6th Mar 2007 07:00
Allied Irish Banks PLC06 March 2007 Allied Irish Banks, p.l.c. ("AIB") (NYSE:AIB) Part 1 HIGHLIGHTS - AIB GROUP ANNUAL RESULTS 2006 Basic earnings per share EUR 246.8cless profit on disposal/development of property(1) EUR (42.8c)less profit on disposal of businesses(2) EUR (21.7c)adjust for hedge volatility under IFRS(3) EUR 0.5cAdjusted basic earnings per share EUR 182.8c up 25%(4) Divisional operating profit performance(5) - AIB Bank ROI up 23% - Capital Markets up 29% - AIB Bank UK up 18% - Poland up 52% Income/cost gap +4% Cost income ratio down 1.7% to 53.5% Bad debt provision charge 0.12%, down from 0.15% in 2005 Return on equity 29.0% Tier 1 capital ratio 8.2% Total dividend of EUR 71.8c, up 10% M&T reported 10% US GAAP EPS growth(6) AIB Group Chief Executive Eugene Sheehy said: '2006 was a year when AIB enjoyed outstanding growth across all its divisions. Iam pleased about the consistency of this performance - and that customer demandremains strong for our range of innovative and competitive products andservices. AIB has the top-class people needed to deliver these products andservices through its comprehensive suite of channels. That is why I'm confidentthat the prospects remain bright for sustaining AIB's level of high-qualitygrowth into 2007 and beyond.' (1) Includes profit on new Bankcentre development (construction contractincome) and profit on the disposal of the existing Bankcentre (• 352 millionbefore tax, • 289 million after tax), profit on disposal of Donnybrook House (•29 million before tax, • 25 million after tax) and profit on sale of 11 branchesin the Republic of Ireland (• 73 million before tax, • 58 million after tax). (2) Profit on disposal of Ark Life discontinued operation (• 112 million aftertax), profit from the sale of 50% stake of AIB/BNY Securities Services (Ireland)Limited to the Bank of New York Company (• 51 million after tax) and thetransfer by Ark Life of the management of certain investment contracts to Avivaas part of the disposal of Ark Life (• 26 million after tax). (3) The impact of interest rate hedge volatility (hedging ineffectiveness andderivative volatility) under IFRS was a decrease of • 4 million to profit beforetaxation for the year (• 4 million after tax). (4) A 25% increase compared with EUR 145.9c for 2005. The EUR 145.9c in 2005includes the earnings from Ark Life which is a discontinued operation since 30January 2006 and excludes profit on the new Bankcentre development and interestrate hedge volatility in 2005. (5) Operating profit excludes profit from disposal of property/businesses andassociated undertakings. The percentage increase excludes the impact of exchangerate movements on the translation of foreign locations' profit. (6) AIB's share of M&T's profit on a local currency basis was down 4%. Thisdecrease reflects the conversion of M&T's contribution from US GAAP to IFRS. Thebank's application of IFRS to M&T's US GAAP numbers gave a lower result due tothe movement of previously unallocated credit provisions to specific provisionsin M&T's books (which now classifies as specific provisions under IFRS andreduces the M&T profit reported in AIB's books by • 15 million). Allied Irish Banks, p.l.c. Dividend The Board is recommending a final dividend of EUR 46.5c per share payable on 10May 2007 to shareholders on the Company's register of members at the close ofbusiness on 16 March 2007. The final dividend, together with the interimdividend of EUR 25.3c per share, amounts to a total dividend of EUR 71.8c pershare, an increase of 10% on 2005. For further information please contact: John O'Donnell Alan Kelly Catherine BurkeGroup Finance Director General Manager, Group Finance Head of Corporate RelationsBankcentre Bankcentre BankcentreDublin Dublin Dublin353-1-660-0311 353-1-660-0311 353-1-660-0311Ext. 14412 Ext. 12162 Ext. 13894 This results announcement and a detailed informative presentation can be viewedon our internet 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 and 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 2006 31 December 31 December 2006 2005 • m • mResultsTotal operating income 4,326 3,647Operating profit 1,908 1,493Profit before taxation - continuing operations 2,615 1,706Profit attributable to equity holders of the parent 2,185 1,343 Per • 0.32 ordinary shareEarnings - basic (note 13(a)) 246.8c 151.0cEarnings - diluted (note 13(b)) 244.6c 149.8cDividend 71.8c 65.3cDividend payout 29% 44%Net assets 928c 773c Performance measuresReturn on average total assets 1.63% 1.20%Return on average ordinary shareholders' equity 29.0% 20.6% Balance sheetTotal assets 158,526 133,214Ordinary shareholders' equity 8,108 6,672Loans etc 120,015 92,361Deposits etc 136,839 109,520 Capital ratios(1)Tier 1 capital 8.2% 7.2%Total capital 11.1% 10.7% (1) The final dividend of • 407m has not been taken into account in thecalculation of the Tier 1 and Total capital ratios. The Financial Regulator hasissued a requirement that a Prudential Filter be applied to proposed finaldividends with effect from July 2007. If applied at 31 December 2006, the Tier 1and Total capital ratios would be 7.9% and 10.8% respectively. Allied Irish Banks, p.l.c. Group Headquarters & Registered Office Bankcentre, Ballsbridge Dublin 4, Ireland Telephone (01) 6600311 Registered number 24173 Consolidated income statementfor the year ended 31 December 2006 2006 2005 Notes • m •mInterest and similar income 3 6,928 5,151Interest expense and similar charges 4 3,929 2,621Net interest income 2,999 2,530Dividend income 5 23 17Fee and commission income 1,235 1,061Fee and commission expense (161) (145)Net trading income 6 173 112Other operating income 7 57 72Other income 1,327 1,117Total operating income 4,326 3,647Administrative expenses 8 2,174 1,881Amortisation/impairment of intangible assets and goodwill 53 47Depreciation of property, plant and equipment 87 83Total operating expenses 2,314 2,011Operating profit before provisions 2,012 1,636Provisions for impairment of loans and receivables 17 118 115Provisions for liabilities and commitments (15) 20Amounts written off financial investments available for sale 1 8Operating profit 1,908 1,493Associated undertakings 167 149Profit on disposal of property 9 365 14Construction contract income 10 96 45Profit on disposal of businesses 11 79 5Profit before taxation - continuing operations 2,615 1,706Income tax expense - continuing operations 12 433 319Profit after taxation - continuing operations 2,182 1,387Discontinued operation, net of taxation 1 & 19 116 46Profit for the period 2,298 1,433Attributable to:Equity holders of the parent 2,185 1,343Minority interests in subsidiaries 113 90 2,298 1,433Basic earnings per share - continuing operations 13(c) 233.5c 145.7cBasic earnings per share - discontinued operations 13.3c 5.3cTotal 13(a) 246.8c 151.0cDiluted earnings per share - continuing operations 13(d) 231.4c 144.6cDiluted earnings per share - discontinued operations 13.2c 5.2cTotal 13(b) 244.6c 149.8c Consolidated balance sheetas at 31 December 2006 31 December 31 December 2006 2005 Notes •m •mAssetsCash and balances at central banks 989 742Treasury bills and other eligible bills 196 201Items in course of collection 527 402Trading portfolio financial assets 15 8,953 10,113Derivative financial instruments 2,890 2,439Loans and receivables to banks 12,900 7,129Loans and receivables to customers 16 107,115 85,232Financial investments available for sale 18 19,665 16,864Interests in associated undertakings 1,792 1,656Intangible assets and goodwill 550 517Property, plant and equipment 593 706Other assets 1,117 778Current taxation 17 18Deferred taxation 256 253Prepayments and accrued income 927 801Disposal group and assets classified as held for sale 39 5,363Total assets 158,526 133,214LiabilitiesDeposits by banks 33,433 29,329Customer accounts 74,875 62,580Trading portfolio financial liabilities 191 240Derivative financial instruments 2,531 1,967Debt securities in issue 28,531 17,611Current taxation 112 133Other liabilities 1,757 1,599Accruals and deferred income 1,410 1,092Retirement benefit liabilities 937 1,227Provisions for liabilities and commitments 93 140Deferred taxation - 32Subordinated liabilities and other capital instruments 4,744 3,756Disposal group classified as held for sale - 5,091Total liabilities 148,614 124,797Shareholders' equityShare capital 294 294Share premium account 1,693 1,693Other equity interests 497 497Reserves 543 1,152Profit and loss account 5,578 3,533Shareholders' equity 8,605 7,169Minority interests in subsidiaries 1,307 1,248Total shareholders' equity including minority interests 9,912 8,417Total liabilities, shareholders' equity and minority interests 158,526 133,214 Condensed statement of cash flowsfor the year ended 31 December 2006 31 December 31 December 2006 2005Consolidated statement of cash flows • m • mNet cash flows from operating activities 8,645 4,561Investing activitiesNet increase in financial investments available for sale (2,477) (264)Additions to property, plant and equipment (144) (100)Disposal of property, plant and equipment 489 89Additions to intangible assets (87) (36)Investment in associated undertaking - (3)Disposal of investment in subsidiaries and businesses 268 11Dividends received from associated undertakings 44 41Cash flows from investing activities (1,907) (262)Financing activitiesRe-issue of treasury shares 48 47Redemption of subordinated liabilities - (630)Issue of subordinated liabilities - 1,813Issue of perpetual preferred securities 1,008 -Interest paid on subordinated liabilities (196) (90)Equity dividends paid on ordinary shares (587) (532)Dividends on other equity interests (38) (38)Dividends paid to minority interests (82) (62)Cash flows from financing activities 153 508Net increase in cash and cash equivalents 6,891 4,807Analysis of changes in cashAt 1 January 7,670 2,773Net cash inflow before the effect of exchange translation 6,891 4,807adjustmentsEffect of exchange translation adjustments (206) 90At 31 December 14,355 7,670 Consolidated statement of recognised income and expense 2006 2005 •m • mForeign exchange translation differences (149) 301 Net change in cash flow hedges, net of tax (283) (76) Net change in fair value of available for sale securities, net of (13) (6)tax Net actuarial gains/(losses) in retirement benefit schemes, net of 200 (285)tax Net other losses relating to the period (47) (72)Income and expense recognised (292) (138) Profit for the period 2,298 1,433Total recognised income and expense for the period 2,006 1,295Attributable to: Equity holders of the parent 1,859 1,191 Minority interests in subsidiaries 147 104Total recognised income and expense for the period 2,006 1,295 Condensed consolidated reconciliation of movements in shareholders' equity 2006 2005 • m • mProfit attributable to equity holders of the parent 2,185 1,343Dividends on ordinary shares (587) (532)Dividends on other equity interests (38) (38)Share based payments 30 16Actuarial gains/(losses) recognised in retirement benefit schemes 200 (285)Other recognised (losses)/gains relating to the period (471) 198Other recognised losses in associated undertakings (47) (65)Ordinary shares reissued 87 66Net movement in own shares 77 (6)Net additions to shareholders' equity 1,436 697 Opening shareholders' equity 7,169 6,472Closing shareholders' equity 8,605 7,169Shareholders' equity: Ordinary shareholders' equity 8,108 6,672 Other equity interests 497 497 8,605 7,169 Commentary on results Earnings per share The table below shows the basic earnings per share excluding profit on disposal/development of property(1), profit on disposal of businesses(2) and adjustingfor hedge volatility(3). Earnings per share Year Year 2005 % change 2006 2006 v 2005Basic - continuing operations(4) 233.5c 145.7c 60Basic - discontinued operations 13.3c 5.3c -Basic - total 246.8c 151.0c 63less profit on disposal/development of property(1) (42.8c) (4.4c) -less profit on disposal of businesses(2) (21.7c) - -adjust for hedge volatility under IFRS(3) 0.5c (0.7c) -Adjusted basic earnings per share 182.8c 145.9c 25 Rates of exchange 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 accounting effective rates effective rates rates rates 2006 2005 2006 2005US dollar 1.26 1.25 1.21 1.29Sterling 0.68 0.69 0.69 0.69Polish zloty 3.90 4.03 3.85 4.02 (1) Includes profit on new Bankcentre development (construction contract income)and profit on the disposal of the existing Bankcentre (• 352 million before tax,• 289 million after tax), profit on disposal of Donnybrook House (• 29 millionbefore tax, • 25 million after tax) and profit on sale of 11 branchesin theRepublic of Ireland (• 73 million before tax, • 58 million after tax). (2) Profit on disposal of Ark Life discontinued operation (• 112 million aftertax), profit from the sale of 50% stake of AIB/BNY Securities Services (Ireland)Limited to the Bank of New York Company (• 51 million after tax) and thetransfer by Ark Life of the management of certain investment contracts to Avivaas part of the disposal of Ark Life (• 26 million after tax). (3) The impact of interest rate hedge volatility (hedging ineffectiveness andderivative volatility) under IFRS was a decrease of • 4 million to profit beforetaxation for the year (• 4 million after tax). (4) Continuing operations exclude Ark Life, which is reported as a discontinuedoperation following its disposal, which was announced in 2005 (transactioncompleted 30 January 2006). Commentary on results Basis of presentation The following commentary is on a continuing operations basis. The growthpercentages are shown on an underlying basis, adjusted for the impact ofexchange rate movements on the translation of foreign locations' profit andexcluding interest rate hedge volatility (hedging ineffectiveness and derivativevolatility) under IFRS. Very strong growth in operating income, up 18% Total operating income Total income increased by 18% to • 4,326 million. Year Year Underlying 2006 2005 % changeTotal operating income • m • m 2006 v 2005Net interest income 2,999 2,530 18Other income 1,327 1,117 17Total operating income 4,326 3,647 18 Commentary on results Net interest income Net interest income increased by 18% to • 2,999 million in the year to December2006. The key drivers of the increase were strong loan and deposit growth inRepublic of Ireland, UK and Poland. Loans to customers increased by 26% andcustomer accounts increased by 19% on a constant currency basis since 31December 2005 (details of loan and deposit growth by division are contained onpage 14 of this release). Year Year %Average interest earning assets 2006 2005 change(1) •m • m 2006 v 2005 Average interest earning assets 132,542 106,380 25 (1) This particular analysis is not adjusted for the impact of exchange ratemovements. Year Year BasisNet interest margin 2006 2005 Point % % changeGroup net interest margin 2.26 2.38 -12 The domestic and foreign margins for 2006 are reported on page 38 of thisrelease. 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 amounted to 2.26%, a decrease of 12 basis pointscompared with 2005. The margin attrition between 2005 and 2006 was reduced by alower level of growth in Treasury assets compared with the growth in retail andcommercial assets. This mix impact reduced the margin attrition to 12 basispoints from an underlying attrition of 16 basis points. The underlying marginreduction of 16 basis points was due to a combination of the following factors: (a) loans increasing at a faster rate than deposits. (b) lower yields on the re-investment of deposit and current account funds asthey mature. (c) a changing mix of products where stronger volume growth has been achieved inlower margin products; corporate loans, home loans and prime rate advances onthe lending side and term deposits and other lower margin products on thedeposit side. (d) competitive pressures on loan and deposit pricing. The margin reduction continues to be impacted by average loans increasing at agreater rate than average deposits compared with 2005.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 interest earning assets. The impact of low yields on the investment of deposit and current account fundsparticularly affected AIB Bank Republic of Ireland and Poland divisions. Asinterest rates increase and more of the funds reinvest, over time the impact ofthis factor is expected to reduce. While it is difficult to disaggregate trends in product margins between mix andcompetitive factors, competitive pricing behaviour did impact loan and depositmargins. The Group's new business lending continued to meet targeted return oncapital hurdles. Commentary on results Investment banking and asset management fees up 57% Banking fees and commissions up 6% Other income Other income was up 17% to • 1,327 million since the year to December 2005. Year Year Underlying 2006 2005 % changeOther income • m • m 2006 v 2005Dividend income 23 17 35Banking fees and commissions 921 863 6Investment banking and asset management fees 314 198 57Fee and commission income 1,235 1,061 16Fee and commission expense (161) (145) 10Trading income 167 119 37Currency hedging profits/(losses) 10 (13) -Interest rate hedge volatility (4) 6 -Net trading income 173 112 37Other operating income 57 72 -23Total other income 1,327 1,117 17 Dividend income increased by 35% mainly reflecting growth in dividends frominvestments held by the Polish business. Banking fees and commissions increased by 6%, reflecting increased business andtransaction volumes in AIB Bank Republic of Ireland and Corporate Banking andgood growth in credit card revenue in Ireland. Investment banking and asset management fees increased by 57% driven byparticularly strong performances in Asset Management in Poland and BZWBK'sbrokerage operation and very good growth in Goodbody stockbrokers. Total fee andcommission income was up 16%, driven by the 57% increase in investment bankingand asset management fees and the 6% increase in banking fees and commissions. Trading income increased, with strong growth in foreign exchange and interestrate management activities. Trading income excludes interest payable andreceivable arising from these activities, which is included in net interestincome. Accordingly the above trading income does not give the full picture interms of trading activities, largely in Global Treasury. Interest income inGlobal Treasury decreased and total income was broadly flat relative to 2005. Other income as a percentage of total income remained the same as 2005 at 31%. Commentary on results Investment to sustain the long term health of the business Higher productivity - cost income ratio decreases by 1.7% to 53.5% Income/cost gap +4% Total operating expenses Operating expenses increased by 14% compared with 2005. Year Year UnderlyingOperating expenses 2006 2005 % change • m • m 2006 v 2005Personnel expenses 1,502 1,298 15General and administrative expenses 672 583 14Depreciation(1)/amortisation(2) 140 130 6Total operating expenses 2,314 2,011 14 Operating expenses increased by 14%, in a period of substantially increasedbusiness volumes and strong growth on the revenue line. As a consequence of thecontinuing growth opportunities available to the business and in order todevelop capabilities to exploit them, the Group is investing in variousprogrammes to sustain the long-term health and development of the business. Thishas included investment in appropriate skills, in enhanced reward systems, theongoing building of common operating systems in line with our single enterpriseagenda and in developing a resilient risk, compliance and corporate governanceframework (including Sarbanes Oxley and Basel II). Excluding regulatory driven costs, performance related remuneration resultingfrom very strong revenue growth and investment in our risk, compliance andcorporate governance framework, the increase in costs was 9%. Personnel expensesincreased by 15% reflecting a higher level of variable performance relatedremuneration linked to the strong revenue outperformance and salary increases. General and administrative expenses were up 14% mainly due to consultancy,systems and infrastructure costs to ensure compliance with the changingregulatory requirements and to sustain the long-term development of thebusiness. Depreciation/amortisation increased by 6%, reflecting the commencementof depreciation on the aforementioned recent investment initiatives. Productivity improved with the cost income ratio reducing by 1.7% to 53.5% from55.2% in 2005. (1) Depreciation of property, plant and equipment.(2) Amortisation/impairment of intangible assets and goodwill. Commentary on results Provision charge lower at 12 basis points reflecting strong asset quality Reduction in impaired loans as a percentage of loans to 0.9% High level of provision recoveries in the period Provisions Total provisions were • 104 million, down from • 143 million in 2005. Year Year 2006 2005Provisions • m • mProvisions for impairment of loans and receivables 118 115Provisions for liabilities and commitments (15) 20Amounts written off financial investments available for sale 1 8Total provisions 104 143 The provision for impairment of loans and receivables was • 118 million comparedwith • 115 million in 2005, representing a charge of 0.12% of average loanscompared with 0.15% in 2005. The lower charge reflects strong asset quality,good recoveries and a benign credit environment. Impaired loans as a percentageof total customer loans decreased from 1.0% at 31 December 2005 to 0.9% at 31December 2006 with the total provision coverage for impaired loans at 76%. In AIB Bank Republic of Ireland asset quality continued to be strong. Impairedloans as a percentage of total customer loans reduced to 0.6% at 31 December2006 from 0.7% in 2005. The provision charge was 0.15% of average loans comparedwith 0.11% in 2005. The quality across all sectors of the retail and commercialportfolios remains very good. In Capital Markets the provision charge was 0.02% compared with 0.22% in 2005reflecting a strong level of provision recoveries, through realisation ofexposures during the period as a result of the benign credit environment andstrong liquidity in the corporate market. Impaired loans reduced to 0.6% from0.7% of total customer loans at 31 December 2005. In the UK division, the provision charge remained at 0.13% of average loans andimpaired loans remained at 0.9% of total customer loans compared with 31December 2005. The provision charge in Poland decreased to 0.23% of loans from 0.40% in 2005.Asset quality continued to improve with the ratio of impaired loans as apercentage of customer loans declining to 4.9% from 6.8% at 31 December 2005. There was a net credit in provisions for liabilities and commitments of c 15million in 2006 compared with a provision of • 20 million in 2005, whileprovisions for amounts written off financial investments were • 1 millioncompared to • 8 million in 2005. Associated undertakings The profit in 2006 was • 167 million compared to • 149 million in 2005 andmainly reflects AIB's 24.0% average share of the income after taxation of M&TBank Corporation and income after taxation from the joint venture in Life andPensions with Hibernian. M&T's contribution of US$ 177 million was down 4%relative to the year to December 2005 contribution of US$ 185 million. Thisdecrease reflects the conversion of M&T's contribution from US GAAP to IFRS. Thebank's application of IFRS to M&T's US GAAP numbers gave a lower result due tothe movement of previously unallocated credit provisions to specific provisionsin M&T's books (which are now classified as specific provisions under IFRS andreduce the M&T profit reported in AIB's books by • 15 million). The profit in 2006 also included • 8 million from the disposal of investments inassociated undertakings. Commentary on results The following commentary is in respect of the total Group. Loans up 26%; deposits up 19% Effective tax rate at 16.6% Balance sheet Total assets amounted to • 159 billion at 31 December 2006 compared to • 133billion at 31 December 2005. Adjusting for the impact of currency, total assetswere up 20% and loans to customers were up 26% since 31 December 2005 whilecustomer accounts increased by 19%. Risk weighted assets excluding currencyfactors increased by 22% to • 123 billion. Risk weighted assets, loans to customers and customer accounts (excludingcurrency factors) Risk weighted Loans to Customer assets customers accounts(1)% change December 2006 v December 2005 % change % change % changeAIB Bank Republic of Ireland 36 32 20Capital Markets 8 17 9AIB Bank UK 19 19 22Poland 26 23 16AIB Group 22 26 19 (1) Excludes money market funds. Assets under management/administration and custody Assets under management in the Group amounted to • 17 billion at 31 December2006 compared with • 16 billion at 31 December 2005. AIB sold its 50% stake inAIB/BNY Securities Services (Ireland) Limited to its joint venture partner, Bankof New York during 2006. Assets under administration and custody relating to theAIB/BNY joint venture at 31 December 2005 were • 220 billion. Income tax expense The taxation charge was • 433 million compared with • 319 million in the year toDecember 2005. The effective tax rate was 16.6% compared with 18.7% (or 17.0%excluding the bank levy) in the year to December 2005. The taxation chargeexcludes taxation on share of results of associated undertakings. Share ofresults of associated undertakings is reported net of taxation in the Groupprofit before taxation. The effective tax rate is influenced by the geographicmix of profits, which are taxed at the rates applicable in the jurisdictionswhere we operate. Commentary on results Return on equity 29.0% Business expected to continue to perform strongly Outlook - low double-digit EPS growth expected in 2007 Return on equity and return on assets The return on equity was 29.0%, compared to 20.6% in 2005. The return on assetswas 1.63%, compared to 1.20% in 2005. Capital ratios A strong capital position was reflected in a Tier 1 ratio at 8.2% and a totalcapital ratio of 11.1%. Outlook We operate in strong high growth economies and sectors which serve as firmfoundations for our business. In 2007, income is again expected to grow at afaster rate than costs, driven by the strength of the customer business pipelineand focus on further productivity gains. Asset quality is expected to remainsolid with the provision for bad debts anticipated to show only a moderateincrease on the exceptionally low level in 2006. Based on these factors, we aretargeting low double-digit growth in 2007 adjusted basic earnings per sharecompared to the adjusted basic earnings per share of EUR 182.8c in 2006. Divisional commentary On a divisional basis, profit is measured in euro and consequently includes theimpact of currency movements. The underlying percentage change is reported inthe divisional income statements adjusting for the impact of exchange ratemovements on the translation of foreign locations' profit. The followingcommentary is on a continuing operations basis. AIB Bank Republic of Ireland profit of • 966 million was up 24% Very strong product volume and revenue growth Income/cost gap at +4% Cost income ratio decreases to 49.6% 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 Hibernian Life Holdings Limited, AIB's joint venture withAviva Group p.l.c. in the life and pensions Year Year Underlying 2006 2005 % changeAIB Bank Republic of Ireland income statement £££ m £££ m 2006 v 2005Net interest income 1,581 1,314 20Other income 434 376 15Total operating income 2,015 1,690 19Personnel expenses 675 568 19General and administrative expenses 270 250 8Depreciation / amortisation 55 49 12Total operating expenses 1,000 867 15Operating profit before provisions 1,015 823 23Provisions for impairment of loans and receivables 78 45 75Provisions for liabilities and commitments (4) 10 -Amounts written back financial investments available for sale (1) - -Total provisions 73 55 33Operating profit 942 768 23Associated undertakings 18 (1) -Profit on disposal of property 6 12 -47Profit before taxation - continuing operations 966 779 24 AIB Bank Republic of Ireland generated growth in profit before tax of 24% fromits continuing operations underpinned by a buoyant Irish economy and a refinedand dynamic business model. Operating income was up 19% and operating expenseswere up 15% with the operating income/cost gap at +4%. The strong profit growth reflects increased customer demand for a competitivelypriced product range driven by a strong customer relationship management ethosin both front-line and back-office activities. Loans and deposits increased by 32% and 20% respectively since 31 December 2005.AIB benefited from a pricing strategy to retain maturing SSIAs and depositgrowth exceeded that of the overall market. Similarly total loan growth wasahead of the market and was well spread across business, personal and mortgagesectors. Operating expenses were up 15%. Key drivers were growth in staffnumbers reflecting the increased levels of business activity, annual salaryinflation, the impact of a new career framework pay structure, performancerelated costs, a higher advertising spend and increased costs associated with anumber of mandatory/regulatory driven project costs. The strong operatingperformance is reflected in a further improvement in the cost income ratio to49.6% compared with 51.3% in 2005. Asset quality remains good and the provisioncharge for the year to 31 December 2006, was 0.15% of average loans, up 0.04%compared with the year to 31 December 2005. Retail Banking reported a very strong out-turn for the year where businesslending growth continued to be exceptionally strong and personal lending, homemortgages and private banking also experienced excellent growth. Profit growthin AIB Card Services also increased significantly benefiting from strong growthin revenue. AIB Finance & Leasing saw solid operating profit growth reflectingincreased new business levels across all key sectors. In early 2006, AIB completed its joint venture with Hibernian Life HoldingsLimited of which AIB owns 24.99%. This represents an important part of the AIBwealth management platform in the distribution of life and pension products. Theshare of operating profit of associated undertakings from Hibernian LifeHoldings Limited was • 11 million in 2006. Divisional commentary Capital Markets division profit of • 589 million was up 46%. Operating profit up29%. Excellent performance and continued momentum in Corporate Banking Particularly strong growth in customer treasury business and solid performance in wholesale trading Exceptional profit growth across key investment banking products Capital Markets Corporate Banking, Global Treasury, and Investment Banking. Year Year Underlying 2006 2005 % changeCapital Markets income statement £££ m £££ m 2006 v 2005Net interest income 490 435 13Other income 464 407 14Total operating income 954 842 13Personnel expenses 302 280 8General and administrative expenses 123 103 19Depreciation / amortisation 13 17 -21Total operating expenses 438 400 10Operating profit before provisions 516 442 17Provisions for impairment of loans and receivables 5 34 -86Provisions for liabilities and commitments 1 4 -72Amounts written off financial investments available for sale 2 8 -78Total provisions 8 46 -84Operating profit 508 396 29Associated undertakings 2 2 -26Profit on disposal of businesses 79 5 1,615Profit before taxation 589 403 46 Profit before taxation of • 589 million, including profit on disposal ofbusinesses, grew by 46% on 2005 or 29% on an operating profit basis driven bystrong revenue growth, an exceptionally low level of bad debt provisions andgood core cost management in each of the key business areas. Corporate Banking performed exceptionally well, with profit before provisions up26% and profit before taxation up 42%. Loans were up by 17%, driven by continuedfocus on customer relationships and new product development. Growth inestablished international businesses, new structured product initiatives and theopening of new overseas offices contributed to the underlying performance. Overall Global Treasury profit before tax declined marginally (2%) on 2005,against a backdrop of significant challenges in money markets impacted byincreased interest rates and inflationary pressures. This belied particularlystrong growth in the customer treasury business in Ireland, Britain and Polandand a robust performance in bond management activities. Investment Banking experienced exceptional growth with profit before tax up 62%,reflecting quality product development and strong customer relationships,particularly in Polish asset management and stockbroking services. In Irelandstockbroking reflected strong growth in equity trading, corporate advisoryservices and structured investments. Costs continued to be managed closely with higher performance related costspartly offset by the impact of selective business rationalisation in 2005 andnotwithstanding the impact of once-off technology, compliance and marketingcosts, the division's cost income ratio decreased to 45.9% from 47.5% in 2005. Strong recoveries of credit provisions arising from realisation of exposures,was a factor during the year and a conservative approach to credit managementcontinued to prevail in a benign global credit environment. Profit on disposal of businesses arose from the transfer by Ark Life of themanagement of certain investment contracts to Aviva, as part of the Ark Lifedisposal (• 26 million after tax), and from the sale of our 50% share of AIB/BNYSecurity Services (Ireland) Limited to the Bank of New York Company (• 51million after tax). The division's growth continues to be underpinned by its ability to identify andbring to market new quality product initiatives within profitable sectors andniches. Divisional commentary AIB Bank UK division profit was up 17% to • 379 million Well managed growth in profit before taxation of 17% Income/cost gap at +6% Cost income ratio improves by 2.8% to 45.9% AIB Bank UK Retail and commercial banking operations in Great Britain andNorthern Ireland. Year Year Underlying 2006 2005 % changeAIB Bank UK income statement £££ m £££ m 2006 v 2005Net interest income 593 516 14Other income 154 148 4Total operating income 747 664 12Personnel expenses 238 224 6General and administrative expenses 94 89 4Depreciation / amortisation 11 10 12Total operating expenses 343 323 6Operating profit before provisions 404 341 18Total provisions 26 21 26Operating profit 378 320 18Profit on disposal of property 1 2 -Profit before taxation 379 322 17 AIB Bank UK division reported another strong business performance in 2006 withprofit before taxation increasing by 17%, continuing the trend of strongdouble-digit growth in recent periods. Loans and deposits increased by 19% and22% respectively during 2006, with the growth well spread across both thebusiness and personal sectors. Customer deposit and current account balancesgrew very strongly, with excellent growth in personal and business currentaccounts. Net interest income increased by 14%. Other income increased by 4%, with an increased focus on diversifying incomeaway from traditional sources of fee income towards alternative income streams.Operating expenses increased by 6%, due to normal salary increases andinvestment in customer and corporate marketing activity. Overall, the costincome ratio improved significantly from 48.7% to 45.9%, reflecting acombination of the strong revenue growth and management action taken to managecost growth. The bad debt charge of 0.13% of average loans, is consistent with2005 and reflects the good credit quality in the portfolio. Allied Irish Bank (GB), which focuses on business banking, reported strongprofit growth of 23% to • 209 million in 2006. This growth was primarily drivenby a combination of strong lending and deposit volume growth and by goodmanagement of lending margins in a competitive environment. Loan and depositbalances increased by 16% and 24% respectively since 31 December 2005, withgrowth in lending balances increasing to 24% when measured on an average balancebasis. Costs increased by 4% when compared with last year, reflecting good costmanagement, with a resultant improvement in the cost income ratio from 48.7% to44.1%. In Northern Ireland, First Trust Bank increased profit before tax to • 170million representing 11% growth on last year. Loan and deposit balances were up26% and 19% respectively when compared with 31 December 2005, with strong growthin business and mortgage lending activity combining with significant growth incurrent account balances. Costs increased by 8% impacted by normal salaryincreases and by increased operating costs, the latter reflecting additionalinvestment in the personal market and improvements to the branch networktechnology platform. The cost income ratio improved marginally from 48.6% to48.2%. Divisional commentary Poland division profit was • 207 million, up 56% Significant profit increase Very strong loan growth momentum in second half-year Exceptional growth in mutual funds Income/cost gap +10% Poland Bank Zachodni WBK ('BZWBK'), in which AIB has a 70.5% shareholding,together with its subsidiaries and associates. BZWBK Wholesale Treasury and Capital Markets share of certain Investment Bankingsubsidiaries results are reported in Capital Markets division. Year Year Underlying 2006 2005 % changePoland income statement £££ m £££ m 2006 v 2005Net interest income 236 205 11Other income 302 222 32Total operating income 538 427 22Personnel expenses 170 137 18General and administrative expenses 120 99 16Depreciation / amortisation 40 44 -14Total operating expenses 330 280 12Operating profit before provisions 208 147 41Provisions for impairment of loans and receivables 9 14 -36Provisions for liabilities and commitments (2) 1 -Total provisions 7 15 -53Operating profit 201 132 52Associated undertakings 6 - -Profit before taxation 207 132 56 Profit before taxation grew by an exceptional 56% on a local currency basis.This reflected the very strong momentum across the business lines of thedivision in a favourable economic climate, resulting in significantly higherbusiness activity and volumes. Total operating income increased by 22% with net interest income up by 11%.There was a substantial pick up in the demand for credit in 2006, with momentumparticularly noted in the second half-year. Total loans increased by 23% fromDecember 2005 due to strong business lending growth, which was ahead of themarket growth, and the ongoing pick up in retail lending. Mortgage growth at 26%benefited in the second half-year from the reduced market preference for foreignexchange denominated lending and growing customer demand for zloty mortgages,the sector in which the bank actively participates. Overall lending margins werelargely flat reflecting improved product mix, offsetting increasing competitionin business and mortgage lending. Customer deposits increased by 16% fromDecember 2005, with growth primarily in current accounts and foreign exchangedeposits. Business deposits increased by 26%. Personal deposits were higher by8% which is a strong performance given customer preference for mutual funds inthe market. Lower interest rates and increased competition reduced depositmargins, which was somewhat compensated for by a better product mix. Other income growth of 32% was driven by a variety of positive factors,primarily by the exceptional growth in the mutual fund business where balancesincreased by 123% since December 2005 and market share increased to 17.4% at 31December 2006 from 12.6% at 31 December 2005. A high level of sales andfavourable portfolio mix resulted in asset management net income growth of 202%.The brokerage business enjoyed a tremendous year, buoyed by the performance ofthe Warsaw Stock Exchange in 2006 with substantial increases in turnover andresultant fee income. In addition, dividends, equity investment disposals,foreign exchange income and e-business and payment fees all contributed to thestrong growth recorded in other income. Operating expenses increased by 12% reflecting increased business activity andinvestment in developing the franchise in Poland. Staff costs increased by 18%reflecting higher staff numbers, substantial increase in performance relatedcosts, including a once-off year end payment to staff related to the very strongrevenue growth. Operating costs continue to be carefully managed. Betterbusiness generation opportunities have resulted in increased spend on marketingand IT in particular. The cost income ratio fell to 60.3% from 65.7%. Impaired loans as a percentage of total loans have continued to improve with theratio at 4.9% at 31 December 2006 compared with 6.8% at 31 December 2005,reflecting strong asset quality as the loan book increased. The credit provisioncharge as a percentage of average loans was 0.23%, compared with 0.40% in 2005. Divisional commentary Group Group includes interest income earned on capital not allocated to divisions, thefunding cost of certain acquisitions, hedging in relation to the translation offoreign locations' profit, unallocated costs of central services, thecontribution from AIB's share of approximately 24.0% in M&T Bank Corporation ('M&T') and profit on disposal of property. Year Year 2006 2005Group income statement £££ m £££ mNet interest income 99 60Other income/(loss) (27) (36)Total operating income 72 24Personnel expenses 117 89General and administrative expenses 65 42Depreciation / amortisation 21 10Total operating expenses 203 141Operating loss before provisions (131) (117)Provisions for impairment of loans and receivables - 1Provisions for liabilities and commitments (10) 5Total provisions (10) 6Operating loss (121) (123)Associated undertaking 141 148Profit on disposal of property 358 -Construction contract income 96 45Profit before taxation - continuing operations 474 70 Group reported profit before taxation of • 474 million for the year to December2006 compared with a profit of • 70 million in 2005. The increase includesprofit on disposal of property and construction contract income (total • 454million - see below for detail). Net interest income increased due to higher capital income resulting from highercapital balances (strong retained earnings and the return on the funds generatedfrom the disposal of property and the sale of businesses). Other income/(loss)includes hedging profits/(losses) in relation to foreign currency translationhedging and interest rate hedge volatility (hedging ineffectiveness andderivative volatility). Total operating expenses were higher due to increased compliance related spend,mainly Sarbanes Oxley and Basel II and investment in systems and infrastructureto sustain the long-term development of the business in line with our singleenterprise agenda. Performance related costs were higher in line with strongprofit growth. M&T reported its annual results on 11 January 2007, showing net income up 7% toUS$ 839 million. US GAAP-basis diluted earnings per share was up 10% to US$ 7.37from US$ 6.73 in the year to December 2005. Diluted net operating earnings pershare, which excludes the amortisation of core deposit and other intangibleassets and merger-related expenses, was US$ 7.73 in 2006, up 10% from US$ 7.03in 2005. AIB's share of M&T after-tax profit in 2006 amounted to m 141 million.On a local currency basis M&T's contribution of US$ 177 million was down 4%relative to the year to December 2005 contribution of US$ 185 million. Thisdecrease reflects the conversion of M&T's contribution from US GAAP to IFRS. Thebank's application of IFRS to M&T's US GAAP numbers gave a lower result due tothe movement of previously unallocated credit provisions to specific provisionsin M&T's books (which are now classified as specific provisions under IFRS andreduce the M&T profit reported in AIB's books by • 15 million). Profit on disposal of property includes profit on the disposal of the existingBankcentre building (• 256 million before tax), profit on the sale of 11branches in the Republic of Ireland (• 73 million before tax) and profit ondisposal of Donnybrook House (• 29 million before tax). Construction contractincome of • 96 million reflects the profit earned from the new development atBankcentre, based on the stage of completion. Basis of preparation There have been no significant changes to the accounting policies described onpages 49 to 62 in the 2005 annual report. Prospective accounting changes The following standards/amendments to standards have been approved by theInternational Accounting Standards Board (IASB), and were adopted by the EU inJanuary 2006 but not early adopted by the Group. These will be adopted in 2007and thereafter:- Amendment to IAS 1 - Presentation of Financial Statements - Capital disclosures(effective 1 January 2007). This amendment requires disclosure, bothquantitative and qualitative, of an entity's objectives, policies and processesfor managing capital. The impact is not expected to be material in terms ofGroup reporting. IFRS 7 - Financial Instruments: Disclosures (effective 1 January 2007). Thisstandard updates and augments the disclosure requirements of IAS 30 'Disclosureson the Financial Statements of Banks and Similar Financial Institutions', andIAS 32 'Financial Instruments: Disclosure and Presentation' and IFRS 4 'Insurance Contracts' and requires the additional qualitative and quantitativedisclosures set out below. Qualitative disclosures Further information regarding each type of financial instrument risk includingthe exposures to risk and how they arise, the Group's objectives, policies andprocesses for managing the risk, the methods used to measure the risk, and anychanges from the previous period. Quantitative disclosures Further information regarding each type of the Group's financial instrument riskincluding a summary of quantitative data about exposure to that risk at thereporting date including any concentrations of credit risk, financial assetsthat are either past due or impaired, any collateral and other creditenhancements obtained, liquidity risk, market risk, and capital objectives andpolicies. The impact of IFRS 7 is not expected to be material in terms of Groupreporting. IFRIC 7 - Applying the restatement approach under IAS 29 'Financial Reporting inHyperinflationary Economies'. This interpretation, (effective 1 January 2007)provides guidance on applying the requirements of IAS 29 which deals withfinancial reporting in hyperinflationary economies. This will not have anyimpact for Group reporting purposes. IFRIC 8 - Scope of IFRS 2 (effective 1 January 2007). This Interpretationclarifies that the accounting standard IFRS 2 'Sharebased Payment' applies toarrangements where an entity makes share-based payments for apparently nil orinadequate consideration. If the identifiable consideration given appears to beless that the fair value of the equity instruments granted or liabilityincurred, this situation typically indicates that other consideration has beenor will be received. IFRS 2 therefore applies. This IFRIC is not expected tohave a material impact on the Group. IFRIC 9 - Reassessment of Embedded Derivatives (effective 1 January 2007). ThisInterpretation clarifies whether an entity should reassess whether an embeddedderivative needs to be separated from the host contract after the initial hybridcontract is recognised. IFRIC 9 concludes that reassessment is prohibited,unless there is a change in the terms of the contract that significantlymodifies the cash flows that otherwise would be required under the contract, inwhich case reassessment is required. This IFRIC is not expected to have amaterial impact on the Group. The EU Transparency Directive is due for transposition into Irish law in 2007.Accordingly, it will impact Group reporting from 1 January 2008. The Directiveseeks to enhance transparency in EU capital markets in order to improve investorprotection and market efficiency. The Directive sets out publication deadlinesand content requirements in relation to annual financial reports and half yearlyfinancial reports. In addition, there is a new requirement for issuers withshares listed on the Irish Stock Exchange to publish management statementsduring the financial year. This directive is not expected to have a significantimpact on Group reporting. The IASB announced on 1 July 2006 that it will not require the application ofnew IFRSs under development or major amendments to existing IFRSs before 1January 2009. Delaying implementation of new standards until 2009 provides fouryears of stability in the IFRS platform of standards for those companies thatadopted IFRSs in 2005. Companies will however, be permitted to adopt a newstandard on a voluntary basis before its effective date. Interpretations andminor amendments to correct problems identified in practice are not subject tothis 2009 delay. This information is provided by RNS The company news service from the London Stock ExchangeMORE TO FOLLOWRelated Shares:
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