AIB defends ‘insanely high’ credit charge of 1.2 billion euros as 2008 haunts

AIB has defended its decision to levy a much higher than expected upfront fee of € 1.2 billion in the first half of the year to absorb expected loan losses from Covid-19, as the scars of the financial crisis of 2008 prompted it to take a more cautious view than most European banks.

“You seem to be incredibly focused compared to the rest,” Chris Cant, analyst at Autonomous Research in London, said in a conference call with AIB executives after the bank released its interim results Thursday. “You are clearly an outlier. “

Another analyst said AIB’s fees were much higher than UK banks, relative to the size of their loan portfolios.

AIB CFO Donal Galvin said the bank had looked “comprehensively” at the risks of its loans as well as a number of economic scenarios, and was looking to take the brunt of Covid-19 in 2020 , although it will be next year. before there is an increase in household and business insolvencies. AIB’s loan loss forecasting models also reflect the bank’s experience with the crisis, he said.

“I think the difference, frankly, between AIB and the UK banks is just that our story is different. History dictates the models, ”said Galvin, adding that it will be the second half before it is clear where the economy is going. AIB needed a € 20.8 billion bailout during the financial crisis.

Managing Director Colin Hunt said the charge “represents the significant majority” of its anticipated loan loss charge for the full year. Analysts at Goodbody Stockbrokers said AIB’s full-year forecast points to a provision of between € 1.4 billion and € 1.5 billion, against a current market consensus of less than 900 million euros.

Loss in the first semester

The provision dragged AIB into a net loss of 700 million euros in the first half, compared to a profit of 361 million euros for the same period last year. Net new lending across the group fell 27% to € 4.4 billion, due to a collapse in lending to small businesses and businesses, while its loan portfolio contracted by 3% to 60.6 billion euros. Other income plunged 31% to 220 million euros, as fees and commissions were hit by the decline in economic activity.

AIB has granted 64,000 Covid-19 payment interruptions to households and small businesses since the crisis began in March. The initial three-month payment freezes have ended for half of the customers, with 50% of them choosing to extend the relief period to up to six months, Mr Hunt said.

The bank has downgraded its financial forecast for the full year, saying its net interest income is expected to reach 1.9 billion euros, 5% less than before the crisis. The other income would amount to around 420 million euros, against 500 to 550 million euros previously.

Mr Hunt, who set out in early March to cut 1,500 jobs by 2022 to help control running costs, signaled two months later he could seek additional savings as analysts see the Covid crisis -19 drive growth of the bank’s loan portfolio and income outlook. coming years. He told the Irish Times on Thursday that he had not seen any further job losses as a result.

Plans to cut jobs this year have been put on hold, even as rival Bank of Ireland said on Tuesday it had opened a voluntary layoff program with the aim of cutting more than 1,400 jobs over the next few years.

Future form

“While our strategic priorities and medium-term financial goals remain unchanged, the challenge to achieve them is greater as a direct result of the Covid-19 health crisis,” AIB said on Thursday.

“We are thinking about the future shape of our business in order to adapt to the financial impact of Covid-19 and also to examine the opportunities presented by the crisis, namely the acceleration of themes such as digitization, flexible working and sustainability, so that AIB maintains a strong and resilient balance sheet, generates sustainable profits and returns capital to shareholders. “

Mr Hunt remains committed to his key goal of having a tangible return on equity – a key measure of profitability over equity – of more than 8% by 2022, almost double the level of last year. It aims to have a Tier 1 (CET1) capital ratio – a measure of the bank’s capital reserves for rainy days – above 14%.

The CET1 ratio stood at 15.6% at the end of June, well above the minimum of 9.7% required by regulators.

Meanwhile, Mr Hunt said he expects the Central Bank to conclude its investigation early next year into AIB’s role in the industry-wide mortgage scandal. The bank has made 70 million euros in provisions to cover an expected fine.

Alice P. Darby