In buoyant economic conditions AIB produced a strong set of results for the six months to end June, well ahead of market expectations. At £401.3 million, profits before tax and the group's return on equity at 26.9 per cent hit record levels. And the chief executive, Mr Tom Mulcahy, conceded that AIB will be "well challenged" to keep up that level of return on equity.
The latest results reflect the geographic expansion of Ireland's largest bank in recent years, the fact that all the economies in which it operates are performing well and that bad debts are at historically low levels. In addition, they reflect a strong management drive to diversify and improve products, to boost non-interest income and to curtail growth in operating costs growth.
Profits were boosted by the inclusion of Dauphin in the US for the full six months and WBK in Poland as a subsidiary rather than as an investment. But if these acquisitions are excluded the growth in core underlying profits was about 35 per cent. In strong economies, and particularly in the domestic economy, booming loan demand fuelled profit growth. But lending markets were more competitive with a consequent tightening in net interest margins - the profits from core lending less the cost of funds.
In the expectation of further contraction in net interest margins AIB moved to boost non-interest income. In the six months to end June this income - fees, charges and commissions - increased by 52 per cent to £393.4 million.
More importantly, it rose to 38.3 per cent of total income from 35.2 per cent. Increasing the proportion on non-interest income in total income will be an important influence on future profit growth. The results show a conservative approach to provisioning for bad and doubtful debts with balance sheet provisions of £419 million at end June representing 119 per cent of non-performing loans. Non-performing loans declined to 1.5 per cent of total loans.
For the rest of the year the outlook appears positive, though the future impact of the Asian crisis on markets worldwide remains an unknown quantity. The domestic market remains buoyant with strong growth in consumer spending and good demand for business loans. AIB expects full year domestic loan growth of about 20 per cent - compared with first half growth of 14 per cent. Slower second half growth would be caused by seasonal factors such as the traditional strength of finance and leasing loans in the first half and the negative impact of the Bacon measures on demand for housing loans in the lower to middle end of the market.
The bank will remain conservative. Anticipating overall credit market growth of about 24 per cent, Mr Mulcahy said: "We would like to be a touch under".
In Northern Ireland, AIB, with about 20 per cent of the market, should benefit if the peace initiatives result in a more stable economic environment. In Britain, the turnaround after bad years in the early 1990s has resulted in more cautious lending. While the economic environment is deteriorating and AIB could not remain immune, the bank is a small niche operator in the SME sector.
In the US the sales of the credit card and mortgage origination businesses have put AIB in a better position to withstand any deterioration in bad debts, while cost savings from the integration of the Dauphin acquisition will help the bottom line. Poland is a very underdeveloped banking market which offers huge potential for AIB. Development plans include adding a range of services to WBK including leasing, credit cards, home mortgages and asset management.
On the negative side net interest margins are slipping due to higher Central Bank reserve requirements and competition for deposits in a high interest rate/ inflation environment. In addition, AIB is among four foreign banks shortlisted to acquire 41 per cent of Bank Przmyslowo-Handlowy, which would increase its exposure to the Polish economy.
