AIB has achieved its stated aim of returning to sustainable profitability on a post provision basis in 2014 with our half year results reflecting strong improvements in margins, funding position and capital ratios. The Group has demonstrated its capacity to support economic recovery with loan approvals, including the UK segment, of € 5.6 billion, up 33% year on year.
Our mortgage arrears and overall levels of impaired loans are reducing and our performance in the first half of the year saw a material reduction in provision charges. As the Irish economy and the Group recovers, we remain focused on growth and maximising value for the Irish State, as 99.8% shareholder, and all other stakeholders over time.
Meeting Strategic Objectives
We have made continued progress in the first six months of 2014 and have reached an important milestone in the Group’s recovery by returning to profitability on a post provision basis. This reflects the consistent focus on the delivery of our strategic objectives, improved economic conditions and the ongoing commitment of our employees. The Irish and UK segments were profitable which demonstrates the growing strength in the Group’s underlying franchise. We are well positioned in the market segments in which we operate and continue to seek appropriate lending opportunities. We are supporting our customers by continuing to invest in simpler and more effective technology to allow convenient and accessible banking services to suit our customers’ requirements. Balance sheet fundamentals continue to stabilise with improving capital, liquidity and funding metrics coupled with a reduction in impaired loans and NAMA senior bonds.
Lending approvals and customer proposition
We are actively supporting sustainable lending opportunities and are driving the ‘open for business’ agenda with our personal, business and corporate banking customers in Ireland and the UK. We approved over € 5.6 billion in lending in the first six months of the year and customer drawdowns were c. 37% higher than in H1 2013.
We have maintained our strong market share position with c. 37% share of mortgage approvals in Ireland albeit that the overall levels of mortgage activity in the market remains low relative to historic norms. Given the demand and supply dynamics in the mortgage market, we are actively engaging with relevant stakeholders in this regard.
For Irish businesses we are focused on our new lending origination strategy and are providing specialist sector expertise to our customers including the ongoing publication of Sector Outlook Reports. During the first six months of the year we launched a € 500 million Agri fund, a € 350 million New Homes Development fund and a € 200 million export fund. Overall credit demand is improving and lending approvals to Irish business customers were c. € 2.6 billion or c. 42% higher in H1 2014 in
comparison to 2013.
Our strategic approach to corporate banking is sector driven and based on a differentiated service model. Overall activity in the Irish Corporate Banking market has been stronger in the first half of 2014 and our drawdowns were c. 40% higher than the sameperiod in 2013.
Delivering differentiated customer service through our Omni Channel Strategy
The investment in technology and digitisation to deliver convenient and accessible banking services to our customers has resulted in the launch of a number of online deposit and lending products (including mortgage applications) and services in the first half of the year. These include online account opening facilities and the enhancement of ‘self-service kiosks’ in our branches which will result in greater convenience and control for the customer. We now have over 500,000 active mobile banking customers and over 900,000 active online users. The number of over the counter transactions in our branch network has reduced materially in the last eighteen months which enables our staff to spend more time on strengthening customer relationships.
Continued focus on delivering objectives, which are aligned to the strategy of the Group, has resulted in cost savings and significantly higher levels of revenue. Additionally overall asset quality continues to improve. The customer product strategy and proposition continues to be aligned with the rest of the Group.
AIB has placed the customer at the heart of our strategy. We appreciate the support we have received from our customers in the difficult economic environment of recent years. Delivering professional, quality customer service is a key priority for the Group in all our engagements.
Return to profitability
Profit before tax for the first six months of 2014 was € 437 million, a € 1.28 billion improvement on the loss before tax in the corresponding period a year earlier.
Compared to H1 2013, net interest income, net interest margin and other income increased and operating expenses declined in H1 2014. The Group remains on track to meet its € 350 million cost reduction target in 2014 relative to 2012 levels and continued cost discipline and reductions will remain an ongoing component of the Group’s strategy in 2015.
There were a number of specific transactions in H1 2014 that had a positive impact including disposals in the Available for Sale (“AFS”) portfolio, bespoke asset sales and the receipt of a coupon on NAMA subordinated bonds for the first time.
Impairment charges reduced
Total impaired loans reduced from € 28.9 billion at December 2013 to € 26.0 billion at June 2014. Impaired loans have now decreased by € 3.2 billion or 11% since June 2013. This reduction reflects improving economic conditions coupled with restructuring activity completed with customers in difficulty, partially offset by a growth, albeit at a slower pace, in new impaired loans.
Given the continued stabilisation in the asset quality of our loan portfolios, the existing stock of provisions held on the Group’s balance sheet, the ongoing level of restructuring activity of customer loans and the improving economic environment, our impairment charges materially reduced in the first half of the year.
Meeting targets for arrears management
A key priority for the Group is the resolution of both business and mortgage customers in arrears and continued steady progress has been made in relation to both the offer and conclusion of solutions with these customers. We are seeing ongoing evidence of increased engagement and are concluding solutions on commercial terms. Importantly, the total number of accounts in arrears in the Irish residential mortgage portfolio declined by 6% in H1 2014 with total arrears for owner-occupier mortgages down 9%. At 30 June 2014, c. 34k mortgage accounts were in arrears greater that 90 days. At this date, customers comprising c. 20k accounts have engaged with the Bank and have been offered a sustainable solution. c. 8k solutions have been concluded.
Continued progress in Balance sheet stabilisation
Customer accounts increased in the first six months of the year, reflecting improved current account flows and the recognition of deposits from Ark Life as customer accounts following sale of that business. The Group continues to actively manage liability pricing against the backdrop of a declining asset base. The Group’s loan to deposit ratio declined to 96%, down 4% from December 2013.
Strengthened funding profile
Following the successful and balanced return to the funding markets in late 2012 and 2013, we continued the positive momentum in the first half of 2014 with € 1.0 billion in funding issuances. This included an asset covered security issuance and senior unsecured funding. Our funding from monetary authorities continues to reduce substantially, down 71% since December 2013.
The Group’s capital ratios remain robust and have improved during the period. The Group’s capital ratios are on a Capital Requirements Directive (“CRD IV”) basis from 1 January 2014. Further details are set out in the Capital section pages 24 to 26 of the Half-Yearly Financial Report 2014.
AIB is currently undergoing a Comprehensive Assessment by the European Central Bank (“ECB”) prior to the introduction of the Single Supervisory Mechanism in November 2014. The comprehensive assessment includes an asset quality review and, in collaboration with the European Banking Authority (“EBA”), a stress test with the results expected in Q4 2014.
Resolutions to reorganise the share capital of the Group were passed at the EGM held on 19 June 2014. These included the renominalisation of the ordinary shares and a resolution to allow for the creation of distributable reserves totalling € 5.0 billion. An application was made to the Irish High Court in July 2014 in relation to the creation of distributable reserves which is currently being considered by the High Court. Furthermore, the ADR Depositary, The Bank of New York Mellon has now advised that it has completed the sale of the remaining ordinary shares underlying the ADSs. AIB understands that the Depositary will shortly commence the process of remitting the cash from the proceeds of sales to the ADS holders.
As previously indicated, discussions are continuing with the Department of Finance over the future shape of the Group’s capital structure, particularly in reference to the possible conversion of some or all of the 2009 Preference Shares into common equity and options in respect of the Contingent Capital Notes. The discussions are being undertaken with reference to the Group’s evolving operating performance and regulatory capital requirements with a view to creating maximum value for the State over time. Any actions in relation to capital structure decisions would have regard to the timing of the ongoing Comprehensive Assessment and would be subject to all required regulatory and shareholder approvals.
AIB currently has c. 523 billion shares in issue, 99.8% of which are held by the National Pensions Reserve Fund Commission (“NPRFC”). This includes the issuance of 500 billion ordinary shares to the NPRFC in July 2011 at a price of € 0.01 per share. Based on the number of shares currently in issue and the closing share price of Monday 28 July 2014, AIB trades on a valuation multiple of c. 6 x (excluding the 2009 preference shares) 30 June 2014 Net Asset Value (“NAV”). The Group continues to note that the median for comparable European banks is c. 1 x NAV.
AIB Restructuring Plan
The recent approval of the AIB Restructuring Plan by the European Commission is an endorsement of AIB’s recovery and progress and reflects the extensive internal restructuring and change that has already taken place at the bank over the last number of years. The commitments outlined in the approval are in line with our own existing operational plans and medium term targets and will be implemented between now and December 2017.Further details on the Restructuring Plan can be found on page 27 of the Half-Yearly Financial Report 2014.
Relationship with the Irish State
The Group has received significant support and investment from the Irish State over the last number of years and is deeply cognisant of its responsibilities to maximise the value of this investment over time. The Group is now profitable and generating capital and has paid € 2 billion in fees and coupons on capital instruments since 2008 to the Irish State. The Group is focused on increasing this level of return over time with any returns subject to the timing preferences of the Irish State, the financial performance of the Group, evolving regulatory and market capital requirements and all relevant approvals.
The Group’s day to day engagement with the State is governed by the March 2012 Relationship Framework document specified by the Minister for Finance.
Economic conditions have shown steady improvement in the main markets in which AIB operates, however, the Group still faces a number of challenges including reductions in the size of the Group’s net loan book and resolution of the Group’s impaired loans.
Subject to continued stabilisation in economic conditions and the conclusion of the Comprehensive Assessment, we expect the underlying operating performance to remain profitable for the remainder of 2014.
The Group remains focused on delivering our strategic objectives including steady progress towards reaching our medium term performance targets. Further reductions in the balance of impaired loans are expected in H2 2014 driven by improving economic conditions and restructuring of customers in arrears.
The Group is well positioned from a capital and funding perspective to support and benefit from continued recovery in the Irish economy.
I would like to thank our staff for their commitment in contributing to the recovery of AIB despite the many challenges that the Group has faced. As we move forward in this process I am confident in our staff’s determination to ensure AIB’s service levels and customer focus are paramount in all of our engagements with customers.
Chief Executive Officer
29 July 2014