AIB returned to profit in the first three months of the year - its first profit since the economic bubble burst six years ago. But with customers being squeezed and mortgage arrears still at close to record levels, the taxpayer is still a long way from getting any of the €20bn pumped into AIB back
How much of a profit did AIB make? Unfortunately the bank chose not to share this information with us. We will have to wait until AIB publishes its half-year results later this year to find this out.
So with AIB now back in the black is it time to declare an official end to the banking crisis that has crippled the Irish economy since 2008?
Not yet. While AIB is certainly in a much better place than it was a couple of years ago things are still pretty desperate at what was Ireland’s largest - and some would say the most arrogant - bank during the boom years.
According to the interim management statement, AIB had €28.2bn of impaired loans on its balance sheet at the end of March. While this was down €700m on the impaired loans figure at the end of December 2013, it is still over a third of AIB’s total €82bn loan book.
The very high level of problem loans on AIB’s books takes some of the shine off its achievement of reducing its dependence on short-term loans from other banks. AIB’s loan-to-deposit ratio is now down to 100pc, which means that it is now funding virtually all of its loan book from good old-fashioned customer deposits.
AIB’s day-to-day operations are now also much more efficient. The bank’s net interest margin, the difference between what it receives in interest from all of its loans and the interest it pays on its deposits, climbed to 1.57pc in the first quarter.
And that is about as far as the good news can be made to stretch. The €20bn pumped into AIB by the taxpayer included €3.5bn of preference shares, which pay the state interest. AIB now wants to convert these into ordinary shares - which haven’t paid a dividend since 2008.
Finance Minister Michael Noonan should resist this. The state already owns 99.8pc of AIB or almost 520 billion of the 522 billion AIB ordinary shares. Converting the preference shares into ordinary shares would merely leave the unfortunate taxpayer with even more worthless paper.
Thanks but no thanks.
There may also be less to the reduction in impaired loans than meets the eye. According to the Central Bank, mortgage arrears remain at close to record levels with €46bn, about a third of the total, either in arrears and/or having been restructured. Loans to small businesses are in an even worse state with an estimated 50pc of all SME loans impaired.
With the ECB due to publish the results of its stress tests of Eurozone banks, including AIB, in the autumn, what are the chances that the ECB will tell AIB that it needs more capital? Even after this week’s good news, there is no way that AIB will be able to raise this money from the markets meaning that the poor taxpayer would have to cough up once again.
The improvement in the net interest margin is a silver lining that comes with a large dark cloud attached. This has been achieved by ruthlessly squeezing the interest paid to savers while at the same time jacking up the interest rates paid by borrowers.
Expect this to continue. AIB’s net interest margin still trails that of its main rival Bank of Ireland which racked up a 2pc margin in the second half of 2013. So congratulations to AIB on returning to the black but just remember customers won’t benefit any time soon.