AIB defends ‘incredibly’ high €1.2bn loans charge as 2008 haunts

AIB has defended its decision to take much-higher-than-expected €1.2 billion upfront charge in the first half of the year to absorb expected loan losses from Covid-19, as the scars of the 2008 financial crisis prompted it to take a more cautious view than most Europe banks.

“You seem to be incredibly front-loaded versus others,” said Chris Cant, an analyst with Autonomous Research in London, on a conference call with AIB executives after the bank reported interim results on Thursday. “You’re a clear outlier.”

Another analyst said AIB’s charge was well above what UK banks have taken, relative to the size of their loan books.

AIB chief financial officer Donal Galvin said the bank has taken a “comprehensive” look at risks across its loans as well as a number of economic scenarios, and is seeking to take the Covid-19 hit in 2020, even though it will be next year before there is a spike in household and business defaults. AIB’s loan-loss forecasting models also reflect the bank’s experience of the crisis, he said.

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“I think the difference, frankly, between AIB and UK banks quite simply is that our history is different. History drives the models,” said Mr Galvin, adding that it will be well into the second half before there is clarity on where the economy is going. AIB needed a €20.8 billion bailout during the financial crisis.

Chief executive Colin Hunt said that the charge "represents the significant majority" of its anticipated loan-loss charge for the full year. Goodbody Stockbrokers analysts said AIB's guidance for the year as a whole points to a provision of between €1.4 billion and €1.5 billion, compared to current market consensus of less than €900 million.

First-half loss

The provision resulted in AIB sliding into a first-half net loss of €700 million from a €361 million profit for the same period last year. Net new lending across the group fell 27 per cent to €4.4 billion, driven by a slump in small business and corporate loans, while its loan book contracted by 3 per cent to €60.6 billion. Other income plunged 31 per cent to €220 million as fees and commissions took a hit as a result of lower economic activity.

AIB has provided 64,000 Covid-19 payment breaks to households and small business customers since the onset of the crisis in March. Initial three-month payment freezes have come to an end for half of the customers, with 50 per cent of these having decided to extend the period of relief to a maximum six months, Mr Hunt said.

The bank has lowered its financial forecasts for the full year, saying its net interest income is likely to come to €1.9 billion, some 5 per cent lower what it had expected before the crisis. Other income is projected to come to about €420 million, down from €500 million to €550 million previously.

Mr Hunt, who set out in early March to cut 1,500 jobs by 2022 to help keep running costs in check, signalled two months later 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. He told The Irish Times on Thursday that he did not see additional job losses as a result.

Plans for initial job reductions this year have been paused, even as rival Bank of Ireland announced on Tuesday that it has opened up a voluntary severance programme under its aim to cut more than 1,400 jobs over the coming years.

Future shape

“While our strategic priorities and medium-term financial targets remain unchanged, the challenge to achieve these is greater as a direct result of the Covid-19 health crisis,” AIB said on Thursday.

“We are considering the future shape of our business in order to adjust to the financial impact of Covid-19 and equally to examine the opportunities presented by the crisis, namely, the acceleration of themes such as digitisation, flexible working and sustainability, so that AIB maintains a strong and resilient balance sheet, generates sustainable profits and returns capital to shareholders.”

Mr Hunt remains committed to its key target of having a return on tangible equity – a key measure of profitability relative to shareholders’ equity – of more than 8 per cent by 2022, almost double last year’s level. It aims to have a common equity Tier 1 capital ratio (CET1) – a measure of the bank’s rainy-day capital reserves – of in excess of 14 per cent.

The CET1 ratio stood at 15.6 per cent at the end of June, well above the minimum 9.7 per cent required by regulators.

Meanwhile, Mr Hunt said he expects the Central Bank to conclude its investigation early next year into AIB’s role in the industry-wide tracker mortgage scandal. The bank has set aside €70 million of provisions to cover an expected fine.