Wednesday 17 January 2018

Mission Impossible

New bank boss to inherit poisoned chalice, with 99.8pc state-owned AIB having swallowed up €17bn of taxpayers' money

When he becomes AIB chief executive next month, David Duffy will be taking charge of an institution that, having written off €17bn of bad loans over the past three years, is a shadow of its former self.

On Tuesday AIB announced that Mr Duffy, a Dublin-born career banker, would be its new chief executive. He takes over from David Hodgkinson, executive chairman for the past year, who will stay on as non-executive chairman for another year.

Mr Duffy inherits a poisoned chalice. Having swallowed over €20bn of fresh capital, of which more than €17bn came from the taxpayer, AIB is now 99.8pc state-owned. It is a semi-state in all but name, a point that was emphasised by the fact that Mr Duffy's salary is to be capped at the €500,000 ceiling imposed by the Government on the bosses of those banks whose deposits are covered by the deposit guarantee.

How the mighty have fallen. At the end of 2007 AIB had gross assets of €177bn and a total loan book of €135bn. It was the largest and the haughtiest -- dubbed 'Arrogant' Irish Bank by some wits -- of the Irish-owned banks that bestrode the booming Celtic Tiger economy like latter-day Colossi. It announced pre-tax profits of €2.6bn for that year.

By the middle of 2011 AIB's balance sheet had shrunk by 30pc to €127bn while its loan book shrivelled by 36pc to just €86bn. The family silver, its US and Polish operations, has long since been flogged off to raise desperately-needed cash. The great AIB fire sale continued this week when the bank announced the sale of its asset management arm AIB Asset Managers for an undisclosed sum.

AIB shareholders have been virtually wiped out with the share price falling from a peak of over €23 in March 2007 to a mere six cent yesterday.

This is a fall from grace without parallel in Irish economic history.

And there is more bad news to come from AIB. As one of the leading players in the Irish mortgage market it is certain to suffer more losses as arrears and defaults on homeloans increase. With close to half of all mortgages now in negative equity and a fifth either in arrears or having been restructured there is no way that AIB, which has €27bn of Irish homeloans on its books, can hope to escape the coming mortgage meltdown.

And it's not just mortgages. AIB's most recent results, for the half-year to the end of June, revealed a loan book in complete rag order. Even after offloading €18.5bn of dud property loans to NAMA, over a sixth of its remaining loan book is impaired with a further one-third falling into the "criticised" category. In other words, the quality of at least half of AIB's post-NAMA loan book remains suspect.

While this mightn't be quite as bad as Anglo, the poster boy for the banking excesses of the Celtic Tiger years, it certainly comes close.

Shorn of its overseas operations and with its Irish business effectively in run-down mode with the non-NAMA loans having shrunk by a further €13bn in the first six months of 2011 what does the future now hold for AIB?

For the foreseeable future it will continue to be one of more slash and burn. One of Mr Duffy's first tasks will be to implement the redundancy programme already announced by AIB under which 2,000 jobs will be cut at the bank.

This already difficult exercise has been further complicated by the Government's rejection of AIB's proposed redundancy terms, which would have seen laid-off staff receiving six weeks' pay plus the two weeks' statutory redundancy payment for every year of service. Under these proposed terms some highly-paid AIB staff could have walked away with up to €300,000.

Despite AIB arguing that these terms represented the "industry norm" they were rejected by Finance Minister Michael Noonan as being too generous. With the bank bailout having cost the taxpayer over €60bn, of which almost €20bn went to AIB the Government is acutely sensitive to any accusation of being too soft on bankers.

This sometimes fraught relationship between the Government and the banks was also illustrated by the spat caused by the failure of some lenders to pass on the recent cut in the official ECB interest rate to mortgage borrowers. While Ulster Bank, which is owned by UK bank RBS, and Bank of Ireland, which is only 15pc state-owned, felt able to tell the Government where to stick its demand for lower mortgage rates, AIB had no choice but to bend the knee and cut its variable rate.

While the Government's campaign to bully the banks into cutting their mortgage rates played well with public opinion it doesn't augur well for AIB, whose underlying losses for the six months of this year were an absolutely horrific €2.6bn.

In practice, Irish interest rates have long since decoupled from official ECB rates. With depositors nervous of entrusting their money to any of the Irish banks, they have only been able to attract customer deposits by paying a hefty premium over official ECB rates. AIB currently pays retail customers up to 4.1pc for 12-month deposits compared to an official ECB rate of just 1.25pc.

Meanwhile, AIB charges homeowners a variable mortgage rate of between 2.9pc and 3.3pc. Even when one takes the €28bn of cheap (1.25pc) emergency funding that the ECB and the Irish Central Bank have lent AIB, it's not difficult to conclude that AIB's Irish mortgage book, of which at least half consists of trackers, is inherently loss-making.

The political barriers resulting from it being state-owned will make it much more difficult for AIB to raise its prices and cut its losses than either Bank of Ireland or Ulster Bank, neither of whom are burdened by similar constraints.

Ironically, these political constraints may have worked in Mr Duffy's favour. As AIB's unsuccessful attempt to persuade Mr Noonan to raise the €500,000 salary cap demonstrates, the money on offer wasn't sufficiently attractive to persuade a really big hitter to accept the job.

Although Mr Duffy has enjoyed a relatively successful career in banking, first with Goldman Sachs, then with Dutch bank ING and latterly with the South African Standard Bank, he never quite managed to scale the commanding heights. Having been head of Standard's international, ie its non-South African, operations from 2007 to 2010 he was appointed head of strategic projects in October 2010.

In many organisations the "strategic projects" brief is allocated to an executive whose star is on the wane. Whatever the truth of the matter, Mr Duffy left Standard in June 2011 to set up his own corporate finance consultancy, Celtic Advisory International.

The challenge facing Mr Duffy at AIB is immense. He must try and fix a badly broken bank. Not only has the property collapse destroyed its balance sheet, the bank has compounded the damage by the unsympathetic manner in which it has dealt with many borrowers. Mending the financial and reputational damage which AIB has suffered is a process that will take time.

But does AIB have that time? With the Government desperate for cash what are the odds of it accepting a low-ball bid for a cleaned-up AIB in a few years time? Mr Duffy, no matter how good a job he does, may well be the last chief executive of an Irish-owned AIB.

Irish Independent

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