AIB headquarters, Dublin.

AIB (Allied Irish Banks), Ireland's biggest banking group, today posted a loss of €2.3bn after tax for 2009 and including a bad debt charge of €5.4bn - - AIB was formed in 1966, through a merger of the Provincial Bank of Ireland, Royal Bank of Ireland, and Munster & Leinster Bank. The loss in 2009 was the first full-year loss incurred by the bank.

AIB said that operating profit before provisions was €3.0bn compared to € 2.7bn in 2008. The 2009 profit included a gain of €623m from a bond exchange offering completed in June 2009 and €159m from an amendment to retirement benefits.  Provisions for loans and receivables were €5.4bn; a bad debt charge of 405 basis points (4.05% of average customer loans) with €3.4bn of this related to loans that have been identified for potential transfer to the Irish State toxic property loans agency, the National Asset Management Agency (NAMA).

AIB said the operating environment continued to be very difficult with both the increased cost of deposits and higher funding costs evident and the net interest margin decreasing 29 basis points to 1.92%. It said there has been active management and reduction of the cost base in a period of lower revenue generation and higher credit losses.

Total operating income was down 11% excluding the capital exchange offering with costs down 15% creating a positive income/cost growth rate gap of 4% and a cost income ratio of 44.8% compared with 46.5% in 2008. The cost reduction of 15% included a retirement benefits amendment of €159m related to a change to the basis for which pension benefits are determined, moving from a final salary basis to averaging for five years prior to retirement. Excluding this item, costs were down 8%.

AIB’s loan/deposit ratio at 31 December 2009 was 146% (123% excluding loans held for sale to NAMA) compared to 156% at 30 June 2009 and 140% at 31 December 2008. Gross loans decreased 3% and customer deposits as a percentage of funding represented 51% of balance sheet requirement compared with 49% at 30 June 2009 and 54% at 31 December 2008.

The bank said the outlook and environment remain extremely challenging. There are very significant matters and initiatives including NAMA, the European Union decision on restructuring and funding costs/market conditions, all of which could materially affect the group’s performance. In line with global trends for banks to hold more capital, AIB will be moving to increase its capital ratios. In 2010 AIB said it will prioritise restructuring and restoring its businesses to underpin viability, and renewing the group’s credibility amongst all its stakeholders.

Results detail

Goodbody analyst, Eamonn Hughes, commented: First Glance - - Losses less than anticipated and capital ratio better: "AIB reported a FY09 pretax loss of €2.66bn, which adjusted for goodwill write-downs of €0.3bn, implies an underlying €2.35bn pretax loss, compared to our -€2.7bn forecast. Within the PTP figure, pre provision profit was 14% ahead of expectations, mainly on the cost side. Changes to the pension cost assumptions benefited the cost line by €159m, but the costs were still inside our estimate. Credit impairments were €5.36bn in the period, bang in line with our €5.34bn forecasts. At the net profit level, AIB (adjusted for goodwill impairments) reported a net loss of €2.1bn, compared to our -€2.35bn estimate.

Headline PTP at AIB Bank ROI was -€3.6bn vs. our -€3.3bn forecast (behind on income, better on costs and behind on the credit charge), AIB Bank GB/NI was -€16m (we had -€430m and difference here mainly due to a lower credit charge, with both income and costs lower), Capital Markets was €531m (this compared to our €555m estimate and was better on costs and the credit charge, though lower on income), the US was €44m (vs. our €62m estimate) and CEE was €187m (we had a €123m estimate). Finally, Group Centre reported a €500m profit vs. a €294m anticipated profit.

In the outlook section, AIB gives little visibility in terms of earnings this year, particularly with NAMA and the EU rulings still outstanding. In terms of estimates, we are currently forecasting a net loss this year of €4.1bn which incorporates a bad debt charge of €5.8bn as NAMA gets reflected in the figures. Provisionally, on first glance, our FY10 net income figure could be circa €150m better. Elsewhere, the main focus at today's presentation will be in relation to any commentary from the new Managing Director on future strategy.

The results were a bit ahead of expectations (income in line, with costs better) and the core equity ratio at 5.0% was also c.50bps better than anticipated (helped by lower RWA’s), which should help the stock at the off this morning (and our fair value)."