Thursday 14 November 2019

AIB shares slump as bank profit squeezed

Lender warns of rate pressures

Holding the reins: AIB boss Colin Hunt is aiming to control costs at the lender
Holding the reins: AIB boss Colin Hunt is aiming to control costs at the lender
AIB blamed factors including lower income from investment securities and the rising cost of holding cash. Stock image

Ellie Donnelly and Donal O'Donovan

AIB shares closed down sharply yesterday after the bank said lending margins will fall this year, outlined staff cuts and warned of "challenging" conditions for the sector.

In a trading update, AIB said the operating environment for European banks has become more "challenging" amid the European Central Bank's push for "lower-for-longer" interest rates, and despite a pick-up in Irish lending.

AIB's keenly watched net interest margin (NIM) - measuring the difference between the bank's cost of money and what it charges to lend - has declined to 2.42pc.

The NIM was 2.46pc at the end of June and 2.51pc a year ago.

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The bank blamed factors including lower income from investment securities and the rising cost of holding cash.

The interest rate environment is "very challenging" for the sector, AIB said.

Despite competition including in the Irish mortgage market, the yield on customer loans (3.46pc) remained stable.

Analysts at Davy Stockbrokers said they expected to reduce their forecast for AIB's profits - by a low-mid single digit percentage - following the results.

But Davy noted positive momentum, including in the lending growth, cost-cutting, and in the reduction in the bank's stock of bad loans toward a targeted 5pc of all lending by the end of 2019 - a level described by AIB boss Colin Hunt as a potential "milestone". Davy's Diarmaid Sheridan said AIB looks set to be close to, if not at, the 5pc target by year-end, in line with pressure from regulators to deal with the legacy of the crash, a decade after nationalisation.

Last week, AIB announced the sale of €850m of non-performing loans to Cerberus at an 18pc discount to face value.

The portfolio consists of loans related to more than 1,000 customers, linked to 2,800 mainly buy-to-let and investment properties, and some farm land.

For investors, AIB's capitalisation has long been a draw - with a belief that at some point the bank will move to return capital to shareholders through one-off dividends or share buy-backs.

AIB said it expected its so-called fully loaded tier one capital ratio, a standard measure of financial strength, to fall to around 16pc at the end of 2019, from the 16.5pc reported yesterday, but still well above its medium-term target of 13pc.

However, with a big focus on cost controls under newly installed CEO Mr Hunt, the bank said it expected staff numbers to fall to 9,500 by the end of this year - from 9,830 at the end of June.

The bank had already sought 200 job cuts, and Mr Hunt said last month that staff numbers will be below 9,000 by the end of 2022.

Irish Independent

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