AIB plans capital relief as focus turns to investor payouts

AIB may move next year to reduce the level of expensive regulatory capital it must hold by entering into contracts to move loan-loss risks on parts of its mortgage and corporate parties off its balance sheet.

It comes at a time when the bank is nearing the end of a drawn-out process to lower its level of non-performing loans which tie up high levels of capital, and as it advances plans to return billions of euro of excess capital to shareholders over the coming years.

The Government is currently actively selling down its stake in AIB, having cut its holding from 71 per cent to under 55 per cent since the beginning of 2021. It is expected to reduce its holding below 50 per cent within months.

AIB chief executive Colin Hunt told The Irish Times last week that the group may enter so-called significant risk transfer (SRT), or securitisation, deals next year. This would see a group of institutional investors or pension funds take on the credit risk for an agreed amount of potential losses on loan portfolios for an extended period of time, reducing the level of capital the bank needs to hold in reserve against the loans.

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AIB has been considering the merits of SRT transactions for some time. The customer relationships and loans in any such deal would continue to be managed by the bank.

Rival Bank of Ireland has carried out a number of similar credit-risk transfer deals since 2016, covering Irish business loans, mortgages, project finance loans and UK corporate and leverage acquisition finance exposures.

AIB has cut its non-performing loans from a peak of €31 billion in 2013 to €2.2 billion, or 3.5 per cent of gross loans, as of the end of last year, mainly as a result of debt restructuring and loan sales. The bank said last week it has “a clear path” to reducing the ratio to its 3 per cent target by the end of the year, bringing into line with the EU average.

AIB, which plans to pay out €381 million to shareholders by way of dividends and share buy-backs, indicated in December that it plans to hand over billions of euro of excess capital to investors in the coming years as its profitability improves amid rising rates and loan book growth, aided by the acquisition of Ulster Bank loans.

Meanwhile, Mr Hunt told The Irish Times that AIB’s EBS unit has reaffirmed its commitment to its savings and current account products after completing a strategic review last year. Sources had said early last year that EBS was weighing pulling back on its savings and current account products and relying more on funding from its parent, as it sought to narrow its focus to its mortgages business. AIB took over EBS in 2011, in the middle of the domestic banking crisis, under government orders.

“In the rapidly changing banking environment EBS continues to invest in its digital capability,” a spokesman for AIB said in response to follow-up questions. “EBS remains an important part of the group and we will continue to invest in EBS. With regards to any changes to the EBS’s current and deposit accounts, there are no changes on the agenda.”