AIB may seek deeper cost cuts after Covid-19 crisis

Economic shock caused by pandemic has seen bank extend almost 50,000 loan payment breaks

 

AIB chief executive Colin Hunt, who set out in March to cut 1,500 jobs by 2022 to help keep running costs in check, has signalled he may seek additional savings as analysts see the Covid-19 crisis dragging the bank’s loan book growth and income prospects over the coming years.

Speaking on Tuesday after the bank revealed it took a €210 million charge in the first quarter for an expected surge in bad loans resulting from the coronavirus economic shock, Mr Hunt said he remained committed to medium-term profitability, costs and capital targets outlined two months ago.

Cost

“We said we were going to have a cost line below €1.5 billion and certainly there will be potentially scope for us to have that number somewhat below €1.5 billion rather than marginally below €1.5 billion as we come to the end of 2022,” he said on a call with analyst. “Because clearly the crisis is going to have an impact on how we organise ourselves and how we operate the business over the years ahead.”

While Covid-19 has prompted AIB to press the pause button on redundancy plans, Mr Hunt said that voluntary severance costs were included in €150 million-€175 million of exceptional expenses that the bank expected to book this year. The figure also includes “restitution and operating costs” around the tracker mortgage examination programme, in addition to €600 million of provisions for its role in the scandal taken in recent years.

While it is unclear what additional cost-cutting measures it may take, banks and other large businesses are expected to review their use of office space following the pandemic. AIB has more than 7,000 of its 9,500 staff working from home.

AIB said it had extended almost 50,000 temporary loan payment breaks to customers affected the crisis, up 25 per cent from a figure given two weeks ago, with 8 per cent of mortgage accounts, 3 per cent of loans and 11 per cent of business borrowers availing of the temporary relief measures that will run to the end of September.

Default

While it may be next January before some of these borrowers move technically into default if they do not resume payments in the fourth quarter, the bank said it would analyse its entire loan book by the end of June and set aside provisions for loans that it expects to run into trouble.

The €210 million impairment charge taken in the first quarter, which pushed the bank into a “small loss” for the period, was driven by management’s view that a contracting economy will lead to a spike in distressed debt. It also included €50 million set aside for loans backing corporate takeovers that face a greater threat of default.

The bank expects to book a bigger impairment charge for the second quarter, as it looks in more detail at risks in its portfolio.

“As the largest Irish bank, AIB is committed to supporting its customers and the Irish economy through the unprecedented challenges presented by Covid-19,” said Mr Hunt. “Critical to our ability to support individuals and businesses through the crisis is AIB’s robust capital and liquidity position and the strength of our business model.”

However, overall new lending fell 12 per cent in the first quarter for the bank, mainly due to lower international activity, it said.

Lending

With the effects of the Covid-19 crisis only being felt in the Republic and the UK from the middle of March, the bank’s first quarter mortgage lending grew 11 per cent, delivering a market share of 32.9 per cent.

AIB chief financial officer Donal Galvin said that the mortgage market is effectively closed at present, noting that analysts see full-year home loans lending falling to €6 billion from a previous estimate of between €10 billion and €11 billion.

AIB had a core equity Tier 1 capital ratio – a key measure of a bank’s ability to absorb shock losses – of 16.2 per cent, some 5 percentage points above what it is required to hold and also in excess of its own 14 per cent target.