Allied Irish Banks PLC (OTCPK:AIBSF) Q4 2019 Results Conference Call March 6, 2020 4:00 AM ET
Colin Hunt - CEO
Donal Galvin - CFO
Conference Call Participants
Eamonn Hughes - Goodbody
Stephen Lyons - Davy
Ryan McGrath - Cantor Fitzgerald
Raul Sinha - JPMorgan
Aman Rakkar - Barclays
Alastair Ryan - BofA Merrill Lynch
Chris Cant - Autonomous
Eoin Mullany - Berenberg
Diarmaid Sheridan - Davy
Martin Leitgeb - Goldman Sachs
Good morning, ladies and gentlemen. You're all very welcome to Molesworth Street for the presentation of our annual results for 2019, for our investor updates and for our strategic refresh. As usual, we'll start with the forward-looking statement, which I would ask you to commit to memory very quickly before moving on to the agenda for the day. It is a packed agenda. I'm going to kick off with a very, very quick overview of the highlights of the year just finished. Donal will then bring you through the detailed financial results for 2019. I'll be back then to talk about our strategic updates for the period out to the end of 2022. And then Donal will bring you through the refreshed and renewed financial targets, outlook and guidance for the period ahead. We'll then have an opportunity then for questions and answers here in the room and off the phone. And hopefully, we will have you out the door by no later than 11:00.
Before we start, I need to do something I forgot to do when we presented the interims, which was to ask you all to turn off your mobile phones.
So 2019 was a year of very steady progress for the bank against a challenging and difficult backdrop. We strengthened our customer proposition and our digital leadership. Introducing evermore competitive products, particularly in the mortgage space, where we reduced interest rates in fixed products on 2 occasions, led and approved our customer experience and also enhanced our existing leadership in the fintech space.
We engaged in very, very high-quality new lending with a key focus on credit management, and more than 98% of the new loans we put on to our balance sheet in 2019 were graded strong and satisfactory.
We saw a very significant reduction in our NPEs from close to 10% of gross loans at the start of the year to just over 5%, 5.4% at the close. And in so doing, we reached at a very important pre-IPO commitment that we made to our investors, and we're planning further reductions.
We had a renewed focus on costs. And in the second half of the year, we reduced the headcount of the bank by 5%. We made major advances on the sustainability agenda, put it at the very, very heart of our strategy, and we also made significant progress on culture and accountability.
And that sustainability commitment is now manifested very clearly in a climate action fund of €5 billion, the introduction of a green mortgage, the publication of a Green Bond Framework. And also we're able to report a 20% reduction in our own carbon footprint at the business since 2014.
We simplified our structure to deliver on the strategy, and we made significant management changes. We now have a renewed and refreshed executive committee. And we've continued to deal with legacy issues and a change in regulatory environment with particular reference to the tracker mortgage examination. So steady progress made across a number of fronts, but there's more work to be done as we embark on the next phase of our strategic development, which will see the bank being simplified, streamlined and strengthened in the interests of all our stakeholders.
I'm now going to hand you over to Donal to bring you through the details of the results for last year.
Thank you very much, Colin, and good morning, and welcome to you all. I'm going to go through the 2019 financial results. Firstly, just pulling out some of the key items that that I want to mention for '19.
Net interest income, over €2 billion for 2019, and a net interest margin of 2.37%. And within that, we would have seen strong asset yields and reducing liability yields, so we're very happy with that.
Non performing exposures of €3.3 billion represents an NPE ratio of 5.4%, which is in line with our expectation of milestone of the circa 5%.
On the year, NPEs reduced by €2.8 billion, which is a reduction of 45%, which is a huge lift from the nonperforming workout units. CET1 ratio fully loaded, 16.4%. This includes a dividend of €217 million and €0.08 per share, which we feel is a very strong capital outturn.
Now just to run through the income statement. Overall, like I mentioned, interest income year-on-year, pretty stable, down 1%. Other income, pretty consistent year-on-year. I'd really just draw your attention to the ECL number of €16 million. And although, it's not that large a charge, it does signify a change from prior years. We've been benefiting for the last number of years from a strong macro Irish environment, from the fact that there were write-backs coming through our P&L. But obviously, as our NPEs reduced quite significantly, the write-backs, no longer are going to be coming through the balance sheet. And going forward, we do see a more normalized environment, obviously, and we'll use cost of risk type metrics to define that number.
Obviously, exceptional items, €592 million for the year, largely driven by a €300 million provision for a tracker provision that we would have made recently. So there are the key financial income statements.
Net interest income and net interest margin. This is a really important slide, and there's quite a few moving parts on it. On a headline basis, our net interest margin would have reduced from 2.47% down to $2.37%, so obviously, a 10 basis point reduction. But I'd like to really just break this out into 2 separate pieces.
And on the left-hand side, we can see where the net interest margin drove net interest income erosion, so that's really the most important piece. In terms of customer deposits, we had an improving profile here. Deposits reduced from 0.41% to 0.28%. So that's very strong.
On the loan side, our asset pricing has remained very consistent and disciplined. And in fact, we saw an increase in loan yields -- in core loan yields, up 6 basis points. Then we look at some of the headwinds that we're facing from a net interest margin perspective. Structural hedge that we have in place to hedge some of our equity and reduce the impact of lower interest rates. That is reducing, and that had a 3 basis point NII and NIM reduction.
Cost of MREL issuance of 5 basis points. Obviously, throughout the year, we would have done over €2 billion of MREL issuance, very successfully completed transactions. But that would have had an erosion on net interest margin and net interest income of 5 basis points.
Investment security yields, reduction of 4 basis points. This is simply just fixed income investment securities that we've had from prior years at higher yields that are just maturing and running off the balance sheet and the impact in 2019 was 4 basis points. And then the introduction of IFRS 16 is a one-off item, and that was 2 basis points.
You can see here now on the right-hand side, where the main areas of net interest margin reduction have come from, and that's 7 basis points. It's from investment security volumes and excess liquidity. The point I'm really trying to make here is that, although, there is a net interest margin reduction, there is not net interest income reduction.
If I take, for example, the excess liquidity position. If it uses a proxy that €1 billion of excess euro surplus liquidity reduces net interest margin by 3 basis points, you can see the reduction over time on the net interest margin from that impact. But for example, we had over €6 billion of excess cash sitting with the ECB at the end of 2019, 2/3 of that would have had a 0 rate applied due to tiering. And the other 1/3, we would have applied negative deposit rates to a cohort of customers. So again, the €6 billion is really just grossing up the balance sheet and not having a net interest income eroding effect. So going forward, in the guidance -- in the forward guidance piece, I'll run through this a little bit more. But obviously, there is a distorting impact, and I'm going to keep separating that going forward.
Other income, very strong year-on-year. Fees and commission, up 3%. As we look forward, we think we will get more synergies from the Payzone acquisition that we completed in Q4. There's going to be a lot of synergies with respect to the products they have and that we can bring them to our customers. The outturn for the year at €619 million is, obviously, including some other items, €62 million for B and C notes, et cetera, et cetera, gains on investment securities of €45 million. We wouldn't expect that to be as strong going forward, but the core underlying business income will be greater than €500 million. And for other items, we think even on a look-forward basis, it should be at least €550 million.
Costs deserve a little bit of time to break down and described. So €1.5 billion cost of increase on the year by over 5%. A couple of different moving parts in there. Depreciation from investments has increased by €33 million. On the staff side, we can see that there is increase here from wage inflation. Also from the elevated cost of our NPE workout units, where we consciously decided to keep a larger team managing NPEs, so that we could get to a lower outturn and the hiking cost of regulation, I'd say, is an evergreen item.
Since we would have spoken at the half year, we've made some heavy inroads into our cost base. We've taken over 500 people out of the business in the second half of the year to leave the year at the FTE number of approximately 9,500 employees.
I'll break that out a little bit further on what our plans are for the future. Exceptional cost items for the year of €592 million are made up of restitution costs of €416 million. The largest part of that is, obviously, the recently announced provision for €300 million. A provision for regulatory fines of €78 million that incorporates a €35 million provision for the tracker enforcement process, plus an additional potential provision of another €35 million, making up €78 million overall.
We had termination costs of €48 million in 2019. Like I just mentioned, we would have -- on a voluntary basis, 500 people left the organization in the second half of the year, and the rough cost associated with that was €48 million.
We had loss of disposal of loan portfolios, €40 million. 2 large portfolio sales were executed throughout 2019. The net outturn for those on an exceptional basis was €40 million. But obviously, on a capital basis and on an RWA basis, these were capital accretive.
On the balance sheet, I think the best way to describe it is really -- is if I start on the liability side. And customer accounts increasing by €4.1 billion, debt securities in issue, obviously, increasing by €1.1 billion. So the increase on the liability side is now impacting the asset side as well, where you can see loans to central banks and banks has increased by €5.5 billion.
That's on our balance sheet, where you're seeing the impact of surplus liquidity coming through all of our core business lines, and then being placed with the ECB and other central banks, such as the Bank of England. So they are really the main moving parts on the balance sheet. But on the performing loans side, performing loans would have increased by €2 billion, which is up 3%. New lending was €12.3 billion in the year, which is quite similar to what we would have seen in 2018 as well. Gross performing loans, like I mentioned, up 3.4%. You can see here the breakout of the different asset classes which are performing, personal up, property up, mortgages up, corporate and SME up. So all performing loan areas in all of our markets are performing strongly.
If you look at the new lending statistics, again, we've broken out this by our main business pillars, retail, corporate and U.K. You can see, despite Brexit headwinds in the U.K., there has been a strong performance there. Colin will actually break out some of the activities that we're doing in the U.K.
In CIB, slight reduction year-on-year. We don't see increases in our energy business and our energy portfolio but some reductions in appetite in our international syndicated business. Personal lending, very strong, up 13% year-on-year, and that's an area of real focus for us going forward.
So NPE is a very positive story for AIB. 2013, 37% NPE ratio of €31 billion of nonperforming exposures. At the end of December 2018, we still at €6.1 billion of nonperforming exposures, and through a huge amount of work, effort and a multitude of different ways to manage through this, we've ended the year at €3.3 billion of nonperforming exposures, which is an NPE ratio of 5.4%.
So as I went on to described before, we have different strategy treatments for all of the different asset classes and customer cohorts. But really the way in which the reductions were achieved this year was through redemptions, which is just individual deals made with borrowers. Write-offs restructures. There's a whole host of activities in there when we restructure transactions and then they sit in waiting rooms. Flow in and out of NPEs. That's obviously going to become more of a feature as we enter a more normalized world, that's items going in from Stage 2 into Stage 3 and then reemerging from Stage 3 back up to Stage 2.
And obviously, the largest part of the NPE reduction comes from portfolio disposals of €1.8 billion, leaving us at €3.3 billion at year end. So we're really very, very pleased with that outturn.
NPE provision coverage. Overall, you can see, although, the reduction has been from GBP 6.1 billion down to €3.3 billion, the coverage levels have remained the same year-on-year. The asset classes underlying the NPEs is obviously changing quite a bit. The remaining underlying nonperforming exposures are predominantly mortgage in nature, so that's primary dwelling homes and buy-to-let type of exposures. And for that reason, I've really tried to break it out here in the middle segment to give you an idea of how those different asset classes are segregated between primary dwelling home and Buy-to-lets and the coverage levels that we have applied.
The collateral value here of €2.3 billion is a capped real estate value, just to give you a sense for the type of collateral, which is securing our lending, which really helps describe and get comfort around the coverage level.
Obviously, with a mortgage portfolio or any arrears, the time in arrears is a key indicator for the credit quality of the assets. Typically, when I look on the right-hand side here, I break this into 2 parts. On the right-hand side, now past due less than 90 days past due. Coverage levels on these mortgages will be far less because they are still customers that we are working with to try to reengage and restructure transactions.
On the left-hand side, it says greater than 180 days past due. There's large elements of that portfolio that could be multiple years with little or no engagement. So that is really the deep arrear part of the portfolio that we're really focused on because that's the part of the portfolio that attracts very negative calendar provisioning impacts.
Bottom right-hand side here, again, just to show you the impact over time of the loan-to-value and the collateral values associated with these different portfolios. So from 2016 to 2019, the LTVs have improved markedly. So say, 100%. There was, obviously, a lot of negative equity associated with this, down to much more normalized levels at the end of 2019 in and around 60%. So overall, provision coverage strong NPEs have significantly reduced.
Funding structure. Again, I would have talked about it this a little bit on balance sheet slides. On the wholesale side, you can see the increase here from the MREL issuance that we completed in 2019. 4 deals, €2.6 billion, all very much oversubscribed. Throughout the year, 2 of the rating agencies, Fitch and Moody's, would have upgraded us to investment grade, which now leaves us investment grade with all of the main rating agencies for all of our MREL HoldCo issuance debt, which should help and improve yields going forward as we do more issuance.
I would say, the more interesting part on the funding side is just to look at the breakout on the core deposit side. So I've broken it out here really between nonbank financial institutions, corporate and SME and retail.
Lending growth, you've seen running at around 2% or 3%. On the asset side, the strong macro environment is probably more -- we really see it on the liability side of the balance sheet, where 7% and 8% growth year-on-year from retail customers and SMEs as evidenced on the deposit side. So it's not negative overall from a risk perspective, but that does explain how and why you get from a loan-to-deposit ratio from 90% to 85%. And that is a trend that has -- we have been seeing since 2018, and I would expect to see for this year as well.
Capital ratios and RWAs. Obviously, throughout the year, we would have issued some more hybrid securities. Trying to fill our buckets for AT1 and Tier 2. €51.4 billion RWAs at the start of the year, finishing the year at €54.2 billioin, and that is incorporating the impact for €2.2 billion of the mortgage TRIM exercise.
Outside of that, there's some headwinds and there are some tailwinds, new business is obviously going to increase RWAs, particularly with the business mix we have towards corporate and SME, and as reductions in RWA is coming through from the NPE reduction strategy. In addition, throughout the year, we would have had a number of RWA efficiency programs. Looking at simple things like derivative netting, et cetera. And those items would have improved our RWA outturn by €600 million to €800 million, again, helping the year-end position.
So the walk for the year in terms of CET1 effectively started at 17.5%. Introduction of IFRS 16 of 20 basis points. Profit, take off intangibles and others exclude a dividend and ultimately, leaves us with a year-end position of 16.4%, which is slightly above our previously guided CET1 target of 16% or CET1 outturn of 16%, and that's obviously incorporating the effect and the impact of the €300 million provision. So it's 16.4%. And obviously, there's a small benefit that was due to accrue in the first quarter of 2020 from the previously disclosed NPE sale called order last year, which will have another benefit of around 20 basis points. So overall, very strong capital position, 16.4%.
Okay. I shall now hand it back to Colin to give you an overview of the '20 to '22 strategic refresh.
Thank you very much, indeed, Donal. In setting out our strategy for where we want to bring the bank over the course of the next 3 years. I suppose, it's good to take account of where the bank stands today. And this is, I think, a neat encapsulation of all the salient features of AIB at the start of 2020.
We are the leading banking franchise in this country with leading market shares across all of the key product areas, not least in the mortgage market, where we enjoyed a 31.4% market share in 2019.
We are, by a wide margin the digital leader in this country, with the number one Irish banking app, with 1.3 million of our customers choosing to engage with us using our mobile technology and 1.5 million of our customers choosing to engage with us using all our digital interfaces. We have a modern, resilient and flexible IT at stage today, and we have been a very early and committed supporter of the sustainability agenda. And it is on the strength of that bedrock that we are confident that the strategy we're outlining today will deliver on the new financial targets, the new ambitions that we have set for ourselves, a cost base of no more than €1.5 billion in 2022, a CET1 ratio ahead of 14%, and an RoTE of 8% -- of more than 8%.
So our strategy to simplify, to streamline and to strengthen is built on 5 pillars: Putting our customers first; simple and efficient; risk and capital; talent and culture; and sustainable communities, highlighting the importance that we ascribe to the environmental agenda, and also our commitment to be embedded in the communities that we serve, the length and breadth of this country.
In support of that strategy, we have rebuilt our structure. It's been simplified, and it's now focused on 3 key customer interfacing areas: our retail bank; our corporate institutional and business bank; and our operations in Britain and Northern Ireland. And those customer-facing areas are supported by our business and customer services teams, finance, risk, legal, corporate governance, HR and corporate affairs, strategy and sustainability. All of this being underpinned by an independent group internal audit function, which reports directly to the Board Audit Committee.
The retail bank is the heart of AIB. It is the largest single part of our balance sheet with €36.6 billion of loan book, more than 2.5 million customers. That loan book accounts for 59% of our gross loans, making an operating contribution of 54%. The largest and most important part of the retail bank, of course, is our homes business, where we are the number one mortgage provider in this country. As I said already, we had a 31.4% market share in 2019, and the good news is that we're off to a very, very solid start in January with our mortgage market share in the first month of this year standing at 33.5%.
That share is underpinned by a broad array of propositions delivered through our 3 channels: AIB, EBS and Haven. And it's a very, very clear reflection of the competitiveness of the product offering that we bring to our customers. We're increasingly digitizing our offering in this space, and 60% of our customers are now using our Express Mortgage Journey and also our new My Mortgage app.
We're the number one business bank in the country with a 43% share of current accounts, with a focus on sector sector specialism, delivered through the largest distribution network, the length and breadth of the island. And we've also seen the benefits of significant digital investment in this space, but there's more to come. We have now end-to-end online loans and overdrafts for sole traders, and we've seen a 35% growth in direct channel new lending.
In terms of day-to-day banking, we are the number one bank for personal, current accounts and loans. And we are, by a country mile, the leading digital bank in this country with 1.5 million interactions every single day on our mobile technology.
We've enhanced our existing capabilities in this space with the acquisition of Payzone, and we look forward to that, making a full contribution to the bank as it is integrated. And we've also launched a VoiceID biometric system in 2019, underpinning our commitment to ongoing innovation in the interest of our customers.
Within the corporate institutional and business banking, we provide a unique offering in this country in terms of the completeness and the comprehensiveness of our service offering in terms of delivering senior lending, mezz lending, advice and indeed in very selective cases, equity.
This part of the bank accounts for €16.2 billion of our loan book with more than 7,000 customers, 26% of gross loans and makes an operational contribution of 34%. Our business here is organized into 6 teams: Corporate banking, which caters for our customers with senior debt requirements in excess of €10 million; business banking, which looks after our customers with senior debt requirements between €1 million and €10 million; specialist team, multidisciplinary team within real estate finance, looking after both new development and existing CRE; a energy, climate action and infrastructure team which has seen loans in that area doubled in 2018, double in 2019, and it will remain the fastest single part -- fastest single growing part of our balance sheet over the course of the next 3 years. Within specialized finance, we have teams serving our private banking customers, sponsor finance, corporate finance and mezzanine. Within syndicated international finance, we have a strong track record, going back 20 years, of delivering a geographic and sectoral diversification to the bank, which would otherwise not be available.
Within the U.K., we've got GBP 7.8 billion of the loan book with 300,000 customers. It accounts for about 12% of the group's operation products. In Britain, we have a niche bank, very selective, focused on commercial and SME lending with a particular lean towards lending into the healthcare, renewable energy and infrastructure, hotels and leisure and property industries. That service is delivered through 14 business centers across the island of Britain, and we currently have a market share in the British market of about 1%.
In Northern Ireland, our bank is a challenger bank with a strong focus, again, on the business community. In 2019, we rebranded our operations in Northern Ireland from First Trust Bank. And we now have 1 single brand right the way across our businesses in Britain, Ireland and indeed in New York.
Our operations in Northern Ireland are delivered through 15 branches, and that's a marked reduction in the past 2 years. We've seen the number of branches in Northern Ireland halfing, and we remain very, very focused on cost efficiency in that very, very competitive marketplace.
In terms of the economic outlook, well, obviously, the Irish economy is performing very, very strongly in recent times. And the outturn has -- since -- in the recent years, comfortably exceeded expectations. We expect growth to remain positive. But it will be less buoyant than it has been in recent years. And I suppose that's not necessarily unsurprising, given how long the cycle has been and given the fact that we are, as evidenced by a very strong labor market performance, running out of spare capacity. Employment levels have reached -- have passed through their previous peak, and are now at all-time high, and the unemployment rate below -- remains below 5%.
In the housing market, we're looking at an ongoing recovery in terms of supply. And that gap that exists and has existed really since the crisis in terms of normalized demand and supply is narrowing, but we are some time away from equilibrium being restored to the housing market. That does underpin our expectations in relation to what we're going to see happening in the mortgage market in the next 3 years.
Business sentiment has been negatively impacted by Brexit. And I suspect that once we see the next set of readings in terms of both manufacturing and services, we will see a further dip, thanks to the recent arrival of the coronavirus phenomena.
But it is comforting to remember that the buoyancy we've seen in the economy in recent years has not been credit fueled. And in fact, we've seen an ongoing climb in deposits in both the household and corporate sectors. At the same time, that leverage within both sectors has fallen and fallen quite dramatically.
So we think we are at or close to the point of inflection in terms of overall leverage within the economy, and that will support our expectations for the future development of our balance sheet out to the end of 2022.
So that economic backdrop translates into our expectations for a total mortgage market size, growing from just less than €10 billion as it was at the end of 2019 to some €13 billion in 2022. We expect the SME business to grow from -- for the country as a whole, to grow from €3.5 billion to about €4 billion, and consumer lending to increase marginally from €5.6 billion to €6 billion.
When we apply our own expectations in terms of market share, that looks like an AIB retail loan book increasing from €36.6 billion to of the order of €38 billion in 3 years. I know that growth rate looks rather modest, but it's worth bearing in mind the fact that our FSG units and our NPEs are sitting within the retail book now. And the growth that we're expecting to see will be offset to some extent by planned further reductions in our nonperforming exposures.
The strongest growing part of the bank in the next 3 years in terms of the balance sheet will be the corporate institutional and business banking, largely underpinned by ongoing progress in meeting our commitments to be a driver of Ireland's transition to a lower carbon economy. And in Britain, we're expecting the the loan book to increase from just shy of €8 billion to some €9 billion.
So our strategy, as I said already, for the next 3 years involve the simplifying, streamlining and strengthening of the bank. But in setting out our strategy, I think it's really important that we also set out the challenges that the bank faces. We have ongoing challenges because of the overhang of legacy issues, in particular, NPEs and tracker mortgages. We have a product suite that is too complex and too numerous. We have an organization whose complexity is what you would expect from a bank of 25,000 people, which we were 10 years ago, rather than a bank of less than 8,000, which we will become in the next 3 years. And of course, we continue to deal with an evolving regulatory environment.
But we will meet those challenges head-on by -- through our pillars. We would have enhance our -- continue to enhance our customer propositions, and we will continue to drive the move to digital, not just for personal customers, but indeed, for our business customers as well. We will reduce the complexity of our business through automation and rationalization of our product suite. We will continue to address the legacy issues, build resilience and improve our data models, not simply for regulatory reasons, but because it leads to better credit risk decisions and better credit risk management. And we will invest in talent and implement cultural change across the organization with a particular focus on the accountability agenda. And finally, we will maintain our leadership on the sustainability agenda by embedding it within our business, and we will build on existing credentials. Those pillars will combine to deliver on our ambitions for 2022, the financial targets that I've already outlined, cost base, CET1 and ROTE.
So we have a very, very strong track record in relation to technological investment. We've invested wisely and well in a way which has transformed our business. And we haven't only invested in our systems, we haven't only invested in improved processes, we've invested in our products. And that is clearly manifest and seen in the way that our customers have chosen to change the way that they engage with us.
So if you go back to 2013, on an average day, we had just shy of 150,000 interactions over our mobile devices. In 2019, 6 years later, that 150,000 had become 1.5 million. So because of the quality, the functionality, the reliability of our mobile product, we've seen our customers fundamentally change the way they engage with us. They like it, it works, and it is a really, really important part of our franchise. We now have the number one Irish banking app. We have a 1.5 million customers who are active on a daily basis on our digital offerings. 75% of our personal loans are now applied for digitally, 63% of our key products are sold digitally. We've seen a 200% growth in our digital wallet transaction volumes and a 41% growth in all contactless transaction volumes.
The investment we've made to the end of 2019 has transformed the bank. It has consolidated our position as Ireland's leading digital bank. It has allowed us to make major platform replacements in business banking and payments and also within our treasury division. And this has all led to an enhanced customer experience. It hasn't in any way diminished customer experience, quite the contrary, with the -- our new end-to-end digital Mortgage Journey, attracting an NPS score from its users of plus 64%.
The lessons that we've learned in transforming the personal customer experience in the past 4 years, gives us a template for what we're going to do for business customers in the next 3 years. And we will simplify and automate our business credit processes. We will replace our corporate business lending platforms as we put in place a new end-to-end credit system for our business customers. And in so doing, we will drive the further relentless simplification of our bank in the interest of improving our customer experience, reducing risk and reducing cost.
Customers are at the very, very -- are the center of our concerns, and we do have an ambition to provide for the full range of their financial service needs. We do have an ambition to offer an improved product in the wealth and insurance space, and that's something that we will aim to do on a very planned gradual basis over the course of the next 3 years.
We expect, because of the quality of our technology, to see an ongoing migration onto the mobile platform. We've seen a very, very big increase in the past 3 years. And we expect in the medium to long term, more than 2 million of our customers to engage, primarily on a day-to-day basis for this -- through our mobile devices. And again, as I said, this is not going to lead to reduced customer experience, and it actually, we expect, will lead to an improved customer experience on a transaction basis with relationship NPSs for both personal and SME customers targeted to increase dramatically over the long term.
This should not, in any way, be seen as a subtle way of suggesting we're going to reduce our branch footprint. Our branches are a very, very important part of our franchise. We significantly reduced our footprint, our geographic -- our number of locations in 2012 and 2013. We significantly reduced the average headcount in each branch over the course of the past 5 or 6 years. If you go back 6 years, the average branch had 13 employees in it. Today, that number is of the order of 9. But the role of the branch in the communities that they serve will evolve over time, away from supporting day-to-day transactions and more towards sales and advice. By making the bank simpler and efficient, we reduce risk and we reduce cost at no cost in relation to the customer experience. We will continue to invest wisely in technology enablement, and we will increase the availability in digital formats of our sales and services.
Within the SME space, we expect to see a sea change in terms of how our customers engage with us. We are going to provide functionality that will allow origination, decisioning and fulfillment to be driven digitally over the course of the next 3 years. Across the entire state, we're going to double the amount of our products and services, which will be available over the mobile device. And we're also committed to significantly reducing the number of independent retail products with our own sets of terms and conditions. We're committed to reducing that by about 1/3 in the next 3 years with further reductions planned beyond that part.
This isn't going to, in any way, reduce customer choice. It's going to reduce customer complexity and operational risk for the business as a whole. And taken that drive towards increased efficiency and increased simplicity, the reliance on an ever and greater role for the digital agenda, we expect to see our headcount falling from the 9,500 level it was at the end of 2019 to less than 8,000 at the end of 2022, with half of that reduction being driven by the resolution of legacy issues and half are coming from increased efficiency in how we run our business.
A strong balance sheet is at the -- is the essence of the bank, and we will do everything within our power to maintain the strength of the AIB group balance sheet. We've been very focused on reducing our NPEs. As Donal has already said, they stood at 37% of our gross loans in 2013, and they stood at 5.4% of our gross loans at the end of 2019, and we will continue to address this issue with a view to reducing our NPEs as a percentage of gross loans below 3% by the end of the planning period.
So in a reasonably short period of time, we will have transformed our balance sheet from one of the weakest in the European Union to one of the very, very strongest. And we will continue to focus on the quality of our credit management and the quality of credit risk decisions. I'm delighted that in 2019, 98% of the new loans we put on to the balance sheet were graded strong or satisfactory. And the strength of the lending we have made and the quality of the reductions in NPEs have combined to see the proportion of the group's overall balance sheet, which is characterized as group's overall loan book, which is characterized as strong or satisfactory, moving from 83% to 89%. And we are determined to continue to drive that category north over the years that lie ahead of us.
Notwithstanding the significant investment we've made in technology, our core assets is still our people, and that will remain the case. Because we want to push an evermore open and transparent culture and enhanced accountability at the core of our mission, and they are objectives that could only be delivered by our people. We want to be an employer of choice. We want to be a progressive institution characterized by a diverse and inclusive and streamlined organization. Already, we've made good progress on those fronts, reducing the number of layers within the organization from 10 to 7, with 94 separate job codes no longer relevant within the organization.
At the same time, we've delivered gender balance at both non-executive level and at senior management level, and we look forward to making further progress in terms of our employee engagement over the course of the next number of years.
And finally, on the sustainability agenda. This is the greatest challenge that's our generation faces. And we will not be in a position to arrest and reverse the terrifying phenomenon that is global warming, and this is a concerted effort by governments, businesses and individuals working together to address this major, major challenge.
At AIB, we have a major role to play, not only as a significant employer in our own right, significant business in our own right, but also as a provider of capital to customers, business and personal who are eager to assist in Ireland's transition to a lower carbon economy. We have a major role to play, and we are willing, ready and able to play that role. A role -- and we have demonstrated that willingness through the products we've launched in 2019, our new green mortgage, our green bond framework, our €5 billion climate action fund. And these are not merely aspirations. We're putting our money where our mouth is. €1.2 billion in green lending in 2019, the fastest-growing part of the balance sheet, renewable energy, and that is something we expect to remain a feature of the business landscape and the AIB landscape over the course of the next 3 years.
So AIB in 2022. How will the successful implementation of this strategy manifest itself? A strong, robust and resilient balance sheet amongst the best in the European Union, delivering sustainable profits, generating and returning capital to our shareholders, delivering an excellent customer experience to both personal and business customers with competitive products and highly efficient processes. A streamlined appropriate cost base for a leaner, simpler and more agile business, a de-risked bank with NPEs resolved and legacy issues resolved, and that will position us to deal with whatever challenges and whatever opportunities lie ahead. So in 2022, AIB group will be a bank transformed, simplified, streamlined and strengthened in the interest of all our customers, our shareholders and the communities we're proud to serve.
Okay. Thank you very much, Colin. I'm now going to bring you on to the last piece of the overview, which is the financial targets for 2020 to 2022.
The medium-term targets that we have set ourselves for the coming 3 years are threefold: firstly, a hard cost target of €1.5 billion; secondly, a CET1 ratio of greater than 14%; and thirdly, is an ROTE of greater than 8%.
To guide you along the way and ensure that both the bank management and investors are on the same page. On an annual basis, I will define a set of metrics, whereby I will guide you quite clearly. The 5 items that I've chosen here, obviously, through debate and discussions with analyst community and investors, are the ones that we feel are the most relevant.
So firstly, a net interest income guidance of €2 billion for 2020. I feel that's a much more appropriate and clearer measure than trying to give you a net interest margin number, which has a lot of that distortionary effect from excess liquidity. Cost inflation target, circa 2% to 3%. We're obviously going to work very hard to manage the cost base as tightly as we can. And it looks like for 2020, we will rise it marginally and then reduce more significantly as the plan evolves. Normalized cost of risk of 20 to 30 basis points. I would have alluded to this earlier with respect to the charge that we had in the 2019, whereby we would expect to see charges coming through on an annual basis, so 20 to 30 basis points and probably at the upper end of that range. Performing loans to grow by low single-digit percentage points. Colin would have given a very detailed overview of our core markets, what we see happening with them and our market share assumptions.
So you can see quite clearly that these are both expectations, which are aligned with how we see the overall economy but very manageable and in line with what we would have seen over the last number of years.
Again, Colin would have mentioned, by 2022, we want to reduce our NPEs to less than 3%. So for 2020, we will be looking to reduce them under 4% as a starting point.
So operating expenses, this is one of the -- this is probably the key medium-term target, so we want to use a higher cost number of €1.5 billion. And the way that this is going to break out over time will be with respect to staff costs, firstly. Over the 3-year period, we believe that, that we will be managing down the cost base by around 1,500. And that will be on a fairly linear fashion from 2021 and 22, very much in line with the changes that we would have made in half 2 2019.
And if I was to break out the areas -- Colin would have alluded to at a high level, some of its legacy and some of its efficiency. To be more precise, 750 of the reductions, we will -- believe, will come from legacy units, such as the NPE workers units, such as the mortgage trackage -- mortgage tracker examination unit. 500 FTE reductions, we believe, will come from business process improvements. Colin would have mentioned that one of the main areas that we're going to focus on from a technology investment and customer perspective will be in the SME and the business segment. We think by bringing our expertise and technology investment to bear, we can improve the efficiency, improve the experience for customers. And ultimately, that's going to have an impact on reducing the manual bodies that are associated with a lot of that work. And lastly, 250 FTE reductions from digitalization. That just as more of our customers engage with us online, less and less on a physical basis, we will naturally see reductions in the headcount over the next 3 years.
Against this, we obviously have salary inflation, which we always approximate, to be around 3%. And just to be clear, there will be costs associated with these staff reductions. If we use 2019 as a reasonable proxy, whereby 500 people would have left the firm on a voluntary basis, that cost around €48 million, €50 million. So we believe on a worst-case basis over the next 3 years, that could cost us €150 million. What I'm saying here, it's going to be between €100 million and €150 million. There is -- there are -- there's attrition, there are ways in which we can manage headcount without always having to offer voluntary severance. But they are the boundaries that I would guide you for between '20 and '22. Those costs will be viewed as exceptional, so they're not going to come through the cost line.
Overall, G&A, a reduction of €15 million over the life of the plan, that's an area where I think we can make some more efficiencies in the future. But the focus really was on the headcounts and the investment for now, and we will be able to come back and update you overall with any further initiatives in this space.
So the way we look at these is our cash cost, okay? These are staff costs, these are G&A combined together over the next 3 years, we'll see a reduction of €105 million between these items. Separately, and on the left-hand side, you can see how I look at the depreciation and the investment spend of the organization. I take out the IFRS 16 impact of €58 million. So 2019, the depreciation cost is €171 million. That's going to increase over the period of the plan from €171 million, up to approximately €270 million. So an increase of €100 million which is from prior year's investment spend but also the amount of investment that we feel we need to make in the business to ensure that we can maintain our market-leading position in the digital area and ensure that we're able to take -- make process improvements to facilitate the cost reduction targets.
I'm going to break this one out a little bit more on the investment side. So Colin would have give lots of very strong statistics over AIB's market-leading position in digital banking, et cetera, et cetera, and that's certainly very good news. The bad news is that we have to pay for it. I would say, particularly on the platform side, the app side, the key message I would give is that a lot of the change has happened. It has been done. It's been implemented. There is no execution risk. This is me showing you on a look forward basis, how we're going to represent the costs.
So I'm going to -- on a go-forward basis, break this out into 5 separate areas. Strategic, we would classify as items that help us generate more revenue or take out more costs. Going forward, this is going to be a key area of investment to ensure that we can maintain our market-leading positions.
Resilience. What we mean by this is the underlying platforms in the organization. We would have replaced our payments platform over the last number of years. We would have replaced our treasury system over the last number of years. These are very big investments on which no bank can really look to expand, and we feel like we have done the largest part of the work in that area. Colin mentioned that a lot of the work that was done in the retail personal space, we're now going to look to improve our processes on the business area, and so that's going to be the next area of focus for the organization.
Sustainment is a consistent cost of our overall spend. It's wonderful having new technology and new IT and new kit, but a lot of these IT companies are wonderful, have given us upgrades and so all of those wonderful things that we need to continue to pay for. But obviously, it's very important to ensure that we have resilience in our systems, and we obviously always have an ongoing investment in cyber type of activities.
Regulatory. I put 1 line in there, I had a whole slide on it. And some of the work that we've done over the last number of years in the regulatory space has been really significant. I think, Colin would have mentioned, sort of stats -- statistics around where AIB sits in the payment system or ecosystem in Ireland. I mean, we have processed approximately 50% of payments. Along with that, and our customer profile, implementation of things like PSD2, open banking have been really, really significant projet investments for the organization.
In addition, we don't have things coming down the track, such as IBOR. So we don't believe that the regulatory spend is something as we look forward, that is likely to reduce significantly because there's always new items. On top of that, when we have business model assessment reviews with the regulator, there's a lot of adjustments, amendments, things that we need to improve to keep -- to manage our relationship with the regulator, but ultimately, to try to drive down our P2R.
Property. Again, this is probably the new item into this overall picture. Throughout 2018 and 2019, as you know, we would have materially changed our physical footprint, particularly in the Dublin region. We would have been all located in one area in Bank Center, in Ballsbridge. Now we have a number of large properties throughout Dublin in different parts of the county, which does facilitate flexible working hours, which does facilitate more collaboration amongst employees.
Obviously, you would have seen in prior years some of those expenses being exceptionalized. They were with respect to onerous leases and such items. But as we moved into some of the new properties, 2 or 3 of the main ones, there's obviously fixtures and fittings associated that go along with that, which are -- I'm including here in the depreciation picture, so you got a complete overview.
Lastly, another item, which is incorporated in here and that needs to be taken into account is when we purchased Payzone, part of the way we've accounted for it as we were depreciating an intangible asset of €50 million, so that's an additional €10 million onto the depreciation number, which is included in that €270 million number that I gave you for the end of 2022.
So that's the picture on the investment spend. Our capital target of 14%. The way that we've looked at this is we have looked at the environment at the moment and all of the buffers that we currently know about. So obviously, Pillar 1, P2R, capital conservation buffer, O-SII, countercyclical buffer and phased them in over time on the timelines with what we know and expect.
So by 2021, with all non buffers, that gives you 12.6%. We don't disclose our P2G, but effectively P2G plus management buffer would lead us to a CET1 target of greater than 14%, and we're very comfortable with that. Outside of that, there are headwinds as ever and there are tailwinds.
TRIM. So we've concluded the mortgage TRIM. We have yet to conclude and incorporate impacts from corporate and SME and that's going to happen over 2020 and 2021.
Buffers. We believe we have captured all known current buffers. However, it does seem likely that the Central Bank of Ireland will utilize and implement a systemic risk buffer, or certainly, they have asked the Minister for Finance in Ireland for permission to introduce a buffer such as this. We do not know it's timing, we do not know how it interacts with other buffers, we do not even know if it will be implemented, but it is certainly an item that I think we'll get clarity on throughout 2020.
Basel IV. Typically, we would have talked about this, and we would have updated you that from a credit perspective. We don't believe there could be any material downside, just given where our RWA density is at the moment, and that is what gives us the comfort. And the only question we may have is around any potential multiplier that could be applied to operational risk. That isn't going to come into effect until 2022 in any case. But we would hope throughout 2020 to get a little bit more visibility on that.
Calendar provisioning, again, a hot topic throughout 2018 and 2019. Last guidance that I would have given on this is, it was an early estimate to say that the 2020 impact of calendar provisioning would be less than 50 basis points. And given the update, that Collin just gave you there, on the trajectory for our nonperforming exposures, on our targeting of deep arrears exposures and the endpoints that we want to reach of less than 3%, I'd be happy enough to say that calendar provisioning impact will be less than 50 basis points over the period of the plan.
In terms of tailwinds, P2R reduction year-on-year of 15 basis points. We continue to focus in all areas of engagement with the regulator. NPEs is obviously a huge area of focus over the last number of years. As I look to the future, it seems that IRB modeling is going to be a large theme for them, that's obviously a huge focus area for us. And associated with that is data, data management, et cetera, that all lives in the same family. We're putting a lot of effort, time and investment into areas of improvements so that we can drive down this P2R.
Other tailwinds, Article 104, how to fill P2R with AT1 and Tier 2. Again, it's a thematic euro item at the moment. We'll wait and see exactly how this concludes with respect to the regulators. And then RWA efficiencies. We're always internally working on ways that we can improve efficiencies around RWAs. So an example I gave earlier was a simple one around derivatives netting, which had a positive benefit €600 million or €800 million.
There are other areas in our balance sheet where we think we can find ongoing efficiencies. And as we move to a more normalized capital structure and capital base, we do want to become more efficient with our capital, and we will look to introduce more securitization type of products, more likely to be in 2021 or 2022. And I mean SRT type trades to optimize our capital number.
So overall, that is the capital picture and the capital targets. With respect to capital returns, this is clearly a very important slide. So important that I have copy and paste the wording from our RNS and repeated it here. The way I think about this is twofold -- and certainly, the way you need to think about this is going to be similar. We have an ordinary dividend payout ratio of attributable profit of 40% to 60%, okay? So with respect to balance sheet growth, guidance, et cetera, et cetera, what I'm trying to do here is from a normal business as usual activity provide very clear guidance on where we will set our annual dividends.
Separate to that is the question of surplus capital or excess capital, et cetera, et cetera. We have a CET1 outturn of 16.4%, arguably, 16.6%, if I include the benefit from the NPE sale. So the question is clearly, how does one look at a 16.6% CET1 ratio and a target of 14%?
With respect to additional distribution, what I would say is that we intend to apply for regulatory approval to make an additional capital distribution as soon as possible, ideally this year. This will be the first step of a multi year program, where we will look to converge on our capital targets. This will be subject to regulatory approvals, and we'll maintain flexibility on the form of any additional distributions.
So I think this is as clear as we can make it. And certainly, I think our intentions are the key item here, converge on capital targets and the fact that we believe this will be the first step of a multiyear program.
Okay. I'm going to wrap it up there. Simplified, streamlined, strengthened that was certainly the theme of Colin's presentation. From my perspective, the key items of focus are going to be: costs, €1.5 billion; CET, greater than 14%; driving returns greater than 8%. That's what we're going to look to.
Thank you very much.
A - Colin Hunt
Thank you very much, indeed, Donal. Now we're going to have the Q&A session. I think we have up to 55 minutes available to us. So plenty of time for questions and answers. And the first man with his hand in the air is Eamonn.
It's Eamonn Hughes from Goodbody. Two or three, if you don't mind, just in relation to the targets. Maybe Donal, in relation to -- you kind of gave guidance there for 2020. How should we maybe think around the impairment number and some of the MREL targets as we move into '21 and '22. And so specifically, also thinking about -- you've kind of talked about NII of €2 billion, how should we think about that progressing over the next year or 2? And maybe any context around -- I know you kind of restrain or pull away for NIM as kind of total liquidity point. But is there anything else you would say on that? And then maybe just delving into the NII point as well. Looking at asset yields, they were up, I think you said 6 bps. Just is that mostly a mix issue? Or what are you seeing in terms of pricing on some products? And maybe on the liability side, given all the discussion and as was the tightness in swap rates we've seen over the last while. What more potentially are you doing in relation to customers on the deposit side in terms of negative rates?
Okay. Thank you very Eamonn. The 20 to 30 basis points cost of risk, if I look at our balance sheet growth in 2019, the underlying cost of risk was approximately 20 basis points on new lending, new assets. So that really is the core underlying. Against that, we've obviously got a number of write-backs, which has been a feature of our balance sheet over the last number of years. Notoriously hard to predict quite frankly, but just due to the fact that the quantum of NPEs has now reduced so materially, we have a -- we don't have a very high expectation that, that write-backs could be as high as in the past. So that gets us to a similar level of 20 basis points on balance sheet. And the reason I'm guiding for 20 to 30 basis points and at the higher end of that range is just -- it's -- there's no particular single assets or event that is driving that. It's just it's management's view that give -- where we are in the cycle, where we are in the environment, that is our best estimate of what we see how it's going to be. So that was question one. Question two, I think despite the fact that I gave you an NII target. You really want to drag me back and talk about NIM, but I'm not going to do it. So the net interest income number for 2020 at €2 billion. If you look at what happened and the moving parts in 2019. That will -- and I'll talk to it in terms of that because that will help you understand what '20 is going to look like. We had benefits on the customer yield side in 2019, largely driven by business mix. You would have seen increases in our personal lending, which is higher rate business. Corporate SME was quite strong as well. So overall, yields in our core market would have held up very well.
But as I look to 2020 overall on asset yields, I don't believe that we're going to be able to increase pricing across the board. I think asset pricing would hold in core markets, but obviously, on the mortgage side, recently, we would've announced a number of costs, so that will have a small impact. On the deposit side, you're right to say that the amount is now quite low, it's 0.41% to 0.28%. But an enduring negative rate environment means that we will need to continue pushing that number down, and we will continue to reduce deposit pricing on all products. And in fact, if we -- I think I might have mentioned when I was describing the surplus liquidity. The way in which we look at applying negative deposit pricing to customer over the last number of years, we've segmented client groups from top to bottom, starting with nonbank financial institutions. And obviously, at the bottom of the waterfall, you might see smaller retail customers. As the negative rate environment has prolonged, and it looks like it will endure, we have enabled ourselves and our platforms to be able to apply more negative rates to different cohorts of customers. So to date, it's really just been nonbank financial institution customers and large corporates. But we will obviously look to apply negative rates to other large businesses and high net worth individuals over the coming years.
Other items, I would say, on net interest income. A 2019 impact, 5 basis points of MREL. I don't think you're going to see that again in 2020 because the issuance is done. IFRS 16 won't really be an issue. So I'd say for '20 and beyond, the 2 pieces of the jigsaw that you need to understand is probably the structural hedge. And what I'd say on that is that approximately 6% of NII in 2019 came from the structural hedge, and I would expect that to reduce to 3% over the life of the plan to 2022, I should fill that in for you nicely.
And secondly, on the investment security side, the reduction in 2019 was approximately 4 basis points. What I say on available for sale is that was approximately 9% of NII in 2019. And I would expect that to fall to approximately 6% in 2022. So you can clearly see what the headwinds are going to be there from a structural hedge available for sale, and the ways in which we're going to be able to counteract that is definitely on the deposit pricing side and maintaining discipline on the asset side.
Okay. Thank you. Steve?
Stephen Lyons from Davy. Just a few questions for me. Firstly, just in terms of the NII outlook. Just to confirm what your interest rate expectations, market interest rate expectation that is built into that given expectations for an ECB cost. And furthermore, just on NPL reduction. Appreciate the guidance there. Would it still be your expectation that you can reduce NPLs within current capital, i.e., neutral to possibly capital accretive as you work through that effort? And then just finally, I appreciate the -- or the added clarity you gave on capital return. But prudently, how should we look about it over the next few years of that multiyear program? Should total payout based on attributable profit at €100 million be maybe an upper limit of what should we consider? Or is there opportunities going in excess of that?
So I'll ask Donal to take question 1 and 3 of your set and I'll do 2, but Donal to kick off first.
Okay. Well, on the rates, always a bit of a moving feat in these times. Over for 2020, we would have you -- we would have assumed a negative 50 and associated Euribors. On the euro side, I would have assumed a small cut in the U.K., for example, that's for planning purposes there. On the capital side, what I would say to you is not to create your own methodology for defining what I would have outlined, okay? It's better than 2, ordinary, okay, work off consensus, work off guidance that will drive you to a dividend payout percentage.
On the capital distribution side, we'll apply for approval as soon as possible, ideally this year. It will be the first step of a multiyear program, where we look to converge on our capital target and that's how we're going to approach it.
Okay. In relation to the NPEs, we have -- well, good effort, well done. In relation to the NPEs, you know our track record. We are now within shouting distance of where we want to bring our NPEs to. And we've a an ambition to reduce them from 5.4% to 4% -- less than 4% this year, and then down towards less than 3% at the end of 2022. The vast bulk of the reductions to date have been driven by agreed restructurings with our customers, that's our preferred means of reducing our NPEs. But we don't rule the option out. And in the event that we have further portfolio loan sales, it is worth recalling that the loan sales we've had to date have all been, at worst, neutral from a capital perspective, and we would envisage no change in that scenario in the event that we have for the loan sales.
Ryan McGrath, Cantor Fitzgerald. Just one on the impairments, and looking forward to this year. Maybe in the short term, is there a risk of an impairment spike just on a decrease in domestic economic growth linked to the coronavirus? Also, you mentioned the syndicated international lending and that was at lower levels last year. Any reason behind that? And should we expect a rebound? And finally, if I could, rating agency upgrades in 2019, which are always welcome. S&P upgraded the sovereign in late last year. And any thoughts of further rating actions as we go into 2020?
I'll do 1 and 2, and you can do 3. So on the impairments, the -- we are monitoring the coronavirus situation very, very closely. We're in touch with our customers. We're in touch with our suppliers. Our number one priority is to ensure the safety and health of our staff and our customers. And in the event that it does unfold as it has in other countries. It is likely to have a near-term negative impact on a number of sectors across the economy. Most obviously, the hospitality sector. It is too early to quantify what that impact will be in the near term. But I would -- I suppose, our position on this is that we've been working really hard in the past 3 years to prepare for a hard Brexit situation. So we're continuously planning along of all scenarios on hard Brexit really since the middle of 2017 and some of the products we developed, some of the protocols we developed there are now being applied in contingency planning for how coronavirus might impact on the economy. The bottom line on this is that the bank is very, very well capitalized. We have a really, really strong balance sheet, which is in mar contrast to the position we were in the last time the country went into an economic dip. So we stand ready to support our customers through the cycle.
I would just add in addition to that, I mean, the way in which we approach IFRS 9 from a macro perspective, we've applied pre any of this a 40% downside in our probability waivings, which were already reflective of a global macro environment with some trade tensions, et cetera, et cetera. And so we're probably comfortable with that position. I wouldn't see any particular reason to change. But I think we are in an unusual territory at the moment, so it's always under review.
With respect to rating agencies, we've put a huge amount of time and effort in to get to the IG level with the 3 main rating agencies. Rationale there, number one, I think, is validation for the organization around normalized bank, normalized balance sheet. More selfishly, we're able to issue tighter levels with the 3 IG ratings. We don't -- we haven't planned for any upgrades in the coming years. We will obviously continue to engage, some of it will be related to Irish macro events. But we're not planning and we don't -- nor do we expect any upgrades in the near future. Obviously, given a lot of the focus of the bank for the growth areas on sustainability, et cetera, going forward, we are looking to improve our ratings with the SG type of agencies. I think Colin would have mentioned that we put a green bond framework in place. So this is going to be pretty thematic for AIB going forward on the asset side and the liability side as well.
And sorry, just in relation to your question on syndicated international finance, as I said earlier, this is a business we've been active in for 20 years. We have a really strong track record of delivering value to the cycle there. The lower activity we saw in 2019 was the result of very, very deliberate choices based on asset quality and pricing. And given that the floor seems to be silent, I think we'll go to the phone lines. You may identify yourself freely now.
[Operator Instructions] Our first is from Raul Sinha.
It's Raul here from JPMorgan. I've got a couple, please. Just the first one is trying to a get more medium-term sense of your cost and cost efficiency targets. If I look at where you end up on the revenue and on your absolute cost guidance, that obviously implies the cost-to-income ratio towards the sort of high 50s, almost up to the 60% level. I was just trying to get a bit more thoughts from you about whether this is sort of the new normal for AIB, or do you think that there is hope for you to bring it back from that kind of level in the future?
Obviously, I do realize that your cost base is going to be declining on an absolute basis from '21 to '22 as well. So just some color on what you think about the right efficiency ratio for AIB in the long-term would be helpful. And then the second one, maybe a bit more detail on the RWA moving parts. If I try and estimate the RWA base for the bank in 2022, there are a wide range of moving parts in there. And obviously, that feeds into your RoTE sort of target as well. So I was wondering if you could help us a little bit in terms of what are the moving parts, the main moving parts we need to keep in mind. It looks to me like the RWA number could be higher than where we are for 2022. But if you confirm that, that would be helpful.
Okay. Thanks, Raul. Donal?
Okay. With respect to costs, I just -- again, similar to NIM, I've really wanted to move away from a cost-to-income ratio. And the reason for that is the income in the current environment being so heavily impacted by rates, obviously, plays into that. So the rationale of really breaking out the costs on a single stand-alone hard number was to ensure that there was absolute clarity, a, with respect to ourselves internally, but more importantly, for the external commentators such as yourself to understand that. The speed and timing of the reductions, it is, I think, we look at it twofold, and that's very similar to how I would have broken it out. The reduction in headcount will be fairly linear over from '19, '20, '21 and '22. So I think you can -- you should be able to model that fairly clearly.
Overall, from, call it, Q1 of 2019 to the end of '22, that's 15% to 20% of the headcount in the organization. We don't see any changes beyond that level. Colin would have said that the footprint across the country with respect to the branch network is strong, stable and very front and center in our plans, so that is not an area where we would look to flex. So I think you need to be looking at the €1.5 billion, certainly for '20 to '22 as a very realistic number. And where we go beyond that, it will be driven, I would expect, by lots of events, such as digitization, society take-up of mobile applications, which quite frankly, I wouldn't want to hazard a guess to see how they're going to play out in the future.
But I think what will help you is with respect to the depreciation charge that I've guided for 2022 of €270 million. It effectively plateaus at 2022. And it isn't until further years that it begins to decline, but I'm sure there'll be continual reinvestments. But the point there is that, that depreciation number does not rise beyond 2022. So that is the cost side.
In terms of RWAs, I think Colin gave a very good overview of the main markets where we operate, the market share expectations. So you can see from that, the different mix of assets, whereby we intend to grow. So although we will see growth in the mortgage market, we'll also see reductions on a net basis from NPEs, et cetera, et cetera. So you can expect to see going forward, RWA growth from the business mix and the type of assets that we're lending into but in line with annual growth targets, which is low single digits which will happen over time.
Okay. Thank you. There was another -- go back to the lines again for another question there.
Our next question is from Aman Rakkar from Barclays.
Thanks for the detail on the impact from structural hedge and the liquidity portfolio. Can I ask you just for a little bit more disclosure on that hedge, please? In terms of the absolute size of that hedge and what the average yield on it is and the duration, please? Because I guess the reason I'm asking is we've seen a pretty precipitous fall in kind of 5- and 7-year swap rates. So it'd be really interesting just to kind of benchmark kind of what your expectation for those swap rates were when you gave that impact, and we can kind of compare it to where the swap rate is now. And the second question was just regarding kind of capital return. I don't know if I'm kind of overanalyzing this, actually. But do I sense -- is there a somewhat of a delay in your expectations regarding getting approval from the ECB regarding commencing special distributions. I think that the conversation of the narrative before is this might have been something that we could potentially expect to get sign off on -- during H1, and we may even be in a position to commence special distributions in H1 2020. I guess another way to ask that is do you think you could pay a special dividend with half year results based on this year?
Okay. Thank you for that. You won't be surprised that Donal is going to take the structural hedge, and I'm going to have a go at the capital return issue. Donal?
It's over there, yes. Okay. Yes, on the structural hedge, so you have the income effect, okay, 6% and 3%, which really is €120 million down to €60 million. What I would say on the nominal of the hedge, it's approximately €8 billion, average life is approximately 5 years. The key point there is I've given you the outcome, okay? So I've probably done a lot of the heavy lifting for you. Over the last 12 to 18 months, as midterm rates have reduced, we have not continued to roll our structural hedge, okay? And the reason for that is just because I don't want to lock the balance sheet in on a 5-, 10-year basis to prolong with negative rates. So it isn't within the guidance that I gave you there, that is effectively the existing swaps running down over the next 3 years. So you should get comfort from, I would say, the percentage of NII.
Okay. And on capital return, how will I put this? We intend to apply for regulatory approval to make an additional capital distribution as soon as possible, ideally this year, as a first step in what we envisage would be a multiyear program to converge on the group's capital target. We have another question on the line. Alastair?
Three small ones, please. The dividend last year was outside of the 40% to 60% range. But clearly, there's a lot of one-offs last year, but I don't quite understand that one. Second, the 80% capitalization of your investment spend, that's awful high, it's going through quite a shift. I'd say that was the issue of 2019. Presumably, that puts an upward drag on your costs post-2022, just to check whether that's the case. And thirdly, if you could just walk us through your mortgage pricing a little? Your NII guidance for this year is somewhat below consensus and mortgage prices are clearly a key component of that. Being a price leader, isn't the obvious thing from the outside for you is to be doing it at this point? So just to understand your pricing strategy versus total revenues.
Okay. I think on the ordinary dividend payout ratio, this is for 2020 going forward. We've tried to be absolutely crystal clear, 40% to 60% of attributable earnings. Obviously, if we look at 2019, depending on the methodology that you want to use, it's slightly different than that, but it's very much in line with 40% to 60% of profit after tax. So that was always the range of discussions that we would have discussed at the board. But really, what I'm trying to do for the future is to make and create absolute clarity and consistency between our dividend payout assumptions, RoTE, calix, et cetera. So that's the dividend question.
On the capital investment question, really, what I've tried to ensure is that by breaking out all of the different components of capital expenditure, including non-IT platform-related items, such as property investment, such as depreciation of Payzone acquisition, I'm trying to create as complete a picture as possible for the outward years '20 to '22. And I don't believe with the trajectory that we have -- with the existing intangibles we have, which are going to be paid for over the next number of years and actually, the future year's investment spend of €300 million added €270 million, but 2022 should be the maximum amount, we believe, on an annual basis we'll be paying out from a depreciation perspective.
Last question was on non-interest income, but I think you were really asking about mortgage pricing. So I'll pass that one back to you.
Yes. We -- this is a competitive market. This is a very, very important part of our balance sheet. We keep our pricing under constant review. We've made some adjustments in the past number of weeks, and we are now very, very happy with where our pricing levels are in the marketplace. We think it's a very, very strong proposition, not only on price, but in terms of speed of delivery, and we're very, very happy with where we currently stand.
Another question from the phones or are we done?
We have another question, sir. It's from the line of Chris Cant from Autonomous.
If I could ask about your investment spending, please, the €300 million per annum, of which you're going to capitalize 80%. How much intangible asset growth do you expect off the back of that? Given where you're starting from in terms of amortization in 2019, it looks like you've probably got about €300 million to €350 million of CET1 drag over the plan in absolute terms from net growth in intangibles. And there's a point of detail related to that, why are you not deducting all of your intangible asset balance from your capital position at the year-end? You've got €917 million on balance sheet, and €798 million in the capital schedule as the deduction. I think in previous years, those 2 numbers have been the same. And then a separate point, please. On DTA utilization, obviously, you've changed the definition of the returns for your target. But in the past, you've talked to us about DTA utilization as being a key part of your capital generation, also of return to shareholders longer term. What's your expectation now on the pace of DTA utilization going forward, please?
Okay. With respect to the investment spend overall than the outlook that I've given you for '22 would incorporate all of the existing spend, which has been made to date across all types of areas that have -- that create our intangible assets. And the number of -- from '20 to '22 and the associated depreciation incorporates all of those amounts, different assets and different platforms, obviously, have different profiles. What I tried to give you by giving 80% capitalization and 20% revenue impact is really an average number for it to try to help you model that out over the life of the plan. And that was the question on the investment side. The intangibles do get do get amortized through the capital on an annual basis for an amount. I think that's a fairly detailed question. And I guess I'll give you a call on that one later.
With respect to tax, again, I would say, in 2018, AIB's effective tax rate was around 12.5%. For 2019, it was much higher at 27% or 28%. And going forward, I would -- I think you should use an effective tax rate of around 15%. The performance and the -- that the tax rate in 2019 was impacted by a few moving parts. The exceptional items, obviously, would have impacted the profitability of AIB plc. So the utilization of the deferred tax asset would be far less in the year of 2019. Profits in the U.K. were a little bit stronger. So we have a little bit more bias to the U.K. and the tax line was, in fact, impacted by a write-down of the U.K. deferred tax asset of approximately €25 million.
Going forward, in terms of DTA utilization, I think for 2018, the utilization of the DTA was approximately 70%. I think going forward, you should use a DTA utilization rate of approximately 50% over the medium-term and out for the rest of the plan. I think with respect to your commentary on intangibles is the difference that you saw pre and post was probably related to the Payzone acquisition, but I definitely won't get into that in too much detail now. Happy to call you on it later.
Okay. Thank you. We have a question now from Exane I understand on the line.
So just a couple of quick questions from me. Firstly, just going back on the capital return. My sense is that over recent years, the ECB has been quite cautious about allowing excess capital return across the sector. Now that may or may not change going forward. And I think without a doubt, they will consider each case individually. But within that context and from your discussions that you've had with them today, what do you think are some of the regulators' key concerns or things that they would want to think about around capital distribution before they allow it? So whether that is Brexit negotiations being finalized, the regulatory landscape still being in transition, economic uncertainty, what are the key things that you think the regulator is concerned about when they think about AIB's excess capital return for this year or going forward?
Secondly, just going back on the impact of Basel IV. As you rightly pointed out, you previously indicated that there would be relatively immaterial impact from Basel IV. I think it sounds like the difference now was around the operational risk RWAs. What's driving your expectation that there will now be more of an impact from operational risk RWAs? Is that related to the various tracker mortgage review fines? And can you give us a sense of what you think the range of impact would be based on the current reform package? Also, when I look back over the last couple of years, operational risk RWAs have already been growing at about 9% a year. Is it fair to expect this to grow at similar rates going forward? And how does that impact the way you think about Basel IV and how that fully loads?
I'm going to hand over to Donal just to take those questions in a second. But just on the capital return, either to make it up simply won't fit here. We will do everything that is within our power to ensure that, that application as we intend to make as soon as possible, ideally this year, is as robust and a strong and as cogent as is possible. Donal?
Yes. And obviously, from a capital perspective, what are the items that would be on the regulator's mind? I think there's no difference to the items that are, frankly, on most people's minds sitting around the table here. And I think, again, I would draw you back just to the snip of the headwinds that I would have talked about, the tailwinds that I would have talked about. I've purposely separated them from the conversation over how we've defined our capital target because I have no way of knowing exactly how they're going to conclude. Your guess is as good as mine, arguably better. So I will leave that to you to work through all of those parts to try and figure out what's positive and what's negative, and we can only make our own assumptions.
Basel IV, it's not new news that I'm trying to put into the conversation here. And it's not AIB-specific news per se, there's a conversation that has to conclude within the Eurozone, and it's going to be around an op risk multiplier that's going to be applied. And it could be between 1 and it could be between 1.5. And obviously, us, along with every other bank will be impacted if it's at the upper end of that range. So we are keenly awaiting an update on that. But I think the reality is, as you mentioned, when you have historic legacy fines, your op risk charges are going to be higher as you will have witnessed from our disclosures anyway over the last number of years. But it is not the recent €300 million provision that is concerning me or the question on my mind with respect to Basel IV, it's simply the key question of what the multiplier is going to be.
Okay. Thanks, Donal. We're going back to the lines. I understand that Eoin from Berenberg is on.
Just coming back on your new RoTE target you've gone from 10% to 8%, but you have changed the sort of calculation to exclude the DTAs. On a like-for-like basis, it looks like it's in the RoTE targets in the 6%, 6.5% range. I mean what's the reason for the change in methodology? And then maybe, secondly, just coming back to excess capital again. Sorry, sorry for this. You say you ideally wanted to apply this year. And I mean, one of the previous questions sort of asked about what the regulators think. I mean what are the conditions necessary from your perspective to do it this year versus, say, next year?
Okay. With respect to the RoTE methodology, fairly straightforward. I have traveled the world and met hundreds of investors over the last 3 or 4 years, I've never met one who has fallen over with joy, saying how much they loved our old methodology on RoTE and how intuitive it was. So that was the starting point for us thinking if we needed to have a much more standardized RoTE, which reflected how we, as a management and a board, look at managing the business. So it's -- the methodology is more like a return on target of equity, which would reflect the amount of CET1 and capital we believe we require to manage the business on an ongoing basis. And that really was the basis for the discussion and taking out any distortionary effects, frankly, that can come into play from the DTA and bring it more in line with what management's intention is, which is to manage the business going forward with a CET1 ratio of 14%.
And excess capital?
Excess capital, we intend to apply for regulatory approval to make an additional capital contribution as soon as possible, ideally this year.
Aman, you're going to have another go -- from Barclays.
It's just regarding the European-wide release that banks are getting on Pillar 2 and presumably, AIB is going to benefit from that. So I was just wondering if you guys are planning to issue AT1 and Tier 2 instruments. Have you kind of -- have you included that in your budget? And if so, kind of what quantum of issuance you're expecting? Can you assume an indication of costs that you've planned for?
Did the DCM guys run down to your office and ask you to put in that question?
No. Again, what's in the plan for 2020? You'd already seen in '19, we would have issued some Tier 2, we would have issued some AT1. And rationale for that was really to de-risk some of the restructuring and refinancing that we need to do already in 2020. So pre-IPO, pre HoldCo, actually, we had obviously issued a Tier 2 and AT1, and that's going to have to be refinanced by the end of 2020, December 2020. So as was what we would look to do is if we can get any clarity over how exactly this is going to operate, we will be able to adjust at that time towards, let's say, optimum levels. But again, by filling P2R with hybrid debt, I mean, it's great from a capital perspective, and it's very positive from that perspective. But we have to look at the entirety of the capital structure and make sure that we feel confident and comfortable that we're able to move up and move down all parts of that capital stack. So in effect, nothing really to update you on specifically in that area. Other than we will definitely be refining some Tier 2 and AT1 later in this year, and we will adjust this too the most optimum levels in advance of that.
Very good. Back to the floor now for any remaining questions here. Diarmaid? Diarmaid is going to ask the question there.
Don't worry, I won't ask about capital. Colin, you mentioned wealth and insurance is an area that you're looking to build out. Perhaps you could give us a little bit more detail about what you're planning there. Is this to digitize your offering with your partners? Or is there something more expensive that you're looking to? And then secondly, maybe around risk-weighted assets. I mean in the past, we had looked at EBS as being maybe an area where you could move from standardized into IRB. Is that something that will be on the agenda once TRIM and IRB reviews generally are gone through this year and early into next year?
Okay. Thanks so much, Diarmaid. Notwithstanding the fact that we've got some strong market shares in so many of the key products side, I'm very, very -- we're all very conscious of the demographic shape of our customer base and the fact that we do have market share weakness in relation to wealth and insurance. And given the fact that we have this ambition to sit at the very, very heart of our customers' financial lives, it will be remiss of us not to have an improved offering in that space. Now there is no near-term big story that I'm holding back from you. But we are going to deploy our own organic growth and an ongoing digitalization of our products and services in collaboration with existing customers -- existing people we work with in order to improve our service offering. But we're calling it out very, very openly, very honestly as a gap, and a gap that we're intent on closing not next week, not the week after, but over the course of the next 3 years.
RWAs. RWAs overall, we will have a hierarchy of models that we are looking to get approval for IRB status with. I think we have updated you on the mortgage side, the IRB mortgage side. EBS will, at a point in time, be brought forward for approval. But in the meantime, it isn't really a priority. We're looking at AIB mortgages are the largest part. Next was our corporate model. After that, it's going to be our SME model and are not until after that will we look at the EBS models.
Okay. So any other questions here in Dublin? Because we'll go back to London for one last. They are multiplying in London. Back to the lines.
We have a question from Martin Leitgeb from Goldman Sachs.
Just two questions from my side. And the first one is on just how you're thinking about mortgage pricing in Ireland going forward. I'm just noting there's a couple of headwinds coming, obviously, in terms of P&L, so low interest rates, the inability of passing on certain low interest rates to retail depositors. So just thinking what your thinking is regarding mortgage pricing here going forward? Is there pressure for pricing to go up to absorb some of those pressures? So it's competition such that you would expect it to stay flattish where it is now? And the second question, just on the impact of the virus and potential disruption. I was just wondering how are you thinking about supporting impact that SMEs supporting impacted sectors, whether that's [indiscernible] and payment holidays. So what kind of tools you're thinking if this was to get worse to support some of your borrowers?
Okay. On the mortgage pricing, as I said already, we're very happy with where our mortgage pricing is. This is the largest single part of our balance sheet. We want to remain a very, very relevant player in the space. We keep our pricing under ongoing review, but I want to really emphasize that we are very, very, very comfortable with where our products are currently priced right away from variable all the way out to the 10-year area. And in relation to the products we're going to make available to our customers, they are the preexisting products. Every customer is going to be different, every customer will be impacted in a different -- to a different level of severity, depending on the nature of the overall coronavirus impact. But the key thing for us is that this is a bank that is underpinned by strong relationships. We're in very regular contact with the customers who may well be affected if coronavirus becomes very, very problematic for the economy here, and we will stand ready to support them because relationships, if we're serious about being a relationship bank, we'll be there for them in good times and in bad.
One more question in London, and this is the last question from Chris.
It's Chris Cant from Autonomous. I just wanted to come back to something that you said earlier in the call when discussing your income and specifically, the other income line. Just trying to understand, I think from memory, you said you expect this to be more than €550 million on a go-forward basis once you include the nonbusiness income items. I just wanted to unpack that a little bit if I could. When I think about your 2019 actual, the €491 million. Within that, you've got €26 million of dividend income, which I think is largely on your NAMA sub bond. And obviously, that's going to drop away. So it feels like you're starting business income post-Payzone is a €485 million type number. How do you get to the €550 million on an ongoing basis? What is it that you expect to continue to recur perpetually that's not business income. I would have thought that those items would subside over time.
Thanks, Chris. Very good question. If we look at the fees and commissions year-on-year, very strong, very comfortable with that. I think the NAMA sub that you're referring to will be a '21, '22 type item. But obviously, you're wondering about the go-forward and where I get comfort with the €550 million type level. What you can expect to see is, overall, on fees and commission, we believe that, that would be able to accrue and climb quite steadily over the coming years from areas such as Payzone, from areas such as wealth management and insurance. And if I look at the other items for €128 million in 2019, they will reduce over time. We would expect, obviously, gains from restructured loans to decrease over time, but it will take a number of years. So that €128 million doesn't go to 2 -- doesn't go to 0 in 2020. It will over the coming years reduce year-on-year, I would imagine, between €30 million and €40 million. So that's how I really get to the €550 million. So there is going to be moving parts. I do expect fees into commission to rise, and I do expect the other items to reduce.
Okay. Well, that's it. Just one last thing I want to do before we finish this morning. And some of you may be aware that this is our Chairman's final AIB results presentation. And Richard has been our Chair since late 2014. He's led the organization with great distinction. He's been a wonderful steward of the organization at a time of great change and great turbulence. Richard, we're going to miss you an awful lot because you've been a great leader, a great friend and a great colleague, and thanks for all you've done for us.
That's all folks. Thanks for being with us this morning.