AIB ups forecasts as first-half profit soars amid rising rates

AIB has raised its full-year net interest income forecast and said its profitability will be “materially in excess” of target, after delivering a strong set of interim results amid rising official interest rates and the acquisition of loans from Ulster Bank.

The lender posted net profit of €854 million for the first half of the year, up 79 per cent from the same period in 2022, as the European Central Bank (ECB) continue to raise interest rates this year. Following the latest official set of ECB rate increases on Thursday, AIB is earning 3.75 per cent – or an annualised €1.17 billion – on the €31.2 billion of excess deposits it has stored with the central bank.

AIB and other Irish banks have lagged behind many European peers in raising mortgage rates since the ECB started hiking rates last July, as they are more reliant on cheap household deposits to fund loans.

The bank said it now expects to post more than €3.6 billion of net interest income this year, compared to its previous forecast of a figure in excess of €3.3 billion. Other income, including fees and commissions, is on track to reach €780 million, some €30 million in advance of previous guidance.

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It also sees its full-year return on tangible equity – a key measure of profitability relative to shareholders equity – soaring to about 20 per cent this year from 9.6 per cent in 2022 and coming in well above its 13 per cent-plus medium-term target. Analysts see a return of at least 8 to 10 per cent as a sign of a healthy bank.

The bank set aside €91 million of provisions to deal with potential loan losses, driven by a charge against its commercial property portfolio as asset values come under pressure in a rising rates environment. In the year-earlier period, it released €309 million of provisions that had been set aside during the height of the Covid-19 pandemic.

Still, non-performing loans declined to 3.3 per cent of its total book from 3.5 per cent in December.

Net interest income rose to €1.77 billion in the first half from €895 million for the corresponding six months last year, when the ECB was imposing negative rates on banks for excess deposits stored with central banks across the euro zone.

AIB has taken more than €2.9 billion of commercial and corporate loans from Ulster Bank, with the final amount down from the originally estimated figure of about €4 billion. Meanwhile, some €4 billion of the €5 billion of Ulster Bank tracker loans that AIB is taking over migrated last week.

The Government lowered its stake in AIB below the 50 per cent threshold last month – to 46.9 per cent – as it continued a programme of share sales. The State has now recovered about €13 billion of AIB’s crisis-era rescue bill.

[ Severe downturn would mean AIB capital dips below euro average ]

AIB set aside a further €63 million provision during the reporting period to cover compensation and other costs relating to a failed series of boomtime UK commercial property funds, known as the Belfry Funds, marketed to customers between 2002 and 2006. It brings the total related charges booking in recent years to €239 million.

Reacting to the bank’s statement, the Financial Services Union (FSU) – which is due to hold further talks at the Workplace Relations Commission next week with AIB over its call to revise an existing pay agreement in light of higher-than-expected inflation – said the positive half-year results left no justification for the company’s treatment of its staff.

“The results also show that the decision by AIB not to support its staff with a pay top-up this year to help them cope with inflation is an unjust decision and one that should be immediately reversed,” said FSU general secretary, John O’Connell.

Meanwhile, Pepper Finance, the mortgage services provider used by a number of investment funds for Irish loans acquired after the financial crash, said on Friday it is increasing borrowing costs on most of its standard variable mortgages in a move that will leave the average rate at about 7 per cent. Increases of between 0.5 and 1.25 percentage points are being applied to most of the 21,000 variable mortgages it services.

Permanent TSB said it is increasing rates for certain new fixed rate mortgages by up to half a percentage points.