AIB cuts earnings forecast on rising bad debt charges

AIB said this morning its full-year earnings will fall by more than 40 per cent compared to last year because of rising bad debt charges and costs related to the Government's guarantee of deposits.

In an interim management statement the bank said full-year earnings per share will drop to 120 cents a share compared with 205.9 cents a year earlier and well below the bank's July forecast of 185-190 cents. The principal reason for this is a deterioration in the bank's residential development loan book in Ireland.

AIB will not pay a final dividend this year which analysts estimate will save around €500m in capital. It gave no guidance on a dividend for 2009. Shares in the bank fell almost 20 per cent in early trade before recovering to reach 3.30pm down 2 per cent at €4.15.

The bank said the deterioration in the credit environment had accelerated in recent months due to the "acute scarcity of liquidity" and "highly elevated funding costs".

"There has been some negative effect on asset quality generally across our loan portfolios, though the effect is most material in our Irish residential development book".

AIB expects a bad debt charge this year of 75 basis points of average loans or approximately €950 million. Around €700 million is likely to be incurred by its Irish divison.

"This €700m represents a bad debt charge of circa 94 basis points of the division's average loans of close to €75 billion. Around one third (€25 billion) of the book is personal house mortgages which is currently
experiencing a bad debt charge of circa 4 basis points or circa €12 million," the bank said.

The bank said this implies a bad debt charge of around 140 basis points or €688 million this year on the remaining €50 billion of the book.

AIB said its €10.7 billion portfolio of residential development in Ireland had seen a more severe deterioration and it does not expect a recovery in this market until 2011. It expects a fall in values of 40 per cent for undeveloped land, of which the bank has a €7 billion loan book and 30 per cent for residential houses which account for the remainder.

Customer deposits remain the largest source of funding for the bank which said it will increase as a proportion of total funding this year. The bank also indicated that it is curbing lending growth.

"We are targeting customer deposits to grow by a low teens percentage in 2008. Customer loans are forecast to increase by around 9 per cent causing the loan to deposit ratio to fall from 157 per cent at the end of 2007 to circa 150 per cent at the end of 2008."

The bank said while it was not experiencing significant funding outflows prior to the Irish Government guarantee, its introduction had improved the availability of funding, without reducing its cost.

The cost of wholesale funding has increased and the bank said it expected this to increase by €200 million above the level paid in last year.

"Customer lending margins are widening and are expected to continue to rise, though at a slow pace due to lower levels of lending activity."

According to AIB non-interest income is expected to contract by a low 20s percentage with hedging costs of around €150 million on conversion of US dollar borrowing account for close to half of the reduction.

The bank aims to have a core tier 1 captial ratio of around 6 per cent at the end of the year rising to "at elast 7 per cent over time".

AIB says it has several options to increase its capital ratio including the disposal of assets and revising the level of cash dividend. “It should be noted that our plan does not exhaust available options to generate capital nor does it include action that would dilute our shareholders.

AIB said its capital position was good and expected to remain resilient "in all plausible scenarios" through the downturn in the credit cycle.

"Looking to the end of 2009, we expect to have significant levels of retained profits in both years, reflecting a robust operating profit performance and notwithstanding a material increase as guided for bad debt charges," it said.

AIB said it has no material exposure to asset classes that are causing significant writedowns in other banks.