AIB shares surge as it allays fears over any further tracker provisions

Shares in AIB surged to the highest level since their summer flotation as the bank eased concerns it will have to set aside "material" further provisions for an industry-wide tracker-mortgage scandal.

The bank’s latest trading update, issued on Tuesday, also showed its bad loans fell while its lending margins and capital levels rose during the third quarter, prompting positive commentary from a number of analysts.

AIB shares gained as much a 3.9 per cent to €5.76, marking the highest level since the Government sold a 28.8 per cent stake at €4.40 a share in the lender in June and floated the company on the main London and Dublin stock markets for the first time since it was seized by the State in 2010 amid the financial crisis.

Refunds

AIB has set aside as much as €190 million in recent years to deal with refunds compensation and legal and professional costs linked to cases where customers were either wrongly denied a cheap mortgage linked to the European Central Bank rate, or put on the wrong rate. As of the end of October, the bank has acknowledged as many as 3,586 cases of impacted customers.

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Last month, Bank of Ireland said it would set aside up to an additional €175 million of tracker-related provisions, in addition to €25 million ringfenced last year. Moody's, a leading credit ratings agency, said that the move raised questions over the figures of other lenders.

Speaking on a call with analysts, group chief financial officer Mark Bourke said that the Central Bank is reviewing the bank’s tracker examination, including “cohorts” of customers that were and were not included in AIB’s figures.

“We believe that any change in our provision would not be material - and I expect [that] to be the case no matter what,” Mr Bourke said, adding that he expects the Minister for Finance Paschal Donohoe to issue a public update on December 20th on the tracker controversy.

Analysts at stockbroking firm Davy said: “In light of the significant scrutiny regarding the industry-wide tracker mortgage review, AIB’s view that any change in provisioning is unlikely to be material is encouraging.”

Target

The country’s largest bank by market value also said in the trading update that its key common equity Core Tier 1 (CET1) capital ratio, a key measure of a bank’s financial strength, rose by 1 percentage point to 17.6 per cent during the third quarter as it “continues to deliver sustainable profitability”.

The European Central Bank has raised its CET1 target for the bank to 9.525 per cent for 2018 from 9 per cent which had been set for this year.

Goodbody Stockbrokers analyst Eamonn Hughes described the trading update as “strong”, and that the end-September capital ratio was “stellar”. He added that he will likely increase his full-year earnings forecasts for the bank.

AIB’s level of bad loans fell by €500 million to €7.3 million during the quarter, bringing its year-to-date decline to 20 per cent, while the bank said its level of mortgage drawdowns grew by 29 per cent on the same period last year as the market continued to improve. It id not give monetary amounts for mortgages extended during the period.

Mr Bourke said that the bank’s rapid capital growth did not change the bank’s previous guidance that it will be 2019, when the bank’s bad-loan levels are expected to normalise, before it will be able to consider returning surplus capital to shareholders. Analysts largely believe that the bank will have more than €3 billion of excess capital on its balance sheet at that date.

Portfolio

The bank is preparing to start the sale of a €3.8 billion portfolio of non-performing loans (NPLs), known as Project Redwood, imminently, under efforts to accelerate the reduction of NPLs. This well-flagged sale includes buy-to-let mortgages as well as small business and commercial property loans.

The bank is reportedly also at the early stage of planning the sale of another NPL portfolio, called Project Ocean, which may include loans on private dwellings where borrowers are years in arrears and are not engaging with the lender.

Mr Bourke declined to comment on individual transactions.

“We are looking at this area,” he said. “You’ll see it play out over ‘18 and ‘19.”