ANALYSIS:THE OLD joke – "Apart from that, Mrs Lincoln, how did you enjoy the play?" – sprang to mind when the State's largest bank, Allied Irish Banks (AIB), issued its annual results for 2008 yesterday.
The figures were predictably dismal: pre-tax profits fell 62 per cent; earnings dropped 68 per cent; there was a 17-fold increase in bad debts on a year earlier; and the bank made an operating loss of €121 million in its Irish operations.
This is the first time the bank has posted a loss in Ireland since the company was created in 1966.
Apart from all that, the bank said its “pre-provision” performance (before the bank wrote off €1.8 billion on bad loans), was good. Deposit growth and cost management was strong.
However, the outlook for future bad debts at the bank dominated.
AIB has written off 8 per cent of its Irish residential development loans in 2008 and expects to write off a similar percentage this year.
All told, AIB may face bad loan charges of up to €8.5 billion over three years to the end of 2010.
Impaired loans, on which the bank may have some write-offs, could rise from €3 billion, or 2.3 per cent of all loans, at the end of 2008 to €9.5 billion (5.4 per cent) in 2011 or €17.9 billion (12.2 per cent) in a stressed scenario.
AIB said that in a “pretty severe scenario” it may have to write off up to €4 billion in 2009 and €2.6 billion in 2010. However, the “charge-offs” are expected to be closer to €2.9 billion and €1.6 billion respectively in those years, based on forecasts for unemployment and economic contraction.
Stockbroker Davy expects AIB to make a loss in 2009 and 2010.
Despite a poor lending record to a collapsing property market, AIB chief executive Eugene Sheehy says he should still lead the bank.
He said he has not offered his resignation to the bank’s board, nor has he considered it.
“I see myself as an experienced banker who wants to work through this cycle,” he said, adding that he wants to “make sure” the bank can pay the 8 per cent yearly interest bill on the €3.5 billion coming from taxpayers.
Mr Sheehy also expressed some regrets: over his decision to raise the half-year dividend; over some of the bank’s lending, particularly to property developers; and that “the risk appetite was too strong”.
“The mistake was that we believed a soft landing would still give you a good chance to get out without serious damage. The fact is there hasn’t been a soft landing and there isn’t going to be one.”
Mr Sheehy said that four to five of the bank’s developer clients each owe more than €500 million, while 30-40 customers accounted for more than half this loan book.
He said there would be no need to nationalise the bank as it is “adequately capitalised”. AIB’s core tier capital ratio – the key measure used to assess a bank’s ability to absorb unexpected losses – jumps to 8.4 per cent with the Government’s €3.5 billion recapitalisation.
Analysts noted with surprise that the bank expected in its results presentation that the ratio would fall to a low of 3.4 per cent, without taxpayers’ money, by 2010 in its stressed scenario.
This is pretty bleak, particularly given AIB said last autumn it did not need outside capital.
“Since then there has been a dramatic change in the environment,” said Mr Sheehy. “I couldn’t have foreseen all the things that have happened.”
While he said the revelations emerging about Anglo Irish Bank have been “very trying” for AIB, “difficult” and “very troubling”, he believes that disclosure will help. “As they say in America, sunshine is the best disinfectant.”
AIB results 2008
Operating profit (before bad debts):€2.7bn (+18%)
Bad debts:€1.8bn (+1,603%)
Pretax profit:€1bn (-62 %)
Earnings per share:66.5c (-68%)
SUMMARY
AIB managed a strong operating performance in 2008, growing deposits (notably in the bank’s capital markets division) and reducing costs. However, loan losses spiralled, primarily due to a surge in bad debts on loans to Irish developers/builders, leading to a dramatic fall in profits. No final dividend was paid; the interim payout was 30.6 cent per share
