22nd Apr 2008 12:21
Allied Irish Banks PLC22 April 2008 EMBARGO 12.00 22nd APRIL 2008 ALLIED IRISH BANKS, P.L.C. ANNUAL GENERAL MEETING CHAIRMAN MR. DERMOT GLEESON'S SPEECH ("AIB") (NYSE: AIB) Chairman's speech to AIB Annual General Meeting in AIBGroup, Bankcentre, Ballsbridge, Dublin 4, Ireland Click here to download accompanying slidesSlides are available at: www.aibgroup.com/investorrelations Check against delivery Our shareholders have indicated that they like to receive an account of how thebusiness is performing, at the AGM, which I'm very happy to provide. And, given the current unprecedented turmoil in the financial markets, it isparticularly timely to provide you with some detailed information confirming thefinancial strength of AIB. An extensive account of our performance and financial position is available inthe Annual Report, and a smaller, more digestible and accessible version isavailable in what we call the Summary Review, the cover of which is shown on thescreen, which provides a useful birds-eye view of where the Bank is at thispoint in time. I'm very happy to be able to tell you that 2007 was another successful year forAIB. Slide 1 - Performance highlights We increased our adjusted basic earnings per share, a key indicator of theunderlying performance of our businesses, by 13%. Each of our divisions, the Republic of Ireland, Capital Markets, the U.K. andPoland, saw their operating profit grow in 2007, which was especiallyencouraging as market conditions for the banking and financial services sectorbecame more challenging particularly from the middle of last year. And we continued to demonstrate diversity and resilience in the sources of ourgrowth by Division and geography, with 57% of our profit generated outside theRepublic of Ireland in 2007. This carefully chosen spread of businesses is a distinguishing feature of AIBrelative to peer banks in Europe. We continued to invest in our operating infrastructure with the aim ofincreasing quality and efficiency and reducing operational risk across theGroup. And we continued our growth in Central Europe, with a number of small butjudicious acquisitions to complement our successful Polish franchise. Slide 2 - Progressive dividend policy This continued success is reflected in the increase in our dividend, which hasgone up by 10% this year, and for each of the past five years, as illustrated onthe slide, and by over 60% over that same five year period. Our goal is to maintain a progressive dividend policy, whereby we pay around 40%of the profit attributable to shareholders in dividends. So, another successful year and a year in which our confidence in the strengthand resilience of the business to withstand market shocks was reinforced. Slide 3 - Financial markets turmoil I want to speak for a short while on the background to the turmoil in financialmarkets which has dominated much of the financial news since the middle of lastyear, and had such an impact on share prices generally. The turmoil has its origins in U.S. sub-prime mortgages, which are mortgagesmade to higher-risk borrowers. That is, borrowers with lower income or poorercredit histories than "prime" borrowers. The sub-prime mortgage crisis began to emerge with the weakening of both theU.S. economy and the US housing market, the combination of which led to higherdefault rates on those sub-prime and other mortgages. Many of those mortgage lenders had, in effect, sold on their mortgages. Theyhad passed the rights to those mortgage payments and related credit risk tothird-party banks and investors through financial instruments known asmortgage-backed securities and collateralised debt obligations, or CDOs. As the value of the underlying mortgage assets declined through defaults, banksand investors holding those instruments experienced significant write-downs. And so, as we have seen, many major banks and financial institutions around theworld, including CitiGroup, Merrill Lynch, Lehman Brothers, UBS, and many more,have reported combined write-downs of approximately $200 billion as of April 1,2008. The lack of clarity and uncertainty regarding the financial system's exposuresto these instruments has had a contracting effect on the wholesale fundingmarket, which is a critical source of funding for many banks. When the availability of such funding contracted, and the cost of that funding,where available, increased, many institutions' business models were put undersevere pressure. Northern Rock in the U.K. and Bear Stearns in the U.S. were both victims of thisphenomenon. At the same time, the uncertainty surrounding the dispersion of the credit risk,and its potential impact on financial institutions, damaged confidence in thestock markets and, with the contagion spreading indiscriminately to otherunaffected asset classes, the share prices of financial institutions, generally,fell sharply. So, while there are many and varied views on what it will take for markets tobegin operating again in an orderly manner, it is apparent that investors willwant transparency in three core areas. Slide 4 - AIB's solid capital position The first of those relates to the level of capital, the life blood of a company,and whether the ratio of a company's capital to what are known as 'risk-weightedassets' is at an acceptable level for the scale and mix of the business. Let me assure you that AIB's capital position is solid. There are two keycapital ratios that Investors look to and they are the Tier 1 and Total Capitalratios. The regulatory minima which banks must maintain are 4.25% for the Tier1 ratio and 8.5% for the Total Capital ratio. AIB's equivalents, as displayed,are significantly above these at 7.5% and 10.1%. There is now a new capital requirements directive for banks, known as Basel 2,which we do not expect to significantly change our minimum regulatory capitalrequirement in the short to medium term. So AIB has no requirement for recourse to shareholders for supplementarycapital. Slide 5 - AIB's strong funding diversity The second issue that investors are currently looking at is whether a bank hassufficient liquidity. In other words, is its funding sufficiently predictableand longer-term in nature to support its existing lending portfolio, and toallow it to continue to write new business. From AIB's perspective, our funding is stable and robust with a strong emphasison stable customer deposits. These account for 48% of our funding requirements. Our funding is well spread by product, currency, geography, duration, andinvestors, with significant headroom across a wide range of funding programmes. At year-end, 78% of our term funding had a remaining maturity of greater thanone year, and the combined value of our customer accounts and longer-term marketfunding equated to 94% of the value of our customer loans. That is a strong position to be in. As for all banks, there is no doubt that funding is becoming more expensiveunder current conditions, which is having some impact on our margin, and thereis growing evidence in our markets of higher rates being sought when the fundsare lent on to customers. Slide 6 - AIB's robust asset quality The third area that concerns investors is asset quality, that is, the quality ofour customer loan book and other assets and their resilience to a downturn inthe economic cycle. While always important in the banking world, asset quality becomes more of afocus for Investors when economies begin to slow down. I can assure you that AIB's asset quality is strong. You can see from this slide that our key indicators of asset quality remainsolid, when compared with their equivalent numbers from 12 months ago. There is no doubt that during 2008, with economies slowing, our provision chargeis expected to increase from 9 basis points of average advances in 2007 toapprox. 20 basis points. But it's coming from historically low levels which were driven by the strengthof the economies in which we operate and the resulting financial strength ofindividuals and companies generally. Our exposure to sub-prime assets is very low, but, as you have seen from our2007 financial statements, we are not immune to, and have been affected by, thecurrent indiscriminate asset valuation write-downs, caused by the global marketdislocation, factors which are outside of our control and which do not reflectthe underlying value of those assets. Let me assure you that AIB is performing very well in the three areas ofcapital, funding, and asset quality, and so will be well positioned to benefitwhen the markets eventually recover. Slide 7 - Irish economy In addition to the global concerns in the markets, which I've outlined, there isalso, at present, a generally cautious view of the Irish Economy and the housing/ property & construction market in Ireland, both of which are weighing on Irishshares. With regards to the economy, it has been clear for some time that 2008 would bea year of slower growth - certainly by the standards we have become accustomedto in recent years. However, a major part of this slowdown is due to the adjustment in the housingmarket to more sustainable levels. While this leads to some short-term difficulties, such an adjustment is anecessary - and some would say desirable - development, and is generally seen assuch, with economic forecasters predicting higher and better balanced growthlevels in 2009. However, this adjustment in the housing market has led to concerns over theIrish banks exposure to the mortgage and property & construction sectors. Let me say a few words on AIB's position in this regard. As the largest bank in the country, AIB is a major player in what has been thecountry's biggest growth sector of the past few years. The main consideration for investors, both retail and institutional, is thequality of our lending to this sector. And, in this respect, we are comfortable with the quality of these loans, andthe diversified nature of our exposures to these broad sectors. Slide 8 - AIB's solid / resilient residential mortgage portfolio First of all, in relation to our residential mortgage portfolio, our primaryemphasis continues to be on a customer's repayment capacity. We stress test our customers' capacity to repay their mortgages in a higherinterest rate environment, and our policy on loan to value remains veryconservative. This is a very solid and resilient portfolio with a very lowlevel of arrears. Slide 9 - AIB's property & construction portfolio well diversified With regard to our commercial Property & Construction portfolio, a significantportion of the growth in this sector has been to well-established, longstanding, high net worth customers. The portfolio continues to be well diversified by loan type, sub-sector,location and individual customer, across the Group's businesses. You can see from this slide that 50% of the Group's exposure, and 41% of ourexposure in the Republic of Ireland, is to the Property Investment sub-sector,which represents lending where cash-generating assets are held to service debt. Slide 10 - AIB's property & construction assets well spread geographically And, as the next slide shows, 45% of our exposure relates to assets locatedoutside the Republic of Ireland. The Residential Development sub-sector in the Republic of Ireland has beenimpacted by the slowdown in residential sales. We are very conscious of the potential difficulties in this sector and theportfolio continues to be reviewed and tightly managed in light of emergingmarket dynamics. We continue to maintain our strategy to support existing and proven customers inthis sector, and have been prudent in our risk-assessment and management in thisregard. Now, finally, let me say something about this year, 2008. In line with banks globally, our businesses are facing a clearly morechallenging and uncertain environment. We continue to target a low single digit percentage increase in earnings pershare in 2008, relative to a 2007 base figure of 205.9c. This guidance is based on current business trends, and factors within ourcontrol. In common with other banks, however, the actual outcome could be affected byhighly volatile conditions and their potential effect on our business, funding,and the market value of our assets. Thank you. -ENDS- For further information please contact:Catherine BurkeHead of Corporate RelationsAIB GroupBankcentreDublin 4Tel: +353-1-6413894 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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