Better bad loan result helps AIB beat trading forecasts

AIB has beaten its own expectations for trading so far in 2006 and is on track to comfortably beat forecasts for the full year, according to a surprise trading update issued by the bank yesterday.

The news sent AIB's shares 3.3 per cent higher, as analysts moved to upgrade both their forecasts and price targets on the stock.

AIB said business across all of its main units had been strong over the first few months of 2006, but singled out a better bad loan result as a key driver behind the outperformance.

"Asset quality is very strong and recoveries of impaired loans are particularly high in the year to date," the statement read.

The bank also reassured investors by describing the overall credit environment as "exceptionally benign". "There are currently no trends or developments that lead us to foresee an imminent deterioration," the market was told.

The trading update came less than three weeks after AIB's annual general meeting, at which chairman Dermot Gleeson said the bank's prospects remained "bright". Analysts had expected more guidance next month.

There had been some speculation that yesterday's update had been timed to address rumours that AIB was on the point of being ejected from the EuroStoxx 50 index.

This was, however, denied by the bank's spokeswoman, who said it had simply "become apparent" that AIB's performance was ahead of guidance previously given and that the market needed to be informed of this.

AIB said customer demand had been buoyant in the year to date, with both actual levels of new business and pipeline trends underpinning its confidence for the future.

In the Republic, according to the update, AIB is now expecting loans to climb by 25 per cent this year, with deposits to climb by 15 per cent. The bank said competition was fierce but added that it had anticipated it.

Group margins are still forecast to decline by 20 basis points over the year, reflecting the faster growth in loans over deposits.

The bank also flagged a positive performance in Britain, the North and in Poland. It expects a "good contribution" from its 23 per cent owned US associate, M&T Bank.

AIB said corporate banking was having "another outstanding year", with loans to increase by about 20 per cent.

Across the group, non-interest income is forecast to rise by 12 per cent in 2006. Costs are set to grow three percentage points more slowly than income, according to the statement.

Shares in AIB rose by 60 cent to close at €18.60 after a heavy day of trading. The consensus among analysts is that the stock is undervalued, with Davy holding a price target of €22.35 and NCB a "conservative" projection of €22.50. Most commentators upgraded their earnings per share forecasts by 5 per cent in the wake of yesterday's update.

Three senior players in AIB also did their bit to boost confidence in the stock by buying blocks of shares yesterday. Chairman Dermot Gleeson spent €182,800 on 10,000 shares, while both chief executive Eugene Sheehy and AIB managing director Donal Forde exercised options.

Mr Sheehy realised a paper profit of €272,120 after exercising options over 34,000 shares, while Mr Forde made a paper return of €128,700 on options over 15,000 shares.