Annual profits at AIB surge 13% to record £420.8m

STRONG growth in both lending and income from life assurance, funds management and its Polish investment helped AIB Group generate record profits for 1996.

Pre-tax profits rose by 13 per cent to £420.8 million, with a 12.3 per cent increase in earnings per share to 38.4p. AIB recorded its highest ever return on equity at 21.3 per cent, while the return on assets was steady at 1.09 per cent. Shareholders will benefit from the strong performance with a 16.3 per cent increase in the dividend to 15p per share.

Group chief executive Mr Tom Mulcahy said that the 9 per cent rise in operating profits before bad debts reflected "the high quality" of the latest profits.

General manager Mr Kevin Kelly explained that improvements in bank profits in the early 1990s had relied heavily on reductions in bad debt provisions, while the growth in AIB's profits for 1996 was driven by increases in core income and cost control.

With the bad debt provision just marginally lower - down from £52.5 million to £52.1 million - group operating profit before tax improved by 11 per cent to £410.8 million. The addition of income from associates, mainly WBK Bank in Poland in which AIB has a 36.3 per cent stake, elevated pre-tax profits to £420.8 million.

WBK contributed £8 million, its first contribution to the group. AIB has a three-year option to raise its shareholding in WBK to 60 per cent. Mr Mulcahy declined to disclose the cost of exercising this option which, he said, was based on "a complicated formula".

AIB's life assurance subsidiary, Ark, contributed £20 million for 1996, an increase of 60 per cent. The 1996 profits included contributions from acquisitions during the year - the British-based John Govett funds management operation and the US-based Zirkin Cutler investment advisory business and First Washington Bancorp.

AIB's net interest income rose by 5.1 per cent to £837.1 million, enhanced by a 11.3 per cent increase in lending with net new loans of £1.5 billion and a 10.1 per cent rise in deposits. The net interest margin - profits from lending and funding activities - was stable at 3.54 per cent in the second half but fell from 3.74 per cent in the half year to December 1995

Margin stability in the second half reflected a strong treasury performance, an increase in lower-cost current accounts and a drop in non-performing loans to under 2 per cent of total lending, according to Mr Kelly. But there was pressure on margins from increases in lower margin home mortgage lending and increases in higher-cost term and notice deposits, he said.

AIB lost money on its market making in Government bonds through Goodbody Stockbrokers but Mr Mulcahy declined to disclose the extent of the losses. "It was difficult for everyone, make no bones about it," he said. The Goodbody Government bond operation is being integrated within AIB's capital markets division in preparation for post European Monetary Union trading in Irish pound products.

Non-interest income - from Ark, funds management including the acquisitions during the year, credit card fees, and fees and service charges generated by the US operation - was 16 per cent higher at £466.5 million.

Group operating expenses were 8.5 per cent higher at £840.4 million. But when the cost of the three acquisitions, the joint venture with Bell Atlantic in the US, new display signs at branches in Britain and the new 24-hour bank in Naas is stripped out, underlying costs were 2.3 per cent higher. AIB's cost income ratio was 64.5 per cent, with an underlying ratio of 62 per cent, according to Mr Kelly.

A breakdown of profits by division shows that AIB Bank - branch banking in the Republic, Northern Ireland and Britain, Channel Islands and the Isle of Man, AIB Finance and Leasing and the Ark subsidiary - generated 53.9 per cent of profits. Profits were 15.7 per cent higher at £226.5 million.

In the domestic market overall lending rose by 19.6 per cent. Branch lending increased by 14.7 per cent, mortgage lending was 23 per cent higher, while leasing advances rose by 26.5 per cent, boosted by demand for finance for new cars.

Northern Ireland had "a sparkling year", Mr Kelly said, with a 12.6 per cent rise in lending, an 11 per cent increase in deposits and lower costs. In a better business environment Britain generated "good" profits, with a 12 per cent rise in branch lending.

Operations in the Republic contributed 48.1 per cent of group profits in 1996. The US was the second largest profit generator with 26.3 per cent followed by Britain with 23.6 per cent. The Polish contribution accounted for 1.9 percent of group profits.