Deposits at AIB fall by €13bn

Customer deposits at AIB have fallen by about €13 billion from the beginning of the year, and the bank said today it will increase the size of its planned capital-raising to €6.6 billion.

In a trading update issued this afternoon, the bank said lower institutional and corporate balances were primarily the cause of the decline, as international sentiment towards the Irish sovereign and banking sector turned more negative. Deposits are the largest source for AIB's funding, accounting for 50 per cent of its overall funding at the end of September.

The bank originally said it would raise €5.4 billion in a sale of new shares, underwritten by the State, to meet the capital target of €10.4 billion set in September by the Financial Regulator. However, since it decided to stop the sale of its UK division, it said it will now increase the size of the placing.

This could leave the Government with an even larger stake in the bank if the shares are not taken up by investors.

The bank has already agreed the sale of its Polish subsidiary Bank Zachodni and its stake in M&T.

Loan volumes, excluding the effect of transfers to Nama and reclassifications, fell by about 6 per cent in the nine months to the end of September. However, AIB said gross customer loans were broadly stable over the period despite weak demand.

Drawdown of new credit in the SME sector was low, the bank said, while domestic mortgage balances have not materially changed, despite an overall decline in the market.

Operating profit fell at the bank compared to a year earlier as business volumes fell, net interest margins were lower and the cost of the Government guarantee rose to about.€190 million. The figure excludes bad debt provisions, gains on capital exchange, interest rate hedge volatility and the loss on transfer of loans to Nama.

“Challenging economic and market conditions are reducing operating profits overall, and in each of our divisions, relative to the same period in 2009,” AIB said in a statement.

“Factors reducing our net interest margin this year include lower capital income, lower treasury income, lower income on loans pending transfer to Nama and higher wholesale funding costs.”

Bad debt charges were in line with expectations, the bank said.

Residential mortgage arrears continued to increase in the three months to the end of September, but the rate of increase moderated compared to the previous quarter. According to the bank, about 2.6 per cent of owner occupier mortgages were in arrears for more than 90 days, compared with about 2.1 per cent at the end of the last quarter.

The bank noted that future trends would be “strongly influenced” by the unemployment rate.

Property and construction loans in the UK remain under pressure, particularly land and development loans in Northern Ireland. Total loans in arrears on its UK mortgage book, which is worth about £3 billion , were £144 million at the end of September.

“The outlook in our markets is uncertain with additional stress likely from the implementation of the Irish and UK budgets,” AIB said. “We are carefully and thoroughly assessing these impacts and market conditions.”

The bank has reduced staff numbers by about 600 since last year, and cut back on operating costs for the year.

“A lower cost base aligned with the bank’s reduced size is a key part of our plans to improve the future performance of the bank,” it said.

Shares in the bank were trading 7.2 per cent higher at 3.30pm on the Dublin market, trading at 44.6 cent.