I am chief executive of Bank of Ireland Group and I am joined here by my colleagues Ms Lynda Carragher, head of mortgage and consumer credit for Ireland and the UK; and Mr. Michael Lauhoff, head of small business and agriculture. We are pleased to have accepted the committee's invitation to appear before it to discuss challenges facing Bank of Ireland and the banking sector. I will now give a short presentation regarding Bank of Ireland in the context of the committee's invitation.
Since the beginning of 2009, Bank of Ireland has been focused on restructuring and repositioning itself to enable it focus on the core businesses. Our core businesses are as follows. In the Republic of Ireland we employ more than 10,000 people and hold market share positions of number one or number two in all of our activities. We are number one in consumer and corporate banking; number two in business banking; and number two in life, pensions and investment products. We serve our customers through more than 250 branches and have a very significant investment in branch premises, infrastructure and payment systems. We are continuing to invest in our Irish business particularly in payment systems and e-banking.
In Northern Ireland we operate a full services consumer, business and corporate bank with 44 branches and hold number three or four market share positions. In the UK we also are the financial services partner to the UK Post Office in a joint venture which provides us with access to the post office's 11,500 branches. Internationally we are also retaining certain very profitable niche corporate banking activities whose income streams are very important to us as we restructure and reposition our business.
Our key strategic goals are: to be the leading Irish retail and commercial bank; to be well positioned in our core markets with strong customer franchises and market positions capable of supporting future economic recovery; to be strongly capitalised without reliance on exceptional monetary authority support and Government guarantees; to have a sustainable funding base with our core loan portfolios substantially funded by customer deposits and term wholesale funding; to be operationally efficient with sustainable, lower cost structures; to achieve appropriate returns on services and products to ensure that costs are covered, risk is appropriately priced and capital is remunerated; to reduce the risk to the taxpayer from any support for Bank of Ireland, to reward any taxpayer investments in Bank of Ireland, to repay any taxpayer investments in Bank of Ireland; and to achieve attractive returns for stockholders through strong operational performance and the return of surplus capital.
We have a number of focussed priorities and a comprehensive integrated set of plans have been implemented and continue to be implemented against these priorities. While we see these times as challenging, we also see this as an opportunity for Bank of Ireland to strengthen our core businesses with a very significant focus on supporting existing customers, strengthening our relationships with those existing customers and recruiting new customers.
We must continue to reduce the size of our balance sheet in our non-core businesses while supporting our core businesses particularly in Ireland. We have made good progress through closing certain of our international lending activities to new business, accepting repayment and redemptions, and through selective sale of certain businesses and assets.
We have had a strong focus on increasing the proportion of our balance sheet which is funded from retail deposits and terming out our wholesale funding. We have made good progress on those priorities including having recently issued €2.9 billion in unguaranteed term funding in very difficult markets.
Our capital base has been very considerably strengthened and in the year to date we have raised €4 billion in equity capital of which €3.7 billion has come from the private sector.
Our income continues to be impacted by the high cost of money to us including the costs of the ELG guarantee. Our deleveraging initiatives and those of our competitors should give us some alleviation from this. We anticipate some margin recovery as interest rates increase and we will progressively disengage from the ELG scheme.
While the macroeconomic scenario continues to be difficult, we are carefully managing our credit risks and expect that loan losses will continue to reduce. We have reduced our costs by 19% since September 2008, and we are making good progress to reduce costs further and embed a lower cost base in the group. Since March 2009, we have generated a net circa €9.85 billion in equity capital, of which a net €8.3 billion has come from the private sector. The State has invested €1.8 billion in preference shares in the bank, paying a coupon of 10.25% per annum, and €1 billion in a contingent capital instrument, paying a coupon of 10% per annum. In the past three years the bank has paid to the State guarantee and other fees and preference share coupons of €1 billion. The bank is now strongly capitalised with a pro forma core tier 1 ratio of circa 15% at June 30 2011.
The bank has continued to restructure itself with considerable support from the taxpayer. All staff in Bank of Ireland are and must continue to be conscious of that support and the responsibilities that arise from having received it. We also recognise our responsibilities to our customers and these are aligned with our strategic objective to further strengthen and develop our core businesses. We have a set of financial targets for the next three years and these are set out in the presentation.
On 10 August, we announced our results for the six months to 30 June. Although our losses remain high, they are reducing and our financial plans remain on target to achieve our financial objectives. Since September 2008, we have reduced the size of our balance sheet by €49 billion and we expect to bring our customer loans outside Ireland down by a further net €16 billion over the next two and a half years. Despite turbulent market conditions, our customer deposits have stabilised in Ireland and we are seeing growth in our UK retail deposits. We remain well on track to achieve a loan-to-deposit ratio of less than 120% by the end of 2014.
We have continued to reduce our costs and our cost reduction targets remain on track. A significant component was the reduction of a significant liability on our balance sheet through a pension deficit, which reduced from €1.6 billion at the end of 2009 to €0.2 billion at the end of June, primarily through staff agreeing to material reductions in future pension benefits. While reducing our costs, we have also continued to make sensible investments in our businesses to improve our infrastructure, deliver efficiencies and enhance our customers' experiences in their dealings with us.
The bank, independent advisers Oliver Wyman, the investors who were given access to the bank's information base and BlackRock on behalf of the Central Bank have all reviewed the bank's loan books in considerable detail. Based on these indepth analyses, and as reaffirmed by the bank on 10 August, we believe that loan losses peaked in 2009 and will progressively reduce to a more normalised level by 2013. The recovery in our income will be significantly influenced by the cost of money to us, which in turn will be impacted by interest rates, increased demand for new loans in our core portfolios, our efforts to reduce our reliance on wholesale funding, and moving off ELG support.
The operating environment in 2011 has been challenging. Nevertheless, we have issued more than €2.9 billion in unguaranteed secured term funding to date and we anticipate doing more by the year end. Our income remains under pressure and our loan losses remain high, but they are lower than in 2010 and remain within our expectations. The outlook for the rest of 2011 remains challenging, particularly in terms of funding costs, including Government guarantee fees, and continuing issues in international sovereign and capital markets that may impact on the pace and outlook for global growth. We have strengthened our capital base considerably and our deleveraging plan includes specific initiatives that will deliver a more conservative funding structure and enable the repayment of monetary authority and Central Bank funding. We are well positioned to support corporate, business and personal customers and contribute positively to the recovery of the Irish economy. We have a clear strategic plan and financial targets that we are focused on achieving. Our clear goal is to be the pre-eminent corporate, business and consumer bank in Ireland. For the taxpayer, we would emphasise that we must continue to reduce the taxpayer's risk, reward the taxpayer's investment in the bank, eliminate the need for support for Bank of Ireland and repay any taxpayer investment in the bank in a timely manner.
I know that members of the committee have a particular interest in the mortgage and SME markets in Ireland. These are markets of particular focus for Bank of Ireland. We have the largest market share of the mortgage market through Bank of Ireland and our subsidiary, ICS. While elements of our Irish mortgage book are undoubtedly facing some stress, we believe it is performing relatively better than the sector as a whole. While arrears are continuing to increase, this is broadly in line with our expectations. We have a significant infrastructure and processes to support customers in arrears who wish to work with us and this support is generally working for our customers. We are making credit available to people who wish to purchase their homes, and while demand is muted, Bank of Ireland accounted for well over 40% of first-time buyer mortgages drawn down in the first six months of 2011. It is also interesting to note that the draw-down rate of mortgage approvals in the first quarter of 2011 was only 30%, which shows that, even if customers have been approved for mortgages, they may be reluctant to draw down the funds and proceed with the purchase.
The SME market is of critical strategic importance to the bank. We hold the number two position in the market and we want to be number one. We will achieve that position by working hard to meet the needs of existing customers, further deepening their relationships with us, and by actively recruiting new customers.
At the half-year reporting stage, we were on target to meet our lending commitments for 2011. We have a substantial customer base and in the seven months to the end of July we dealt with more than 30,000 credit applications for SME and agri customers, with an 80% approval rate. We are seeing good demand for certain of our specialist funds and the demand for the agri fund we launched earlier in 2011 has exceeded our expectations. It will now be increased. We are devoting significant resources to customer support, staff training, recruitment and redeployment, product development and marketing to underpin our strategic objective of being the number one business bank in Ireland.
My colleagues and I will be pleased to take questions from committee members and other Deputies and Senators.