AIB warns weakening currencies will take 4% off profits

AIB has warned that the weakening value of the dollar and sterling will knock 4 per cent off profits this year and has told investors they should now expect only a modest increase in earnings.

In February, the Republic's biggest bank had signalled that strong growth in its businesses would deliver a 5-6 per cent increase in earnings in 2003 but yesterday was forced to paint a more pessimistic outlook.

AIB said that, while growth in its Irish and UK divisions continued to be excellent, a poorer performance in Poland and the slide in the value of the dollar, sterling and the zloty, would depress profits. The bank is now telling investors to expect an increase of around 1-2 per cent.

Close to 50 per cent of AIB's profits are earned outside of Ireland and, despite what it described as an active hedging policy, this portion of its earnings are affected by changes in the value of these currencies.

Analysts had factored in some downturn in profitability as a result of the currency movements and some were preparing to cut their profit forecasts by up to 6 per cent. Most were not overly concerned about the warning, as the group's key businesses were continuing to trade strongly.

Sentiment towards AIB was sweetened by news that the bank intends to use surplus capital to undertake another rolling share buyback programme. It completed a €483 million share buyback programme in May, funded from the cash it received from the sale of its US Allfirst subsidiary to M&T Bank.

The bank has not stated the size of the next share buyback, although it is expected to be less than €483 million. Market sources suggest it could spend €300-€350 million in the next phase.

AIB's share price slipped to lower levels following the statement. In Dublin the shares closed 18 cents down at €12.30.

Mr John Kelly, an analyst at NCB Stockbrokers, revised his pre-tax profit forecasts for this year to €1.36 billion from €1.5 billion, a decline of 6 per cent.

In February AIB had said that the adoption of a new accountancy standard, FRS 17, and the new Government levy would hit earnings.

In its trading statement, the bank said the adoption of FRS 17 would translate into a cost of 5.9 cents per share, while the Government levy would take a further 3.5 cents off earnings.

AIB said it would "relentlessly focus on productivity and expected to maintain a positive underlying gap between income and cost growth" this year.

In Ireland, the bank said it was winning a greater share of customers' business with demand for its retail and commercial banking products and services still very strong.

Its loan book is on target to grow by around 15 per cent this year, with home mortgages continuing to be the fastest growing product.

In the UK and Northern Ireland division, the bank has been recording good double-digit annual increases in loans and deposits, while its niche banking activities remain very solid.

The bank's operations in Poland are being hampered by stagnant economic conditions where loan growth is poor.

In relation to its activities in the US, the bank said it continued "to expect that the combination of earnings generated by Allfirst in the first quarter of this year, our 22.5 per cent share of M&T's net income for the subsequent quarters and the impact of the recently completed buyback of 35.9 million shares will give a marginally accretive overall result in 2003 relative to the contribution of Allfirst to group 2002 earnings".