Tuesday 21 January 2020

AIB facing fines of up to €260m if whistle-blower’s claims confirmed

AIB Headquarters in Dublin Photo: Bloomberg
AIB Headquarters in Dublin Photo: Bloomberg

State owned AIB could face fines potentially amounting to €260m if a whistle-blower’s claims that the bank exaggerated its success in dealing with problem loans are confirmed.

On Friday, RTE reported that an unnamed whistle-blower had contacted the Central Bank claiming that AIB’s progress on restructuring problem loans had been exaggerated.

If true it would cast a big doubt over the financial position of the bank, and particular paper profits known as “write-backs” generated over recent years, as it prepared for a stock market sale.

AIB is undertood not to have been aware of the claims before being contacted by RTE.

The case is the first in Ireland to be investigated under the authority of the European Central Bank’s (ECB) new single supervisory mechanism.

If it finds breaches the ECB can impose penalties of up to 10pc of a bank’s annual turnover in the preceding business year. AIB’s operating income last year was €2.6bn.

Alternatively fines can be double the profits gained as a result of any breach.

It is understood that the whistle-blower, who has not been named, did not use the bank’s internal complaints processes before contacting regulators.

While the investigation that has now been launched will run under the authority of the ECB its likely that work on the ground will be carried out by staff from the Central Bank of Ireland, reporting to Frankfurt.

A key issue for investigators is whether the bank’s valuation of its loans resulted in AIB  reporting higher profits through so called write-backs. 

Write-backs occur when a bank adjusts-up the valuation of previously identified problem loans. 

It’s a paper exercise, but the difference between the old and new valuations is counted as profit by the bank.

AIB, and other Irish banks, generated substantial profits through write-backs as the economy recovered.

Last year, AIB’s annual profit of €1.9bn included €925m of loan write-backs.

The same annual results showed that AIB’s impaired loans dropped from €21.8bn at the end of 2014 to €13.1bn last year. 

Any improvement in a bank’s balance sheet frees up capital – because less cash has to be set aside to cope with potential losses. 

Valuing loans is notoriously tricky.  Two years ago the Central Bank warned lenders to be cautious in reading across from recovering house prices to the value of their books of mortgages. However, even the regulator has no fixed formula for valuing loans.

According to RTE, the AIB whistle-blower worked as a manager in the bank’s Financial Solutions Group which manages problem loans mostly linked to businesses.

The allegations are understood to include that some loans were moved out of the problem unit altogether, when they should not have been, and that others were classed as better performing than the reality, so that cash set aside to cover losses from 100pc of the loan value in some cases reduced to two thirds of the value.

The ECB investigation will initially have to establish the facts of the case. If it finds grounds for further action it will be referred on to the Enforcement and Sanctions Division for follow-up, so the duration of a probe is difficult to predict.

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