Bank bonus reform could bring down the Government

Paschal Donohoe knows the dangers inherent in AIB’s proposed share scheme

It's four years since AIB's then chairman, David Hodgkinson, made a failed attempt to persuade the minister for finance of the day, Michael Noonan, to support the reintroduction of share bonus plans for top executives.

He probably felt emboldened as the bank was on the cusp of returning to profitability following a €20.8 billion bailout, and he needed to keep top executives on board to be able to re-float the bank and start repaying taxpayers.

Noonan, a wily operator, saw him coming. The minister later recalled how he shot the plan down, saying: "The answer is, 'Sorry guys, much better performance required before we'll even consider [bonuses]'. If any executive wants to leave AIB, I'll shake his hand and wish him fair passage as he leaves." Chief executive of the day, David Duffy, who had done much to stabilise the bank from the time he joined in late 2011, quit within the year.

Hodgkinson's successor and fellow British banker, Richard Pym, has since taken up the challenge, with AIB outlining in its recent annual report how it plans to establish a share scheme, starting in 2019, entitling senior management to deferred shares of up to 100 per cent of their salary a year. They would be exercisable within five or six years.


Sources say that Pym, known to be emotionally invested in the plan, expected Noonan's successor, Paschal Donohoe, to abstain from voting on the matter at the agm and allow the group's new investors, who paid €3.8 billion for an almost 29 per cent stake in the bank in its initial public offering (IPO) last June, to have their say.

After all, the Minister for Finance could be comfortable in the knowledge that any incentive scheme would need his final approval and consent from the Oireachtas to remove a 89 per cent levy, enshrined in tax law since 2011, that applies to bonuses at rescued banks.

But with banks still dealing with the tracker mortgage crisis, sales of non-performing loans to overseas funds, a minority Government in place, and the 10th anniversary of the financial crisis looming, Donohoe knows that one false move around the vexed issue of bonuses could prove fatal for Taoiseach Leo Varadkar’s administration.

The AIB chairman has done well to force the issue on to the Minister's table

The Minister revealed on Thursday that he was using his 71 per AIB stake to vote against the bonus plan at the bank's annual general meeting, while abstaining from a resolution on Friday at the agm of the 14-per-cent State-owned Bank of Ireland, allowing that bank to merely start talks with major shareholders on how it could reintroduce bonuses.

However, Donohoe also decided to bring in outside experts to review remuneration across bailed-out banks, as salaries remain capped and bonuses banned for more than nine years. It buys the Minister some time, but it also, finally, allows a grown-up conversation to occur around performance-based share remunerations.

Major stock market investors like to have management teams tied in in order to align their interests. It may also be in taxpayers’ interests to have share bonus schemes in place that incentivise management of banks – as Pym’s plan envisaged – to maximise the recovery on the €64 billion pumped into the banking system during the crisis.

The AIB chairman may be seething that Donohoe has shot down his plan. But he’s done well to force the issue on to the Minister’s table.

Will Daniele Nouy come to Dublin bearing a gift for PTSB?

Daniele Nouy, the Frenchwoman who leaves Europe’s brashest bankers quaking, is set to give the chief executives of Ireland’s main lenders a prod to get on with reducing non-performing loans (NPLs) when she turns up in Dublin next week for an annual visit.

However, there are growing hopes that the head of the European Central Bank's banking supervision arm will finally deliver formal written guidance on how Permanent TSB can reclassify a category of restructured mortgages as performing loans – and remove them from a portfolio sale.

Nouy told a European Parliament hearing last month that so-called split mortgages – a favoured PTSB restructuring option, where repayments on part of a loan are put on hold, or warehoused, until a future date – could be reclassified as performing loans under certain circumstances.

While AIB can categorise the part of its split mortgages that is being repaid as performing, as it has divided the loans into two contracts, the way PTSB’s deals are structured means they currently have to put all of its split loans into the NPL basket.

PTSB has elected to hold off on making a decision on pulling €900 million of split mortgages from a planned €3.7 billion non-performing loans sale until it gets formal written clarification from the ECB.

Any clarity that could facilitate the withdrawal of these loans from the portfolio sale would puncture political controversy surrounding the deal.