Dismantling the ivory tower at AIB

Chief executive David Duffy is convinced that earning the trust of its customers again is the first step in returning the State-controlled lender to profitability, writes SIMON CARSWELL,Finance Correspondent

DAVID DUFFY HAS been chief executive at Allied Irish Banks for only eight months but has already moved office. He has chosen to work from the fourth floor of AIB’s old blocks in Ballsbridge overlooking the RDS rather than from the fifth floor of the new wing with views of Aviva stadium.

The relocation is to bring him closer to other managers and into the thick of what AIB does. The change of office is also symbolic, moving away from what could be seen as management’s ivory tower in the new annex and closer to what he says AIB should be more focused on – serving the needs of customers.

He wants customers to be able to arrive at AIB’s head office in Ballsbridge and meet him or other senior executives within three minutes of arriving at Bankcentre. It’s all about ease of access to AIB’s most senior banker and his new leadership team.

Duffy says the rate-rigging scandal which has erupted in Britain is a symptom of banks turning their backs on the customer and becoming too inwardly focused.

“The absolute essence of culture in a bank has to be driven around how you focus on a customer. Nothing is going to cure you from human behaviour, but when you focus on yourselves, your economics and your position in the market, you get distracted.

“If we are relentless on focusing on the customer, you will at least give yourself a starting point.”

Duffy circulated a 24-page strategy document to staff last week outlining how he plans to restructure the bank and return the State-controlled lender to profitability by 2014. The aim is start paying back some of the Government’s €20.7 billion bailout by attracting outside investors.

Describing the strategy as being about “drawing a line in the sand”, Duffy says it sets out a plan to simplify the business and put the loss-making lender on a course to viability and profitability in what is the most radical restructuring of the bank in its 46-year history.

Repairing what was once the State’s largest bank will inevitably involve increasing lending rates and reducing interest paid on deposits.

Duffy says the bank’s ambition is simple – maximise the billions in capital the bank has received from the Government to support the economy and try to mitigate anything that dilutes that.

“The State has funded this bank, and the taxpayer ultimately, and without that the bank would not be viable. It would not be a good place to go to end up needing more capital and being in a position where you didn’t take the tough decisions to stabilise the basic banking model.”

One such tough choice recently was the bank’s decision not to pass on last week’s European Central Bank interest rate reduction on standard variable rate mortgages.

“In any circumstance where our funding model and our pricing on our products are inverted, we try to address that because that will only lead to a further dilution of capital,” says Duffy.

The bank is already talking to investors about the possibility of buying into the lender to allow the Government to reduce its 99.8 per cent shareholding in the bank.

The investors cover a “broad spectrum”, he says – from people willing to pay distressed prices for property to those looking for long- term investment returns. Duffy believes AIB can offer a rate of a high single digit percentage return to potential investors.

It will be up to the Government to decide when the price is right to reduce its stake to a minority position but he is hopeful that AIB can do enough to attract outside investment during 2014.

“Nobody has put a specific date or pricing model, but I am optimistic that if we deliver our controllable universe in terms of our performance and Europe is not too negative, there will be investors who are attracted to an investment in AIB,”says Duffy.

AIB is no longer a bank with a wide international reach, so it has to be reshaped and reduced, both in size and in the number of staff, to serve the economy and public that has bailed it out, says Duffy. First Trust Bank in Northern Ireland and AIB’s business bank in Britain have also been retained.

Duffy is restructuring the bank around products and services on one hand and customers on the other, eliminating the various independent units that contributed to AIB’s “siloed” set-up and the heavy losses on property loans.

“We were too complex; we had too many people with too many ambitions, hopes and dreams, or whatever it would be,” he says.

“Here, it is down to two people and myself. One decides based on the customer experience what the customer wants and the other says I will make that from the factory, so it is very basic. If two children can’t agree in any family on anything, then the parents are there.”

Independent of those businesses, new executives in charge of audit and risk can bypass Duffy, if required, and report any concerns to subcommittees of AIB’s board.

“The past sometimes had too many of those functions embedded in businesses and some of the products were the same. There were too many independent businesses with the confusion of the areas in there,” says Duffy.