Caution proves a valuable asset for AIB

Analysis A conservative lending policy has helped AIB weather a turbulent time better than some of its more reckless competitors, writes Simon Carswell

Being low risk and lucky helped AIB avoid the pitfalls that have tripped up many of the leading European and US banks in recent months.

AIB chief executive Eugene Sheehy said yesterday that the bank's strong focus on growth in Poland and the UK meant it did not buy into high-risk, high-yielding assets linked to the US subprime market that many European and US banks snapped up in recent years.

These radioactive assets have now contaminated most bank stocks as billions of dollars in new losses are dumped on the subprime waste pile on an almost daily basis.

Sheehy said AIB was lucky not to have followed others into this market. Its exposure to the US home loans crisis has been minimal - it wrote down €131 million in assets linked to the US sub-prime housing market in 2007.

This made only a minor dent in the performance of Ireland's biggest bank - it made a pretax profit of €2.5 billion, down 4 per cent on the previous year but in line with market expectations. The group's divisions - Ireland, Poland, the UK and the US - remain profitable on an operating level, though its US bank, M&T, and its capital markets divisions took hits in 2007 due to the subprime crisis.

At home, a weakening economy, a slowing mortgage market and tighter profit margins mean AIB will not be making the record profits of recent years but it still expects earnings growth of around 4 per cent in 2008.

As the property market slows, the bank expects bad debts to rise, albeit from low levels. It has also been conservative in its lending. Its low-risk strategy on residential mortgages meant it avoided the sales frenzy on 100 per cent home loans.

Sheehy did admit that it was "a mathematical certainty" that some customers who drew down mortgages for up to 92 per cent of the value of the properties last year were now in negative equity. However, the percentage of customers affected is small, said Sheehy, and it has not prevented them meeting their monthly repayments.

He said the bank had not started foreclosure proceedings on "one single customer".

As for concerns about residential property developers being overstretched, AIB has spotted the increased risks. It has investigated 8 per cent of its residential property loan book to see if these homebuilders are having any difficulties repaying €700 million in loans to the bank. Where AIB once reviewed some of these loans every year, it now looks at them on a monthly basis.

By disclosing its 2007 results in considerable detail, AIB seemed to reassure investors that its various asset classes were robust.

Davy analyst Emer Lang said that while Irish bank shares have fallen since the start of the year, they were still outperforming European counterparts. This will bring little comfort to investors who have endured the white-knuckle descent from AIB's share price highs of €24.40 in March 2007 to €13.90 yesterday.

Sheehy believes it will be 2009 or even 2010 before investors return, and only the brave will get in early and invest before then.