AIB Bank Centre, Dublin

AIB, Ireland's biggest bank, said in a trading update today that it is expecting 2009 bad debt charges to rise to €5.3bn, up from a previous forecast of €4.3bn.

The bank said in an interim management statement, that the charges were weighted towards the €24 billion loan portfolio, that may potentially be transferred to the State "bad bank," the National Asset Management Agency (NAMA).

The loans mainly related to the Republic of Ireland division, with some in the UK divisions.

The bank said the Capital Markets division continues to perform very strongly, and its operating profit is expected to be ahead of 2008, while its Polish operations will see a broadly similar operating profit to 2008.

However, income pressure and the cost of customer deposits is the main reason for the expected fall in operating profits in its Irish and UK divisions.

AIB said the increase in "criticised" or overdue loans in the second half of 2009 is expected to be much less than the €18 billion increase in the first half of the year.

The bank said it anticipates providing around €2bn of new lending this year to its SME customers, "delivered through our extensive branch network, 15 dedicated business centres and 250 relationship managers. We are providing 1 in 3 of all new mortgages and first time buyer drawdowns are currently up this year by around 28%."

The customer loan to deposit ratio was at 152% at the end of September, down from 156% at the end of June.

IMS statement

Goodbody analyst Eamonn Hughes commented: IMS statement broadly in line with expectations - - "At the Operating Profit line (i.e. pre-provisions) it is indicating an outturn for the group overall on an underlying basis (which backs out the debt buyback gain) of “around €2bn”. That compares to our estimate of €2.04bn. It is guiding that Operating Profit at Capital Markets is anticipated to be up yoy (we have +21% yoy), Poland is flat (we are flat in PLN this year), whilst Operating Profit will be down in ROI and the UK (we have down 38% and -18% in sterling terms respectively). Loans are anticipated to be down 4% for the year (we have it down a bit more, so redemptions must be low still since they are saying gross loans will be flat), while deposits are anticipated to be up on the H1 levels, which we have in our figures. At H1, the LDR was 156% and AIB indicated the figure was 152% at end September. AIB is guiding that the margin will be down “around 25bps” from 221bps last year.

After the 18bps decline in H1 to 2.03%, we have a figure of 1.86% in our forecasts for the full year (-34bps yoy), so this looks better. Non interest income is guided down “over 10%” this year, which excludes the hybrid buyback gain but benefits from some bond disposal gains, so this looks a bit better too than our forecasts. Finally, on the cost side, AIB indicates that it is anticipating costs to be down “around 5%”, which compares to our estimate of -10% (was -7% in H1). So overall, the Operating Profit looks in line with our figure, with net interest income and non interest income better and costs a little behind.

On the asset quality front, AIB is guiding that the credit charge is anticipated to be €5.3bn. At the H1 stage, AIB recorded a €2.37bn credit charge which was equivalent to 358bps of loans. For the full year, we have modelled a €5.33bn credit charge, which equates to 429bps of advances, so our figure looks bang in line. AIB indicates that the pace of deterioration is slowing “but this trend reflects the significant portion of the book already criticised rather than a material improvement in the quality of the book or operating conditions”.

It does indicate that recent reviews show some signs of stabilisation on the non-NAMA Irish loan book “and the overall provision requirement in the portfolios has not materially increased since the year end”. It provides some update on its NAMA designated loans, but in line with BOI’s comments a fortnight ago, the language is becoming a bit more vague on the haircut, adding that “there is no reason to believe that the average discount applicable to AIB’s NAMA eligible loans will fall significantly outside the Minister’s guidance of 30%“ (for the industry).

On capital, AIB guides that its core Tier 1 capital ratio was 8.5% at end September, flat on H1 (though note this includes the €3.5bn of preference shares). It reiterates its earlier comments about its “resolve to strengthen our capital base” and it is watching developments on capital trends “and in that context, we are reviewing the quantum and ratios appropriate for AIB”. We estimate that AIB needs to raise c€3.5bn over the coming few years in addition to selling its stake in M&T. Finally, on the EU, AIB indicates it is far to early to comment, which is as anticipated."