DBRS: AIB’s Recovery Continues With a Return to Net Profit in 2014

Summary:
• AIB reports profit before tax of EUR 1.1 billion in 2014, a EUR 2.8 billion improvement YoY, and a net profit of EUR 915 million.
• Balance sheet metrics continue to improve with lower impaired loans and higher capital ratios.
• DBRS rates Allied Irish Banks at BBB (low), with a Negative trend, for Non-Guaranteed Long-Term Debt & Deposits.

DBRS Ratings Limited (DBRS) views the FY14 results of Allied Irish Banks plc (AIB or the Bank) as further demonstrating the Bank’s progress. The Bank reported profit before tax from continuing operations of EUR 1.1 billion in 2014, a EUR 2.8 billion improvement year-on-year (YoY), and a net profit of EUR 915 million. These results mark AIB’s first full year profit since 2008. As well as a number of one-offs the substantial improvement reflects solid net interest income (NII) growth and further cost reductions. The one-offs included a EUR 181 million net profit on the disposal of AFS securities and EUR 132 million from the re-estimation of the timing of cash flows on NAMA senior bonds, which helped to increase other operating income by 46% YoY to EUR 843 million. The Bank’s net interest margin (NIM), excluding the cost of the Eligible Liabilities Guarantee Scheme (ELG), was 1.69%, up from 1.37% in 2013, reflecting reduced funding costs, higher margins on new lending and the lower impact of the NAMA bonds as their balance declines.

Operating expenses, excluding exceptional items, were down 5% YoY, driven in part by a 10% reduction in average employees during 2014. Exceptional cost items included the EUR 60 million Bank Levy, EUR 24 million of termination benefits from voluntary severance programmes and EUR 151 million of restructuring and restitution expenses. As a result of the cost reductions, and the higher revenues, the Bank reported a cost-income ratio of 55% in 2014, a substantial improvement on the 76% level in 2013.

The 2014 results of the Bank included a EUR 188 million net write-back of provisions, a EUR 2.1 billion positive change compared to 2013. This, reflected lower levels of new impairments and the write-back of some provisions due to loan restructuring, as well as a reduction, to 50% from 55%, in the peak to trough house price assumption used in the Bank’s provisioning models. DBRS also positively notes that AIB’s total impaired loans reduced by EUR 6.7 billion YoY, with reductions across all of the Bank’s loan books. Overall asset quality, however, remains extremely weak, with impaired loans accounting for 29.2% of the EUR 75.8 billion total loan book. This highlights the need for the Bank to continue to improve its asset quality.

In 2014 AIB’s usage of monetary authority funding continued to reduce substantially (to EUR 3.4 billion at end-2014, from EUR 12.7 billion at end-2013) reflecting the repayment of NAMA senior bonds, a EUR 2.3 billion net loan reduction, debt issuance in the period of EUR 1 billion and an increase in customer deposits, excluding repos. The Bank’s loan to deposit ratio was 99% at end-2014, a further improvement on the 100% level at end-2013, whilst the Bank’s LCR and NSFR ratios were 116% and 112% respectively.

As of end-2014, the Bank’s fully-loaded Basel III common equity tier 1 (CET1) ratio was 11.8%, and under the transitional rules the ratio was 16.4%. DBRS, however, notes that these ratios include the EUR 3.5 billion of 2009 Preference Shares (2009 Prefs), which will cease to qualify from 2018. Excluding the 2009 Prefs, the pro-forma CET1 ratio stood at 5.9%. Although the Bank has indicated that it is in discussions with the Irish government over potentially converting the preference shares into equity, in DBRS’s view it remains important for AIB to continue to generate solid profitability in order to further increase capital levels through earnings retention.

DBRS rates Allied Irish Banks at BBB (low), with a Negative trend, for Non-Guaranteed Long-Term Debt & Deposits.

Note:
All figures are in Euros (EUR) unless otherwise noted.