AIB may top key 2023 profit target amid raft of ECB rate hikes

AIB said on Friday that it may beat its key 2023 profitability target on the back of rising interest rates and the purchase of much of Ulster Bank’s loan book, even as the bank and its customers grapple with inflation and mounting economic uncertainty.

Chief executive Colin Hunt said he saw “upside potential” to the bank’s overriding financial target of delivering profit returns in 2023 equivalent to 9 per cent of tangible equity shareholders (RoTE) hold in the business. That is double the return AIB delivered in 2019, before the Covid-19 pandemic.

The improved outlook came as AIB reported a 74 per cent increase in net profit for the first half of the year, to €477 million, driven by the release of €309 million of loan loss provisions, up from €103 million a year earlier, as it continued to free up money set aside during the height of the Covid-19 crisis. Defaults stemming from the pandemic have been much lower than originally feared.

However, the bank signalled that the first-half provisions release would effectively be reversed in the second six months of the year as it takes a “small” full-year charge.

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“We are dealing, once again, with a big array of uncertainties of [rising] gas prices, energy prices, inflation and interest rates, dropping global economic [growth and] supply chain challenges,” Mr Hunt said, adding that the bank would continue to take a “conservative and cautious stance” on provisioning at the full-year stage.

He highlighted that the bank was required by accounting rules to release some Covid-19 provisions as its loan book proved to be much more resilient than expected two years ago.

Up to €100 million of the full-year charge results from booking standard provisions against a €4.2 billion corporate and commercial loan book AIB is buying from Ulster Bank.

The European Central Bank’s 0.5 of a percentage point increase to its main rates last week is set to lift AIB’s net interest income by €150 million on an annual basis, the bank said. This is driven by the lifting of a 0.5 per cent charge the ECB previously applied to banks’ excess deposits, as well as the passing-on of the central bank’s lending rate increase to tracker mortgage customers.

Financial markets expect the ECB will increase its rates by a further 1 percentage point by the end of this year. While AIB decided not to change its non-tracker lending rates as a result of last week’s ECB move, Mr Hunt said the bank would keep its pricing under review as the Central Bank continues to raise its rates.

As of the end of June, AIB had taken over an initial €200 million of the Ulster Bank corporate and commercial loans it is acquiring. AIB has also agreed to buy Ulster Bank’s €5.7 billion tracker mortgage book.

The three remaining banks in the market — also including Bank of Ireland and Permanent TSB — are taking greater share of new lending and banking activity in the Irish market as Ulster Bank and KBC Bank Ireland leave.

New AIB lending grew 20 per cent in the first half to €5.4 billion, with green lending making up 23 per cent of the total, AIB said. The bank’s total income rose 8 per cent to €1.3 billion.

“Given the changing banking landscape and evolving operating environment, our medium-term targets are under review and we will update the market in due course,” Mr Hunt said. “We see upside potential to our RoTE target, with the significant momentum we are seeing in income offset to some extent by cost inflation.”

AIB booked €168 million of exceptional charges during the first half, including an additional €73 million set aside to compensate investors affected by a failed series of Belfry boom-time UK commercial property funds. It had made a compensation provision of €75 million last year against the funds.

Speaking to RTÉ’s Morning Ireland radio show about its recent U-turn on making 70 of its branches cashless, Mr Hunt said “we made a mistake” — the bank moved “too far, too fast”. He said the reversal of the decision followed a strong reaction from customers, who made it clear they did not want it to happen.

“The move is now off the agenda. Branch services will continue as before. It is not going to be revisited.”

Mr Hunt said he could guarantee there would be no change under his stewardship.