AIB profits rise 12% as bank ‘re-estimates’ restructured loans

AIB’s profits rose 12 per cent in the first half of the year as the State-controlled lender raised the value of some large loans it had restructured in recent years and grew net interest income in a recovering economy.

Operating profit rose to €814 million from €729 million for the same period last year, even though the level of bad loan provisions freed up in a recovering economy fell to €19 million from €211 million. AIB’s earnings have been flattered in recent years by such releases.

Still, the bank recorded a €146 million gain from a “re-estimation” of the cash it expects to recover in time from previously restructured loans.

"There were three big cases in that," group chief executive Bernard Byrne told The Irish Times, adding that they were restructured company facilities that had "some property-related loans" where the outlook had improved. He declined to name the borrowers.

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Meanwhile, the group's level of impaired loans fell by €1.3 billion during the six months to €7.8 billion, a faster pace than analysts at Cantor Fitzgerald had been expecting. The bank, which has seen its bad loans fall from €29 billion in 2013, has set a target of cutting the level to between €3 billion and €4 billion by the end of 2019.

AIB returned to the main stock markets in Dublin and London in June for the first time since it was seized by the State in late 2010, with the State's initial public offering (IPO) of a 28.8 per cent stake raising €3.4 billion to repay part of the bank's €20.8 billion crisis-time bailout.

Before the deal, AIB had returned €3.3 billion of the capital injected into the lender, plus about €3.6 billion of other cash payments, including interest, Government guarantee fees and dividends.

Shareholder payments

Mark Bourke, the bank’s chief financial officer, said the bank aims, over time, to pay between 50 per cent and 60 per cent of its net profits to shareholders, or in excess of €500 million.

The bank’s net interest margin – the difference between the average rate at which it funds itself and what it charges customers for loans – rose to 2.54 per cent from 2.06 per cent in the first half, while new lending increased by 15 per cent to €4.3 billion. Mortgage drawdowns rose by 41 per cent to in excess of €1 billion, giving the bank a 37 per cent share of the market during the period.

However, the average size of the bank’s loan book continued to decrease in the first half, to €60.8 billion from €62.8 billion, as sterling weakness dented the size of its UK portfolio. “Overall, it has been a positive first half,” said Bernard Byrne. “We are on track for another strong year at AIB.”

However, he said that “there will be plenty of challenges, many of which, including Brexit, may be material”. While the bank continues to lend in the UK, it has no plans to expand the business there as uncertainty over Brexit continues.

Net profit at the group fell by 21 per cent to €652 million, with the year-earlier figure having been boosted by a €272 million gain from the disposal of the bank’s stake in Visa Europe.

Mortgage overcharging

The bank’s common equity Tier 1 ratio, a gauge of capital reserves to help withstand a shock loss, rose to 16.6 per cent in June from 15.3 per cent in December.

Meanwhile, the bank said it has paid out €133 million in redress and related costs tied to the overcharging of mortgage customers who had previously been denied their contractual rights to a cheap rate linked to the European Central Bank’s benchmark rate.

The bank had set aside a total of €190 million of provisions in late 2015 to deal with an industry-wide tracker mortgage examination ordered by the Central Bank at the time. Some €57 million of such provisions remain unused by the bank.

Shares in the bank rose as much as 3 per cent to €5.05. That’s almost 15 per cent above the price at which the IPO was set.