Thursday 17 October 2019

Loans up at AIB for first time since crash, but profits stay flat

A decade on from the crash the AIB loan book finally is growing once again with net loans to customers increasing by €200m in the first half.

AIB chief Bernard Byrne says it is not chasing market share and is comfortable with its position Photo: Collins
AIB chief Bernard Byrne says it is not chasing market share and is comfortable with its position Photo: Collins

Dan White

AIB's loans to customers, net of loss provisions, rose by €200m to €59.9bn in the six months to the end of June. While the rate of increase was just 0.3pc, it was still the first increase recorded since the 2008 crash. In the intervening decade, the AIB loan book has shrunk by more than 50pc.

Strip out non-performing loans, still a high €7.5bn or almost 12pc of all loans, and AIB's performing loan book increased by €2.2bn (4.1pc) to €55.3bn in the first half. AIB's non-performing loans have almost halved over the past 18 months having stood at €14.1bn as recently as the end of December 2016.

Chief executive Bernard Byrne predicts that AIB's level of non-performing loans will "normalise" at about 5pc of all loans in 2019.

The resumption in loan growth came as AIB announced first-half pre-tax profits of €762m, virtually unchanged from the €761m pre-tax profits recorded in the first six months of 2017.

However, this year's performance was flattered by the €130m writeback of amounts previously written off against bad loans as against a €19m writeback in the first half of 2017.

AIB also booked €204m of gains on the value of financial assets held on its balance sheet as against similar gains of just €6m for the same period last year - the first-half 2017 profits were in turn boosted by a €146m gain resulting from the recalculation of the cash flows of restructured loans.

When these various once-off gains and writebacks are excluded, AIB's underlying profit figure in the first half was more than €150m shy of the comparable 2017 figure.

Drawdowns of new loans at AIB were €5.5bn in the first half, up almost 15pc on the first half 2017 drawdowns.

AIB is the market leader in mortgages with a €33bn home loan book, almost a third of the market. Despite this market-leading position, its new mortgage lending was relatively restrained in the first half, rising by just 9pc to €1.2bn.

"There is some competitive pressure [in the mortgage market]. We are not chasing market share. We are comfortable with our position," said Byrne. Unlike most of its competitors, AIB has concentrated on reducing its variable mortgage rate rather than offering fixed-rate loans with very low introductory 'teaser' rates.

Its dominant share of the mortgage market means that AIB has been heavily exposed to the tracker mortgage scandal, with the bank expecting the total cost of compensating customers who were wrongly taken off their trackers at €260m.

According to Byrne, 96pc of affected customers have already received compensation with the remainder likely to receive their money in the next few weeks - dissatisfied customers retain the right to appeal the amount of compensation paid by AIB.

While new lending to corporates jumped by 46pc to €1.9bn, new non-mortgage personal lending and lending to SMEs were unchanged at €400m and €700m respectively in the first half with certain sectors, particularly some segments of retail, still lagging behind.

Despite the marginal increase in the size of its loan book, AIB's net interest income, the difference between interest paid by borrowers and that paid to depositors actually shrank by 1.5pc to €1.06bn. After swallowing almost €21bn of taxpayers' money in the wake of the crash AIB is now highly capital-generative. It had a core equity tier one (CET1) ratio (the measure favoured by investors and regulators) of 17.6pc at the end of June and a total capital ratio of 19.3pc.

These very strong capital ratios mean that AIB is unlikely to be affected by the decision by the Central Bank earlier this month to force banks to hold a special counter-cyclical capital buffer (CCCB) equal to 1pc of Irish lending from July 5, 2019. It could be a different story if the Central Bank were to order a further increase in the CCCB in response to an overheating economy.

While AIB's very strong CET1 ratio and the introduction of the CCCB by the Central Bank go some way to reducing the risk of the bank getting into difficulties once more, the price of such high capital ratios is reduced lending capacity.

When a bank has to hold more capital against a loan then it will either be able to lend less or else will need more capital to increase its loan book - AIB has €4.61 of loans for every €1 of shareholders' equity as against €16.15 of loans for €1 of equity in 2008.

While AIB shares are trading at €4.85, up 11pc on last year's IPO price, they are well down on their late-January peak of €5.80, having lost another 1pc in the wake of the results announcement.

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