Stress test was AIB's turning point, says executive chairman

AIB ANNUAL RESULTS: ANALYSIS: AIB CHARACTERISED the Central Bank stress tests and the resulting capital bill of €13.3 billion facing the bank as a turning point.

The investigation into the bank’s loan books to understand finally the extent of AIB’s problems had stopped the leakage of deposits. “The worst is over for AIB and its customers,” said executive chairman David Hodgkinson yesterday.

It was possible that AIB may make a net profit in 2012 as he expected 2010 to be the worst year for the bank, though loan arrears could rise further, the bank said. Some 29 per cent of AIB’s loanbook (€27 billion) showed some form of impairment or stress, the bank said.

AIB lost a staggering €22 billion in deposits last year as investors sought safer places for their money after credit downgrades and concerns about Ireland’s finances shut Irish banks out of the debt markets.

AIB borrowed heavily from the Irish and European Central Banks to make up for the lost deposits. The bank had borrowed €26 billion from ECB and €11 billion in “special liquidity” from the Irish Central Bank at the end of last year. The emergency lending from the Central Bank has since reduced to “single-digit” billions.

Proceeds from the sale of the Polish operation BZ WBK (which had about 10,000 staff) and the transfer of €8.6 billion in deposits was the reason for this reduction, AIB said. The bank’s net interest margin – the measure of profitability – had fallen from 1.84 percentage points to 1.52 percentage points in 2010, which does not include the €500 million cost of the bank guarantee.

This is due primarily to the cost of paying more for deposits and market funding and a reduction in income from the bank’s debt management exercises to generate capital.

AIB had raised about €8 billion from debt swaps and buybacks, loan reductions and the sale of its Polish and US operations, and of Goodbody Stockbrokers.

AIB has hired London corporate finance firm Ondra Partners to advise on the bank’s deleveraging of about €20 billion in loans. These loans will be moved to the bank’s new non-core division which will include some of the €7.4 billion in sub-€20 million land and development loans which are not being transferred to Nama.

Mr Hodgkinson said that while these customers would form part of the bank’s new “core” business in Ireland, the loans would be “non-core” and worked out over time. AIB’s focus will be on “the needs of Irish customers at home and our Irish expatriates abroad”, he said as the new “second pillar” bank would retain its UK division.