Investors need reassurance on bank's strategy

Mr Michael Buckley and his senior executives will be hoping to improve sentiment towards AIB shares over the coming days as they clarify the factors affecting its 2003 figures and reassure investors about the bank's strategy.

Yesterday he suggested that there was a lot of "noise" around the bank's headline figures that has distracted investors from AIB's strong underlying performance and insisted the outlook remains positive.

"There is no need to search for a growth catalyst. The underlying earnings will be accelerating in 2004 and onwards and more business will fall to the bottom line," he said.

The "noise" was generated largely by exceptional costs, largely due to the restructuring of the bank's various operations, that have eaten into profits.

AIB has already cautioned that there will be further exceptional costs this year and that investors will have to wait until 2005 before the bank can return to delivering earnings growth in double digits - or 10 per cent plus per annum.

The bank has been described as facing a "strategic dilemma" about what to do with its 22.5 per cent investment in M&T Bank in the US - something which Mr Buckley strongly refuted. He said this has largely been levelled at the bank by investors in the UK but had filtered back to the Republic where he said that the "capacity to think independently was sometimes a bit deficient".

He explained that he was taking a "pretty pragmatic" view of AIB's €2 billion investment in M&T undertaken just nine months ago. Since then he stressed that M&T's share price had appreciated by 25 per cent and that the bank was on track to deliver double-digit growth in 2004. "It is very clearly adding value to AIB shareholders."

Ireland's largest financial institution also sought to play down the concerns about the attrition in its net interest margins - the gap between the rate at which it raises and lends on money - which appeared to have been the primary source of concern for investors in the immediate aftermath of the results announcement. Some analysts had not expected the group's margin to fall as sharply as it did; it declined by 0.21 of a percentage point from 2.91 to 2.70 per cent. In Ireland, that margin fell by 0.19 per cent and tightened by 0.22 per cent at its foreign businesses.

Mr Buckley blamed much of this decline on the bank's increased reliance on raising funds in the money markets for its lending activities, as the rate of demand for loans has grown at twice the rate at which deposits have expanded over the past five years. The bank has predicted further pressure on its margins this year and will be highlighting the record lending growth achieved in the Irish economy and the strong performance of its UK and Northern Ireland operations to investors. Mr Buckley suggests this is evidence of AIB's ability to generate large volumes of new business to offset the further reduction in margins.

Another area of concern is Poland where AIB's Bank Zachodni WBK bank recorded a 17 per cent decline in profits to €20 million. Mr Buckley said the bank's management team had done a "great job" in terms of the bank's underlying performance and has been working to position that bank for growth. He suggested that the bank has the capacity to significantly increase the size of its loan book in that market and will deliver strong growth in profits in 2004.

The chief executive refused to comment on whether the bank would acquire Eagle Star's Irish operations but said the bank had made no secret of its desire to expand in this area. For now though, AIB's main priority is to try to win over investors.