AIB reports €291m profit and raises medium-term target

AIB has raised its medium-term profitability goal, fuelled by deals this year to buy stockbroker Goodbody, part of Ulster Bank's loan book and to enter a joint life and pensions venture with Canada Life.

As it reported a pretax profit of €291 million for the first half of the year as it released some loan-loss provisions, the lender said it now plans to deliver sustainable profit returns on shareholders’ equity of at least 9 per cent from 2023, up from 8 per cent previously.

That compares with a rate of 3.6 per cent in 2019, before Covid-19 struck, and a range of 8-10 per cent that analysts expect of a healthy bank.

The return to profit from a €909 million loss for the year-earlier period came as the bank freed up €103 million of loan impairment provisions. This compares with a €1.22 billion charge taken in the first half of 2020 as banks prepared for a spike in defaults as a result of the pandemic, which has yet to materialise. Shares in the bank rose 2.2 per cent to €2.22 in Dublin.

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Strong fundamentals

"Reflecting the improving economic environment, today I am pleased to report a return to profitability for the group for the first half of 2021 with the fundamentals of our business remaining strong, underpinned by our solid balance sheet and robust capital base," said chief executive Colin Hunt. "While remaining alert to the economic uncertainties, I look forward to the remainder of 2021 and beyond with confidence, focused on our newly revised medium-term targets."

The bank has also raised its medium-term forecast on annual costs to €1.48 billion from €1.35 billion, previously, to reflect the planned acquisitions and a plan to take out €230 million of underlying costs over three years to 2023.

AIB has also lowered its target for an appropriate level of capital reserves to a common equity Tier 1 ratio of 13.5 per cent of risk-weighted assets, from 14 per cent. This takes advantage of a recent regulatory move to allow banks to use subordinated debt, rather than equity, for a sliver of a key regulatory capital requirement. The lower target will also help improve the bank’s profit returns.

AIB’s loan book dipped to €54.9 billion in June from €55.2 billion at the end of last year, with the group reporting mixed lending trends across various sectors, including subdued consumer lending, but strong mortgage activity and business lending.

Total new lending increased 3 per cent on the year to €4.5 billion.

Mortgage market

The overall mortgage market in the Republic “performed strongly” in the first half, with total drawdowns of €4.4 billion up 26 per cent on the year. The bank expects total lending in the market to come to €10 billion in 2021. AIB’s new mortgage lending in in the Republic was €1.1 billion for the first six months.

Customer deposits rose 8 per cent over the first six months of the year to €88.3 billion as Covid-19 pandemic related savings continued to accumulate, it said.

AIB agreed to buy Goodbody Stockbrokers in March for €138 million. It signed up in June to acquire €4.2 billion of Ulster Bank’s corporate and commercial loans the Republic, as the UK-owned lender exits the market in the Republic.

The bank also agreed in June to form a life and pensions joint venture with Canada Life Irish Holdings Company as it seeks to boost its income and product offering in an era when ultra-low interest rates are weighing on lending margins.

The bank will invest €90 million in the 50:50 joint venture, to cover its share of the set-up costs and regulatory capital required for the new business.

Mr Hunt declined to comment when asked during Newstalk and RTÉ radio interviews about an Irish Times report on July 23rd that the bank is also in talks to buy Ulster Bank’s low-profit €6.5 billion tracker loan book in the Republic. However, he highlighted that the bank has a strong capital position and “will remain alert to any opportunities that may arise” in the market.

AIB also plans to proceed in the last two months of 2021 with an instant-payments feature on its mobile app to rival the likes of Revolut, which will allow customers of the lender to transfer money to each other without the need to share banking details. This is in advance of the planned setting up of a instant payments joint venture, called Synch Payments, between the main Irish banks, which is being assessed by the Competition and Consumer Protect Commission (CCPC).

It was reported over the weekend that Bank of Ireland has suspended internal work on Synch as it prioritised other IT projects.

However, a spokesman for the bank said that the focus at the moment is on handling the CCPC process. “Upon CCPC approval for the Synch project, technology integration for the payments platform will ramp up and our plan is to roll out the platform next year,” it said.