20th Feb 2008 07:00
Allied Irish Banks PLC20 February 2008 Allied Irish Banks, p.l.c. ("AIB") (NYSE:AIB) HIGHLIGHTS - AIB GROUP ANNUAL RESULTS 2007 Basic earnings per share EUR 218.0cless profit on disposal/development of property(1) EUR (12.1c)adjust for hedge volatility(2) EUR -Adjusted basic earnings per share EUR 205.9c up 13%(3) Divisional operating profit performance(4) - AIB Bank ROI up 14% - Capital Markets up 6% - AIB Bank UK up 20% - Poland up 29% - M&T US$ contribution down 7% Income/cost gap +3% Cost income ratio down 1.7% to 51.8% Bad debt provision charge 0.09%, down from 0.12% in 2006 Return on equity 21.8% Tier 1 capital ratio 7.5% Total dividend of EUR 79.0c, up 10% AIB Group Chief Executive Eugene Sheehy said: 'AIB delivered a strong performance in 2007, despite adverse changes inworldwide banking. This performance reflects the hard work, commitment andloyalty of our people. We are serving a growing number of customers in our highquality domestic and international franchises. The broad base and resilience ofour business is a hallmark of AIB which positions us to deliver profitablegrowth in the more challenging operating environment for 2008'. (1) Includes construction contract income (• 48 million after tax) andprofit on sale of 22 branches in the Republic of Ireland(• 58 million after tax). (2) The impact of hedge volatility (hedging ineffectiveness and derivativevolatility) was negligible in 2007. (3) A 13% increase compared with EUR 182.8c for the year to December 2006(see note 15 of this release). (4) Operating profit excludes profit from disposal of property/businesses,construction contract income and associated undertakings. The percentageincrease excludes the impact of exchange rate movements on the translation offoreign locations' profit. Allied Irish Banks, p.l.c. Dividend The Board is recommending a final dividend of EUR 51.2c per share payable on 23April 2008 to shareholders on the Company's register of members at the close ofbusiness on 29 February 2008. The final dividend, together with the interimdividend of EUR 27.8c per share, amounts to a total dividend of EUR 79.0c pershare, an increase of 10% on 2006. For further information please contact: John O'Donnell Alan Kelly Catherine BurkeGroup Finance Director General Manager, Group Finance Head of Group Corporate RelationsBankcentre Bankcentre BankcentreDublin Dublin Dublin353-1-660-0311 353-1-660-0311 353-1-660-0311Ext. 14412 Ext. 12162 Ext. 13894 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 highlights for the year ended 31 December 2007 31 December 31 December 2007 2006 •m •mResultsTotal operating income 4,868 4,326Operating profit 2,248 1,908Profit before taxation - continuing operations 2,508 2,615Profit attributable to equity holders of the parent 1,949 2,185Per • 0.32 ordinary shareEarnings - basic (note 14(a)) 218.0c 246.8cEarnings - diluted (note 14(b)) 216.4c 244.6cDividend 79.0c 71.8cDividend payout 36% 29%Net assets • 10.61 • 9.28Performance measuresReturn on average total assets 1.21% 1.63%Return on average ordinary shareholders' equity 21.8% 29.0%Balance sheetTotal assets 177,862 158,526Ordinary shareholders' equity 9,330 8,108Loans and receivables to banks and customers 137,068 120,015Deposits(1) 153,563 136,839Capital ratios(2)Tier 1 capital 7.5% 8.2%Total capital 10.1% 11.1% (1) Deposits by banks, customer accounts and debt securities in issue. (2) The final dividend of • 451m has been taken into account in the calculationof the Tier 1 and Total capital ratios. The Financial Regulator issued arequirement that a Prudential Filter be applied to proposed final dividends witheffect from July 2007. If applied at 31 December 2006, the Tier 1 and Totalcapital 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 2007 2007 2006 Notes •m •mInterest and similar income 3 9,340 6,928Interest expense and similar charges 4 5,922 3,929 Net interest income 3,418 2,999Dividend income 5 31 23Fee and commission income 6 1,453 1,235Fee and commission expense 6 (197) (161)Net trading income 7 74 173Other operating income 8 89 57Other income 1,450 1,327 Total operating income 4,868 4,326Administrative expenses 9 2,376 2,174Amortisation of intangible assets 60 53Depreciation of property, plant and equipment 85 87Total operating expenses 2,521 2,314 Operating profit before provisions 2,347 2,012Provisions for impairment of loans and receivables 106 106 118Provisions for liabilities and commitments (8) (15)Amounts written off financial investments available for 1 1sale Operating profit 2,248 1,908Associated undertakings 128 167Profit on disposal of property 10 76 365Construction contract income 11 55 96Profit on disposal of businesses 12 1 79 Profit before taxation - continuing operations 2,508 2,615Income tax expense - continuing operations 13 442 433 Profit after taxation - continuing operations 2,066 2,182Discontinued operation, net of taxation 1 - 116 Profit for the period 2,066 2,298Attributable to: Equity holders of the parent 1,949 2,185 Minority interests in subsidiaries 117 113 2,066 2,298Basic earnings per share - continuing operations 14(c) 218.0c 233.5cBasic earnings per share - discontinued operations - 13.3c Total 14(a) 218.0c 246.8c Diluted earnings per share - continuing operations 14(d) 216.4c 231.4cDiluted earnings per share - discontinued operations - 13.2c Total 14(b) 216.4c 244.6c Consolidated balance sheetas at 31 December 2007 31 December 31 December 2007 2006 •m •mAssetsCash and balances at central banks 1,264 989Treasury bills and other eligible bills 15 196Items in course of collection 383 527Trading portfolio financial assets 16 8,256 8,953Derivative financial instruments 22 4,557 2,890Loans and receivables to banks 9,465 12,900Loans and receivables to customers 17 127,603 107,115Financial investments available for sale 19 20,969 19,665Interests in associated undertakings 1,682 1,792Intangible assets and goodwill 636 550Property, plant and equipment 608 593Other assets 786 1,117Current taxation 2 17Deferred taxation 254 256Prepayments and accrued income 1,143 927Disposal group and assets classified as held for sale 239 39 Total assets 177,862 158,526 LiabilitiesDeposits by banks 30,389 33,433Customer accounts 20 81,308 74,875Trading portfolio financial liabilities 194 191Derivative financial instruments 22 4,142 2,531Debt securities in issue 41,866 28,531Current taxation 181 112Deferred taxation 60 -Other liabilities 1,473 1,757Accruals and deferred income 1,808 1,410Retirement benefit liabilities 423 937Provisions for liabilities and commitments 74 93Subordinated liabilities and other capital instruments 4,605 4,744Disposal group classified as held for sale 161 - Total liabilities 166,684 148,614 Shareholders' equityShare capital 294 294Share premium 1,693 1,693Other equity interests 497 497Reserves 327 543Profit and loss account 7,016 5,578Shareholders' equity 9,827 8,605Minority interests in subsidiaries 1,351 1,307 Total shareholders' equity including minority interests 11,178 9,912 Total liabilities, shareholders' equity and minority interests 177,862 158,526 Condensed statement of cash flowsfor the year ended 31 December 2007 Consolidated statement of cash flows 31 December 31 December 2007 2006 • m • mNet cash flows from operating activities 622 8,645Investing activities Net increase in financial investments available for sale (3,331) (2,477)Additions to property, plant and equipment (128) (144)Disposal of property, plant and equipment 105 489Additions to intangible assets (138) (87)Disposal of investment in associated undertaking 5 -Disposal of investment in subsidiaries and businesses 1 268Dividends received from associated undertakings 56 44 Cash flows from investing activities (3,430) (1,907) Financing activities 48 Re-issue of treasury shares 49 -Issue of subordinated liabilities 128 1,008Issue of perpetual preferred securities - (196)Interest paid on subordinated liabilities (254) (587)Equity dividends paid on ordinary shares (651) (38)Dividends on other equity interests (38) (82)Dividends paid to minority interests (82) Cash flows from financing activities (848) 153 Net (decrease)/increase in cash and cash equivalents (3,656) 6,891 Analysis of changes in cash 14,355 7,670At 1 January (3,656) 6,891Net cash flow before the effect of exchange translation (272) (206)adjustments Effect of exchange translation adjustmentsAt 31 December 10,427 14,355 Consolidated statement of recognised income and expense 2007 2006 •m • mForeign exchange translation differences (290) (149)Net change in cash flow hedges, net of tax (37) (283)Net change in fair value of available for sale securities, net of (191) (13)tax Net actuarial gains in retirement benefit schemes, net of tax 393 200Net other losses relating to the period (22) (47) Income and expense recognised (147) (292)Profit for the period 2,066 2,298 Total recognised income and expense for the period 1,919 2,006 Attributable to: Equity holders of the parent 1,793 1,859 Minority interests in subsidiaries 126 147 Total recognised income and expense for the period 1,919 2,006 Condensed consolidated reconciliation of movements in shareholders' equity 2007 2006 • m • mProfit attributable to equity holders of the parent 1,949 2,185 Dividends on ordinary shares (651) (587)Dividends on other equity interests (38) (38)Share based payments 25 30Actuarial gains recognised in retirement benefit schemes 393 200Other recognised losses relating to the period (527) (471)Other recognised losses in associated undertakings (22) (47)Ordinary shares reissued 83 87Net movement in own shares 10 77 Net additions to shareholders' equity 1,222 1,436 Opening shareholders' equity 8,605 7,169 Closing shareholders' equity 9,827 8,605 Shareholders' equity: Ordinary shareholders' equity 9,330 8,108 Other equity interests 497 497 9,827 8,605 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 % change 2007 v 2006 2007 2006Basic - continuing operations 218.0c 233.5c -7Basic - discontinued operations - 13.3c - Basic - total 218.0c 246.8c -12less profit on disposal/development of property(1) (12.1c) (42.8c) -less profit on disposal of businesses(2) - (21.7c) -adjust for hedge volatility(3) - 0.5c - Adjusted basic earnings per share 205.9c 182.8c 13 Rates of exchange A significant proportion of the Group's earnings are denominated in currenciesother than the euro. As a result, movements in exchange rates can have an impacton earnings growth. In 2007, the US dollar and Polish zloty effective ratesweakened relative to the euro by 8% and 1% respectively and sterlingstrengthened relative to the euro by 1%, compared with the year to December2006. 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 2007 2006 2007 2006 US dollar 1.37 1.26 1.32 1.21Sterling 0.69 0.68 0.68 0.69Polish zloty 3.78 3.90 3.88 3.85 (1) 2007 includes construction contract income (€48 million after tax) andprofit on sale of 22 branches in the Republic of Ireland (€58 million aftertax). 2006 includes construction contract income (€82 million after tax) andprofit on disposal of property (€290 million after tax). (2) Profit on disposal of Ark Life discontinued operation (€112 millionafter tax), profit from the sale of 50% of AIB/BNY Securities Services (Ireland)Limited to the Bank of New York Company (€51 million after tax) and the transferof the management of certain investment contracts to Aviva as part of thedisposal of Ark Life (€26 million after tax). (3) Hedge volatility (hedging ineffectiveness and derivative volatility) hada negligible impact in 2007. The 2006 impact was a decrease of €4 million toprofit before taxation for the year (€4 million after tax). Commentary on results Basis of presentation Underlying percentage change The growth percentages are shown on an underlyingbasis, i.e. adjusted for the impact of exchange rate movements on thetranslation of foreign locations' profit and excluding hedge volatility (hedgingineffectiveness and derivative volatility). Strong growth in operating income, up 12% Total operating income Total income increased by 12% to €4, 868 million. Year Year Underlying 2007 2006 % changeTotal operating income • m • m 2007 v 2006Net interest income 3,418 2,999 14Other income 1,450 1,327 9Total operating income 4,868 4,326 12 Commentary on results Net interest income Net interest income increased by 14% to €3,418 million in the year to December2007. The key drivers were strong loan growth in the Republic of Ireland andstrong loan and deposit growth in the UK, Poland and Corporate Banking. Loans tocustomers increased by 23% and customer accounts increased by 12% on a constantcurrency basis since 31 December 2006 (details of loan and deposit growth bydivision are contained on page 14 of this release). Average interest earning assets Year Year % 2007 2006 change(1) 2007 v 2006 • m • mAverage interest earning assets 159,570 132,542 20(1) This particular analysis is not adjusted for the impact of exchange rate movements. Year Year Basis 2007 2006 pointNet interest margin % % changeGroup net interest margin 2.14 2.26 -12 The domestic and foreign margins for 2007 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 2.14%, a decrease of 12 basis pointscompared with 2006. The margin reduction was due to a combination of thefollowing factors: (a) customer loans increasing at a faster rate than customer deposits. (b) a changing mix of products where stronger volume growth has been achieved inlower margin products; corporate loans and prime rate advances on the lendingside and term deposits and other lower margin products on the deposit side. (c) competitive pressures on loan and deposit pricing. (d) higher funding costs experienced in the period. The margin reduction continues to be impacted by average customer loansincreasing at a greater rate than average customer deposits compared with 2006.While this strong lending growth generated good incremental profit, the fundingimpact resulted in a reduction in the overall net interest margin calculationwhen net interest income is expressed as a percentage of average interestearning assets. 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. Both loan and deposit margins were broadly stable while higher funding costs hada 1 basis point impact on the overall margin. The reinvestment of customeraccount funds had a close to neutral effect on the net interest margin in 2007. Commentary on results Banking fees and commissions up 12% Investment banking and asset management fees up 33% Trading income affected by global market dislocation Other income Other income was up 9% to • 1,450 million since the year to December 2006. Year Year Underlying 2007 June 2006 % changeOther income • m • m 2007 v 2006Dividend income 31 23 32Banking fees and commissions 1,029 921 12Investment banking and asset management 424 314 33feesFee and commission income 1,453 1,235 17Fee and commission expense (197) (161) 21Trading income 62 167 -64Currency hedging profits 12 10 -Hedge volatility - (4) -Net trading income 74 173 -64Other operating income 89 57 55Total other income 1,450 1,327 9 Other income growth of 9% was resilient in the face of turbulent marketconditions in the second half-year. Dividend income increased by 32% mainly reflecting growth in dividends frominvestments held by the Polish business. Total fee and commission income increased by 17%, with banking fees andcommissions up 12% and investment banking and asset management fees up 33%. The12% increase in banking fees and commissions reflects 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 33% driven byparticularly strong performances in Asset Management in Poland and BZWBK'sbrokerage operation and very good growth in Goodbody Stockbrokers. Trading income was affected by global market dislocation effects. Asset valuewritedowns in markets have been indiscriminate with current mark to marketvalues less than their par values. Where assets are deemed or classified astrading, the accounting convention is to fair value these assets, using bidprices, through other income in the income statement. The market dislocationparticularly impacted the traded credit portfolio in Global Treasury withwritedowns of • 92 million recorded in the second half of 2007. Also reflectedin trading income is a mark to model charge to income of • 25 million (US$ 35million) in relation to positions held in subprime (portfolio US$ 483 million/•328 million), a further • 11 million in relation to Collaterised Debt Obligation('CDO') / Collaterised Loan Obligation ('CLO') exposures and • 3 million forother asset backed securities (• 39 million for the total structured securitiesportfolio) which by their nature require writedowns in value to be reflectedthrough fair value to other income in the income statement rather than byprovisioning. In summary, values ascribed to the structured securities (• 39million charge to income) and trading portfolios (• 92 million writedown in thesecond half of 2007) have resulted in a mark to model/market reduction for 2007of • 131 million. Trading income excludes interest payable and receivablearising from trading activities, which is included in net interest income.Accordingly, the above trading income does not reflect the full extent oftrading activities, which are largely in Global Treasury. Interest income inGlobal Treasury increased slightly compared with 2006. The increase in other operating income mainly relates to a • 40 million profiton the sale of a trade investment in Investment Banking. Other income as a percentage of total income was 29.8% compared with 30.7% for2006. Commentary on results Higher productivity - cost income ratio decreases by 1.7% to 51.8% Income/cost gap +3% Significant progress with our single enterprise agenda Completion of preparation for regulatory programmes Total operating expenses Operating expenses increased by 9% compared with 2006. Year Year UnderlyingOperating expenses 2007 2006 % change • m • m 2007 v 2006Personnel expenses 1,615 1,502 8General and administrative expenses 761 672 13Depreciation(1)/amortisation(2) 145 140 3Total operating expenses 2,521 2,314 9 Operating expenses increased by 9% reflecting increases in business activity andvolumes. The increase in costs reflects normal inflationary increases andcontinuing investment in various programmes to develop capabilities to benefitfrom the ongoing business opportunities and to position the business forlong-term growth and development. This has included investment in people,locations and the continuation of our programme to build common operatingsystems in line with our single enterprise agenda. Significant progress has been made on our single enterprise approach tooperations and technology and we have reached a point at which the level offurther investment spending will moderate. The Group has addressed majorregulatory changes (including Sarbanes Oxley and Basel II) and the completion ofthe preparation for these regulatory changes will slow the rate of future costgrowth. Cost growth decelerated in the second half-year due to the nonrecurrence of the step up in regulatory driven and performance relatedremuneration costs incurred in the second half of 2006. Personnel expenses were up 8% due to the introduction of new salary structures,normal wage increases and investment in developing our operating systems. General and administrative expenses were up 13% including costs associated withpreparation for AIB's Basel II application to the Financial Regulator, costsrelating to the building of common operating systems, rental costs arising fromthe sale and leaseback arrangements for the Bankcentre and branch network (22branches sold in 2007, 11 sold in 2006) and normal inflationary increases.Depreciation/amortisation increased by 3%. Productivity improved with the cost income ratio reducing by 1.7% to 51.8% from53.5% in 2006. (1) Depreciation of property, plant and equipment. (2) Amortisation of intangible assets. Commentary on results Provision charge lower at 9 basis points reflecting strong asset quality Reduction in impaired loans as a percentage of loans to 0.8% Provisions Total provisions were • 99 million, down from €104 million in 2006. Year Year 2007 2006Provisions • m • • mProvisions for impairment of loans and receivables 106 1118Provisions for liabilities and commitments (8) (15)Amounts written off financial investments available 1 1for saleTotal provisions 99 104 31 December 2007 As a % of 31 December 2006 As a % of impaired loans at impaired loans at loans 31 December loans 31 DecemberImpaired loans by division • m 2007 • m 2006AIB Bank ROI 511 0.7 366 0.6Capital Markets 77 0.3 130 0.6AIB Bank UK 274 1.1 205 0.9Poland 187 2.8 232 4.9AIB Group 1,049 0.8 933 0.9 The provision for impairment of loans and receivables was • 106 million comparedwith • 118 million in 2006, representing a charge of 0.09% of average loanscompared with 0.12% in 2006. The lower charge reflects strong asset quality andgood recoveries. Impaired loans as a percentage of total customer loansdecreased from 0.9% at 31 December 2006 to 0.8% at 31 December 2007 with thetotal provision coverage for impaired loans at 71% compared with 76% in 2006. In AIB Bank Republic of Ireland asset quality continues to be strong. Impairedloans as a percentage of total customer loans were 0.7% at 31 December 2007compared with 0.6% in 2006. The provision charge was 0.16% of average loanscompared with 0.15% in 2006. In Capital Markets there were net provision recoveries of • 18 million during2007, compared with credit provisions of • 5 million in 2006. The provisionrecoveries equated to 0.08% of average loans compared with a provision charge of0.02% in 2006. The recoveries during the first half of the year reflected thebenign credit environment and strong liquidity in the corporate market in theearly part of 2007. Impaired loans reduced to 0.3% from 0.6% of total customerloans at 31 December 2006. The impact of market conditions on certain exposuresheld by Capital Markets in its structured securities portfolio is reflected byway of a • 39 million writedown in the fair value through the other incomecategory in the income statement rather than provisions. In the UK division, the provision charge reduced to 0.08% of average loans from0.13% in 2006 and impaired loans were 1.1% of total customer loans compared with0.9% at 31 December 2006. The provision charge in Poland decreased to 0.03% of loans from 0.23% in 2006.Asset quality continues to improve with the ratio of impaired loans as apercentage of customer loans declining to 2.8% from 4.9% at 31 December 2006. There was a net credit in provisions for liabilities and commitments of • 8million in 2007 compared with a net credit of • 15 million in 2006, whileprovisions for amounts written off financial investments were • 1 million in2007, the same as 2006. Commentary on results Loans up 23%; deposits up 12% Effective tax rate at 17.6% Associated undertakings The profit in 2007 was • 128 million compared with • 167 million in 2006 andmainly reflects AIB's 24.6% average share of the income after taxation of M&TBank Corporation and income after taxation from Hibernian Life Holdings Ltd, thejoint venture in Life and Pensions with Hibernian. M&T's contribution of US$ 166million (• 120 million) was down 7% relative to the year to December 2006contribution of US$ 177 million (• 141 million). The performance of M&T in 2007was affected by unprecedented turbulence in the financial markets and inparticular, the US residential real estate sector. M&T has taken the necessaryactions to appropriately provide for this portfolio. Separate to this, M&Texperienced good growth in its commercial and property books and hassuccessfully integrated Partners Trust Financial Group and First HorizonNational Corporation branches into the M&T network. The contribution of M&T toAIB Group's 2007 performance was also impacted by a weakening in the US dollarrate relative to the Euro in 2007. AIB Group profit in 2007 also included • 1 million from the disposal ofinvestments in associated undertakings compared with • 8 million in 2006. Balance sheet Total assets amounted to • 178 billion at 31 December 2007 compared to • 159billion at 31 December 2006. Adjusting for the impact of currency, total assetswere up 15% and loans to customers were up 23% since 31 December 2006 whilecustomer accounts increased by 12%. Risk weighted assets excluding currencyfactors increased by 17% to • 139 billion. Risk weighted assets, loans to customers and customer accounts (excludingcurrency factors) Risk weighted Loans to Customer assets customers accounts% change December 2007 v December 2006 % change % change % changeAIB Bank Republic of Ireland 20 20 3Capital Markets 11 30 23AIB Bank UK 17 20 17Poland 28 39 26AIB Group 17 23 12 Assets under management Assets under management in the Group amounted to • 19 billion at 31 December2007 compared with • 17 billion at 31 December 2006. Income tax expense The taxation charge was • 442 million, compared with • 433 million in 2006. Theeffective tax rate was 17.6% compared with 16.6% in the year to December 2006.The taxation charge excludes taxation on share of results of associatedundertakings. Share of results of associated undertakings is reported net oftaxation in the Group profit before taxation. The effective tax rate isinfluenced by the geographic mix of profits, which are taxed at the ratesapplicable in the jurisdictions where we operate. Commentary on results Return on equity 21.8% Return on equity and return on assets The return on equity was 21.8%, compared to 29.0% in 2006. The return on assetswas 1.21%, compared to 1.63% in 2006. Capital ratios A strong capital position was reflected in a Tier 1 ratio of 7.5% and a totalcapital ratio of 10.1%. Global market dislocation In the second half of 2007, debt and equity markets experienced a period ofmarket turmoil. This adjustment was triggered principally by global concernsover exposures to US subprime mortgages and lending. A consequence of this eventwas the reduction of liquidity in debt markets and an increase in its cost whereavailable. The following commentary outlines the impact on our funding and assetportfolios. Funding In conditions where access to term debt is severely curtailed for all banks, AIBis in a relatively strong position. Our activities in the term senior debt andunsecured interbank markets in the first half of 2007 and availability offunding to us since then through a range of current funding programmes haspositioned us well. Our most significant source of funding at 48% of our totalrequirement, is our solid, highly predictable retail and business customerdeposit base comprising c. 2 million customers. These deposits, when combinedwith wholesale funding that matures after the end of June 2008 provide fundingthat is 94% of our total customer loans. Wholesale funding with a remainingmaturity of over 1 year is c 20 billion, representing 78% of total term funding.In addition, at 31 December 2007 we held • 31 billion in qualifying liquidassets which supports a significant excess over both the regulatory requirementand our own higher internal policy level. Net unsecured interbank deposits areless than 8% of our total funding. In summary, we have solid, well diversifiedsources of funding that are sufficient to support our planned business growth.The cost of funding has increased but did not have a significant effect on our2007 performance. Asset portfolios There are three distinct portfolios affected by the market dislocation. Two aremanaged by Global Treasury and one by Corporate Banking. Trading portfolio financial assets (managed by Global Treasury) Global Treasury manages a trading portfolio principally comprising bank bondsand collateralised prime residential mortgage obligations. Asset valuewritedowns in current markets have been indiscriminate with current mark tomarket values less than their par values. Where assets are deemed or classifiedas trading, the accounting convention is to fair value these assets, using bidprices, through other income in the income statement. Based on quoted prices at 31 December 2007 Global Treasury recorded a secondhalf-year valuation writedown of • 92 million in relation to the traded creditportfolio. Available for sale portfolio (managed by Global Treasury) Global Treasury also manages the significant majority of AIB's "financialinvestments available for sale" portfolio of • 21 billion. This portfolioconsists of high quality assets (also held for liquidity management purposes)that have not suffered impairment. The accounting convention is to fair valuethese assets through the equity account and not the income statement. We haveapplied the same approach to valuation as outlined for our trading portfoliofinancial assets and the writedown to equity across our business is • 177million (after tax) which does not affect our regulatory capital calculation. Commentary on results Structured securities portfolio (managed by Corporate Banking) Our total credit exposure to US subprime mortgages is low. We have twoportfolios: - US$ 188 million (c 128 million) whole loans/not tranched portfolio - US$ 293 million (c 199 million) asset backed securities portfolio The whole loans were purchased in 2007 from a top US originator and comprisecollateral selected by AIB and purchased in April and July after extensive duediligence and are performing well. The subprime asset backed securities portfolio is marked to model and for 2007we have taken a charge to income of • 25 million (US$ 35 million) which weconsider an appropriate market adjustment. In relation to other asset backed securities, we have taken a charge to incomeat • 3 million in 2007. Other CDO/CLO exposures total • 550 million and for 2007 we have taken a chargeto income of • 11 million in relation to these exposures. We have no exposure toconduits or structured investment vehicles (SIVs), either directly or throughbackstop facilities. The total charge to income reflected in the income statement for the totalstructured securities portfolio is a • 39 million (including the • 25 million/US$ 35 million quoted above for the subprime mortgages) mark to model/marketcharge in relation to positions held in these portfolios. The quality of these portfolios remains strong. To summarise the impacts of market dislocation on our 2007 performance: Portfolio Treatment/Impact Valuation Method Trading portfolio financial • 92 million writedown reflected in Quoted prices(1)assets income statement in H2 2007 in relation to traded credit portfolio Available for sale portfolio • 177 million (after tax) writedown taken to Quoted prices(1) equity account Structured securities • 39 million charge reflected in income statement Mark to model/marketportfolio in H2 2007 (including • 25 million /US$ 35 million regarding subprime exposure) The above charges reflect the accounting convention to fair value these assetsand the charges are all unrealised losses (1) Quoted prices in relation to debt securities and quoted/unquoted prices inrelation to equity shares. Outlook - low single digit EPS growth expected in 2008 2008 Outlook Our approach and performance are founded on delivering products and services toa broad base of customers in our diverse geographies and sectors. This focus isexpected to underpin solid, predictable revenues that will continue to grow at afaster rate than costs. Asset quality is expected to remain good although baddebt provisions are expected to rise from the very low level in 2007 due tolower economic growth and a more difficult operating environment. Based on thesefactors, we are targeting low single digit growth in 2008 adjusted basicearnings per share compared to the adjusted basic earnings per share of EUR205.9c in 2007. Divisional commentary AIB Bank Republic of Ireland profit of • 1,094 million was up 13% Very strong product volume and revenue growth Cost income ratio decreases to 48% 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; Wealth Management and share of Hibernian Life Holdings Limited,AIB's venture with Hibernian Life and Pensions Limited. Year Year Underlying 2007 2006 % changeAIB Bank Republic of Ireland income statement • m • m 2007 v 2006Net interest income 1,777 1,581 12Other income 490 434 13Total operating income 2,267 2,015 13Personnel expenses 716 675 6General and administrative expenses 320 270 19Depreciation / amortisation 52 55 -7Total operating expenses 1,088 1,000 9Operating profit before provisions 1,179 1,015 16Provisions for impairment of loans and receivables 104 78 34Provisions for liabilities and commitments - (4) -Amounts written back financial investments for sale - (1) -Total provisions 104 73 43Operating profit 1,075 942 14Associated undertakings 7 18 -63Profit on disposal of property 12 6 97Profit before taxation - continuing operations 1,094 966 13 Against a less buoyant economic backdrop, AIB Bank Republic of Ireland reporteda very satisfactory increase in profit before tax of 13% benefiting from welldiversified revenue growth and good cost management across the division.Operating income was up 13% and operating expenses were up 9% with the operatingincome/cost gap at +4%. This strong and profitable performance was built onAIB's continuing progress in developing its product, service and relationshipoffering for customers - a combination that is building a very differentiatedbrand in the marketplace. AIB continued to compete aggressively to protect andincrease market share through the delivery of market leading products andservice standards. Period end loans increased by 20% since 31 December 2006 andcustomer deposits grew by 3%. Loan demand remained good, with growth in businesslending particularly strong. AIB successfully defended its share of the depositmarket which saw final SSIA funds maturing. Operating expenses increased by 9%while operating leverage remained positive. Growth of 6% in personnel expensesmainly reflects higher staff numbers and salary inflation. General andadministrative expenses were up by 19% with the key cost drivers being higheradvertising spend and continuing investment in the branch network andstreamlining back-office activities. The strong operating performance resultedin a reduction in the cost income ratio from 49.6% to 48.0%. AIB Bank Republic of Ireland continues to adopt a conservative approach tocredit management and credit quality remains strong with the provision chargefor the year to December 2007 at 0.16% of average loans compared with 0.15% inthe year to December 2006. Retail Banking reported another strong year with good growth in business andmortgage lending, while growth in personal lending was impacted by the effect ofmaturing SSIAs on credit demand. The wealth management proposition was developedfurther during 2007 and resulted in very strong growth in investment productsales with strong product offerings from both AIB Private Banking and HibernianLife Holdings. Sales of life and pensions through the bank channel has producedAnnual Premium Equivalent ("APE") growth of 34% in the year to December 2007,which represents significant outperformance over the market. Profit growth inAIB Card Services was strong benefiting from good growth in cardholder balancesand merchant turnover while AIB Finance & Leasing also reported good growth inaverage balances with resultant benefit to the revenue line. Divisional commentary Capital Markets division profit of • 532 million was down 8%. Operating profitup 6%. Good operating profit growth after charging significant mark to market writedowns Continued strong growth across our international corporate banking business Exceptional profit growth across key Investment Banking units Strong growth in our Customer Treasury business offset by exceptionally difficult wholesale trading environment Capital Markets Corporate Banking, Global Treasury and Investment Banking. Year Year Underlying 2007 2006 % changeCapital Markets income statement • m • m 2007 v 2006Net interest income 586 490 21Other income 389 464 -15Total operating income 975 954 4Personnel expenses 328 302 9General and administrative expenses 118 123 -2Depreciation / amortisation 14 13 10Total operating expenses 460 438 6Operating profit before provisions 515 516 2Provisions for impairment of loans and receivables (18) 5 -Provisions for liabilities and commitments 2 1 91Amounts written off financial investments available for 1 2 -63saleTotal provisions (15) 8 -Operating profit 530 508 6Associated undertakings - 2 -Profit on disposal of businesses 2 79 -98Profit before taxation 532 589 -8 Capital Markets profit before taxation of • 532 million fell by 8% on 2006(1).Excluding the impact of disposals of businesses and income from associatedundertakings, operating profit increased by 6%. This operating profit growth wasachieved after incurring mark to market writedowns of • 92 million in the secondhalf of 2007 in the traded credit portfolio and writedowns of €39 million in thevalue of the structured securities portfolio, including subprime mortgages. Thisstrong underlying result was driven by significant growth in business volumes,tight cost control and superior credit management. Corporate Banking continued to experience significant deal momentum during 2007with profit before provisions up 10% and profit before taxation up by 19%. Loanvolumes grew by 30% reflecting strong underlying demand both domestically andacross all of the division's international business lines. Asset quality remainsstrong, reflecting the quality and strength of the division's franchise togetherwith management's vigorous approach to credit management. We have recognised theimpact of market dislocation, including downgrades, on the division's structuredsecurities portfolio which includes subprime mortgages by writing down the valueof those assets by • 39 million. New corporate banking overseas offices continued to generate additional incomestreams, leveraging off the division's focus on a small number of core sectors.Margins remain robust and continue to be actively managed against a backdrop ofincreasingly volatile and competitive markets. The average margin earned on thedivision's loan portfolio has again increased year on year. Global Treasury was negatively impacted by the exceptional events experienced incredit and interbank markets during the second half of the year with abreak-even profit position recorded in 2007. The traded credit portfolio,comprising principally of bank bonds and collateralised prime residentialmortgage obligations, which is subject to mark to market accounting, was writtendown by • 92 million in the second half of 2007 as widening credit spreadsimpacted market prices across all asset classes. This portfolio has an averagelife of 2.9 years and management is satisfied the underlying assets will redeemat par value on maturity. Notwithstanding the extent of market volatility,Customer Treasury business generated 35% income growth in Ireland, Britain andPoland, driven by strong core business deal flow, particularly in foreignexchange, derivatives and structured products. Investment Banking generated exceptional growth with operating profit up 115% on2006. Asset management continued to be a key income contributor, underpinned bystrong growth in volumes and new product initiatives both in Ireland and Poland.In Ireland, stockbroking activities, structured product initiatives, corporateadvisory services and financial outsourcing activities all contributed stronglyto the exceptional level of growth. The outturn was also buoyed by profit of •40 million from the sale of a trade investment. Excluding this gain, InvestmentBanking operating profits were ahead of 2006 by 50%. Total operating expenses increased by 6% while general and administrative costsfell by 2%, reflecting management's continued focus on cost containment. Thecost income ratio was 47.1% compared with 45.9% in 2006. (1) The year to December 2006 included • 26 million profit on disposal ofbusiness arising from the transfer by Ark Life of the management of certaininvestment contracts to Aviva, as part of the Ark Life disposal, and alsoincluded • 51 million arising from the sale of our 50% share of AIB/BNY SecurityServices Ireland Limited to the Bank of New York Company. Divisional commentary AIB Bank UK division profit was up 20% to • 452 million Strong double digit growth in profit before taxation Cost income ratio improves by 1.8% to 44.1% Strong growth in both businesses, driven by success in business banking Year Year Underlying 2007 2006 % changeAIB Bank UK income statement • m • m 2007 v 2006Net interest income 685 593 16Other income 156 154 2Total operating income 841 747 13Personnel expenses 257 238 9General and administrative expenses 102 94 10Depreciation / amortisation 12 11 1Total operating expenses 371 343 9Operating profit before provisions 470 404 17Provisions for impairment of loans and receivables 18 26 -31Provisions for liabilities and commitments - - -Total provisions 18 26 -31Operating profit 452 378 20Profit on disposal of property - 1 -Profit before taxation 452 379 20 AIB Bank UK reported strong business performance in 2007 with profit beforetaxation increasing by 20%, built on well managed growth on both sides of thebalance sheet, in both First Trust Bank in Northern Ireland and in Allied IrishBank (GB) in Britain. Loans and deposits increased by 20% and 17% respectivelysince 31 December 2006, resulting in a net interest income increase of 16%, withcustomer deposits growing very strongly across both personal and businesscurrent accounts, particularly in Britain. This strong growth has been achievedin the context of a continued emphasis on margin management and on maintaininggood credit quality. The provision for impairment of loans and receivables wasdown by • 8 million when compared against 2006, representing 0.08% of averageloans, compared to 0.13% in 2006 and reflects recoveries of previously providedprovisions. Costs increased by 9% reflecting a combination of increasedperformance-linked remuneration, investment in front line staff and upgradingenterprise technology platforms. Overall cost management remains a key focus,contributing to a further improvement in the cost income ratio from 45.9% to44.1%. Allied Irish Bank (GB), which focuses mainly on business banking, reportedstrong profit growth of 20% to • 249 million in 2007. This growth was driven bystrong growth in deposit balances, which increased by 23% since 31 December2006. Strong deposit growth has been a continued feature of Allied Irish Bank(GB) strategy in recent years. Lending balances increased by 18% since 31December 2006, complemented by strong levels of loan origination fee income,further contributed to the increase in revenue, with interest margins being wellmanaged and maintained over the year. Costs increased by 12%, reflecting acombination of increasing investment in staff and upgrading of the corporate andbusiness banking technology infrastructure. The strong income growth has beenreflected in an improvement in the cost income ratio from 44.1% to 43.3%. Thelevel of bad debt provisioning fell significantly relative to last year, as aresult of lower levels of specific provisioning and significant recoveries,resulting in a provision charge of 0.10% of average loans, compared with 0.17%in 2006. First Trust Bank increased profit before tax by 20% to • 203 million, with theprofit growth reflecting strong growth in business banking, particularly in thefirst half of 2007. Loan and deposit balances were up 23% and 8% respectivelysince 31 December 2006, which together with strong loan origination fee income,drove an increase in net interest income of 16%. Costs increased by 5%reflecting the impact of increased investment in marketing initiatives and alsoin the corporate and business banking technology infrastructure. The cost incomeratio improved significantly from 48.2% to 45.0% reflecting a continued focus onefficiency. Credit quality remained strong with the provision charge of 0.04% ofaverage loans compared with 0.07% in 2006. The period also saw the introductionof a new personal current account "The Plus Account" for First Trust Bank, whichoffers customers the opportunity of earning credit interest and the opportunityof free transaction banking. Divisional commentary Poland division profit was • 269 million, up 26% Significant profit increase Very strong loan growth momentum Exceptional growth in mutual funds Poland Bank Zachodni WBK ('BZWBK'), in which AIB has a 70.5% shareholding,together with its subsidiaries and associates. BZWBK Wholesale Treasury andCapital Markets' share of certain Investment Banking subsidiaries results arereported in Capital Markets division. Year Year Underlying 2007 2006 % changePoland income statement • m • m 2007 v 2006Net interest income 308 236 27Other income 371 302 19Total operating income 679 538 22Personnel expenses 217 170 24General and administrative expenses 160 120 30Depreciation / amortisation 33 40 -20Total operating expenses 410 330 21Operating profit before provisions 269 208 25Provisions for impairment of loans and receivables 2 9 -84Provisions for liabilities and commitments (1) (2) -77Total provisions 1 7 -86Operating profit 268 201 29Associated undertakings 1 6 -91Profit before taxation 269 207 26 AIB Poland division has reported another very strong year's performance withprofit before taxation increasing by 26% and operating profit up 29%.This hasbeen achieved through continued momentum across the various business lines ofthe division, leading to increases in volumes and business activity against abackground of significant investment being made to realise strategic objectives. Total operating income increased by 22% with net interest income increasing by27%. Demand for credit has been exceptionally strong in 2007 with total loansincreasing by 39% since 31 December 2006. Business lending growth of 32%outperformed the growth of business lending in the marketplace. Volume growth iswell diversified across the corporate, SME and leasing portfolios. Personallending continues to grow rapidly with mortgage lending growth of 43% and otherpersonal lending growth of 47%. Customer deposits increased by 26% since 31December 2006, achieved through balanced growth on both business and personaldeposits, supported in particular by a successful marketing campaign in thefourth quarter. Overall deposit margins have improved as interest ratesincreased during the year. Other income increased by 19%. Asset management income increased by 66%, drivenby increases in balances in mutual funds of 32% and continued favourableportfolio mix. A strong second place in the market has been retained with marketshare at 16.8%. The brokerage business had an excellent year with higher levelsof turnover and successes in the primary market. Business momentum in 2007 hasresulted in good growth in foreign exchange, e-business and payments, dividendsand fees. Operating expenses increased by 21%. This reflects the business decision toexpand and optimise opportunities in the Polish market place. Branch networkdevelopment continues with 34 new branches opened in 2007. Personnel expensesgrowth was 24%, driven by higher staff numbers, higher basic salaries andenhanced incentive schemes. Significant investments are being made in supportingthe business, which resulted in general and administrative expenses increasingby 30%. Specifically this includes increased spending on marketing and promotingthe brand and strategic products, IT development spend and costs related tobranch expansion. The cost income ratio was 60.4%, down from 61.1% in 2006. Impaired loans as a percentage of total loans continued to show significantimprovement with the ratio at 2.8% compared with 4.9% at 31 December 2006.Recoveries throughout the year in a very favourable credit environment have ledto an overall provision charge as a percentage of average loans to 0.03%compared with 0.23% in 2006. 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 average share of approximately 24.6% in M&T BankCorporation ('M&T') and profit on disposal of property. Year Year 2007 2006Group income statement • m • mNet interest income 62 99Other income / (loss) 44 (27)Total operating income 106 72Personnel expenses 96 117General and administrative expenses 62 65Depreciation / amortisation 34 21Total operating expenses 192 203Operating profit/(loss) before provisions (86) (131)Provisions for impairment of loans and receivables - -Provisions for liabilities and commitments (9) (10)Amounts written off financial investments available for sale - -Total provisions (9) (10)Operating loss (77) (121)Associated undertaking 120 141Profit on disposal of property 64 358Construction contract income 55 96Profit/(loss) on disposal of businesses (1) -Profit before taxation 161 474 Group reported a profit of • 161 million for the year to December 2007 comparedwith a profit of • 474 million in 2006. The result for both years includesprofit on disposal of property and construction contract income (see below fordetail). The operating loss was • 77 million compared with a loss of • 121million in 2006. Net interest income decreased from • 99 million in 2006 to • 62 million in 2007.Other income/(loss) includes hedging profits/(losses) in relation to foreigncurrency translation hedging and hedge volatility (hedging ineffectiveness andderivative volatility). Total income was up from • 72 million in 2006 to • 106million in 2007. Total operating expenses decreased from • 203 million in 2006 to • 192 millionin 2007. A higher depreciation/amortisation charge reflects project andinvestment spend in recent years. AIB's share of M&T after-tax profit for 2007 amounted to • 120 million. On alocal currency basis, M&T's net income of US$ 654 million in 2007 was down 22%while M&T's contribution to AIB of US$ 166 million was down 7% relative to 2006(US$ 177 million). The differential in percentages was mainly due to the bank'sapplication of IFRS to M&T's US GAAP numbers in 2006 which gave a lower resultdue to the movement of previously unallocated credit provisions to specificprovisions in M&T's books (which were classified as specific provisions underIFRS and reduced the M&T 2006 profit reported in AIB's books by • 15 million).The M&T euro contribution to AIB Group performance was impacted by the weakeningin the US dollar rate relative to the euro in 2007. M&T's 2007 performance wasaffected by unprecedented turbulence in the financial markets and in particular,in the US residental real estate sector. Profit on disposal of property in 2007 includes profit on the sale of 22branches in the Republic of Ireland (• 64 million before tax). Constructioncontract income of • 55 million reflects the profit earned from the developmentof Bankcentre, based on the stage of completion. Profit on disposal of propertyin 2006 includes profit on disposal of the existing Bankcentre building (• 256million before tax), profit on the sale of 11 branches in the Republic ofIreland (• 73 million before tax) and profit on disposal of Donnybrook House (•29 million before tax). Construction contract income of • 96 million reflectsthe profit earned from the new development at Bankcentre, based on the stage ofcompletion. Basis of preparation There are no significant changes to the accounting policies described on pages47 to 61 in the 2006 Annual Report. Notes to the accounts Notes to the accounts can be found on the AIB Group website at www.aibgroup.com/investorrelations This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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