ANALYSIS:AIB's watchlist of risky loans has surged and in large part reflects the difficulty developers now find themselves in, writes Simon Carswell.
THE SIZE of AIB's watchlist of risky loans jumped off the page, said one analyst, who expressed surprise that the bank was monitoring loans of €10.2 billion - a rise of €3.5 billion in just six months.
Predictably, given the housing slump, most of the loans were to Irish residential developers. A fifth of AIB's €10.4 billion loan book to Irish residential developers was now "on watch", the bank said yesterday at its half-year results.
AIB finance director John O'Donnell said that €10.2 billion in "criticised" loans did not mean they were in arrears or could go bad - they were just being watched more closely. The recent and rapid deterioration in the bank's loan quality startled some analysts.
Chief executive Eugene Sheehy said mortgage lending had started out "fine" this year but declined 35 per cent in May and June, putting housebuilders under pressure.
Under new accounting rules, the bank must take account of "criticised" loan losses as soon as the borrowers stop making repayments. Moreover, the bank must include all loans owed by a risky customer; this partly explains the sudden rise. Sheehy said that if a borrower could not afford interest for three years, then AIB must account for this in its current financial year.
This is partly why AIB believes its bad debts will peak next year when most commentators believe the worst will come in 2010.
The bank says that, assuming Irish property values fall 30-40 per cent from their peak, bad debts will top 0.8 per cent of loans, or roughly €1.05 billion.
Davy stockbrokers believes this is on the low side and the charge will end up at 1 per cent of loans.
O'Donnell painted an extreme worst-case scenario, stress-testing AIB to the point where bad debts would top 1 per cent of loans every year from 2009 to 2011 and there would be no loan growth, but where dividends would still rise 10 per cent a year.
He found that the bank would still have a Tier 1 ratio - a key measure of its ability to cope with unexpected losses - of 6.8 per cent, similar to other banks.
AIB confirmed it was "rolling up" interest for some property developer clients as there was no activity in the market and no cash being generated to repay interest.
Sheehy said the bank had adopted "a very supportive approach".
"There is absolutely no point in forcing people to put assets into a market that is illiquid - it is a total waste of time," he added.
In the meantime, the bank has tightened its own belt, reducing its staff numbers by about 600. This has been achieved by cutting 300 IT consultants and not replacing 350 departing staff. Also, 200 staff have been moved to help monitor the bigger watchlist of risky loans.
