Allied Irish Banks (AIB) today said 2008 profit fell 62% after it set aside €1.8 billion to cover loan losses. The Chief Executive Eugene Sheehy said: "I regret some of the lending decisions we made."
Operating profit fell to €662 million from €2.2 billion in 2007. Net income declined to €767 million, or 82 cents a share, from €1.95 billion, or €2.18, a year earlier, the bank said in a statement.
AIB said operating profit before provisions of €2.7 billion, pre-tax profit of €1 billion and adjusted earnings per share of €66.5c, reflecting what it termed a resilient performance by the Group in 2008 in the prevailing environment.
AIB said there was a significant deterioration in asset quality, most notably in property portfolios, with the overall bad debt charge increasing to 137 basis points and "criticised" - - loans with overdue payments - - loans increasing to 11.7% of loans of which 2.3% were impaired. Loan growth was slower than previous periods at 8% with reduced customer demand and increased focus on maintaining a strong funding and liquidity position and reducing the loan to deposit ratio. Deposit growth at 22% was very strong and the loan to deposit ratio reduced from 157% at 31 December 2007 to 140% at 31 December 2008.
AIB Bank ROI loss of €52 million in 2008.
Results detail
Eugene Sheehy, AIB Chief Executive said : "2008 was a very challenging year for AIB. Market and economic conditions were unprecedented and it was a year in which shareholder value was significantly diminished. It is disappointing for me as Group Chief Executive to report on a decrease in AIB’s share price of close to 90% in 2008.While good growth in operating profit before provisions was achieved, net profit for the period and earnings per share were down compared with 2007.The decrease in profitability and erosion of shareholder value while largely influenced by market and economic conditions, is not all down to factors outside our control.
Decisions made under our sole control, particularly in relation to our exposure to the property and construction sectors, negatively impacted on our business. I regret some of the lending decisions we made. I believe our business remains resilient when set in the context of the pace and extent of the economic downturn in Ireland and abroad. In these difficult conditions, in which there has been a material increase in bad debts, I believe that the depth and diversity of the customer franchises built by our people will continue to stand us in good stead."
Goodbody banking analyst Eamonn Hughes commented: Good deposit growth and cost containment: "Overview: AIB reported adjusted FY08 PTP of €899m, down 62% yoy and bang on our €899m forecast, though AIB's taking the cost of the government guarantee above the line vs our assumption below the line implies the PTP figure is really 3% better (nets out at EPS). Within the PTP figure, pre provision profit was 1% ahead of expectations, mainly on the cost side as income trailed expectations. Credit impairments were €1,822m in the period, compared with our €1,803m forecast. Given AIB pre-announced only a week ago, the adjusted EPS of 66.5 cent was no surprise. The final dividend was suspended, as expected, leaving the H1 30.6 cent dividend as the full year outturn. What jumps out at us is the really good cost management and the 22% deposit growth figure, a welcome development. While impaired jumped, we already have 9.3% losses over-the-cycle in our estimates.
Divisional: Headline PTP at AIB Bank ROI was -€126m vs our -€197m forecast (behind on income, better on costs and credit charge a bit lower), AIB Bank GB/NI was €150m (we had €275m and due to lower income and higher impairments), Capital Markets was €585m (this compared to our €480m estimate and was better on income and lower on costs, so the strongest performance across the bank and a very good outturn in tough market conditions), the US was €94m (vs our €122m estimate) and CEE was €172m (we had a €280m estimate), though AIB has created a CEE division, so losses in its other CEE businesses are now included here and taken out of Group Centre, which reported a €24m profit vs a €62m loss anticipated.
Outlook Statement & Estimates: In the outlook section, AIB gives little visibility in terms of earnings this year, which is no surprise really and a common trend across the European/UK bank sector. In terms of estimates, we are forecasting a loss this year of €1.86bn which incorporates a bad debt charge of €4bn (c300bps+). For the moment, estimates are unlikely to move materially. Given AIB pre-announced the key figures from the results recently, the main focus today is going to be on the presentation/webcast at 9.30am.
Recommendation: We recently cut our GDP figures and extended our asset decline forecasts (residential property now down 40% from 35%, and commercial down 65% peak to trough, from 45% previously). Substantial credit losses over the cycle (we are pitched at losses of 9.3%) will see TNAVs (Total Net Asset Value) erode quickly. However, a lack of clarity on the extent of the credit cycle continues to stalk the shares and, on our estimates, AIB will need to convert about c.€1bn of the recently committed Government Preference shares into equity to ensure the core equity ratio remains above 4% at the bottom of the cycle.
With ROEs likely to trail COEs at the far side of the credit cycle, we suspect AIB will trade at a discount to the end cycle TNAV. We will revert on our €1 fair value through the day, though the TNAV per share finished at €8.49 compared to our €8.87 estimate (higher FX hit, AFS in line, but pension deficit wider), however, it’s hard to garner interest in the Irish financials until the bigger picture settles down."
