AIB stalls return of excess capital to shareholders until 2023

AIB executives signalled on Wednesday they are on track to resume normal dividends in early 2022, after a two-year hiatus, but plan to delay a long-awaited return of excess cash to shareholders, led by the State, until the following year.

Davy analyst Diarmaid Sheridan estimates that the bank may be sitting on about €900 million of surplus capital by that stage.

"We are increasingly confident about the economic outlook and our ability to generate sustainable shareholder returns, and in this regard the board will consider the resumption of dividends for 2021, subject to regulatory approval," said chief executive Colin Hunt in a trading update from the bank.

AIB scrapped a planned dividend early last year on 2019 profits as regulators in the European Central Bank called for payouts to be put on hold across the industry amid the Covid-19 crisis. The guidance ran until September of this year.

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Meanwhile, the prospect of AIB returning excess capital – a legacy of its €20.8 billion taxpayer bailout during the financial crisis – has been speculated upon since the Government sold a 28.9 per cent stake in the bank to stock market investors in 2017. However, it has been delayed by a number of factors, including the bank’s slow progress in lowering its non-performing loans levels, Brexit, and the coronavirus pandemic.

AIB, in which the State retains a 71 per cent stake, has returned to profitability this year, helped by growth in new lending and as it began to release some of the provisions set aside in 2020 for loan losses resulting from the Covid-19 crisis.

Preserving capital

However, chief financial officer Donal Galvin told analysts on a conference call on Wednesday that the bank will hold off on handing over excess capital – either by way of special dividends or, more likely, share buybacks – until 2023.

The bank will be concentrating in the meantime on working through its recent acquisition of Goodbody Stockbrokers, a planned life and pensions joint venture with Canada Life, and its expected purchase of €4.1 billion of corporate and commercial loans from Ulster Bank, which is exiting the market.

Mr Galvin said AIB will also be preserving capital to support lending to a growing mortgage market and wider economy as well as other “opportunities that present themselves” in a rapidly-changing Irish banking landscape.

The Irish Times reported in July that AIB is also in talks to buy Ulster Bank’s €6.5 billion tracker-mortgage book. Neither bank has commented publicly on this to date.

AIB said in its trading update that new lending rose by 7 per cent over the first nine months of the year to €7.2 billion, with €2.7 billion of new loans recorded in the third quarter marking an uptick from €2.3 billion for the second quarter and €2.2 billion for the first three months of the year. The bank said that it expects the trend to continue in the fourth quarter, “with a strong performance expected in mortgages and corporate banking”.

The Irish mortgage market continued to perform strongly in the third quarter, with nine months drawdowns up 32 per cent on the prior year period. Economists and analysts expect the market to top €10 billion for the year as a whole. While AIB’s new mortgage lending was up only 17 per cent for the period, its share of activity in the market increased as the year progressed.

AIB said that it has recorded “strong profitability” in the third quarter, without giving a figure. This was boosted as the bank released some of the €1.46 billion of bad-loan provisions taken last year during the height of the Covid-19 crisis. The bank freed up €103 million of these provisions in the first half of the year and Mr Galvin said a similar amount could be written back in the second half.

In addition, the bank also expects to release further provisions as it reassesses the generally favourable economic backdrop as the world continues to emerge from the pandemic. Mr Galvin said this release will be “far less than €100 million for 2021”.

Elsewhere, Mr Hunt said that the bank has selected a preferred bidder for its almost £1 billion (€1.2 billion) British SME business loan book, which was put on the market earlier this year. A spokesman for AIB declined to identify the bidder.