AIB chief banking on deeds of trust
The lender is rebuilding its tarnished reputation through action on social objectives
The road to hell is paved with good intentions. So too is the road to recovery. And at some point in the recovery process, the penitent returns to the fray, to restore lost trust.
Bernard Byrne, chief executive of AIB, was mere months into his new role as the pillar bank's chief financial officer when the State pumped more than €20bn into the lender to keep it afloat in late 2010.
It fell to figures such as former AIB chief executive Eugene Sheehy and former chairman Dermot Gleeson, to don the sackcloth and ashes and seek forgiveness for AIB's sins. Both men left their roles at the height of the global financial crisis in 2009.
But it is Byrne, the affable Dublin-born chartered accountant who took over the role of chief executive from David Duffy in May 2015, who is the public face of AIB's new phase: rehabilitation.
The initial public offering (IPO) of AIB last June, when the sale of a 28.8pc stake to stock market investors generated €3.4bn, was a landmark for the bank - and the Irish economy.
Investment bank Morgan Stanley hailed the partial relisting - which was more than four times oversubscribed - as the "crescendo" of AIB's rehabilitation. But Byrne insists that Ireland's largest bank is nowhere close to the end of the journey.
"The future of the bank is making sure that we have a proper social licence to operate," says Byrne who led AIB's IPO after a decade of turmoil and uncertainty that decimated the trust of its customers, shareholders and society.
Later this week Byrne and AIB chairman Richard Pym will host a major conference to facilitate what the lender describes as "a conversation on the need to align both commercial and social objectives to create real value in business and for society". An array of speakers including Bill McDermott, chief executive of SAP and Volvo's chief futurologist Aric Dromi, will descend on Croke Park to take part in a debate that is part of AIB's own efforts to win back public trust.
Byrne, whose bank has set aside close to €200m to compensate customers embroiled in the system-wide tracker mortgage scandal, knows that many may give short shrift to the thought of AIB - or any bailed-out bank - leading talks on sustainability. "We're not completely virtuous, we're not trying to pretend we are," says the budding triathlete. "Nobody trusted us and that was totally understandable. Big statements and big positions about how wonderful we're going to become have no credibility. What we had to do and must continue to do is prove by doing."
The sale by the Government of the first tranche of its AIB stake (the State maintains a 71pc ownership) followed a prolonged and painful restructuring of AIB's balance sheet.
It was a process which saw the bank shed almost a third of its branch network and saw its employee base shrink to some 10,000 from a peak of almost 26,000 in 2007.
AIB has emerged from the global financial crisis with a cleaner, healthier balance sheet. But with some of the highest exposures, relative to its European peers, to non-performing loans (NPLs), AIB has some way to travel before it completes its journey from perdition to redemption.
AIB's non-performing loans remain high in a European context: at some 19pc, they are well above the 5.4pc European Union average. And, at €12.1bn, they represent approximately 88pc of AIB's €13.8bn market cap.
With the spectre of the supervision arm of the ECB looming large over the Irish banking sector, Byrne is firmly within Frankfurt's sights as he seeks to reduce AIB's non-performing loans to 5pc by 2019. How fast and by what means, write-downs or loan sales to so-called vulture funds, can AIB run down the remainder of its bad loan book in two years?
AIB took steps recently to deal with some of its most embattled borrowers when it entered into a deal with David Hall of the Irish Mortgage Holders Organisation (IMHO) to support a not-for-profit mortgage to rent scheme.
"Even Jesus Christ couldn't restructure these mortgages," said Hall, who believes the scheme, if adopted by other banks, could help up to 50,000 homeowners to stay in their homes. Byrne thinks the scheme, which is only open to people who qualify for social housing due to their low income - and who will have to undergo an affordability test - may ultimately help hundreds of borrowers in AIB's 'Come to Jesus' category. But he warns that unless banks or private-equity investors can realise their security in the form of repossessions or other means, the cost of credit will rise for all.
"If, long-term, people form a view that actually you can't exercise security, then fundamentally the cost of credit just rises," says Byrne, adding that he believes AIB can effectively sell its problem portfolios "if that's what we need to do".
The plight of thousands of tracker mortgage holders, some of whom gave harrowing testimony to the Oireachtas Finance Committee last week, has further dented the banking sector's rehabilitation efforts. In some cases, customers were moved off a tracker to a more favourable rate for a fixed period of time only to be refused the right to revert.
In other cases, customers were charged a much higher rate than stipulated in their contracts.
AIB has set aside €190m to deal with its tracker issues. To the outside world, the debacle, which could cost €1bn across the sector, bore all the hallmarks of a concerted scheme. Central Bank Governor Philip Lane has described the scheme as 'system wide'.
And although the regulator spoke to the gardaí about the issue of tracker loans being wrongly taken from customers, the Central Bank has stopped short of describing the scandal as systemic.
Byrne says there is no one within AIB who set out to harm its customers. "We haven't found any systemic issue," says Byrne.
"What happened was as a result of the tracker being effectively suspended in 2008 because the market dislocated.
"It took quite a while to track through into a systems issue. So it effectively took quite a while. And remember 2008, 2009, 2010, 2011, banking wasn't in the sort of position where people were thinking about these things - they were thinking about pure survival."
One issue Byrne is not apologetic about is the fact that AIB will pay no tax on profits for up to 30 years due to the huge losses it racked up over the course of the financial crisis.
In presentations given to investors in the run up to the IPO last June, the bank described how its deferred tax asset (DTA) of €3bn gave it advantages over many other listed banks, sending customers and commentators into further apoplexy.
"Can I offer a different perspective?" says Byrne, who explains that because the €3bn was part of AIB's capital structure, the State didn't have to put in €3bn. "If that didn't exist we would have had to put in another €3bn. The second point is we're selling the bank now, or the State is selling the bank, and it's realising more than tangible book value. And €3bn of that book value is deferred tax.
"Do you want the €3bn up front or do you want it over a time period? Which is better for the State: to get €3bn up front or on a very slow curve?"
Despite Brexit and renewed efforts at EU level to harmonise the bloc's corporate tax and other tax areas, Byrne - whose business mantra is 'don't panic' - is upbeat on the Irish economy.
AIB has deployed 21 'Brexit champions' around the country to help SMEs navigate the twin challenges of currency and competitiveness.
"We see our job as supporting those businesses. Some of those will reposition some of their activities into the UK in order to effectively take out the hedge position. But most of them will effectively end up looking for alternative markets to supplement what'll probably come from a changed position on the trades environment." Byrne sees no major threat to Ireland's 12.5pc corporation tax rate, but says we need to maintain a broader tax competitiveness to attract key overseas talent and multinationals to Ireland.
"We need to make sure Ireland is well positioned to encourage senior employment in the economy, because senior employment tends to attract junior employment," says Byrne. "Making sure that the economy is seen as an attractive location, not just for indigenous firms but for international firms and international players to exist."
A vastly-accelerated rundown of impaired loans will prime AIB for a full return to the stock market.It's a decision that falls ultimately to Finance Minister Paschal Donohue. But Byrne, who says last summer's IPO was "about as clean and textbook an IPO as you could possibly get", is aiming to wrest AIB from State ownership within two to three years.
AIB is "genuinely within touching distance" of repaying back all of the State's €20bn injection, says Byrne who spent the best part of his career in the State-owned electricity supplier ESB.
"Ireland Inc did well out of it [the IPO] because we were effectively internationally marketing Ireland and then the bank. Ireland first and then the bank," says Byrne.
"It's a good time. Those investors are still there and there's a broad pool who didn't participate who are interested in this story. So there's an opportunity in the shorter term rather than in the longer term to continue to run on it".
"AIB will need to start thinking about doing different things in a two to three year time frame as well," adds Byrne.
"Whether that's regulation, virtual integration of fintech - whatever it is. State ownership isn't necessarily the right ownership model when businesses have to start to think about the next thing."
Sunday Indo Business