Analysis: More to do at AIB but profitability is good start

AIB’s profit for the first half of this year might have been 16 per cent below the result for the same period of 2015 but it was in line with expectations.

The bank made a pre-tax profit of €1 billion for the six months to the end of June, compared with just more than €1.2 billion a year earlier.

The difference was due to lower level of net writebacks, reduced other income, and higher costs (up 5 per cent), due to increased regulatory expenses and extra spending on staffing and strategic projects.

This year’s figure was also bolstered by a €272 million gain on the sale of its share in Visa Europe.

Its impaired loans fell by €1.8 billion with its provisions coverage unchanged at 52.2 per cent. As noted by analysts at stockbroker Davy, its fully loaded Core Equity Tier 1 ratio rose by 30 basis points to 13.3 per cent in spite of a €500 million swing in its pension deficit.

AIB’s mortgage drawdowns rose by 2 per cent in the period while the bank remains the largest home loans provider in the market with a share of 34 per cent.

Legacy issues continue to dog the business. A review of its tracker mortgage book, ordered by the Central Bank of Ireland last December, has shown that some of its 630,000 tracker customers were not placed on the correct interest rate.

Chief executive Bernard Byrne apologised for this error this morning and indicated that the bank would begin contacting the affected customers to offer redress and compensation.

It's a reminder of the shabby practices of the past that ultimately resulted in AIB needing a State bailout of €20.8 billion following the global financial crash in late 2008.

On a more positive note, it was able to pay the State €1.76 billion today for the contingent capital notes that matured this month and had formed part of its taxpayer bailout. This was also the final element in tidying up its capital structure.

As indicated by its CEO, AIB has “more to do” and it faces economic headwinds from Brexit (the UK represents 10 per cent of its balance sheet) but with underlying profitability of close to €560 million, it is in decent shape to tackle these issues.

Question marks remain over the timing of an IPO of 25 per cent of its shares by the State. This would be a major milestone for the bank in terms of ultimately returning to private ownership but stock market volatility and uncertainties created by Brexit have ruled it out for the time being.