AIB hikes income forecasts amid slow move by savers to higher rate accounts

AIB hiked its full-year net interest income forecast for a third time in 2023, as savers have been slower than expected to move from low-rate accounts into its more attractive products.

The bank now expects its net interest income (NII) to top €3.75 billion – €150 million higher than its previous guidance, it said in a trading statement.

It sees its net interest margin (NIM) – the difference between the average rates at which a bank funds itself and lends on to customers – coming in higher than 3 per cent, up from its previous forecast for a figure in excess of 2.9 per cent.

AIB’s NII for last year amounted to €2.16 billion, while its net NIM was 2.74 per cent.

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While AIB and the other main Irish banks have increased rates on certain deposit products to as much as 3 per cent in recent months following a series of European Central Bank (ECB) rate hikes, about 95 per cent of household savings remain in on-demand – or overnight – accounts that are earning little or nothing. AIB indicated that it expected the migration to pick up.

The shift by borrowers into higher rate savings products “has been a little slower than we would have imagined”, AIB chief financial officer Donal Galvin told analysts on a call.

AIB had €104.4 billion of deposits at the end of September. However, the amount of customers’ money that has moved into higher earning term and notice deposits has increased by only €2.2 billion to €7.5 billion so far this year, executives indicated on the call.

AIB’s €29.5 billion of excess customer deposits that are resting in the Central Bank are earning a rate of 4 per cent, up from zero in July last year, before the ECB started to increase its rates in an effort to fight inflation.

Shares in AIB were up 1.9 per cent at lunchtime on Wednesday.

New lending at AIB fell by 6 per cent over the course of the first nine months of the year to €8.5 billion, amid declines in mortgage, commercial property and UK activity. The Irish mortgage market last year had been fuelled by a spike in switching activity as homeowners sought to fix rates at a time of uncertainty about where ECB rates were headed.

Meanwhile, AIB said it expected its other business income to amount to €850 million this year, up from previous guidance of €780 million, as fee-based income has proven to be stronger than expected so far this year and the bank records income from its contracted purchase of Ulster Bank tracker loans that have yet to fully transfer.

AIB has taken more than €2.9 billion of commercial and corporate loans from Ulster Bank as the latter exits the market. Meanwhile, €4 billion of the €5 billion of Ulster Bank tracker loans that AIB is taking over have been transferred so far, with the rest due to move early in 2024.

Mr Galvin also said that the return of staff bonuses on this year’s earnings would cost an estimated €30 million, with the addition of health benefits across the bank next year lifting the combined cost to €70 million for 2024. AIB said last week that it would cap cash bonuses at €12,700 – below a €20,000 limit that was set by the Government last year as it lifted a previous outright ban on variable pay across bailed-out lenders.

Meanwhile, the group confirmed that it expected to pay a bank levy of about €100 million next year, up from €40 million in 2023, after the Government moved to more than double the industry charge to €200 million by changing the basis of calculation.

“Notwithstanding geopolitical uncertainty, AIB remains in a position of strength, delivering on our strategy and supporting our 3.2 million customers as well as the wider economy. 2023 is set to be a record year for the group,” said chief executive Colin Hunt.

He added that he planned to outline when it posts full-year results early next year how it plans to distribute excess capital on its balance sheet to shareholders. The State owns almost 46 per cent of the bank.