Colin Hunt: Green transition ‘is the biggest opportunity in the history of global banking’

AIB is emerging from the pandemic in a strong position given its earnings potential and rising interest rates

Colin Hunt knew 15 years ago as he toiled on a doctoral thesis on infrastructure economics that he had someone special in his corner as then Trinity College Dublin professor Philip Lane supervised his work.

“Philip is an exceptionally gifted economist,” says Hunt, a one-time chief economist at Goodbody stockbrokers and former government advisor, who has been AIB’s chief executive for the past three years.

“He was very supportive and extremely knowledgeable – and was instrumental in me submitting and ultimately defending my thesis.”

AIB’s ability to post a €645 million net profit last year, and free up some of the €1.46 billion of bad loan provisions taken at the height of the Covid-19 shock in 2020, was due in no small part to the action of Lane, now the European Central Bank’s chief economist, and other central bankers globally that came to the rescue of the world economy as it went into lockdown.

The trillions of euros that central banks pumped into capital markets during the pandemic saved the financial system from meltdown and allowed governments, like our own, to borrow heavily, and cheaply, to keep businesses and households afloat.

“The extraordinary economic standout [from the crisis] was that monetary policy and fiscal policy worked together to protect the global economy,” says Hunt (51) in a meeting room in the bank’s headquarters in central Dublin this week.

“It was an extraordinary experiment focused on societal needs and health outcomes. But it was an experiment.”

The reopening of the global economy last year, however, has triggered a spike in inflation, a phenomenon exacerbated by volatile oil and gas prices in the wake of Russia’s invasion of Ukraine in late February.

While euro zone inflation hit a record 7.5 per cent in March – a multiple of the ECB’s 2 per cent target – the ECB, criticised by many late last year for adopting a slower approach to removing stimulus than other major central banks, now has to grapple with the risk of the euro area falling into recession this year as a result of its proximity to the Russia-Ukraine war.

Would Hunt like to be in his former mentor’s position now? “No. I think it’s a really, really difficult moment in policymaking. I think that there are risks to inaction. And there are obvious risks to action as well.”

Early days

Hunt didn't always see himself in his current shoes as a banker, either – even if his working life started off as a teller in an AIB branch in his native Waterford over two summers while he was a student in University College Cork (UCC).

On leaving UCC in 1992 with a bachelor's degree in commerce and a masters in economics in his back pocket, Hunt joined KPMG in Dublin as a corporate tax analyst.

He realised within 15 months that this kind of work wasn't for him. After slightly longer stints in both NatWest Group in London, where he analysed the creditworthiness of countries, and the treasury department of Bank of Ireland, the then 28-year-old joined Goodbody in 1998 as its chief economist.

A scan through press coverage from his time there shows that he was warning in late 2003 that house price growth – running at about 15 per cent at the time – was being fuelled by “speculative fervour” and, in early 2004, that if inflation didn’t drop sharply, a “property crash” was in store, “which would have major implications for the Irish economy”.

It was a brave call from the chief economist of a brokerage that was owned at the time by AIB, one of the main lenders into a property bubble.

Residential property prices, of course, are now soaring again around the 15 per cent year-on-year level and market values are within a whisker of their Celtic Tiger peak. But this time round it is being fuelled by supply shortages, rather than unfettered credit, as Irish banks are bound by strict mortgage lending limits, introduced seven years ago.

Hunt would leave Goodbody in November, 2004, to become a special advisor to then minister for transport Martin Cullen, working on a national transport investment plan unveiled the following year, as well as advising on the privatisation of Aer Lingus and development of the second terminal at Dublin Airport.

He would double up in the last nine months of the Fianna Fáil-led government to June, 2007, as an advisor to then finance minister Brian Cowen, helping to put shape on a national development plan.

Whether Hunt continued to warn about property price perils while he had the ears of top ministers, he will not say. But he says he drew comfort from an easing of price inflation from early 2006 and felt there was a need at the time to plan for “significantly lower” economic growth. The global financial crash put paid to any chance of a soft landing.

Finishing his PhD dissertation during the summer of 2007, Hunt found himself at a crossroads, when he was approached by Macquarie, the Australian financial services group and world’s largest infrastructure asset manager, about setting up a presence in Ireland.

“That was the sliding-doors moment,” says Hunt. “I really was in two minds as to whether to go down the academic route or choose to remain in financial services. What swung it for me was the man who was about to become my boss saying to me, ‘Colin, you can always return to academia’.”

Notable deals during Hunt's nine years with Macquarie include advising Bord Gáis on its 2009 purchase of wind farm developer SWS Natural Resources for €550 million as well as the Australian group investing in loans and rights to buy shares in Eddie O'Connor's Mainstream Renewable Power in 2012.

Renewables

Hunt cites his time with Macquarie as the beginning of a real interest in renewable energy that would see him go to AIB’s board in November 2016, three months after joining the bank as head of wholesale, institutional and corporate banking, with a plan to set up a green lending team there.

As group CEO in late 2020, he set a target for green or climate-transition lending to account for 70 per cent all new lending within a decade.

The word green – be it in relation to the green transition, bonds or lending – appears 58 times in AIB’s latest annual report, at a time when there’s a lot of “greenwashing” going on in the corporate world. What does he say to sceptics?

“It’s great business. That’s what I say to them,” says Hunt. “Look at the amount of capital that we are deploying into this space and look at how well the portfolio has performed during Covid. It was an extraordinarily robust book all the way through Covid.”

Green lending, including discount-rate mortgages for homes with high energy ratings, renewables, and funding to companies for specific projects, accounted for almost a fifth of all AIB’s new facilities last year and was the fastest growing part of its overall loan book.

“I think the biggest opportunity in the history of global banking is the opportunity to finance this transition,” he says. “The amount of money that has to be invested, if we are to have a hope of creating a sustainable future for ourselves and for generations to come, is in the trillions.”

The International Monetary Fund estimates €20 billion will need to be spent a year in the Republic alone on climate-related infrastructure and mitigation measures to achieve the Government's medium-term emissions targets for 2030.

AIB currently has a tender out to secure a developer to build a new solar farm in the State and supply 70 per cent of the bank’s future electricity needs under a power purchase agreement.

Hunt has taken his climate passion home, too. “I have a hybrid car, solar panels on the roof, and we did a very big refurb focused on making the house as energy efficient as possible,” he says.

Deals

The AIB boss has also been busy with the corporate cheque book over the past year: committing €90 million to set up a new life and pensions joint venture with Canada Life to boost its income and product offering; agreeing to buy €4.2 billion of corporate loans from Ulster Bank as it quits the Irish market; and sealing, for €138 million, the repurchase of Goodbody, which the bank sold during the financial crisis.

Does Hunt think he missed an opportunity to buy the stockbroking firm’s larger rival, Davy, which was put up for sale only days after the Goodbody deal was signed?

“I’m happy with the business we bought. It’s a business we know really well. We know the people. We know the culture.”

AIB was emboldened by the three deals – and shrinking of banking competition with the planned exits of Ulster Bank and KBC Bank Ireland – to say last August that it now plans to deliver sustainable profit returns on shareholders' equity of at least 9 per cent from 2023, up from a previous goal of 8 per cent.

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.

Cost cutting will also do its bit, with the bank setting out early last year to axe 1,500 of its then 9,200-strong workforce by the end of 2023. That excludes the 333 Goodbody employees who joined the company last year and an estimated 280 Ulster Bank staff transferring with its corporate loan book.

Hunt is also known to be on the prowl for Ulster Bank’s €6.5 billion tracker-mortgages book.

Meanwhile, AIB and the other remaining banks, credit unions and deposit-takers in the State are bracing themselves as more than one million Ulster Bank and KBC Ireland current and deposit accounts are forced to find new homes for their money over the next year or so.

Ulster Bank’s deposit book stood at €18.6 billion at the end of last year. It comes at a time when Irish banks are holding too much customers’ cash – and being charged negative rates by the ECB for storing surplus liquidity – following years of subdued lending and strong household saving, exacerbated by the pandemic.

The main concern is around the handling of the opening of current accounts with new providers, together with their attending direct debits, standing orders and regular payments.

Even in cases where existing direct debit arrangements can move in theory under a Central Bank of Ireland switching code, many direct debit originators and receivers will only take instructions directly from their customers.

Hunt says AIB is redeploying employees and hiring temporary staff to prepare for the onslaught, having seen a “significant increase” in account openings since the start of the year.

“This is not a once-in-a-generation, this is a once-in-a-multiple-lifetimes, change in terms of the Irish banking landscape, where there’s going to be a million accounts – and hundreds of thousands of customers – looking for a new bank,” he says.

“This becomes a huge problem for the system if people leave it to the last minute and the bulk of the new account openings take place over a very, very short period of time.”

Bailout

AIB, which received a €20.8 billion bailout during the financial crisis, by far the highest among the State’s surviving lenders, had paid back only €10.6 billion of the bill as of the end of last year, according to Government figures.

While the Minister for Finance Paschal Donohoe started to drip-feed some of its remaining stake into the market in January (it was reduced on Friday to just below 70 per cent), that plan alone is only likely to see the stake dip to about 68 per cent by the middle of the year – and raise about €160 million, give or take, based off current market prices.

AIB’s plans to return €213 million to shareholders in the coming months – including dividends and a €91 million share buyback – should chip a further €150 million off the bill.

Factoring in the current market value of the remaining shares, after all that, would still leave taxpayers under water to the tune of about €6 billion.

Davy analyst Diarmaid Sheridan said in a report on Thursday that the stock market is not even beginning to appreciate the earnings potential from Hunt's recent deals, expected ECB interest rate increases starting in the second half of this year, and the potential that AIB will have €2.3 billion of surplus capital, all going well, to distribute to shareholders over the next four years.

Hunt won’t allow himself to be held hostage to fortune when asked if AIB will ever repay its entire bailout in simple “cash in, cash out” terms – with so much, including the Government’s timing of share sales, outside of his control.

“We’re doing everything in our power to create a strong, sustainable bank that will allow us to repay that extraordinary investment by the Irish taxpayers in this in this institution.”

CV

Name: Colin Hunt. Age: 51. Home: Blackrock, Co Dublin. Family: Married to Nuala, with three daughters. Something about him you might expect: Holds a BComm. Something him that might surprise: He seriously thought about going into academia after stints with Goodbody Stockbrokers and as a government adviser.