AIB Bank Centre, Dublin

AIB Bank said today that "it remains well capitalised, notwithstanding the continued impact of overall losses which is partially offset by a reduction in Risk Weighted Assets driven by a reduced balance sheet size." In a trading update, Allied Irish Banks said non core deleveraging of €17bn has been achieved to the end of October 2012, which is 83% of the Central Bank of Ireland’s end 2013 deleveraging target of €20.5bn. Substantial progress has been made in the second half of 2012 in restructuring the bank and implementing our revised strategy and cost efficiency initiatives to ensure a reduction in the bank’s operating cost base of c. €0.4bn by 2014. The core business environment remains challenging although "there is continued evidence of stabilisation."

AIB says it has implemented up to 15% pay cuts at senior levels, pay freezes at more junior levels and the transfer of all staff who are members of a Defined Benefit Pension scheme to a Defined Contribution Scheme. 45 sub-office closures and 6 branch amalgamations in the Republic of Ireland will have been completed by end November, and 8 branches and 4 sub-offices will have closed in AIB UK by the end of December.

Statement

Eamonn Hughes of Goodbody comments - - "On restructuring, it has achieved €17bn of deleveraging to date and is well on track to meet its €20.5bn PCAR target, with haircuts within PCAR assumptions. Its mortgage and SME arrears strategies have been finalised and as previously flagged it will be engaging more comprehensively with customers in the coming 6-12 months. Over 1,000 staff have already departed in the bank’s 2,500 redundancy scheme, with a further 700 earmarked for departure by end December. AIB previously announced a branch closure plan, with 45 sub-office closures at this stage and 6 branch amalgamations. A further 16 are due to close in Ireland in 2013.

At the operating level, AIB indicates that lower deposit pricing has had a positive effect in arresting the decline in the margin. However, low interest rates are a challenge. Elsewhere, the cost of the ELG is trending down yoy, with €32bn of liabilities covered from €40bn in June. Deposit balances “have increased across all business segments” and the bank indicates it is ahead of SME and mortgage lending targets year to date.

The bank’s LDR (loan to deposit) ratio is now below 120%, from 125% in June. The bank notes the recent debt issuance in the market and hints at possible action on that front (it is rumoured to be looking at a covered bond). Bad debts are expected to 'materially reduce' from the 2011 levels, though bear in mind the bank recorded c.€8bn of provisions last year. We have the underlying charge at €1.67bn this year. A stabilisation in asset prices is helping and it expects a lower charge in 2013 as well (we are forecasting €1.2bn in FY13).

The range of restructuring measures is in line with expectations and the news that the margin appears to be stabilising is also helpful, as is positive deposit growth. However, we have a flat margin in H2 which may be modestly at risk. Our forecasts also show lower bad debt charges yoy. The AIB statement follows an IMS from BOI less than a fortnight ago and is showing reasonably similar trends, though the BOI turnaround story is a little further progressed (e.g. margin already higher in H2)."

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