sector. Albeit our customers on those sectors correlated with customer spending continue to face difficult trading conditions. As Andrew will outline in his financial review, every line item in the income statement and key performance metrics were better in the second half of 2012.

The delivery of our strategic objective is well on track. We set a target to reduce our portfolios of loans and advances to customers to €90 billion being the quantum which we thought we could safely fund on a commercially viable basis. With the completion of our asset disposal programs and redemptions to-date, we have just €3 billion of quota asset deleveraging to achieve our target and the current pace of redemptions should ensure we achieve this.

Despite the extremely competitive deposit markets, particularly in the first half of 2012 and our successful focus on reducing deposit pay rates, the strength of our franchises and distribution enable us to increase deposit volumes by €4.7 billion to €75 billion during 2012. In addition, in November 2012, we successfully issued €1 billion of Irish mortgage asset covered securities.

Actions to deleverage the group’s balance sheet, reposition assets within the group, increased deposit volumes at less expensive rates and accessing longer term funding markets resulted in a decrease in the loan-to-deposit ratio to 123% and materially reduced their group’s utilization of monetary authority funding to €15.4 billion at the year-end, of which €4.4 billion related to NAMA bonds and €3.1 billion related to the government guaranteed IRBC repo entered into in June 2012, which was redeemed on a no-profit-no-loss basis in February 2013. All current monetary authority funding utilization is through the ECB’s long-term refinancing operations. Our balance sheet targets are being achieved ahead of schedule.

Notwithstanding the continuing challenging economic and interest rate environment, we remain focused on implementing initiatives we can take ourselves in order to rebuild profitability. Despite the ongoing pressure from low official interest rates, the group’s net interest margin flat at 1.20% in H1 2012, and in H2 was positively impacted by the actions taken by the group to reduce pay rates on deposits and the cost of other funding and to improve charge rates on loan assets where commercially appropriate and possible.

More recently, following some easing of competitive intensity in the UK deposit market, the group has been able to reduce the rate it pays to attract new deposits in that market and to retain existing deposits on roll-over. We welcome the government’s announcement of a system-wide withdrawal of the ELG guarantee at the end of March 2013. Through a range of actions we have taken, the volume of liabilities covered by the exceptional guarantees has reduced from circa €136 billion in September 2008 to €26 billion at December 2012. We are ready for the expiry of the ELG and expect the associated costs to pay that quickly.

As we restructure and reshape the group, the number of people we need to employ is regrettably reducing. We are focused on further cost reductions as we streamline our operations and our redundancy programs are ongoing. The engagement with key stakeholders on options to address the pension deficit has commenced.

We remain focused on credit management which continues to receive considerable attention. Our total impairment charges have reduced by 11% in 2012. We expect impairment charges to reduce further from this level trending to a more normalized level as the Irish economy recovers.

We are actively seeking new business opportunities from new and existing customers and returns on new business are in excess of the cost of capital. We continue to take all appropriate opportunities to re-price our back books on a basis which maintains our long-term franchises and does not have a material adverse impact on credit quality.

Over recent months, we have demonstrated market access across the capital structure. The group has successfully returned to the public bond markets in November 2012 with a benchmark unguaranteed three-year €1 billion asset covered security backed by Irish mortgage asset collateral.

In addition, the group issued €250 billion in Tier 2 capital in December 2012. That momentum continued into 2013 with the €1 billion refinancing of the state’s holding of the contingent capital instrument, two private investments in January. And we have also recently completed some short-term unsecured issuance.

The group has received support and investment from the Irish taxpayers. We are grateful for this. The group’s – the state’s gross cash investment in the Bank peaked at €4.8 billion. In the period January 2009 to March 2013, the state has received cash of circa €3.8 billion in payments for its support, returns on its investments, and repayments of its investments. In addition, the state holds €1.8 billion in preference shares in the Bank and a 15% shareholding in the Bank.

In Ireland, our absolute goal is to ensure that we are the leading retail and commercial bank, with strong market positions across our principal product segments, providing mortgages to Irish families and credit to Irish businesses.

We have retained our extensive distribution capability throughout the group’s branch network and have continued to invest in our e-banking and mobile banking propositions as well as in our payment systems. 70% of our personal current accountholders actively use our 365 online e-banking. We have installed 390 Lodgement ATMs throughout our branch network, generating an average of 540,000 transactions per month. Since their launch in late 2012, we have 180,000 active users of our mobile phone apps and we have issued 1 million – Visa debit cards in 2012 to our customer base.

Our business is to win increasing customer numbers and market shares in 2012, our ability to achieve material reductions and deposit pay rates in a highly-competitive market whilst achieving our deposit volume targets along with our ability to grow market share in other business lines notwithstanding revised fee and pricing structures demonstrates the strength of our franchises and our distribution, the quality of our products and the commitment of our staff.

Providing products and services to an increasing number of Irish consumers and businesses together with ongoing investment in our Irish businesses is vital for our strategic objectives and to enable us achieve sustainable returns for the group’s shareholders. We are actively seeking new customers and are strongly supporting the Irish mortgage market with €1.7 billion in new mortgage approvals and €1 billion of draw-downs in 2012, primarily for first-time buyers. This represents a 40% share of new lending in the market.

In October 2012, we launched a new €2 billion mortgage fund and have seen good mortgage demand coming into 2013. We are actively supporting our Irish retail small and medium-size business customers. We achieved our €3.5 billion SME lending approval target for 2012. That’s an increase of 16% on 2011. Importantly, from a Bank of Ireland perspective, this comprised solely of new and increased facilities for businesses (inaudible).

Our business support and network events are highly popular, particularly enterprise week, which provides the opportunity for our customers to showcase their businesses. Our corporate and treasury business has deep relationships with most of Ireland’s major corporates and was pleased to win a number of new relationships during 2012. The Irish state is an important customer for the group and we hold significant investments in Irish government bonds. We are pleased to be able to facilitate the state through the IRBC repo transaction entered into 2012 and terminated in February 2013.

Irish mortgages are a significant part of our portfolio and as such, is a part of our portfolio which acquires considerable group focus in its own right and, obviously, receives significant external attention.

In our accounts and in this presentation, we give extensive detail on how we are dealing with the issue of mortgage arrears. I would like to spend a couple of minutes on the Irish owner-occupied segment.

Let us put it first into context. Bank of Ireland has circa 162,000 Irish owner-occupied mortgage accounts. Nine out of 10 of these are fully performing. Based on Central Bank of Ireland’s statistics, our owner-occupied mortgage book arrears are running at least one-third lower than the sector. We have previously advised the market and today reaffirmed, that reflecting a stabilization of economic conditions and actions we are taking, the pace of increase in new arrears steadily reduced from the first quarter of 2012. Accordingly, the Bank of Ireland, the arrear situation is stabilizing.

If we look at our circa 17,000 arrears customers, approximately 15% of those are very early arrears with the engagement with customers is only just commencing. Roughly 10% of cases some form of legal process has commenced or is underway. For approximately 40%, we were in a formal forbearance having been – mortgages having been real underwritten or customers were making informal, acceptable overpayments assessed as being capable to bring them back to a performing status. For the remaining 35%, which represents circa 4% of our overall Irish owner-occupied mortgage accounts, the engagement is underway but a sustainable solution has not yet been put in place or else we are seeking engagement.

Our focus is on moving this remaining 4% to sustainable restructure or resolution as quickly as possible, and we are making inroads with a significant number of restructuring solutions being offered to owner-occupied and buy-to-let customers every week.

We have worked very hard to put robust processes, procedures and solutions in place to manage mortgage arrears, which are being implemented by over 500 of my colleagues throughout our business, with further assistance from third-parties.

We are putting in place sustainable restructures to support customers who are engaging with us, and in other cases, resolution options are being pursued. We are continuing to enhance our processes, procedures, solutions, and capabilities, and we are satisfied that while this is a very difficult situation for the Bank and a proportion of our customers, it is one which the Bank can manage and is managing.

We’ve taken active steps to reconfigure and reposition our business in Northern Ireland, with a focus on ensuring we can provide compelling customer, consumer, and business banking propositions on a viable basis.

In the UK, we have been very pleased to strengthen on a mutually beneficial basis our very important relationship with our UK Post Office partner during 2012. This partnership continues to generate strong growth in the number of customers to whom it is providing products and services.

Our International Acquisition Finance business continues to do well and is an important source of income and profit for the group. While the economic environment has improved in the recent months, it is still remaining difficult, and the group continues to face challenges. However, we are starting to see some benefits flowing through from the focus we have had over the past four years on our own strategic objectives which are aimed at advancing our core franchises and rebuilding profitability within a restructured robust balance sheet.

We are ahead of our balance sheet targets. We have protected enhanced our core franchises. The welcome expire of ELG should have a materially positive impact on our income. Our net interest margin has been impacted by the lower efficient interest rates. However, our range of management actions, building on the strength of our franchises has seen margins begin to recover in the second half of 2012 and this is an area we will continue to focus on.

While certain of the actions we have taken on costs are taking a relative flow through and costs have been impacted by certain factors outside of our control. We are determined to deliver further reductions in our cost base and the necessary actions are being implemented.

We have got on top of our credit risks albeit it will take – it will continue to take a lot of work to bring them to a more normalized level. However, we are confident we are on the right road with our diverse mix of portfolios.

My colleagues and I must and will continue to keep our focus on serving our customers and delivering against our strategic objectives during 2013 as we strive to reward our shareholders for their patience and for their confidence in the group.

I’ll now turn over to Andrew.

Andrew Keating

Thank you, Richie. Good morning, everyone. I’m going to take off on what Richie spoke about and provide more detail on our financial performance for 2012. I’ll begin by reviewing the key elements of our income statement, highlighting the progress we’ve made on rebuilding our profitability. I’ll then provide an overview of asset quality describing in more detail the improvements that we have seen in the pace of arrear formation. I’ll recap on the funding and capital, outlining the progress we’ve made on our strategic priorities. And in closing, I’ll summarize the key headlines for 2012.

Starting with the group’s income statement, the group made an operating profit on a pre-impairment basis of €242 million for the 12 months ending 31 December 2012. After taking account of impairment charges, the group made an underlying loss of €1,487 million for 2012, which compares with a loss of €1,519 million in the prior year. The underlying loss reflects a range of factors and is impacted by the interest rate environments, ELG fees and economic conditions.

Net interest income was €1,746 million, a reduction of €237 million from 2011. This reflects a reduction of €10 billion in our average interest-earning assets, a result of the progress we’ve made on de-leveraging our balance sheet. This also reflects an 8 basis points reduction in our net interest margin to 1.25% for 2012 as compared with 1.33% for 2011.

ELG fees were €388 million for 2012, which represents 60% of our pre-provision operating profit.

Other income of €522 million in 2012 was broadly in line with last year. Similarly, on a headline basis, operating expenses were in line with 2011. Lower staff costs in 2012 were offset by increased regulator costs, movements in foreign exchange rates and investments in our core franchises, in customer service and in efficiencies.

Impairment charges of €70 million remain elevated reflecting economic conditions. However, total impairment charges were €201 million or 11% lower than in 2011.

Non-core charges in 2012 reflect the cost of asset deleveraging of €0.3 billion and the impact of the tightening of DOA credit space which also give ways to a charge of €0.3 billion. In addition, we have incurred restructuring costs of €150 million which reflected a range of initiatives that were completed in 2012 and which are continuing and underway.

If we break the income statements into two half-year periods, we can see the momentum that we built in the second half of the year. Every line item and every key metric in our income statement was better in the second half of 2012 as compared with the first.

In relation to pre-provision operating profit, we grew the net interest margin by 14 basis points. We reduced ELGs by €36 million and we reduced operating costs by €46 million. These improvements helped us achieve a three-fold increase in our pre-provision operating profit in the second half. In addition, impairment charges reduced by €186 million in the second half such that our underlying loss improved in total by €327 million.

Let me now go into more detail on the factors behind our pre-provision operating profit starting with our net interest margin. Our net interest margin before taking account of the cost of the ELG was an average of 1.25% in 2012 compared with 1.33% in 2011. Interest rates have fallen sharply since 2011 and the outlook remain for official interest rates to remain lower for longer.

We believe the net interest margin troughed at 1.2% in the first half of 2012. Our net interest margin in the second half of 2012 was 1.34%, an increase of 14 basis points on the first half. This increase is a result of a range of actions that we have successfully executed on both the asset and liability side of our balance sheet.

Starting on the asset side, we are achieving higher margins on all new lending. Our BS demand is current low. We’ve repriced our back books wherever possible and appropriate. For example, we increased the standard variable rates on our UK mortgages by 150 basis points during 2012.

We increased the standard variable rates on our Irish mortgages by a further 50 basis points. On relevant SME loans, we’ve had to pass on the cost of deposits and other funding to our customers by way of a liquidity charge.

Moving to deposits. In the Irish market, we are taking a leadership position in reducing pay rates on deposits. At the same time, our brand, our franchise and our distribution have allowed us to maintain a deposit volume in spite of the significant and continuing pay rate gap between the competition and ourselves.

We’ve also made significant reductions in the pay rate of our corporate deposits while increasing volumes during 2012. In the UK deposit market, we’ve seen a sharp reduction in pay rates in recent months and we expect to see the associated financial benefits during 2013 as our deposits roll over. These and other ongoing initiatives and actions provide positive momentum for further increases in our net interest margin in 2013.

Another key element of our income statements are the ELG fees. ELG fees cost us €388 million in 2012 and represent over 60% of our pre-provision operating profit. We welcome the government announcement last week that the ELG scheme will expire on a system-wide basis at the end of this month. Bank of Ireland is ready for the expiry of the ELG. We expect the cost of the scheme will phase out quickly because the ELG is linked to the contractual maturity of the deposits and liabilities. 70% of our ELG liabilities had a contractual maturity of less than three months. The expiry of the ELG scheme will not alter our deposit pricing strategy.

Moving on to operating expenses. Operating expenses for 2012 were €1.6 billion, which on a headline basis was broadly in line with last year. Lower staff costs and the impact of disposal were offset by regulatory costs, movement in foreign exchange rates and investments. In particular, cost in 2012 include a €30 million charge for the UK FSCS scheme. In addition, the year-on-year comparison is impacted by €20 million, arising from a strengthening of the sterling-euro exchange rate during 2012.

We continue to make investment in our branch, mobile, online and payment channels in the extension of the UK Post Office contracts and in significant programs to support customers who are in financial difficulty. In parallel, we’re taking ongoing actions to continue to reduce our cost base and to improve efficiency.

We have executed a range of restructuring programs, which means that we have 1,200 fewer people employed today than we did at the start of 2012. Our redundancy programs are ongoing and the cost benefits of employing fewer people will be realized during 2013.

Let me now move to asset quality. Total customer loans at December 2012 were €100 billion before impairment provisions of €7 billion. The majority, 55% of our loans are mortgages spread evenly between Ireland and the UK. In terms of geographical diversity, half of our loans are in the Republic of Ireland with the other half outside of Ireland predominantly in the UK.

Impairment charges of €1.7 billion in 2012 remain elevated reflecting economic conditions. However, the charge in 2012 was €0.2 billion or 11% lower than the charge in 2011. In addition, the total impairment charge over each of the recent successive half year periods has been reducing. The portfolios are performing broadly in line with our expectations. And looking forward, we expect impairment charges will continue to fall as the Irish economy recovers.

Over the next few slides, I’ll provide an update of the credit quality of each of our key loan portfolios and we will just start with Irish mortgages and their portfolio of owner-occupied mortgages. Our owner-occupied mortgage books was €21 billion at December 2012. The vast majority of our customers continue to meet their mortgage payments.

In addition, the pace of arrear formation in Bank of Ireland has been slowing steadily since early 2012. When compared with the wider Irish banking industry, our book is performing better.

Based on Central Bank’s data, our arrears on owner-occupied mortgages have consistently been around 60% of the rest of the industry. Affordability issues remain the key driver of arrears. Unemployment levels while elevated have remained stable. House prices have also begun to stabilize particularly in the main urban areas.

According to data from the Central Statistics Office, house prices in Ireland have fallen by an average of 50% from the peak value to December 2012. Our impairment position and last forecast allow for an average reduction of 55% and we make further adjustments to take account of any for-sale discount, disposal costs, et cetera.

Moving on to our Irish buy-to-let mortgage book which amounted to €7 billion at year-end. The significant majority of our buy-to-let customers continue to meet their mortgage payments. As of the owner-occupied book, the pace of arrears formation has been slowing since early 2012. Rent levels during the year have remained stable and the key drivers of arrears include the impact of rising repayments as interest-only period ends, affordability issues and economic conditions. Accounts with formal forbearance or overpaid arrangements has increased by 58% during 2012.

We have significantly stepped up our approach to customers with unsustainable buy-to-let mortgages. We have 1,600 cases in the legal process including 1,100 rent receivers.

Moving next to the UK. The UK mortgage portfolio at December 2012 was £22 billion and continues to perform well. During the year, the book reduced by £2.3 billion or 9%. This planned reduction reflects the sale of a portfolio of loans and ongoing repayments which continue in line with our expectations.

Arrears continue to decline across each of the sub-portfolios. Despite the absolute reduction in our overall book, we have reduced the number of loans which were greater than three months in arrears by 25 basis points when compared with last year. Our arrears position continues to be better than the industry average as per the CML data.

Turning to non-property SME and corporate loans. This book is diversified across geographies with 57% of the loans in the Republic of Ireland, and 43% of the loans outside ROI. In line with our strategic plans and reflecting the divestments of project finance and other international corporate loans, the loan book had reduced by €3.7 billion or 14% to €23 billion at December 2012. In the corporate banking portfolios, the level of impaired loans at year-end was €0.9 billion, a reduction of €0.2 billion since December 2011.

The impairment charge during the year was €137 million and the coverage rate deal at year-end was 44%. For SME loans in the Republic of Ireland, pressure continues due to the current economic environment, subdued consumer spending, and the current level of business insolvencies. As a consequence, the level of impaired loans increased from €2.3 billion at December 2011 to €2.8 billion at December 2012. The impairment charge of €223 million in 2012 was a reduction of 21% or €58 million over the prior year.

In relation to SME loans in the UK, economic conditions remain subdued and the level of impaired loans remained stable at €0.6 billion. The impairment charge in 2012 was €53 million, representing a reduction of 28% or €21 million from the previous year.

Looking finally at the property and construction portfolio. Our investment property portfolio is well-diversified both geographically and across sectors, albeit with a bias towards the retail sector. The investment property loan book was €16 billion at December 2012, representing a reduction of €1.3 billion or 8% over the year.

Ongoing economic conditions have led to an increase in the level of impaired loans from €4.5 billion to €5.6 billion over the period. The impairment charge for 2012 was €437 million, a reduction of 26% or €156 million over the 2011 charge. Our land and development portfolio is €3.6 billion, 90% of this portfolio was impaired and the coverage ratio was 60%.

Before I move on, let me summarize the position on asset quality. The loan portfolios are performing in line with our expectations. Our impairment charge for 2012 was 11% lower than in 2011. And looking forward, we expect impairment charges will continue to fall as the Irish economy recovered.

Let me now turn to funding and capital to the progress we’ve made on our strategic priorities and to the strength of our capital position. We’re on track to meet our asset deleveraging target. Since September 2008, we’ve reduced the group’s loan and advances to customers by over a third. During 2012, we announced that we had completed our three-year asset disposal target of €10 billion. These disposals were achieved ahead of schedule and well below the cost assumed in the 2011 PCAR base case. The current rate of redemption is in line with our expectations and will ensure that we achieve our targets.

On the other side of the balance sheet, we are also delivering on our deposit targets. During 2012, customer deposits increased to €75 billion from €71 billion in 2011. As a result, our loan-to-deposit ratio was 123% at December 2012 and is now substantially in line with our medium-term target.

Our joint venture with the UK Post Office continues to perform ahead of expectations with deposits of £3 billion since December 2011. The extension of the Post Office contract to 2023 represents a neutral endorsement and commitment.

The profile of our deposit books continues to be retail-oriented which enhances their stability. At the same time, we’re revising access arrangements on our products ahead of regulatory development. And as I noted earlier, we’re continuing to reduce the pay rates on each of our deposit portfolios.

The other key aspect of our funding is the wholesale market. Excluding the IBRC repo transaction, we repaid €15 billion of wholesale funding during 2012, €11 billion to the ECB and a net €4 billion to private market sources. The IBRC repo transaction terminated in February 2013, another consequence our wholesale funding requirement today is less than €36 billion.

The maturity profile of our wholesale funding has also improved. Following the termination of the IBRC repo transaction, all of our ECB drawings are now covered by the three-year LTRO. Of our private market wholesale funding, 61% or €15 billion has a residual term to maturity of greater than one year. And their unsecured term-funding maturities of €2.6 billion during 2013 are both low and manageable.

Let me now turn to capital. During 2012, with the progress on our deleveraging targets, our risk-weighted assets reduced by €10 billion or 16% to €57 billion at December 2012. Our core Tier 1 ratio at December 2012 was 14.4% compared with a regulatory requirement of 10.5%.

In December 2012, we returned to the subordinated debt markets when we issued €250 million of Tier 2 securities. In January 2013, the CoCo securities were successfully refinanced from government ownership to the private markets.

On Basel III, we estimate that our common equity Tier 1 ratio on a fully-loaded pro forma basis including the government preference shares was 8.5% at December 2012. We expect that the regulatory requirements for Bank of Ireland will be 10% and the group would expect to maintain a buffer above this level on a transitional basis. We include on slide 38 further details of the estimated impact of Basel III on our capital ratio noting deferred tax pension deficit and other items.

Let me now summarize the key headlines from our 2012 results. Firstly, we are delivering on our strategic objectives. We’ve substantially achieved our loan-to-deposit targets. We’ve demonstrated access to the funding markets across the capital structure and we’ve significantly reduced our ECB drawings. In addition, our capital ratios are strong. We have a 14.4% core Tier 1 ratio on the Basel II basis. And on a Basel III fully loaded pro forma basis, our common equity Tier 1 ratio is 8.5%.

Secondly, we are focused on the key levers to rebuild profitability. Every line item and every key metric in our income statement has improved in the second half. We are ready for the ELG expiry at the end of March and the fees will phase out quickly. Impairment charges are reducing and we have positive momentum coming into 2013.

Thirdly, we have strong franchises. We’re expanding credit facilities for Irish businesses and consumers and we’re committed to Irish economic recovery.

Thank you all very much. We’re now happy to take your questions.

Question-and-Answer Session

Eamonn Hughes – Goodbody

Can I kick off? Eamonn Hughes from Goodbody. And maybe just two questions. Firstly, just on the capital side. I think at the time of the IMF, Andrew, the pension debts it was around about €1.5 billion, €1.6 billion. So maybe just some color on that year-end figure, €1.1 billion, €1.2 billion. Obviously, it has capital implications as you mentioned there.

And secondly, just in relation to the margin. It was quite a significant improvement. So well done in the second half. Just maybe some any more sort of color you can give us in relation to maybe 2013 it would appear maybe the exit rate is kind of €140 million, €145 million probably closer to latter one and maybe some thoughts in terms of the potential improvement for 2013.

Andrew Keating

Okay.

Richie Boucher

Would you take that question Andrew?

Andrew Keating

Sure. So just on the pension side, Eamonn, there’s two things affecting the movement in the pension deficit. One is clearly recovery in the asset values of the pension scheme. During 2012, our assets increased in value right from 12%, 13%. And the second factor that’s important is the discount rate. So at the year-end, we will have significant input from our independent actuaries, our independent auditors and looking at peer benchmarks in terms of selecting the discount rates of 3.9% for our 20-year liability.

On the margin, as you say, we have increased our margin in the second half of the year from 1.20% in the first half, an increase of 14 basis points to an average of 1.34% and that’s really a result of the actions we’ve taken on both the asset and liability side.

We believe that further actions are ongoing and that the momentum that gives us as you point out in terms of the exit margin would be higher than the average and that does give us a strong positive momentum as we commenced 2013 and the initial results between January and February will continue to support that position.

Richie Boucher

Next question?

Eamonn Hughes – Goodbody

Maybe just a follow-up on the pension deficit one. How quickly then, Andrew, is it possible to get that deficit down to negligible levels do you think and what sort of actions on your part does that require, do you think?

Richie Boucher

Well, what we are doing as we’ve announced during the engagement process with our staff and with the trade unions and then the range of potential options and those have been discussed with the people who will be most involved in helping with those options. And on that basis it would be kind of inappropriate for me to comment. But there’s an engagement process underway. I think the most important part of any engagement process is agreement on the facts, what has driven the deficit and therefore what are the options available to be able to deal with that.

And it was obviously disappointing because we made quite a lot of progress on this issue in 2010-2011. These are external factors but the external factors happened and one must deal with it. And so I prefer in deference to the engagement process and it’s a good engagement process. I prefer not to compromise that by giving any specific predictions as to what the options will come out or when the situation be resolved but clearly it’s a very important issue for the group. And as we have done on the note of other things over the last four years, we are very focused and trying to deal with it. But we deal with these things in consultation with the people who are most impacted.

John Mullane – Cantor Fitzgerald

Hi, good morning. John Mullane from Cantor Fitzgerald. Just with regards to the preference shares, can you provide us with any update in terms of repayment of those?

Richie Boucher

Well, I think with our preference shares, the first thing we would notice, that under the Basel III rules, they continue to contest core Tier 1 capital until December 2017. We have a step-up in 12 months’ time. And we again, over the past four years, we have documented a range of issues that will often be a combination of potential options and potential solutions as to how we deal with that. Effectively, bear in mind obviously, the overall cost of capital to the group and the impact on our existing shareholders of any actions that we are proposing or will take, but we are looking at a range of options to deal with that. I don’t think there will be any one single way to deal with this but there’s a range of options and we have done this in the past.

Andrew Keating

And we’ll obviously, keep the market up-to-date in terms of any developments in that regard.

John Mullane – Cantor Fitzgerald

And just on impairments, it seems to be trending very much along expected lines. Are there any thoughts on when the next round of stress-testing will happen? And whether there’d be any change in the methodology?

Richie Boucher

Well, I mean we go through stress-testing the whole time. We had both our UK subsidiary and our overall group goes through an ongoing process of stress-testing. We have our ICAPs which we do internally and then we submit to scrutiny by both the FSA and the Central Bank. And based on our own analysis, obviously, our capital position remains robust. We don’t have any greater insight than the rest of the market as to when the next round of public stress-test will emerge. We note that there seems to be some discussion about them being in alignment with the EBA stress-tests and the methodology used for the EBA. But one way or the other, whether there’s external reviews, we must look at our own capital on an ongoing basis.

When we look at the internal stress-testing, which again is shared with the relevant authorities on an ongoing basis and the kind of assumptions, both on a base case and a stress case or the kind of assumptions that one would expect to see in a more public environment. And this stress-test happened to happen – sorry, stress-tests are happening all the time. It is a public stress-test, something we would just deal with.

Andrew Keating

And then it was noted as well, Richie, that our capital position at the end of December is clearly strong, both in terms of the 14.4% ratio on a Basel II basis and the 8.5% ratio on a Basel III fully loaded pro forma basis (inaudible).

Richie Boucher

I think we also noted the momentum on the income side as well. And if we look at some of the other uncertainties that existed in 2011 without the deleveraging shown we can do the funding, we’ve shown there’s demand for the bridge capital instruments in the market. And – yeah, obviously, we remain exposed to the dramatic shifts in the economic environment. But if we look at the level of provisioning that we have done against our loan books, the diversity of those loan books and the internal actions that we are taking, I think we are in obviously a better place than we were in 2011.

Is there any questions on the line?

Operator

(Operator Instructions) We can take our first question, Omar Keenan from Nomura. Please go ahead.

Omar Keenan – Nomura

Good morning. Omar Keenan from Nomura. Thanks very much for taking the questions. Just two questions, if I may. The first one is on group level loan loss provisions. Appreciate your guidance that loan loss provisions will continue to improve from here, but I was wondering if you could put your expectations for 2013 loan losses on a group level in the context of your base and stress three-year case that you gave from your test with all of the Wyman. I mean, should we expect the outcome to eventually be somewhat better than the stress case?

And then just secondly, on your NIM target of 2%, I was wondering how much of that you believe can be achieved without an improvement in the rates environment, potentially by the end of 2014? Thank you.

Andrew Keating

Okay. Perhaps if I take those two questions. Your first question, Omar, was on the impairment provision. As we noted earlier, the total impairment provisions in 2012 have reduced by 11% over 2011 and we further noted that each successive six-month recharge has been reducing. It continues to be our expectation that the impairment charges will continue to further reduce from this elevated level, trending over time to a more normalized impairment charge of between 55 basis points and 65 basis points as the Irish economy recovers. So we do continue to expect a continuation of the trend that we’ve noted here this morning.

In terms of base and stress, we’ve consistently said and continue to say that in relation to the Central Bank’s base and stress scenarios, noting in particular that we are referencing the base and stress numbers that were attributed to Bank of Ireland as opposed to the base and stress numbers that were attributed to Blackrock. So that in relation to those that we expect to be above the base case but within the stress case expectation for the three years 2011 to 2013. And, again, just to note that that relates to the Bank of Ireland’s numbers rather than the Blackrock numbers.

On the net interest margin, and our target of 2%, we’re still, I believe, the 2% is the appropriate medium-term target for Bank of Ireland. Clearly, when we set that target originally in early 2011, the interest rate curve was upward sloping and there was an expectation that official interest rates would increase. Clearly, we now know that official interest rates are going to be lower for longer. However, what we are focused on is taking all actions within our control in terms of both the asset side of the balance sheet and replacing and also in terms of the liabilities side in terms of re-pricing deposits and re-assess in the funding market. I’d note a comment Richie made that all new lending is achieving margins in excess of our cost of capital and all this demand is currently low.

In terms of the journey back to that 2% level, we do believe that the actions that we’re taking that are within our control will continue to bring us a very much along that journey. However, to get always 2%, the final part of the journey, we think will require some level of interest rate rises as an official rate level.

Richie Boucher

But I think the 2% is going to be extremely difficult on this – changing interest rate environment. I mean, we will continue to take all the actions we can but the 2% by 2014 looks challenging given where the interest rate curves are at the moment.

Omar Keenan – Nomura

Okay. Thanks very much for the answers. I guess my question was that if we assume no normalization, the rates environment or no increase in rates for a couple of years, I’m just trying to ascertain how much of the 2% is dependent on rates increasing and what – we could expect that 2% target effectively as without any improvement in the rates environment?

Andrew Keating

Omar, the substantial part of the journey will be achieved, we believe, by the actions which are within our control. But as Richie mentioned, it will be extremely difficult to travel the final part of that journey without some change in interest rates.

Omar Keenan – Nomura

Okay, great. Thanks very much.

Operator

We can now take our next question, David Lock from Deutsche Bank. Please go ahead.

David Lock – Deutsche Bank

Good morning, everyone. Thank you very much for a clear presentation. Can you hear me okay?

Richie Boucher

Yes, we can, David.

Andrew Keating

Good morning, David.

David Lock – Deutsche Bank

Excellent. I just had a couple of questions on your loan balances. You’ve been very successful in your deleveraging so far and you’re within €3 billion of reaching your target for 2014. Do you think there’s a risk that you’ll end up actually troughing below that before getting to 2014? And I have a second connecting question with that.

Richie Boucher

We have a target we can look to adjust, in particular, in some of our international lending portfolios provided we can fund ourselves, which I think is increasingly proving to be the case. I mean, our obvious desire is to continue to build our business in Ireland. And we are aggressively chasing viable businesses and consumers in Ireland to the extent that our Irish business does not get us to the level of loan assets we would like to. We do have some flexibility in our international businesses, which we can dial up or down depending on our funding position. But our funding position gives us a lot of comfort, David.

David Lock – Deutsche Bank

Okay. Thanks very much. And I suppose the second connected question to that is the run-off book you’ve got in the UK, which the European Commission requires you to run-off, I think you gave the target for where that was to go to. But I note the announcement on Friday about the Bristol & West changes in SVR rates. How much further is the deleveraging – how many billions of euros of assets do you need to de-lever in the UK until you meet the EC requirement?

Richie Boucher

The EC requirement I think we’ve pulled out, David, to get us to our overall balance target which incorporates any assumptions regarding our UK business is €3 billion.

David Lock – Deutsche Bank

Okay. Thanks very much.

Operator

(Operator Instructions) We will now take our next question, Vincent Hung form Autonomous. Please go ahead.

Vincent Hung – Autonomous

Hi. Good morning. Just few questions actually. On the action plan around the repayment of state preference shares next year, is that very much dependent on the timeline for the next PCAR because the Finance Minister mentioned last week or maybe a week before that the next PCAR could be in spring next year actually in line with the EBA stress-test so that would potentially exceed the repayment date.

My other question is, if you don’t decide to repay the state preference shares, am I right thinking you could just going to hold it for the duration of the phase-in period. My other question is related to the UK mortgage book. Can you just give us a guidance for the run-off of that book this year and next year in light of the repricing actions you’ve take last week?

And then my final question is, have you got any guidance from what the NSFR and LCR were for 2012? Thank you.

Richie Boucher

I think if we take the preference share question, Vincent, first of all, we obviously, note that these instruments do continue to count as core Tier 1 capital till December 2017. Our issue in 12 months’ time is a potential redemption step-up, the redemption step-up that occurs. So obviously we needed to take that into consideration and the range of options that are available regard to that.

I don’t think the stress-testing in one way or another would be an overly-influenced on how we look at this because as I mentioned earlier we are reasonably comfortable both in our own internal work and the work that we have advisor looking at us regarding where our capital positions are. So I wouldn’t necessarily look to a stress-testing as being any – some public stress-testing as being a metric – a specific target date or anything like that.

So we are – we will continue to keep the market available but I would continue to emphasize that as we dealt with the number of issues over the last three or four years, we’ve always looked at the range of options available to us and how we execute those and coordinate those.

Andrew Keating

Just to pick-up your final two questions, Vincent, on the UK mortgages, we’ve given you some disclosure this morning in the sense that the UK mortgage book run-off reduced by 9% or €2.3 billion during 2012. Albeit, I would – I think I noted that that was in part due to a sale of a portfolio of loans and in part due to an ongoing redemption which continue to be in line with our expectations.

On the NSFR, we haven’t given a formal disclosure on NFSR. However, we have emphasized the retail nature and the stability of our deposits portfolios and we’ve given some disclosure in the book of sales around concentration levels, et cetera, which may help you in your thinking about the NSFR. Obviously, I’ve note that the NSFR move continue to be kept under review by the Basel committee and I guess we’d expect some further announcements in that regard during the course of this year.

Richie Boucher

But we would run our business on the basis of looking to the more historic rules because we believe LCR and NSFR is an appropriate rate. So we look at the mix between, in particular, looking at our book is very, very retail funded now in terms of deposits and we obviously look at our ability to turn out some of that funding.

Going back just to the mortgage question, I mean, clearly we continue to reprice our mortgage and back books, but our products remain competitive for our customers. And we are careful to ensure that we don’t price in a way in particular that could cause any material adverse credit issues. But all of our products remained competitive in the marketplace.

Vincent Hung – Autonomous

Okay. Thank you. I just got one more question actually. What is the guidance in the remaining guaranteed liabilities after March?

Richie Boucher

I think we’ve identified that 75% of the ELG covered liabilities have a contractual maturity of less than three months. Yeah.

Andrew Keating

Yes. So I think the number, Richie, sorry, would be 70% have a contractual maturity of less than three months. So that will help you in terms of thinking about the ELG fees. I think we’ve said this morning that we expect the fees to phase out quickly because the fee is determined by reference to the contractual maturity rather than the behavioral maturity of deposits.

Richie Boucher

So, for example, if we have demand deposits, we have current accounts, et cetera, which are covered by ELG and we expect those to phase off very quickly.

Vincent Hung – Autonomous

Great. Thank you very much.

Operator

We have no further questions.

Richie Boucher

Okay, well, I don’t think we have any further questions here in Dublin. Again, on behalf of my colleagues and myself, thank you very much for your continued interest in the Bank. I think the last six months in particular have seen us make – see some of the benefits of a lot of the work we’ve been doing over the last four years starting to come through but we must remain very focused and continue to deliver on our objectives. So, thank you.

Andrew Keating

Thank you.

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