22nd Feb 2005 07:00
Allied Irish Banks PLC22 February 2005 Allied Irish Banks, p.l.c. ("AIB") (NYSE:AIB) HIGHLIGHTS - AIB GROUP ANNUAL RESULTS 2004 Adjusted earnings per share EUR 133.1c, up 22% - up 13% compared to 2003 base of EUR 118.0c(1) Income / cost gap +4% Tangible cost income ratio down 2.0% to 56.3% Currency translation impact, -4% on adjusted EPS growth Tangible return on equity 29.6% Tier 1 capital ratio 7.9% Total dividend of EUR 59.4c, up 10% Double-digit US$ earnings growth from M&T EARNINGS AHEAD OF MARKET CONSENSUS DUE TO: - Lower tax charge - effective rate 23.7% - Strong fourth quarter business performance, notably in Capital Markets - Technical adjustments in Ark Life including lower discount rate 7.5% DIVISIONAL PROFIT PERFORMANCE (2) AIB BANK ROI up 11% After incurring €50 million investigation related charges Market share gains, loans up 30%, deposits up 16% AIB BANK GB & NI up 16% Loans up 29%, deposits up 15% CAPITAL MARKETS up 30% Strong performance in Corporate Banking, Treasury and Investment Banking POLAND up 135% Costs down 9%; loans up 6%, deposits up 10% AIB GROUP CHIEF EXECUTIVE MICHAEL BUCKLEY SAID: 'AIB had a record year in 2004. We had a great blend of earnings, strong profitgrowth across all geographies and a wide range of market share gains. Totalshareholder return in 2004 was well ahead of our peers. The momentum in ourbusiness is excellent.' (1) Before restructuring and early retirement costs in 2003. A base of EUR 118.0c was established for 2004 comparison with 2003. The adjusted earnings per share for 2003 including restructuring and early retirement costs was EUR 109.5c. (2) 2003 base is before restructuring and early retirement costs, the sale of Govett and the impact of exchange rate movements on the translation of foreign locations' profit. Allied Irish Banks, p.l.c. Dividend The Board is recommending a final dividend of EUR 38.5c per share payable on 28April 2005 to shareholders on the Company's register of members at the close ofbusiness on 4 March 2005. The final dividend, together with the interim dividendof EUR 20.9c per share, amounts to a total dividend of EUR 59.4c per share, anincrease of 10% on 2003. The Company's dividend reinvestment plan has been suspended due to theincreasing dilutive impact on earnings per share growth. Accordingly, the 2004final dividend and future dividends will be paid in cash to all shareholders. Aspecial low cost dealing facility will be made available to shareholders whowish to reinvest their dividend. For further information please contact: Declan Mc Sweeney Alan Kelly Catherine BurkeChief Financial Head of Group Head of Corporate Officer Investor Relations RelationsBankcentre Bankcentre BankcentreDublin Dublin Dublin353-1-660-0311 353-1-660-0311 353-1-660-0311Ext. 14954 Ext. 12162 Ext. 13894 This results announcement and a detailed presentation can be viewed on ourinternet site at www.aibgroup.com/investorrelations Forward-looking statements A number of statements we make in this document will not be based on historicalfact, but will be 'forward-looking' statements within the meaning of the UnitedStates Private Securities Litigation Reform Act of 1995. Actual results maydiffer materially from those projected in the 'forward-looking' statements.Factors that could cause actual results to differ materially from those in the 'forward-looking' statements include, but are not limited to, global, national,regional economic conditions, levels of market interest rates, credit or otherrisks of lending and investment activities, competitive and regulatory factorsand technology change. Any 'forward-looking' statements made by or on behalf ofthe Group speak only as of the date they are made. Financial highlightsfor the year ended 31 December 2004 2004 2003 2002 • m • m • m Results Total operating income 3,264 3,176 3,927Group profit before taxation 1,418 1,011 1,372Profit attributable 1,047 677 1,034Profit retained 477 174 560 Per • 0.32 ordinary share Earnings - basic 122.9c 78.8c 119.1cEarnings - adjusted (note 12) 133.1c 109.5c 122.7cEarnings - diluted 122.4c 78.4c 117.9cDividend 59.40c 54.00c 49.06cDividend cover - times 2.0 1.5 2.4Net assets 628c 587c 471c Performance measures Return on average total assets 1.17% 0.90% 1.24%Return on average ordinary shareholders' equity 20.2% 14.5% 23.7%Return on average ordinary shareholders' equity - tangible(1) 29.6% 20.0% 27.4% Balance sheet Total assets 102,240 80,960 85,821Shareholders' funds: equity interests 5,399 4,942 4,180Loans etc 67,156 53,326 58,483Deposits etc 83,630 66,195 72,190 Capital ratios Tier 1 capital 7.9% 7.1% 6.9%Total capital 10.7% 10.4% 10.1% (1) Tangible shareholders' equity excludes capitalised goodwill of • 1.2 billion at 31 December 2004 (2003: • 1.4 billion; 2002: • 0.5 billion). In addition, profit attributable has been adjusted to exclude goodwill amortisation and impairment of • 90.4 million at 31 December 2004 (2003: • 72.6 million; 2002: • 31.7 million) in arriving at return on average ordinary shareholders' equity - tangible. Allied Irish Banks, p.l.c. Group Headquarters & Registered Office Bankcentre, Ballsbridge Dublin 4, Ireland Telephone (01) 6600311 Registered number 24173 Consolidated profit and loss accountfor the year ended 31 December 2004 2004 2003(1) 2002(1) Notes • m • m • m Interest receivable:Interest receivable and similar income arising fromdebt securities and other fixed income securities 888 712 946Other interest receivable and similar income 4 3,118 2,898 3,807Less: interest payable 5 (1,970) (1,676) (2,402) Net interest income 2,036 1,934 2,351Other finance income 18 12 62Dividend income 27 16 14Fees and commissions receivable 1,031 1,038 1,301Less: fees and commissions payable (131) (125) (138)Dealing profits 6 96 135 74Other operating income 7 187 166 263Other income 1,210 1,230 1,514 Total operating income 3,264 3,176 3,927Administrative expenses Staff and other administrative expenses 8(a) 1,713 1,709 2,098Restructuring costs in continuing businesses 8(b) 9 72 13 1,722 1,781 2,111 Depreciation and amortisation 164 179 207 Total operating expenses 1,886 1,960 2,318 Group operating profit before provisions 1,378 1,216 1,609Provisions for bad and doubtful debts 14 116 152 194 Provisions for contingent liabilities and commitments 20 9 2Amounts (written back)/written off fixed asset investments 9 (1) 16 55 Group operating profit 1,243 1,039 1,358Share of operating profits of associated undertakings 201 143 9Share of restructuring and integration costsin associated undertaking - (20) -Amortisation of goodwill on acquisition of associated undertaking (52) (42) -Profit on disposal of property 9 32 5Profit/(loss) on disposal of businesses 10 & 2 17 (141) - Group profit on ordinary activities before taxation 1,418 1,011 1,372Taxation on ordinary activities 11 336 318 306 Group profit on ordinary activities after taxation 1,082 693 1,066Equity and non-equity minority interests in subsidiaries 30 11 24Dividends on non-equity shares 5 5 8 35 16 32 Group profit attributable to the ordinary shareholdersof Allied Irish Banks, p.l.c. 1,047 677 1,034 Consolidated profit and loss account (continued)for the year ended 31 December 2004 2004 2003(1) 2002(1) Notes • m • m • m Group profit attributable to the ordinary shareholdersof Allied Irish Banks, p.l.c. 1,047 677 1,034 Dividends on equity shares 511 452 429Transfer to reserves 59 51 45 570 503 474Profit retained 477 174 560 Earnings per • 0.32 ordinary share - basic 12(a) 122.9c 78.8c 119.1c Earnings per • 0.32 ordinary share - adjusted 12(b) 133.1c 109.5c 122.7c Earnings per • 0.32 ordinary share - diluted 12(c) 122.4c 78.4c 117.9c (1) The consolidated profit and loss account for 2002 reflects the consolidation of Allfirst for a full year, while the profit and loss account for 2003 reflects the consolidation of Allfirst for the period to 31 March 2003 (see note 2). Consolidated balance sheet31 December 2004 2004 2003 Notes • m • m Assets Cash and balances at central banks 887 838 Items in course of collection 368 339 Central government bills and other eligible bills - 45 Loans and advances to banks 2,320 2,633 Loans and advances to customers 13 64,836 50,490 Securitised assets - 719 Less: non-returnable proceeds - (516) - 203 Debt securities 15 24,076 18,127 Equity shares 195 180 Interests in associated undertakings 1,317 1,361 Intangible fixed assets 380 420 Tangible fixed assets 785 792 Other assets 2,247 1,507 Deferred taxation 198 174 Prepayments and accrued income 918 636 Long-term assurance business attributable to shareholders 16 467 405 98,994 78,150 Long-term assurance assets attributable to policyholders 16 3,246 2,810 102,240 80,960 Liabilities Deposits by banks 20,428 18,094 Customer accounts 17 51,397 44,612 Debt securities in issue 11,805 3,489 Other liabilities 3,900 3,144 Accruals and deferred income 911 595 Pension liabilities 676 502 Provisions for liabilities and charges 122 87 Deferred taxation 123 142 Subordinated liabilities 2,765 2,130 Equity and non-equity minority interests in subsidiaries 1,212 158 Share capital 299 295 Share premium account 1,870 1,885 Reserves 977 951 Profit and loss account 2,435 2,007 Shareholders' funds including non-equity interests 5,581 5,138 98,920 78,091 Long-term assurance liabilities to policyholders 16 3,320 2,869 102,240 80,960 Consolidated cash flow statement for the year ended 31 December 2004 2004 2003 2002 • m • m • m Net cash inflow/(outflow) from operating activities 3,168 1,631 (121) Dividends received from associated undertakings 37 33 1 Returns on investments and servicing of finance (111) (93) (138) Equity dividends paid (340) (378) (345) Taxation (317) (273) (280) Capital expenditure and financial investment (4,130) (1,049) 1,379 Acquisitions and disposals 9 (1,049) (5) Financing 1,744 (173) (129) Increase/(decrease) in cash 60 (1,351) 362 Reconciliation of Group operating profit to net 2004 2003 2002 cash inflow/(outflow) from operating activities • m • m • m Group operating profit 1,243 1,039 1,358 (Increase)/decrease in prepayments and accrued income (280) 106 1,162 Increase/(decrease) in accruals and deferred income 302 (95) (1,191) Provisions for bad and doubtful debts 116 152 194 Provisions for contingent liabilities and commitments 20 9 2 Amounts (written back)/written off fixed asset investments (1) 16 55 Increase in other provisions 33 57 16 Depreciation and amortisation 164 174 207 Profit/(loss) on disposal of businesses 17 (141) - Interest on subordinated liabilities 68 47 83 Interest on reserve capital instruments 38 38 38 Profit on disposal of debt securities and equity shares (17) (40) (117) Profit on termination of off-balance sheet instruments (36) - - Average gains on debt securities held for hedging purposes (2) (1) (4) Profit on disposal of associated undertakings (1) - (1) Amortisation of premiums net of (discounts) on debt securities held as financial fixed assets 24 23 (15) Increase in long-term assurance business (63) (53) (48) Net cash inflow from trading activities 1,625 1,331 1,739 Net increase in deposits by banks 2,703 4,207 3,975 Net increase in customer accounts 6,488 5,729 2,299 Net increase in loans and advances to customers (14,420) (10,043) (6,129) Net decrease in loans and advances to banks 345 591 982 Decrease/(increase) in central government bills 45 (41) 18 Net increase in debt securities and equity shares held for trading purposes (2,066) (1,216) (1,180) Net (increase)/decrease in items in course of collection (29) (161) 174 Net increase/(decrease) in debt securities in issue 8,303 1,082 (1,425) Net increase/(decrease) in notes in circulation 30 41 (3) Increase in other assets (735) (920) (28) Increase/(decrease) in other liabilities 737 701 (521) Effect of exchange translation and other adjustments 142 330 (22) 1,543 300 (1,860) Net cash inflow/(outflow) from operating activities 3,168 1,631 (121) Statement of total recognised gains and losses 2004 2003 2002 • m • m • m Group profit attributable to the ordinary shareholders 1,047 677 1,034 Gain recognised on disposal of Allfirst (note 2) - 489 - Currency translation differences on foreign currency net investments (69) (457) (341) Actuarial loss recognised in retirement benefit schemes (197) (50) (823) Actuarial (loss)/gain recognised in associated undertaking (1) 8 - Total recognised gains/(losses) relating to the year 780 667 (130) Reconciliation of movements in shareholders' funds 2004 2003 2002 • m • m • m Group profit attributable to the ordinary shareholders 1,047 677 1,034 Dividends on equity shares 511 452 429 536 225 605 Gain recognised on disposal of Allfirst (note 2) - 489 - Goodwill written back on disposals - 1,043 - Actuarial loss recognised in retirement benefit schemes (197) (50) (823) Actuarial (loss)/gain recognised in associated undertaking (1) 8 - Other recognised losses relating to the year (80) (491) (352) Ordinary share buyback - (812) - Ordinary shares issued in lieu of cash dividend 134 108 76 Other ordinary share capital issued 71 62 39 Net movement in own shares (20) 141 37 Net addition to/(deduction from) shareholders' funds 443 723 (418) Opening shareholders' funds 5,138 4,415 4,833 Closing shareholders' funds 5,581 5,138 4,415 Shareholders' funds: Equity interests 5,399 4,942 4,180 Non-equity interests 182 196 235 5,581 5,138 4,415 Note of historical cost profits and losses Reported profits on ordinary activities before taxation would not be materiallydifferent if presented on an unmodified historical cost basis. Commentary on results Translation of foreign locations' profit Approximately 50% of the Group's earnings are denominated in currencies otherthan the •. As a result, movements in exchange rates can have an impact onearnings growth. In 2004, the US dollar and Polish zloty average accountingrates weakened relative to the • by 9% and 3% respectively and sterlingstrengthened relative to the • by 1% compared with the year to December 2003.These rate movements, coupled with hedging profits of • 28 million in the yearto December 2003 (• 1 million in 2004) had a 4% negative impact on the adjustedearnings per share growth rate in the year to December 2004. The following table shows the average accounting rates and average effectiverates for both periods. The average effective rates include the impact ofcurrency hedging activities. Average Average Average Average accounting rates accounting rates effective rates effective rates 2004 2003 2004 2003 US dollar 1.2474 1.1346 1.17 1.01 Sterling 0.6813 0.6901 0.70 0.67 Polish zloty 4.5314 4.4157 4.58 4.28 The following commentary on profit and loss account headings covers continuingactivities, which exclude Allfirst in 2003, and is based on underlyingpercentage growth adjusting for the impact of exchange rate movements on thetranslation of foreign locations' profit and excludes the transfer of Ark Life'ssales force to AIB's payroll (resulted in higher payroll costs which werepreviously recorded as a deduction in other income as part of Ark Life profit).Allfirst, which was merged with M&T Bank Corporation ('M&T') on 1 April 2003, isa discontinued activity. Investigation related charges referred to in the following commentary relateprimarily to the application of prices to foreign exchange products withoutregulatory approval. AIB provided • 50 million for investigation related chargesand costs with • 12 million charged to net interest income, • 24 million chargedto other income and • 14 million of costs included in other administrativeexpenses. "Total income up 11%" "Group loans up 28%" Total income Total income increased by 11% to • 3,264 million in 2004. Year Year Underlying 2004 2003 % Change Total operating income • m • m 2004 v 2003 Net interest income 2,036 1,840 11 Other finance income 18 14 28 Other income 1,210 1,124 11 Total operating income 3,264 2,978 11 Commentary on results Net interest income Net interest income increased by 11% to • 2,036 million after incurring • 12million of investigation related charges. Strong and deposit growth in Republicof Ireland and GB & NI divisions as well as exceptional loan growth in CorporateBanking were key factors generating the increase. Loans to customers increasedby 28% and customer accounts increased by 14% on a constant currency basis sinceDecember 2003 (details of loan and deposit growth by division are contained onpage 14 of this release). Half-year Half-year Year Year Dec 2004 June 2004 % 2004 2003 % • m • m Change (1) Average interest earning • m • m Change (1) assets - continuing activities 88,543 79,986 11 Average interest earning 84,288 68,270 23 assets (1) This particular analysis is not adjusted for the impact of exchange rate movements. Half-year Half-year Basis Year Year Basis Dec 2004 June 2004 point 2004 2003 point % % change Net interest margin - % % change continuing activities (2) 2.38 2.46 -8 Net interest margin 2.42 2.70 -28 Business margin -20 Technical margin -8 (2) The net interest margin for AIB Group for the year to December 2003 is included on page 39 of this release. As disclosed in our interim results announcement, AIB introduced a new policy inrespect of the investment of its capital funds. This action increased ourbalance sheet debt securities with a corresponding reduction in off balancesheet derivatives, the effect of which has increased reported average interestearning assets with no impact on net interest income except for any reduction inyield. This technical factor reduced the reported net interest margin by 8 basispoints. Half-year Half-year Basis Year Year Basis Dec 2004 June 2004 point 2004 2003 point % % change Domestic and foreign margins - continuing activities % % change 2.18 2.20 -2 Domestic 2.19 2.54 -35 2.81 2.99 -18 Foreign 2.90 2.98 -8 2.38 2.46 -8 Net interest margin - continuing activities 2.42 2.70 -28 The domestic margin for the year, adjusted for the technical factor, was down 24basis points compared with 2003 and the foreign margin decreased by 8 basispoints. The domestic margin in the second half was 2 basis points lower than thefirst half and the foreign margin declined 18 basis points on the first half. AIB Group manages its business divisionally on a product margin basis withfunding and groupwide interest exposure centralised and managed by GlobalTreasury. While a domestic and foreign margin is calculated for the purpose ofstatutory accounts, the analysis of net interest margin trends is best explainedby analysing business factors as follows: The Group net interest margin was2.42% in 2004, with the business margin reducing by 20 basis points on 2003.Themargin reduction was due to a continuation of trends evident in 2002 and 2003with loans increasing at a stronger rate than deposits, higher growth in mid-market loans in the Republic of Ireland and the United Kingdom, a changing mixof products, growth in our international corporate operations and the impact oflow interest rates on deposit margins and capital income. Average loans increased at over double the rate of deposits compared with 2003and was the largest factor in the margin reduction. While this strong lendinggrowth generated good incremental profit, the funding impact resulted in areduction in the overall net interest margin calculation when net interestincome is expressed as a percentage of average earning assets. While it is difficult to disaggregate trends in product margins between mix andcompetitive factors, competitive pricing behaviour did have some impact ondeposit margins in Ireland and the United Kingdom. Our new business lendingcontinued to meet our targeted return on economic capital hurdles. The full yearimpact in 2004 of ECB and Polish interest rate cuts in 2003 also had a negativeimpact on retail deposit margins. The structural effect of loans growing faster than deposits and changes inbusiness mix are expected to be continuing features with consequent impact onthe net interest margin calculation. Our expectation is that the Group netinterest margin will again reduce by around 20 basis points in 2005. Commentary on results "Other income up 11% after incurring euro24 million of investigation related charges" "Buoyant loan arrangement fees" "Change in Ark Life discount rate - Profit up 18%" Other income Other income at • 1,210 million was up 11%. Year Year Underlying 2004 2003 % Change Other income • m • m 2004 v 2003 Dividend income 27 15 80 Banking fees and commissions 873 830 6 Asset management and investment banking fees 158 128 23 Fees and commissions receivable 1,031 958 8 Less: fees and commissions payable (131) (117) 12 Dealing profits 95 103 -6 Contribution of life assurance company 72 60 18 Profit on termination of off-balance sheet instruments 36 - - Other 79 81 - Other operating income 187 141 34 Hedging profits 1 24 - Total other income 1,210 1,124 11 Banking fees and commissions increased by 6%, or 9% excluding • 24 million ofinvestigation related charges and amounted to over 70% of other income. Thestrong growth reflects increased business volumes and strong growth in lendingrelated fees in Republic of Ireland, GB & NI and Corporate Banking. In Polandthere was good growth in international payment fees and credit card income. Investment banking revenues were higher due to particularly strong growth inGoodbody Stockbrokers and a good increase in AIB Corporate Finance. AssetManagement revenues were lower following the sale, in November 2003, of Govettto Gartmore Investment Management p.l.c. Ark Life profit was • 72 million compared with the 2003 profit of • 60 million.The profit increase included • 12 million from a reduction in the discount rateused in the calculation of its embedded value profit after providing for thesolvency margin. The discount rate was reduced from 10% to 7.5% in the fourthquarter. Included in other income was a gain of • 36 million from closing out capitalinvested positions in January 2004 resulting from the introduction of a newpolicy in respect of the investment of AIB's capital funds. Dividend income increased significantly reflecting a very strong increase inPoland. The other income as a percentage of total income reduced from 38.2% to 37.6%. Commentary on results "Tangible cost income ratio down 2.0% to 56.3%" "Additional investment in groupwide information systems to meet new regulatory initiatives" Total operating expenses Operating expenses increased by 7% compared with 2003,(excluding restructuringand early retirement costs in both years and the Ark Life sales forcereorganisation in 2003). Year Year Underlying 2004 2003 % Change Operating expenses • m • m 2004 v 2003 Staff costs 1,132 1,082 5 Other costs 581 515 13 Depreciation and amortisation 164 170 -3 Operating expenses before restructuring/early retirement costs 1,877 1,767 7 Early retirement costs - 62 Restructuring costs in continuing businesses 9 10 Total operating expenses 1,886 1,839 The increase of 7% includes euro14 million of costs relating to theinvestigation. Excluding these costs the increase was 6%. The growth of 6%should be viewed in the context of significantly higher business volumes andbuoyant revenue growth. Staff costs were up 5% due to higher business activity levels and normal salaryincreases partly offset by some benefits from the early retirement programmeprovided for in 2003. Other costs increased by 13%,or 11% excludinginvestigation related charges. The 11% increase includes consultancy and othercosts to facilitate AIB's preparation for Basel II, Sarbanes Oxley and IFRS,strengthening of compliance and internal audit structures and investment ingrowth businesses. Depreciation and amortisation decreased by 3% reflecting lower depreciation inPoland following branch rationalisations in 2003 and the sale of AIB's IFSCproperty in 2003. Productivity improved significantly with the tangible cost income ratio reducingto 56.3% from 58.3% in 2003. Commentary on results "Lower provision charge at 20 basis points" "Prudent provision cover" "NPLs as a percentage of loans declining" Provisions Total provisions decreased from • 167 million in 2003 to • 135 million in 2004. Year Year 2004 2003 Provisions • m • m Bad and doubtful debts 116 142 Contingent liabilities and commitments 20 9 Amounts (written back)/written off fixed asset investments (1) 16 Total provisions 135 167 The provision for bad and doubtful debts was • 116 million compared with • 142million in 2003,representing a charge of 0.20% of average loans compared with0.30% in 2003. The reduction reflected strong asset quality across divisions andfavourable economic environments in 2004. There was a reduction in non-performing loans as a percentage of total loans from 1.4% at 31 December 2003 to1.2% at 31 December 2004 and provision coverage for non-performing loans was87%. Asset quality was strong in AIB Bank Republic of Ireland where non-performingloans reduced to 0.6% of average loans from 0.8% in 2003. There was also areduction in the provision charge as a percentage of average loans from 0.24% to0.14% in 2004. The provision benefited from recoveries with all portfoliosproving robust. In AIB Bank GB & NI, provision experience was particularly good with the baddebt charge reducing from 0.21% to 0.11% in 2004. Non-performing loans increasedfrom 0.8% to 1.0% at 31 December 2004 but underlying trends remained positive. Asset quality in Capital Markets was strong with non-performing loans remainingat 0.8% and the provision charge at 0.27% of average loans. In Poland, the provision charge reduced to 0.9% of loans from 1.0% in 2003including a • 4 million general provision release. Asset quality continued toimprove with non-performing loans continuing a downward trend and as apercentage of loans declined to 8.4% from 10.9%. Provisions for contingent liabilities and commitments increased from • 9 millionin 2003 to • 20 million in 2004 while provisions for amounts (writtenback)/written off fixed asset investments decreased from • 16 million to a netcredit of • 1 million in 2004. Share of operating profits of associated undertakings The operating profit in 2004 was • 201 million compared to • 143 million in 2003and mainly reflects AIB's 22.5% share of the income before taxes of M&T BankCorporation, under Irish GAAP, for the year 2004 and the period from 1April 2003to 31 December 2003. Commentary on results The following commentary is in respect of the total Group. "AIB Bank Republic of Ireland deposits particularly strong, up 16%" "Lower effective tax rate - some taxation provision releases" "Tangible return on equity at 29.6%" "Strong capital position - Tier 1 ratio at 7.9%" Balance sheet Total assets amounted to • 102 billion at 31 December 2004 compared to • 81billion at 31 December 2003. Adjusting for the impact of currency, total assetsand loans to customers were up 26% and 28% respectively since 31 December 2003while customer accounts increased by 14%. Risk weighted assets excludingcurrency factors increased by 26% to • 79 billion. Risk weighted assets, loans to customers and customer accounts (excluding moneymarket funds and currency factors) Risk weighted Loans to Customer assets customers accounts % change December 2004 v December 2003 % Change % Change % Change AIB Bank Republic of Ireland 29 30 16 AIB Bank GB & NI 25 29 15 Capital Markets 25 31 6 Poland 16 6 10 AIB Group 26 28 14 Assets under management/administration and custody Assets under management in the Group amounted to • 13 billion and assets under administration and custody amounted to • 183 billion at 31 December 2004. Taxation The taxation charge was • 336 million compared with • 318 million in 2003. Theeffective tax rate was 23.7% compared with 31.4% in 2003 (24.0% having adjustedfor taxation arising on the Allfirst / M&T transaction and the sale of Govett).The effective tax rate is influenced by the geographic mix of profits which aretaxed at the rates applicable in the foreign jurisdictions. Return on equity and return on assets The tangible return on equity increased to 29.6% compared to 20% in 2003. The basic return on equity increased to 20.2% from 14.5% in 2003 and the return on assets was 1.17%, up from 0.90% in 2003. Capital ratios The Group was strongly capitalised at 31 December 2004 with the Tier 1 ratio at 7.9% and the total capital ratio at 10.7%. These ratios include the • 1.0 billion of perpetual preferred securities issued in December 2004. Commentary on results "Outlook - business expected to continue to perform very strongly" Commentary on half-year December 2004 performance Adjusted earnings per share increased by 7% in the half-year to December 2004compared with the half-year to June 2004. There was strong business momentum inthe second half with all divisions performing well. Loan and deposit volumesincreased by 29% and 18% respectively on an annualised basis since 30 June 2004. Capital Markets performed very well and enjoyed a very strong fourth quarterperformance. In Ark Life, there were technical adjustments, including areduction in the discount rate used in the calculation of its embedded valueprofits from 10% to 7.5% generating profit of • 12 million, after providing forthe solvency margin. In the second half the effective tax rate was lower, benefiting from sometaxation provision releases. The strong business momentum coupled with the above mentioned items delivered aparticularly strong second half adjusted earnings per share of EUR 68.7c. Outlook Accounts for 2005 will be prepared under IFRS for the first time. This will alsoresult in a restatement of 2004 results in line with IFRS. To facilitateshareholders the following outlook is prepared on the traditional Irish GAAPbasis, as it allows the use of these 2004 accounts as a reference base. Adjustedearnings per share amounted to EUR 133.1c in 2004. This outcome benefited fromsome taxation provision releases and technical adjustments in Ark Life. Our business is expected to continue to perform very strongly and we areanticipating another year in 2005 of buoyant loan and deposit growth. Thedecline in the US dollar will affect the • translation of these profits, with anoverall negative impact of approximately 1% to 2% in earnings per share growthterms anticipated from currency translation of earnings. Based on these factorsour guidance for adjusted earnings per share growth in 2005 on an Irish GAAPbasis would be for a range of EUR 142c to EUR 144c. Implementation of International Financial Reporting Standards AIB's primary financial statements for the year ended 31 December 2004 areprepared in accordance with Irish generally accepted accounting principles ('IRGAAP') which differ in certain significant respects from International FinancialReporting Standards ('IFRS'). Arising from the adoption of a regulation by theEuropean Commission, from 1 January 2005, the Group accounts of all listedcompanies in the European Union ('EU') are required to be completed on the basisof IFRS as adopted by the EU. The objective is to improve financial reportingand enhance transparency to assist the free flow of capital throughout the EUand to improve the efficiency of the capital markets. AIB intends to implementIFRS in such a manner as to comply with EU endorsed IFRS as well as ensuringcompliance with IFRS as issued by the International Accounting Standards Board('IASB'). A groupwide programme has been in place since 2003 to ensure full compliancewith IFRS in 2005. The significant deliverables include the necessaryadjustments to the Group accounting policies, training so as to ensure therequirements are met, addressing the business impacts and making the necessaryadjustments to the Group's accounting and reporting systems, includingreplacement where necessary. Progress is monitored by a Group level steeringcommittee. While many of the uncertainties concerning whether and how IFRS will be adoptedfor use in the EU have been resolved, some questions remain, particularlyregarding the adoption of amendments to standards, interpretative guidanceissued by the IASB/International Financial Reporting Committee ('IFRIC') and therequirements of companies legislation. This could have an effect on the 2005financial statements. In addition, there remains some uncertainty as to theimpact that the new accounting treatments will have on the calculation ofregulatory capital. The IFRS implementation work is nearing completion, although conversion workincluding verifying the accuracy of the opening balances will continue during2005.The audit of the impact of transition to IFRS has not been completed at thedate of this release. It is intended that restated comparative data for 2004excluding the impact of IAS32 and IAS39 on financial instruments and IFRS 4 oninsurance contracts, together with the opening 2005 IFRS balance sheet includingthese standards will be issued in the second quarter of 2005.AIB's first resultsprepared under IFRS will be published in the interim report for the six monthsto 30 June 2005. Divisional commentary On a divisional basis profit is measured in • and consequently includes theimpact of currency movements. The underlying percentage change is reported inthe divisional profit and loss accounts adjusting for the impact of exchangerate movements on the translation of foreign locations' profit. The profitsegments by division for 2003 have been restated to reflect a change in theallocation of pension costs across business segments. Previously businesssegments accounted for the normalised pension contribution rate appropriate toindividual pension schemes. The full impact of FRS 17 (Retirement Benefits) isnow charged to each operating division. Each division now accounts for the fullservice cost, the expected return on pension scheme assets and the interest onpension scheme liabilities. AIB Bank Republic of Ireland profit was up 11% "Banking operations profit up 19%" "Strong volume growth; loans +30%, deposits +16%" "Ark Life discount rate reduced from 10.0% to 7.5% (+• 12 million)" "• 50 million investigation related charges incurred" AIB Bank Republic of Ireland Retail and commercial banking operations inRepublic of Ireland, Channel Islands and Isle of Man; AIB Finance and Leasing;Card Services; and AIB's life and pensions subsidiary Ark Life AssuranceCompany. Year 2003 before early Early Year Year retirement retirement 2003 2004 costs costs as reported Underlying AIB Bank Republic of Ireland profit and loss • m • m • m • m % change(1) account Net interest income 1,126 1,016 - 1,016 11 Other finance income 20 17 - 17 22 Other income 399 389 - 389 1 Total operating income 1,545 1,422 - 1,422 8 Operating expenses 812 747 - 747 8 Early retirement costs - - 40 40 - Total operating expenses 812 747 40 787 8 Operating profit before provisions 733 675 (40) 635 9 Provisions 44 62 - 62 -29 Operating profit 689 613 (40) 573 12 Share of operating profits of associated (1) - - - - undertakings Profit on disposal of property 7 13 - 13 - Profit on ordinary activities before taxation 695 626 (40) 586 11 The divisional profit increase of 11% included • 50 million of investigationrelated charges. The profit was up 19% before these charges. Operating incomeand operating expenses were both up 8%. Excluding the investigation relatedcharges these growth rates were 11% and 6% respectively, demonstrating a strongoperating income/cost gap. Banking operations performed strongly with profit increasing by 19%.Particularly strong loan and deposit growth, higher productivity and a reducedbad debt provision charge were the key performance drivers. Loans increased by30% and deposits performed particularly well with a 16% increase since 31December 2003. Operating expenses were up 6% excluding the transfer of the ArkLife sales force to AIB's payroll and investigation related costs. Higher levelsof business volumes and customer activity coupled with normal salary increaseswere the main drivers of the 6% increase. The cost income ratio was 52.5% andwas impacted by the • 50 million investigation related charges, excluding thesethe ratio decreased to 50.4%. There was a particularly good increase in AIB Card Services profit resultingfrom higher loan volumes, a 21% increase in merchant turnover, good growth infee income reflecting higher consumer spending and a lower bad debt charge. InAIB Finance and Leasing, profit was higher reflecting a 17% increase in loanvolumes and a lower bad debt charge. Ark Life reported profit of • 72 million, an 18% increase compared with the 2003profit of • 60 million. The profit increase included • 12 million from areduction in the discount rate used in the calculation of its embedded valueprofit after providing for the solvency margin. The discount rate was reducedfrom 10% to 7.5% in the fourth quarter. While Annual Premium Equivalent (APE)sales marginally decreased from • 104 million to • 100 million, there was asignificant increase of 30% in new pension APE sales. (1) Excludes currency movements and the impact of the transfer of the Ark Lifesales force to AIB's payroll. Divisional commentary AIB Bank GB & NI profit was up 16% "Strong double-digit profit growth" "Loans up 29%, deposits up 15%" "Lower bad debt charge" AIB Bank GB & NI Retail and commercial banking operations in Great Britain and Northern Ireland. Year 2003 before early Early Year Year retirement retirement 2003 2004 costs costs as reported Underlying AIB Bank GB & NI profit and loss account • m • m • m • m % change Net interest income 411 364 - 364 12 Other finance income (6) (5) - (5) 8 Other income 191 165 - 165 14 Total operating income 596 524 - 524 12 Operating expenses 295 261 - 261 11 Early retirement costs - - 15 15 - Total operating expenses 295 261 15 276 11 Operating profit before provisions 301 263 (15) 248 13 Provisions 13 19 - 19 -35 Operating profit 288 244 (15) 229 17 Profit on disposal of property 1 2 - 2 - Profit on ordinary activities before taxation 289 246 (15) 231 16 AIB Bank GB & NI continued its strong business performance in the year to 31December 2004 with profit before taxation increasing by 16%. Loans and depositsRelated Shares:
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