AIB may need to cut dividend and disappoint market on capital return – Barclays

AIB faces the risk of cutting its dividend and disappointing the market with the scale of excess capital it will return to shareholders as cost-cutting efforts may fall short, according to analysts at Barclays.

The bank, led by chief executive Colin Hunt since last March, may cut its 2019 dividend per share by 24 per cent to 13 cent when it reports full-year figures in March, according to Barclays estimates. In 2017, AIB returned to paying dividends for the first time since the financial crisis.

Shares in AIB fell by as much as 4.3 per cent to €2.95 on Wednesday as Barclays downgraded its recommendation on the stock to underweight, the equivalent of a sell.

“We think the market significantly overestimates AIB’s surplus capital, whilst noting a number of risks/headwinds on the horizon,” said Barclays analysts, adding that the bank may use its strategic update in March to “rebase the ordinary dividend lower”.

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“We expect AIB to announce plans to tackle costs, but think material saves may be difficult to realise before 2022, given stubborn staff costs and rising depreciation through 2021.”

AIB, which has returned a little over half of its €20.8 billion Government bailout during the crisis, was largely estimated when State sold a 29 per cent stake on the stock market in June 2017 to have at least €3 billion of excess capital on its balance sheet to return to shareholders over time.

Reined in

However, those expectations have been reined in by analysts in the past 18 months as banks’ income has been dented by the effect of ultra-low central bank and market interest rates and slow loan book growth amid uncertainty over Brexit and the Irish housing market. Barclays estimates AIB had €1 billion of excess capital at the end of 2019.

AIB, which had 9,831 employees at the end of 2018, signalled in November that it planned to shed more than 300 jobs in 2019 as it dealt with a “very challenging” interest rate environment internationally, which is squeezing lending margins and income. Mr Hunt had indicated in September that he planned to eliminate about 1,000 jobs by the end of 2022.

Investors are keenly awaiting Mr Hunt’s strategic plan in March. A spokesman for AIB declined to comment on the Barclays report.