Rising ECB rates boost AIB’s interest income forecast to 15%

AIB raised its full-year net interest income growth forecast to 15 per cent on Friday on the back of rising central bank interest rates. The bank continued to lay the ground for an upgrade to its medium-term profitability targets, even as it grapples with rising running costs.

The new interest income projection is up from the 10 per cent that was outlined by the bank three months ago, and points to a full-year figure of more than €2 billion.

Interest income growth is being driven, so far, by the bank no longer being charged negative rates by the European Central Bank (ECB) for excess deposits stored with the organisation, as well as AIB passing on some of the ECB’s rate hikes to customers.

The ECB increased its main rates on Thursday by a further 0.75 of a percentage point, resulting in its main lending rate moving from zero in July to 2 per cent now, as central banks globally seek to rein in soaring inflation. Its deposit rate has moved at the same pace, though it started off at minus 0.5 of a point.

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AIB has so far added half a percentage point to the cost of new fixed-rate loans, while rates on its €5.7 billion of tracker mortgages are moving automatically in line with ECB increases.

AIB previously guided that if it were to move all of its rates in parallel with the ECB, every one-percentage-point increase in official rates could add €300 million to its net interest income. AIB executives did not offer any guidance during a call with analysts on Friday on when it might move again on the pricing of loans.

Shares in AIB closed up 2.5 per cent in Dublin trading, outperforming the wider Iseq market.

The bank, led by chief executive Colin Hunt, said it has not yet seen any signs of stress among borrowers as households and businesses grapple with soaring bills amid inflation running at levels last seen four decades ago. Irish inflation stood at 8.6 per cent in September.

“We remain vigilant, with careful management of the loan book, particularly in those sectors impacted by inflationary pressures and rising interest rates,” it said. Still, the bank plans to set aside provisions by the end of the year for a likely increase in problem loans.

AIB’s non-performing loans ratio stood at 3.9 per cent of gross loans at the end of September, close to its 3 per cent medium-term target, and down from 5.4 per cent in December. Most of the decline was down to the sale of a portfolio of deep-in-default loans to a consortium led by US distressed debt group Cerberus earlier this year.

The group posted “strong profitability” during the third quarter and reiterated that there is “upside potential” to its overriding financial target of delivering profit returns in 2023 equivalent to 9 per cent of tangible equity (RoTE) shareholders hold in the business. That is double the return AIB delivered in 2019, before the Covid-19 pandemic.

New medium-term financial targets will be announced on December 2nd, it said.

AIB chief financial officer Donal Galvin signalled on the analysts’ call that the bank, which secured a €20.8 billion bailout during the financial crisis, would also offer guidance at that stage on future returns of excess capital on its balance sheet to shareholders. AIB started the process earlier this year by buying back €91 million of its own stock.

“I am pleased to report that the group had a strong third quarter and, with momentum in our business, we are confident in our delivery for the remainder of the year. Notwithstanding the global macroeconomic uncertainty and volatility, the Irish economy is demonstrating resilience supported by growth, record levels of employment and low leverage,” said Mr Hunt.

However, AIB says it now sees its full-year costs rising to €1.65 billion, some €50 million more than planned, from €1.53 billion last year, amid general inflation, agreed salary increases and the cost of taking on new customers from Ulster Bank and KBC Bank Ireland, who are exiting the Irish banking sector.

Aside from AIB agreeing to buy much of Ulster Bank’s loan book, it has also seen its account openings rise 82 per cent this year as the UK-owned lender and KBC push their customers to find new homes for their daily banking.

AIB said that it expects its non-interest income to rise to €700 million from €590 million, including the first full-year benefit from taking over Goodbody Stockbrokers as well as gains from certain equity investments.