AIB eyes cost cuts as €200m savings needed to reach profit targets

AIB, which unveiled plans earlier this year to cut 1,500 jobs by 2022, is carrying out a fresh examination of costs as the Covid-19 economic crisis is set to weigh on bank incomes for the foreseeable future.

Goodbody Stockbrokers analysts estimate that chief executive Colin Hunt will need to find as much as €200 million in cost savings if he is to achieve his key medium-term profitability goal, outlined in March.

Although Mr Hunt has paused his current job-reduction plan amid the coronavirus shock, further cuts are likely to be on the cards in the coming years, analysts say.

Mr Hunt is also expected to look at office space in Dublin as remote working will remain a feature of the modern workplace after the pandemic. Aside from the group's new headquarters on Molesworth Street, the bank has taken out significant office space in recent years across locations such as Heuston South Quarter, Central Park in Leopardstown and Hume House in Ballsbridge.

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“As with any business in the current environment, we review aspects of how we operate,” a spokesman for the bank said, declining to comment further.

AIB executives flagged in an interview with Davy analysts in recent weeks that the bank may update the market on “levers” it plans to pull to further rein in costs “before the year-end”, the brokerage firm stated in a report to clients last week. However, it is understood the review may continue into early 2021.

Mr Hunt insisted in early August that he was committed to its key target of having a return on tangible equity – a key measure of profitability relative to shareholders’ equity – of more than 8 per cent by 2022, almost double last year’s level. The reaffirmation of the target came as AIB revealed it slid into a €700 million net loss for the first half of 2020, as it set aside €1.2 billion of upfront provisions to absorb an expected surge in bad loans as a result of Covid-19.

Low interest rates

AIB's existing three-year plan is designed to leave it with a cost base in line with 2019's level of €1.5 billion. Goodbody Stockbrokers analyst Eamonn Hughes estimates the bank will end up looking to reduce its costs by €200 million, down to €1.3 billion, by 2022 to be able to reach the 8 per cent returns aim.

Mr Hughes said in a recent report that Irish bank’s loan books would end up shrinking 6 per cent this year, and its net interest income is unlikely to return to 2019 levels until 2023. The income line is also dented by low interest rates on international financial markets, which are set to remain depressed for even longer as a result of extraordinary central bank actions to keep money flowing through the economy.

“But Covid has accelerated digital adoption, reduced network requirements and fostered new work practices. To tackle the revenue fall, banks must better manage funding costs and capital efficiency,” Mr Hughes said. “Costs are the single largest lever to be pulled.”

The group's costs review comes as Bank of Ireland saw 2,000 staff – almost a fifth of its workforce – apply last month for voluntary redundancy. The figure is well above the 1,400 the company's chief executive, Francesca McDonagh, had said she was targeting over the coming years.

Bank of Ireland must now weigh carefully what percentage of the applications it can afford to accept in the coming months without affecting its branch network, or staffing in key areas such as handling problem loans as Covid-19 payment breaks roll off. Analysts expect the bank will ultimately decide to exceed its 1,400 job-cuts target.