Friday 28 October 2016

AIB whistleblower allegations come at a sensitive time

Published 17/04/2016 | 02:30

AIB chief executive Bernard Byrne and CFO Mark Bourke have made progress on legacy debt
AIB chief executive Bernard Byrne and CFO Mark Bourke have made progress on legacy debt

Former Central Bank governor Patrick Honohan was consistently critical of banks for not moving quickly enough during the crisis to restructure loans for customers.

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Now an AIB whistleblower has alleged to the Central Bank that AIB may be moving a little too quickly by classifying loans as restructured prematurely, in order to meet its targets.

In the last two years, banks have restructured thousands of loans by introducing a variety of forbearance mechanisms such as switching to interest-only repayments, loan period extensions and, in AIB's case, some write-offs.

Allegations made by an AIB whistleblower to the Central Bank, and reported by RTE on Friday, are quite serious. The Central Bank is expected to examine the allegations to see what veracity they may have.

AIB has said it was unaware of the allegations. It says it can't comment further.

The whistleblower alleges the bank has misled the Central Bank about the number of loans that have actually been restructured. The allegation is that loan restructuring numbers were pushed through on loans that were not fully restructured and that progress had been overstated.

Banks have benefited enormously from the economic upturn, which has seen the value of the collateral that underpins their loans rising. More people are working in the economy and fewer of them are getting into fresh trouble with legacy loans.

This has prompted the banks to revise the amount of money they need to set aside in provisions for bad loans. Last year, AIB's performance was massively boosted as it wrote-back over €900m of loan provisions.

In other words, the bank felt there was €900m of provisions set aside that it will not now need to call on. This figure goes straight to the bank's' bottom line and has enabled it to report sizeable profits. It has had €1.1bn of write-backs in the last two years but most of that came in 2015.

How sure can any bank be about whether it has set aside enough or too much money for impaired loans? The bank system for estimating this must be rigorous, but it cannot be scientific.

In AIB's own accounts for 2015 it said it does specific analysis of loans over €1m but for less than that amount it has a more generalised formula for working out how things might play out.

The economy improved a lot last year, but AIB also changed its "model parameters" for making these loan loss assumptions.

AIB's 2015 accounts say: "Management is required to exercise judgement in making assumptions and estimations when calculating loan impairment provisions on both individually and collectively assessed loans and receivables. A significant judgemental area is the calculation of individually insignificant (that is under €1m) and IBNR (incurred but not reported) impairment provisions which are subject to estimation uncertainty.

The methods involve the use of historical information which is supplemented with significant management judgement..."

AIB is no different to other banks in making estimates of losses. The key issue alleged by the whistleblower is whether loans that were being classified as "restructured" really were. He or she alleges that some loans classified as restructured incurred a fresh impairment again, when being transferred from AIB's bad bank operation to its good bank business.

If proven to be correct, it may have been some small number of loans where the person's circumstances changed for the worst after agreeing to a restructuring. If it was more widespread or systematic, the situation is more worrying for the bank.

The Central Bank defines a restructured loan as one where "the repayment terms of the mortgage contract have been renegotiated in order to make payment terms more manageable for borrowers."

If the whistleblower's allegations were correct, then ultimately these loans could come back to bite the bank in the future because they could deteriorate. In other words, they haven't ultimately been resolved. This could translate into future fresh impairment charges further down the road.

The Central Bank is expected to examine the allegations and ask AIB some questions.

At the very least, these allegations bring some unwelcome publicity for the bank at a time when it is preparing to look at a fresh stock market listing. Nobody wants a question mark over its progress in dealing with legacy debt. In that sense, AIB will want the outcome of these allegations to be determined as quickly as possible, one way or the other.

Would O'Leary trust a successor at Ryanair?

The subject of Michael O'Leary's retirement came up again during the week. This time the Ryanair chief executive seemed to be a little more forthcoming about the 'if', 'how' and 'why'. But he still wasn't giving too much away about 'when'.

His five-year contract is up in 2019 and he put his chances of retiring then at "50-50". His comments came as the airline announced the next phase of its 'Always Getting Better' plan, a transformation of the airline's modus operandi that could be linked to when O'Leary does actually retire.

Up to recent years O'Leary was the public face of the airline. He set the corporate culture and the tone and drove it incredibly hard. He personified its "raison d'etre" as the underdog taking on the big guys.

All of that has changed. Ryanair is now the big guy and is cruising nicely into middle age. It has even paid dividends.

He referred during the week to the measure of a great company as being linked to how it plans for future succession.

"The acid test of a really good company like Tesco, Lidl and Aldi has been where to get the next management group to come through. I think that's something that's a challenge facing me and the rest of the management team here over the next five years", he said.

O'Leary was the ideal wartime general, but the war is over - and Ryanair won.

He referred to succession planning taking place within the organisation, whatever that means. It usually means bringing along talented people who would be able to step up to the bigger jobs should the need arise.

O'Leary has outstayed previous possible successors, such as his two former deputy managing directors.

Just after he signed his five-year contract, in 2014, O'Leary told the Irish Independent that he'd "go nuts" if he thought he'd still be at the airline in 15 years.

Much of his personal wealth is tied up with Ryanair. His stake in the airline is worth around €700m. Perhaps his biggest challenge after retiring won't be keeping busy, but having the trust in a successor's ability to manage all that money for him.

Secretive Ireland not ready for tax disclosure

The Panama papers and David Cameron's dad have made it very difficult for any future prime minister of the UK not to publish their tax returns. Cameron has done it, so too has his chancellor of the exchequer, George Osborne, and it has triggered tax return disclosures in the North and Scotland.

Should we do the same in Ireland?

The big question is whether we would learn anything. Lots of our politicians are former teachers whose business interests are limited. There are exceptions based on what we already know about the financial affairs of some politicians. Michael Lowry's tax affairs have been, well... complicated.

During the presidential election candidates took to disclosing huge levels of personal financial details. If we do it, where would it stop? Should county councillors do the same thing?

A BBC reporter asked people on the street in London in 2012 to put a ball into a box marked 'yes' for politicians publishing tax returns or 'no' if they should not. The vast majority voted 'yes'. But when questioned about it, they were the ones who had clearly thought about it the least.

Tax returns don't tell everything. It might have to be extended to family members to be really meaningful and that just seems ludicrous.

We are still very secretive about money in Ireland and that is unlikely to change any time soon.

We would be better off ensuring that our register of interests is accurate and up to date.

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