Has AIB dropped clearest hint yet of its designs on Ulster’s tracker mortgages?

AIB bosses were making all the right noises for financial supervisors in Dublin and Frankfurt as they issued a trading statement this week, saying now was not the time to be talking about handing over some of the excess cash on its balance sheet to shareholders.

The same could not be said for taxpayers, who continue to own 71 per cent of the bank and have so far only recovered €10.8 billion of the bank’s €20.8 billion crisis-era bailout.

While chief executive Colin Hunt and his chief financial officer Donal Galvin told analysts on a call on Wednesday they plan to restart regular dividends next year, after a Covid-induced two-year gap, the prospect of handing over excess capital – estimated by Davy analyst Diarmaid Sheridan at €900 million – has been put on the long finger until 2023.

Equity

Christopher Cant, a number cruncher with Autonomous Research, put it bluntly to AIB executives on an analysts' call on Wednesday, asking "what makes you so hesitant to ask the regulator" about returning surplus capital as the bank returns to profit this year?

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“You’ve [some] of the strongest CET1 ratios in the European banking sector at this point,” he said, referring to the bank’s common equity Tier 1 capital position, a measure of reserves available to absorb a shock loss and a key gauge of financial soundness.

That’s despite the fact that AIB, while disastrously slow at ’fessing up to the scale of bad loan losses during the financial crisis, was one of the most active at setting aside provisions for potential losses last year during the height of the Covid-19 pandemic. The €1.46 billion loan charge taken in 2020 had the effect of pushing the bank into a €741 million loss for the year – eating into its capital reserves.

Galvin has started to release some of these provisions this year. The indication he’s given to analysts suggests that about €250 million could end up being freed up, boosting profits. It’s hard to avoid doing this when the big economic assumptions that feed into the loan-loss models – gross domestic product growth, house price inflation and unemployment levels – are much more positive than expected even six months ago.

While successive governments were forced to commit tens of billions of euro into the banking system as it grappled with soaring bad debts during the financial crisis, banks have effectively been cushioned this time around by the borrowed money Taoiseach Micheál Martin’s administration has passed on to households and companies.

Pandemic

The €17.5 billion that the Government directed to individuals, families and businesses between the onset of the pandemic and last month’s budget – by way wage subsidies, unemployment benefits and supports for businesses hit by restrictions – has kept non-performing loans (NPLs) in check. So far.

But the overriding tone from AIB – and the other Irish banks in recent weeks – is that they are well covered, even if it will be the first half of next year before NPLs peak.

Caution in the meantime around returning surplus capital may be no bad strategy.

Of course, AIB’s level of excess capital is a fraction of the €3 billion of surplus reserves (a legacy of its over-the-top bailout to convince the markets it wouldn’t collapse) that analysts estimated it had to play around with almost 4½ years ago when the government sold a 29.8 per cent stake in the bank on the market.

The great hope at the time was that taxpayers would quickly recover more of AIB's bailout in two ways: by the bank handing back excess capital to shareholders through special dividends and buybacks, and Minister for Finance Paschal Donohoe continuing to sell shares at pace. They've been left waiting.

Most of the surplus capital had been chipped away even before Covid-19 as the bank’s income has been squeezed by ultra-low central bank and market interest rates and slow loan-book growth amid uncertainty over Brexit and the dysfunctional Irish housing market.

It seemed earlier this year that AIB was preparing to accelerate its reprivatisation when it secured shareholder permission to buy back an almost 5 per cent stake from taxpayers over the space of 12 months.

Capital

Since then, a march has been stolen by Bank of Ireland, in which Donohoe has sold down the State's stake in recent months, from 13.9 per cent to 9.3 per cent. At the rate he he's going, it's likely the bank will be fully in private hands by the middle of next year.

AIB's current caution on releasing capital comes, of course, at a time when the bank is concentrating on bedding in its recent acquisition of Goodbody Stockbrokers, earmarking money for its planned life and pensions joint venture with Canada Life, and expected purchase of €4.1 billion of corporate and commercial loans from Ulster Bank, which is exiting the market.

Galvin added on the call: “The landscape in Ireland is changing. It has changed so rapidly in 2021. Who knows what other opportunities may present themselves.” Has he dropped the biggest hint yet that Ulster Bank’s €6.5 billion tracker loan book is really in AIB’s sights?

It’s the most obvious sizeable portfolio, according Sheridan at Davy, that remains up for grabs as the UK-owned bank and Belgium’s KBC retreat from the Republic.

The Irish Times reported in July that AIB was in talks regarding the Ulster trackers. However, neither bank has commented publicly on the matter.

Deal

A deal would almost double AIB’s position in trackers, a type of mortgage that the banks rushed out of with indecent haste in 2008. Ask anyone caught up in the tracker mortgage scandal that followed.

But talks around the Ulster trackers could turn interesting. AIB would be seeking a decent price discount to reflect the fact that trackers are generating low returns, priced off the European Central Bank (ECB) main rate, which has been at a record low of zero per cent since March 2016.

The ECB is downplaying the prospect of rate rises next year, even as euro zone inflation is running hot at more than twice its 2 per cent target. But the financial markets are pricing in increases from late 2022. This would automatically make trackers more profitable – playing into NatWest chief Alison Rose's hands as she gets down to brass tacks with Hunt.