AIB, the State-owned Irish bank, released an Interim Management Statement Monday with margins and net write-backs the standout factors.
Lending drawdowns year to date (YTD) increased by c. 40% year on year with the bank saying its positioned for sustainable growth; impaired loan volumes reduced by c. €4.6bn (c.16%) YTD to c.€24.3b and the number of accounts in arrears in the Irish residential mortgage portfolio down c.11% YTD.
Eamonn Hughes of Goodbody commented - - "The net interest margin was 1.64% year to date, which implies a figure of 1.70%+ in Q3 after the H1 average of 1.60% (1.63% in Q2). Our 1.63% full year estimate is likely to move to 1.67% and our 1.80% FY15 estimate is also likely to move up 4-5bps. Lower funding costs are a key driver and new lending drawdowns are up 40% yoy (approvals of €9bn, up 39% yoy and +€3.4bn in the quarter, up from €5.6bn in H1). Net loans of €64.7bn were unchanged from June, though modestly helped by sterling. Deposits were €66bn, down from €67bn in June (LDR 98%). Funding from monetary authorities was just €2.4bn at period end (with €1.9bn of TLTRO). Elsewhere, non-interest income (helped by some additional AFS disposals) and costs look in line with our expectations.
On asset quality, impaired loans were €24.3bn, down €1.7bn in Q3, a slightly faster run rate than the €2.9bn decline in H1. Impaired loan balances were stable or lower in all loan sectors relative to June. Specific provision coverage is down from 55% to 53%. The bank is now set to record an overall net write-back of provisions in the year to date after the €92m charge in H1 given the outcome to date of its restructuring, whilst the underlying charge continues to trend to normal levels. The core tier 1 capital ratio was up 40bps in the quarter to 16.5%.
This is a positive trading update from AIB, with the margin progression the highlight and net write-backs year to date. Whilst the better margin figure is likely to add about €40m to our net interest income estimate, we are likely to materially upgrade our current €691m net income forecast given a likely net write-back in the year compared with our current €210m charge."
Stephen Lyons of Davy commented - - "Top-line recovery ongoing, but loan book shrinkage continues: The bank's net interest margin (NIM) excluding guarantee charges increased to 1.64% from 1.60% at the interim stage. Non-interest income continues to benefit from disposal income, including AFS gains. Operating costs continue to decline, and the group expects to meet its €350m operating costs target for 2014 relative to 2012 levels (excluding €60.5m bank levy). Despite these positive income drivers, the loan book continues to shrink (ex-FX) although total approvals of €9bn year-to-date are c.39% higher year-on-year (yoy) and total drawdowns of €4bn are up 40% yoy. The bank's surplus capacity to support lending is emphasised by a loans-to-deposits ratio of 98% and monetary borrowing of €2.4bn (€1.9bn TLTRO) now at more normalised levels.
Loans restructuring success boosts capital position: Total impaired loans reduced by €1.7bn in the quarter to €24.3bn, and are now down €4.6bn year-to-date. This has been driven by restructuring success, at a positive variance to loan loss provisions and a reduced flow of newly impaired loans. This success has resulted in an overall net provisions write-back year-to-date, which compares with a charge of €92m at the interim stage. The statement does not note any further impact to provisions models from an adjustment to house price assumptions, but the specific provision coverage ratio reduced by 3ppts in the quarter to 52%. In total, the provisions write-back in the quarter and pre-provision profitability resulted in an increase in CET1 capital to 16.5% (transitional basis) from 16.1%, despite a marginal increase in RWA.
No update on capital reorganisation, though LT2 issue should be next step to rebuild a market following in our view: The statement notes that considerations in relation to the €3.5bn of preference shares and the €1.6bn of CoCos are expected to continue. also that these considerations will reflect the evolving regulatory requirements and the improving operating performance of the bank. Uncertainties regarding the introduction of the SSM, Irish banks' required capital stacks in the new capital landscape and the format of possible AT1 instruments are all obstacles to any significant near-term reorganisation. However, we remain of the view that market re-engagement, first through a LT2 capital issue, is necessary to rebuild a following and demonstrate the transformational change underway at the bank."