ALLIED IRISH Banks has warned that acute pressure on borrowers will lead it to take a €4.3 billion bad debt charge this year, a sum that exceeds worst-case scenario projections the bank set out only two months ago.
In a management update from the bank ahead of shareholder meetings tomorrow to vote on a €3.5 billion State recapitalisation and on the re-election of its board, the bank cited a deteriorating economic environment for the rise in bad debts.
Credit demand remains weak and loan balance remains broadly in line with the position at the start of the year, it said. Although mortgage applications are up, there has been no material increase in the drawdown of loans.
The latest forecast came less than a fortnight after AIB chairman Dermot Gleeson, chief executive Eugene Sheehy and finance chief John O’Donnell said they will be leaving their positions.
In advance of their successors taking up office, however, each of the three will seek re-election at the bank’s annual general meeting tomorrow (agm). The agm will follow an extraordinary general meeting at which investors will be asked to endorse the recapitalisation plan.
The €3.5 billion in capital that the State is providing will be in addition to the €1.5 billion that the bank committed in recent weeks to raise from asset sales and debt buybacks.
“All commentators broadly concur on the significant downward revisions to expectations for Irish economic activity and employment that have issued since the beginning of March,” the bank said.
“Therefore our key macro assumptions for Ireland are now more negative than in the stress scenario presented at our results announcement. The pace of change is increasing loan impairment and bad debt charges. This continuing factor means that the previous stress scenario charge is likely to be exceeded and we now expect our bad debt charge for 2009 to be around €4.3 billion.”
Announcing annual results in March, AIB quantified its worst-case bad debt charge this year in a stress scenario at €4 billion. The bad debt charge is more than double the €1.8 billion charge taken in 2008.
In the latest update, the bank indicated that its core Republic of Ireland unit will incur a loss this year and that profit margins in the business at large were under pressure.
Although many academic commentators believe the rising level of bad debts in the bank is such that the Government may have to provide additional capital and may yet end up with a majority of the bank’s shares, AIB and Government sources last night reiterated the case that the present recapitalisation and asset sale plans will suffice to restore the bank’s balance sheet.
AIB said the impaired and vulnerable loans rose by €9 billion in the first three months of the year to €24.3 billion, an increase it attributed to downgrades in the property, building and construction sector.
While stating that the National Asset Management Agency (Nama) will seek to address problems in this sector, the bank said it was aggressively recognising loan impairment as it arises.
However, the bank said it was “premature” to estimate Nama’s effect on its capital base. “The creation of Nama will be a key event for the bank and the industry. We support this Government initiative and will work with the Government to expedite its implementation.”
The bank said customer deposits stabilised in recent weeks following some outflows earlier in the year.
“In the current recessionary conditions balances in current accounts have reduced. In Poland, our deposits are broadly stable and continue to exceed our loans,” it said.
“Customer resources, which include deposit and current accounts, are down by around 10 per cent in the first four months of this year. This mainly reflects seasonal factors and outflows from our foreign institutional deposit base earlier in the year and a reduction from what was a very strong position at the end of 2008.
“Customer resources were up circa 9 per cent year on year at the end of the first quarter.”