Reports identify failures in AIB but praise changes introduced in 2009

ALLIED IRISH Bank, which is almost fully nationalised, is considering two reports by outside consultants into the effectiveness of the bank’s board and the credit risk management at the lender.

The internal reports compiled privately for the bank mark the first analysis of the board and credit risk weaknesses at AIB for executive chairman David Hodgkinson since he took charge of the troubled bank last October.

AIB needs to appoint more independent non-executive directors if further political appointees are made to its board, a report by consultants Promontory Financial Group has recommended.

Meanwhile, consultants from Deloitte found the bank had failed to address credit risk problems identified by AIB’s internal audit department. However, it said credit risk management had improved under changes introduced at the bank over the past year.

The Central Bank asked consultancy firm Promontory Financial Group to carry out a review of the board of AIB last August.

The group’s chairman Michael Foot, a former managing director of the UK regulator, the Financial Services Authority, completed the report with assistance from accountants Mazars last month.

Deloitte carried out a review of credit risk management at the bank between January 2009 and September 2010 and the firm’s report was finalised in December.

Both reports praised changes introduced by former AIB managing director Colm Doherty and executive chairman Dan O’Connor after they took over the running of the bank in November 2009.

The two executives were forced to resign last September as a condition of the Government injecting further capital into the bank in a second State bailout of the lender.

“Some of the most important weaknesses began to be tackled with vigour with the appointment of Mr O’Connor and Mr Doherty as executive chairman and managing director,” wrote Promontory in its report on the bank.

“This momentum must be sustained following their departure.”

The report by Mr Foot said the current AIB management team needed support and “additional high-quality staff hires”.

The board needed 10 to 11 members “if there were in future no political appointees and more if such appointees continue”.

The report said the “absolute majority” of board members should be non-executive directors and that they needed to spend up to 60 days a year, and at least 40, at AIB “given the complexities”.

Non-executive directors needed induction and professional development, and their performances measured, the report said. AIB’s remuneration committee required “a much wider ranging remit”.

Mr Foot said in his report that the most pressing need was for the appointment of a chief executive and a permanent chief risk officer.

Promontory’s other recommendations included:

* the need to set a strategy backed by Government to make AIB a viable, self-financing and profitable over three to five years;

* the need for a major culture change directed by the board “in which high and consistent standards are set for the behaviour expected in the organisation”;

* the need to set/enforce strong and very clear conflict of interest rules for executives where past policy and practice fell short of an acceptable minimum standard.

Promontory found that information provided by AIB management to the board was “still patchy” and that its production depended on “excessive manual intervention”.

Credit had improved, the report said, and work had been carried out to separate “the front-line business-getters” from those making loan approvals.

The report warned about staff morale and pay saying that Government-set constraints on pay would lead to a loss of good staff and make AIB’s recovery much more difficult.

Deloitte report into AIB: 'Insufficient attention given to credit risks'

AIB’S BOARD and executive team failed to emphasise the importance of a robust management of lending risks across the bank, according to a report by Deloitte.

The internal report into credit risk management at AIB’s retail operations in Ireland from January 2009 to September 2010 found there had been “no explicit group risk appetite or tolerance articulated by the board and executive management”.

Insufficient attention was given to addressing relevant credit risk issues identified by AIB’s internal audit, said the report, which was completed just before Christmas.

Deloitte found the structure of AIB was focused around divisional performance rather than overall group management.

The report carried out a detailed assessment of losses incurred by AIB over the period.

The Government has injected €7.2 billion into AIB in two bailouts, taking a stake of 92.8 per cent in the beleaguered lender.

The bank requires a further €4.7 billion to meet higher capital levels set under the EU-IMF financial aid package agreed last year.

The bank has said that this is “likely” to come from the Government, pushing the State’s interest in the bank to over 96 per cent.

Deloitte acknowledged key improvements in credit risk management at AIB over the last year.

The consultants said most of the improvements took place following changes in personnel in the second half of 2009. AIB appointed Colm Doherty as managing director and Dan O’Connor as executive chairman at this time, but they have since stepped down.

Deloitte noted that AIB’s group credit control officer was now a member of the bank’s executive committee. Credit control had also been centralised at the bank.

AIB’s policy around risk appetite had improved, while the framework and governance of credit policy approved by the board and the resourcing of group credit had been enhanced, Deloitte said.