22nd Feb 2006 07:00
Allied Irish Banks PLC22 February 2006 Allied Irish Banks, p.l.c. ("AIB") (NYSE:AIB) Part 1 Highlights - AIB Group Annual Results 2005 Basic earnings per share Eur 151.0cLess profit on new Bankcentre development Eur (4.4c)Less hedge volatility (1) under IFRS Eur (0.7c)Adjusted basic earnings per share (2) Eur 145.9c up 15% (3)(lower than expected taxation charge (4) + Eur 3c) Divisional pre-tax profit performance (5) - AIB Bank ROI up 24% or 15% excluding the • 50m investigation related charges incurred in 2004 - AIB Bank GB & NI up 18% - Capital Markets up 27% - Poland up 13% Income / cost gap +5% Cost income ratio down 2.5% to 55.2% Return on equity 20.6% Tier 1 capital ratio 7.2% Total dividend of EUR 65.3c, up 10% 16% US$ earnings growth from M&T AIB Group Chief Executive Eugene Sheehy said: 'Our 2005 performance reflects quality growth in all our main franchises. Strongcustomer demand continues to drive momentum and underpins our confidence in theoutlook for 2006 and beyond.' (1) The impact of hedge volatility (combines the impact of economic andaccounting hedges) under IFRS was an increase of • 6 million to profit beforetaxation for the year. (2) Excludes profit on new Bankcentre development (• 45 million) and the impactof hedge volatility. This is the relevant number for comparison to the earningsper share guidance in the trading update of 6 December 2005. (3) A 15% increase compared with the year to December 2004 pro-forma earningsper share of EUR 127.1c. The year to December 2004 statutory basic earnings pershare was EUR 132.0c. A reconciliation of the pro-forma and statutory earningsper share for 2004 is shown on page 21 of this release. (4) Lower than expected when communicating the trading update on 6 December2005. (5) Excluding the impact of exchange rate movements on the translation offoreign locations' profit. The percentage increase reflects the growth comparedwith the IFRS pro-forma accounts for 2004. The results for the year ended 31 December 2004 have been restated to represent the results of Ark Life as a discontinued operation to reflect the disposal (note 3) and the application of International Financial Reporting Standards, with the exception of IAS 32,IAS 39 and IFRS 4 which apply with effect from 1 January 2005. See Basis of preparation on page 23. Allied Irish Banks, p.l.c. Dividend The Board is recommending a final dividend of EUR 42.3c per share payable on 27April 2006 to shareholders on the Company's register of members at the close ofbusiness on 3 March 2006. The final dividend, together with the interim dividendof EUR 23.0c per share, amounts to a total dividend of EUR 65.3c per share, anincrease of 10% on 2004. For further information please contact: John O'Donnell Alan Kelly Catherine BurkeGroup Finance Director Head of Group Investor Relations 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 2005 31 December 1 January 31 December 2005 2005 2004 • m • m • m ResultsTotal operating income 3,647 3,216Operating profit 1,493 1,214Profit before taxation - continuing operations 1,706 1,372Profit attributable to equity holders of the parent 1,343 1,129 Per • 0.32 ordinary shareEarnings - basic 151.0c 132.0cEarnings - diluted 149.8c 131.5cDividend 65.3c 59.4cDividend payout 44% 46%Net assets 773c 671c Performance measuresReturn on average total assets 1.20% 1.22%Return on average ordinary shareholders' equity 20.6% 20.7% Balance sheetTotal assets 133,214 102,819 101,109Ordinary shareholders' equity 6,672 5,975 5,745Loans etc 92,361 68,230 67,278Deposits etc 109,520 82,384 82,384 Capital ratiosTier 1 capital 7.2% 8.2% 8.2%Total capital 10.7% 10.7% 10.9% The results for the year ended 31 December 2004 have been restated to representthe results of Ark Life as a discontinued operation to reflect the disposal(note 3) and the application of International Financial Reporting Standards,with the exception of IAS 32, IAS 39 and IFRS 4 which apply with effect from 1January 2005. See Basis of preparation on page 23. Consolidated income statementfor the year ended 31 December 2005 2005 2004 Notes • m • m Interest and similar income 5 5,151 4,018Interest expense and similar charges 6 2,621 1,946 Net interest income 2,530 2,072Dividend income 17 27Fee and commission income 1,061 1,043Fee and commission expense (145) (131)Trading income 7 112 96Other operating income 8 72 109Other income 1,117 1,144 Total operating income 3,647 3,216Administrative expenses 9 1,881 1,724Depreciation of property, plant and equipment 83 82Amortisation/impairment of intangible assets and goodwill 47 63Total operating expenses 2,011 1,869 Operating profit before provisions 1,636 1,347Provisions for impairment of loans and receivables 17 115 114Provisions for liabilities and commitments 20 20Amounts written off/(written back) financial investments 8 (1) Operating profit 1,493 1,214Share of results of associated undertakings 149 132Profit on disposal of property 14 9Construction contract income 10 45 -Profit on disposal of businesses 11 5 17 Profit before taxation - continuing operations 1,706 1,372Taxation on ordinary activities 12 319 267 Profit after taxation - continuing operations 1,387 1,105Discontinued operation, net of taxation 3 46 53 Profit for the period 1,433 1,158 Attributable to:Equity holders of the parent 1,343 1,129Minority interests in subsidiaries 90 29 1,433 1,158 Basic earnings per share - continuing operations 145.7c 125.8cBasic earnings per share - discontinued operations 5.3c 6.2c Total 13 151.0c 132.0c Diluted earnings per share - continuing operations 144.6c 125.3cDiluted earnings per share - discontinued operations 5.2c 6.2c Total 13 149.8c 131.5c The results for the year ended 31 December 2004 have been restated to represent the results of Ark Life as a discontinued operation to reflect the disposal (note 3) and the application of International Financial Reporting Standards, with the exception of IAS 32, IAS 39 and IFRS 4 which apply with effect from 1 January 2005. See Basis of preparation on page 23. Consolidated balance sheet 31 December 2005 31 December 1 January 31 December 2005 2005 2004 Notes • m • m • m AssetsCash and balances at central banks 742 887 887Treasury bills and other eligible bills 201 - -Items in course of collection 402 368 368Trading portfolio financial assets 15 10,113 7,957 -Financial assets designated at fair value through profit - 1,871 -or lossDerivative financial instruments 2,439 2,581 -Loans and receivables to banks 7,129 2,538 2,540Loans and receivables to customers 16 85,232 65,692 64,738Financial investments available for sale 18 16,864 15,720 -Debt securities and equity shares - - 26,142Interests in associated undertakings 1,656 1,395 1,379Intangible assets and goodwill 517 540 540Property, plant and equipment 706 745 745Other assets 778 1,435 2,597Current taxation 18 25 25Deferred taxation 253 204 228Prepayments and accrued income 801 861 920Disposal group and assets classified as held for sale 3 & 19 5,363 - - Total assets 133,214 102,819 101,109 LiabilitiesDeposits by banks 29,329 20,428 20,428Customer accounts 20 62,580 50,151 50,151Trading portfolio financial liabilities 240 332 -Derivative financial instruments 1,967 2,541 -Investment and insurance contract liabilities - 3,887 3,286Debt securities in issue 17,611 11,805 11,805Current taxation 133 197 175Other liabilities 1,599 1,593 3,387Accruals and deferred income 1,092 705 913Retirement benefit liabilities 1,227 886 886Provisions for liabilities and commitments 140 122 122Deferred taxation 32 38 52Subordinated liabilities and other capital instruments 3,756 2,451 2,766Disposal group classified as held for sale 3 & 19 5,091 - - Total liabilities 124,797 95,136 93,971 Shareholders' equityShare capital 294 294 294Share premium account 1,693 1,693 1,693Other equity interests 497 497 182Reserves 1,152 1,159 985Profit and loss account 3,533 2,829 2,773Shareholders' equity 7,169 6,472 5,927Minority interests 1,248 1,211 1,211 Total shareholders' equity including minority interests 8,417 7,683 7,138 Total liabilities, shareholders' equity and minority interests 133,214 102,819 101,109 The financial position as at 31 December 2004 has been restated to represent theresults of Ark Life as a discontinued operation to reflect the disposal (note 3) and the application of International Financial Reporting Standards, with the exception of IAS 32, IAS 39 and IFRS 4 which apply with effect from 1 January 2005. See Basis of preparation on page 23. Condensed statement of cash flowsfor the year ended 31 December 2005 Year IFRS Year 31 December 31 December 2005 2004Consolidated statement of cash flows • m • m Net cash flows from operating activities 4,510 3,389Investing activitiesNet increase in financial investments (264) (4,038)Additions to tangible fixed assets (100) (68)Disposal of tangible fixed assets 89 20Additions to intangible fixed assets (36) (66)Disposal of intangible assets 3 -Investment in associated undertaking (3) (7)Disposal of associated undertakings 4 1Disposal of investment in subsidiary 7 15Dividends received from associated undertakings 41 37 Cash flows from investing activities (259) (4,106) Financing activitiesIssue of ordinary share capital 47 53Redemption of subordinated liabilities (630) (32)Issue of new subordinated liabilities 1,813 733Issue of preferred securities - 990Interest paid on subordinated liabilities (90) (105)Equity dividends paid (532) (345)Dividends on other equity interests (38) (4)Dividends paid to minority interests (14) (2) Cash flows from financing activities 556 1,288 Net increase in cash and cash equivalents 4,807 571 Analysis of changes in cashAt 1 January 2,772 2,152Net cash inflow before the effect of exchange translation 4,807 571adjustmentsEffect of exchange translation adjustments 92 49 At 31 December 7,671 2,772 The financial position as at 31 December 2004 has been restated to represent theresults of Ark Life as a discontinued operation to reflect the disposal (note 3) and the application of International Financial Reporting Standards, with the exception of IAS 32, IAS 39 and IFRS 4 which apply with effect from 1 January 2005. See Basis of preparation on page 23. Consolidated statement of recognised income and expense 2005 2004 • m • m Foreign exchange translation differences 287 (73)Net change in cash flow hedges, net of tax (76) -Net change in fair value of available for sale securities, net of tax (6) -Net actuarial gains and losses in retirement benefit schemes, net of tax (285) (198) Income and expense recognised directly in equity (80) (271)Profit for the period 1,433 1,158 Total recognised income and expense for the period 1,353 887Transition adjustment at 1 January 2005 arising from IAS32,IAS 39 and IFRS 4 (note 2) 545 - Total recognised income and expense for the period including transition adjustment 1,898 887 Attributable to:Equity holders of the parent 1,808 858Minority interests in subsidiaries 90 29 Total recognised income and expense for the period including transition adjustment 1,898 887 Condensed consolidated reconciliation of movements in shareholders' equity 2005 2004 • m • mProfit attributable to equity holders of the parent 1,343 1,129Transition adjustment at 1 January 2005 arising from IAS32,IAS 39 and IFRS 4 (note 2) 545 -Dividends on ordinary shares (532) (475)Dividends on other equity interests (38) (4)Share based payments 16 14Actuarial loss recognised in retirement benefit schemes (285) (198)Other recognised gains/(losses) relating to the period 198 (85)Other recognised (losses)/gains in associated undertaking (65) 15Ordinary shares issued in lieu of cash dividend - 134Other ordinary shares issued 66 71Net movement in own shares (6) (20) Net additions to shareholders' equity 1,242 581Opening shareholders' equity 5,927 5,346 Closing shareholders' equity 7,169 5,927 Shareholders' equity:Ordinary shareholders' equity 6,672 5,745Other equity interests 497 182 7,169 5,927 The results for the year ended 31 December 2004 have been restated to represent the results of Ark Life as a discontinued operation to reflect the disposal (note 3) and the application of International Financial Reporting Standards, with the exception of IAS 32, IAS 39 and IFRS 4 which apply with effect from 1 January 2005. See Basis of preparation on page 23. Commentary on results Earnings per share The table below shows the basic earnings per share and continuing earnings pershare excluding the profit on the new Bankcentre development (constructioncontract income) and the impact of hedge volatility (combines the impact ofeconomic and accounting hedges) under IFRS. IFRS IFRS IFRS % change Year Year Pro-forma(1) 2005 vEarnings per share 2005 2004 2004 Pro-forma 2004 Basic - continuing operations(2) 145.7c 125.8c 123.3c 18Basic - discontinued operations 5.3c 6.2c 3.8c 39 Basic - total 151.0c 132.0c 127.1c 19less profit on new Bankcentre development (4.4c) - - -less hedge volatility under IFRS (0.7c) - - - Adjusted basic earnings per share 145.9c 132.0c 127.1c 15 Basic continuing operations(2) 145.7c 125.8c 123.3c 18less profit on new Bankcentre development (4.4c) - - -less hedge volatility under IFRS (0.7c) - - - Adjusted basic earnings per share - continuing 140.6c 125.8c 123.3c 14operations Rates of exchange The following table shows the average accounting rates for 2004 and 2005. Average Average accounting accounting rates rates 2005 2004 US dollar 1.25 1.25Sterling 0.69 0.68Polish zloty 4.03 4.53 The movement in exchange rates including currency hedging activities was notmaterial from an earnings per share perspective. (1) A reconciliation of the pro-forma and statutory earnings per share for 2004 is shown on page 21 of this release. (2) Continuing operations exclude Ark life which is reported as a discontinued operation following its disposal in 2005. Commentary on results Basis of presentation The results for 2004 have been restated to take account of InternationalFinancial Reporting Standards ('IFRS') as adopted by the European Union andimplemented with effect from 1 January 2004. This restatement of results for2004 excludes adjustments for standards implemented with effect from 1 January2005. IAS 32, IAS 39 and IFRS 4 have been implemented from 1 January 2005. Hadthese standards been implemented from 1 January 2004, it would have impacted theaccounting for derivatives, loan impairment, income recognition on loans(Effective Interest Rate 'EIR'), insurance accounting and classification offinancial instruments. In addition to the IFRS restated accounts, the followingcommentary shows the IFRS pro-forma accounts for 2004. The pro-forma accountsfor 2004 reflect the impacts of EIR, insurance accounting and classification ofnon-derivative financial instruments in order to establish a 2004 pro-forma IFRSrestatement but do not reflect the impact of accounting for derivatives and loanimpairment. A reconciliation of the statutory IFRS accounts for 2004 to the IFRSpro-forma accounts is shown on page 21 of this release. In order to showcomparable trends, the growth percentages in the following commentary reflectthe IFRS year to December 2005 compared with the IFRS pro-forma year to December2004. The growth percentages are also shown on an underlying basis adjusted forthe impact of exchange rate movements on the translation of foreign locations'profit and excluding hedge volatility under IFRS. Investigation related charges referred to in the following commentary wereincurred in 2004 and relate primarily to the application of prices to foreignexchange products without regulatory approval. AIB provided • 50 million forinvestigation related charges and costs in the year to December 2004 with • 12million charged to net interest income, • 24 million charged to other income and• 14 million of costs included in operating expenses. "Double-digit income growth" "Very strong loan and deposit volume growth" Total income Total income increased by 12% to • 3,647 million. IFRS IFRS IFRS Underlying Year Year Pro-forma % change 2005 2004 2004 2005 vTotal operating income • m • m • m Pro-forma 2004 Net interest income 2,530 2,072 2,178 15Other income 1,117 1,144 1,042 6 Total operating income 3,647 3,216 3,220 12 Commentary on results Net interest income Net interest income increased by 15% to • 2,530 million in the year to December2005. The key drivers of the increase were strong loan and deposit growth inRepublic of Ireland and GB & NI, strong loan growth in Corporate Banking andvery good growth in loan arrangement fees. Loans to customers increased by 27%and customer accounts increased by 16% on a constant currency basis since 1January 2005 (details of loan and deposit growth by division are contained onpage 14 of this release). Net interest income also benefited from income earnedon the • 1 billion of perpetual preferred securities issued in December 2004. IFRS IFRS Year Year % 2005 2004 change (1)Average interest earning assets • m • m 2005 v 2004 Average interest earning assets 106,380 84,541 26 (1) This particular analysis is not adjusted for the impact of exchange ratemovements. IFRS IFRS Year Pro-forma Basis 2005 2004 pointNet interest margin % % change Group net interest margin 2.38 2.58 -20 The domestic and foreign margins for 2005 are reported on page 37 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 was2.38% in 2005, a decrease of 20 basis points compared with 2004 on a pro-formaIFRS basis. The margin reduction was due to a combination of the followingfactors: (a) loans increasing at a faster rate than deposits. (b) a changing mix of products where stronger volume growth has been achieved inlower margin products; corporate loans, home loans and prime advances on thelending side and term deposits and other lower margin products on the depositside. There was higher growth in mid-market loans in the Republic of Ireland andthe United Kingdom and growth in our international corporate operations. (c) competitive pressures on loan and deposit pricing. (d) lower yields on the re-investment of deposit and current account funds asthey mature, due to the flattening of the yield curve. The largest factor in the margin reduction was average loans increasing at agreater rate than average deposits compared with 2004. 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 funds particularlyaffected AIB Bank Republic of Ireland and GB&NI divisions. 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. The factors affecting the net interest margin trend areexpected to be continuing features. Commentary on results "Investment banking and asset management fees up 23%" Other income Other income was up 6% to • 1,117 million since the year to December 2004. IFRS IFRS IFRS Year Year Pro-forma Underlying % 2005 2004 2004 change 2005 vOther income • m • m • m Pro-forma 2004 Dividend income 17 27 27 -41Banking fees and commissions 863 888 786 8Investment banking and asset management fees 198 155 155 23Fee and commission income 1,061 1,043 941 11Less: fee and commission expense (145) (131) (131) 7Trading income 119 95 95 25Currency hedging (losses)/profits (13) 1 1 -Hedging volatility (IAS 39)(1) 6 - - -Trading income 112 96 96 16Profit on termination of off-balance sheet - 36 36 -instrumentsOther 72 73 73 -6Other operating income 72 109 109 -37 Total other income 1,117 1,144 1,042 6 Banking fees and commissions increased by 8%, or 5% excluding the • 24 millionof investigation related charges incurred in 2004. The growth reflects increasedbusiness and transaction volumes in AIB Bank Republic of Ireland, GB & NI andCorporate Banking and there was good growth in credit card revenue in Irelandand e-business business and payment fees in Poland. Investment banking and asset management fees increased by 23% driven byparticularly strong performances in Goodbody stockbrokers, AIB CorporateFinance, Asset Management in Poland and BZWBK's brokerage operation. Total feeand commission income was up 11% or 8% excluding the investigation relatedcharges in 2004. Trading income increased, with strong growth in bond management activities.Trading income excludes interest payable and receivable arising from theseactivities, which is included in net interest income. Included in other income in 2004 was a gain of • 36 million from closing outcapital invested positions in January 2004 resulting from the introduction of anew policy in respect of the investment of AIB's capital funds. Loan arrangement fees for the year were strong and are reported in the netinterest income line under IFRS. The growth in other income no longer benefitsfrom the growth in arrangement fees associated with strong lending growth. Other income as a percentage of total income reduced to 31% from 32% in 2004(33% excluding the investigation related charges incurred). (1) Combines the impact of economic and accounting hedges, (IAS 39) Commentary on results "Cost income ratio down 2.5% to 55.2%" "Continued investment to meet customer demand and ensure compliance with new regulatory requirements" "Lower depreciation charge" Total operating expenses Operating expenses increased by 7% compared with 2004. IFRS IFRS IFRS Year Year Pro-forma Underlying % 2005 2004 2004 change 2005 vOperating expenses • m • m • m Pro-forma 2004 Personnel expenses 1,298 1,136 1,136 13General and administrative expenses 583 579 578 -1Depreciation(1)/amortisation(2) 130 145 145 -13 Total operating expenses before restructuring costs 2,011 1,860 1,859 7Restructuring costs - 9 9 Total operating expenses 2,011 1,869 1,868 Operating expenses increased by 7%. The cost base in the comparative year toDecember 2004 included • 14 million of investigation related costs. Under IFRS,operating expenses include other finance income relating to the return onpension fund assets and the cost of pension fund liabilities and this incomereduced in 2005, increasing the growth in personnel expenses. Excluding theabove two offsetting items, the growth in operating expenses remained at 7%. The 7% increase reflects the very strong business volume and strong revenuegrowth in 2005. In the period there were costs to ensure compliance with a rangeof regulatory initiatives such as Sarbanes Oxley and Basel II and there washigher performance related remuneration resulting from strong revenue growth.Excluding these items the increase was 5%. The resourcing and restructuring ofour single enterprise agenda is in implementation and we expect this to increasebusiness capability, improve efficiency and further enable compliance. Personnel expenses were up 13%, or 12% excluding the above mentioned decline inother finance income. The increase reflected a higher level of variable costsarising from performance related remuneration resulting from strong revenuegrowth, the cost of additional resources to respond to business growth demandsand ensure compliance with a range of regulatory initiatives such as SarbanesOxley and Basel II and higher pension costs. General and administrative expenseswere down 1%,or up 2% excluding investigation related costs in 2004. The 2%increase includes the effects of inflation and consultancy and systems costsrelating to the aforementioned strengthening of internal structures to ensurecompliance with new regulatory initiatives. Depreciation/amortisation decreasedby 13% reflecting the benefit of some business rationalisations. Productivity improved with the cost income ratio reducing to 55.2% from 57.7% in2004. (1) Depreciation of property, plant and equipment. (2) Amortisation / impairment of intangible assets and impairment of goodwill. Commentary on results "Provision charge lower at 15 basis points" "Impaired loans as a percentage of loans decreases to 1.0%" Provisions Total provisions were • 143 million, up from • 133 million in 2004. IFRS IFRS Year Year 2005 2004Provisions • m • m Provisions for impairment of loans and receivables(1) 115 114Provisions for liabilities and commitments 20 20Amounts written off/(written back) financial investments 8 (1) Total provisions 143 133 The provision for impairment of loans and receivables was • 115 million comparedwith • 114 million in 2004, representing a charge of 0.15% of average loanscompared with 0.20% in 2004. The lower charge reflects strong asset quality,good recoveries and a particularly benign economic environment. Impaired loansas a percentage of total loans decreased from 1.3% at 31 December 2004 to 1.0%at 31 December 2005 with the total provision cover for impaired loans increasingto 78%. Strong asset quality in AIB Bank Republic of Ireland was reflected in areduction in impaired loans as a percentage of total loans to 0.7% at 31December 2005 from 0.8% in 2004. The provision charge reduced to 0.11% ofaverage loans compared with 0.14% in 2004. The quality across all sectors of theretail and commercial portfolios remains very good. In AIB Bank GB & NI, the provision charge was 0.13% of average loans, increasingmarginally from 0.11% in 2004 but continuing to reflect very strong provisionrecoveries in both periods. Impaired loans at 0.9% of total loans were down from1.1% at 31 December 2004. Asset quality in Capital Markets remained strong. The provision charge was 0.22%compared with 0.27% in 2004 and impaired loans reduced to 0.7% from 0.8% oftotal loans at 31 December 2004. The provision charge in Poland decreased to 0.40% of loans from 0.91% in 2004.Asset quality continued to improve with the ratio of impaired loans as apercentage of loans declining to 6.8% from 8.4% at 31 December 2004. The provision for liabilities and commitments was • 20 million in 2005,the samelevel as 2004 while provisions for amounts written off financial investmentswere • 8 million compared with a net credit of • 1 million in 2004. Share of results of associated undertakings The profit in 2005 was • 149 million compared to • 132 million in 2004 andmainly reflects AIB's 23.5% average share of the income after taxes of M&T BankCorporation on an IFRS basis for the year to December 2005. (1) As noted on page 9, the pro-forma accounts for the year to December 2004 donot reflect the impact of loan impairment under IFRS. The provision forimpairment of loans and receivables in 2005 reflects the change in the financialreporting requirements from FRS 12 to IAS 39. Commentary on results The following commentary is in respect of the total Group. "Loans up 27%; deposits up 16%" "Effective tax rate at 18.7%" Balance sheet Total assets amounted to • 133 billion at 31 December 2005 compared to • 103billion at 1 January 2005. Adjusting for the impact of currency, total assetswere up 26% and loans to customers were up 27% since 1 January 2005 whilecustomer accounts increased by 16%. Risk weighted assets excluding currencyfactors increased by 24% to • 102 billion. Risk weighted assets, loans to customers and customer accounts (excludingcurrency factors) Risk weighted Loans to Customer assets customers accounts(1)% change 31 December 2005 v 1 January 2005 % change % change % change AIB Bank Republic of Ireland 25 28 20AIB Bank GB & NI 32 29 17Capital Markets 23 29 4Poland 4 4 8 AIB Group 24 27 16 (1) Excludes money market funds. Assets under management/administration and custody Assets under management in the Group amounted to • 16 billion at 31 December2005 compared with • 13 billion in 2004. Assets under administration and custodyincreased to • 220 billion at 31 December 2005 from • 183 billion in 2004. Taxation The taxation charge was • 319 million compared with • 267 million in the year toDecember 2004 (• 260 million on a pro-forma basis for the year to December2004). The effective tax rate was 18.7% compared with 19.5% in the year toDecember 2004 (or 18.9% on a pro-forma basis). The taxation charge excludestaxation on share of results of associated undertakings. Share of results ofassociated undertakings is reported net of taxation in the Group profit beforetaxation. The effective tax rate is influenced by the geographic mix of profits,which are taxed at the rates applicable in the jurisdictions where we operate. Commentary on results "Return on equity 20.6%" "Business expected to continue to perform strongly" "Outlook - low double-digit EPS growth expected in 2006" Return on equity and return on assets The return on equity was 20.6%, compared to 20.7% in 2004. The return on assetswas 1.20%, down from 1.22% in 2004. Capital ratios A strong capital position was reflected in a Tier 1 ratio at 7.2% and a totalcapital ratio of 10.7%. Outlook The business is expected to continue to perform strongly in 2006 in line withour strong positions in the high growth markets where we operate. Very good loanand deposit growth and strong asset quality is expected again this year. Theresourcing and restructuring of our enterprise wide approach to operations is inimplementation and we expect this to further bolster our business capability.Based on these factors our guidance is for low double-digit earnings per sharegrowth in 2006 compared with the adjusted basic earnings per share of EUR 145.9cin 2005 (as outlined on page 8 of this release). This guidance excludes theone-time gain to be recognised from the Ark Life joint venture with HibernianLife & Pensions and income from the development of the Bankcentre complex. 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 AIB Bank Republicof Ireland income statement for 2004 and 2005 has been restated to reflect ArkLife as a discontinued operation, which is now reported below profit aftertaxation at Group level, arising from its disposal in 2005. The profit ondisposal will be accounted for in 2006. AIB Bank Republic of Ireland profit of • 779 million was up 24% or 15% excludingthe • 50 million of investigation related charges incurred in 2004 "Loans up 28%;deposits up 20%" "Income/cost gap at +3%" "Customer relationship management is key performance driver" "Strong asset quality" AIB Bank Republic of Ireland Retail and commercial banking operations inRepublic of Ireland, Channel Islands and Isle of Man; AIB Finance and Leasingand Card Services. IFRS IFRS IFRS Year Year Pro-forma Underlying % 2005 2004 2004 change 2005 vAIB Bank Republic of Ireland income statement • m • m • m Pro-forma 2004 Net interest income 1,314 1,144 1,145 15Other income 376 340 337 12 Total operating income 1,690 1,484 1,482 14Total operating expenses 867 813 814 7 Operating profit before provisions 823 671 668 23Provisions 55 44 44 25 Operating profit 768 627 624 23Share of results of associated undertakings (1) (1) (1) -Profit on disposal of property 12 7 7 68 Profit before taxation 779 633 630 24 Pre-tax profit increased by 24% or 15% excluding the • 50 million ofinvestigation related charges incurred in the year to December 2004.Operatingincome was up 14% and operating expenses were up 7%. Excluding the investigationrelated charges these growth rates were 11% and 8% respectively, with theoperating income/cost gap at +3%. The strong profit growth was generated through higher business volumes and thefocus on customer relationship management. Loans and deposits increased by 28%and 20% respectively since 31 December 2004. Operating expenses were up 7% (or8% excluding investigation related costs in 2004). Increased business activity,annual salary inflation, performance costs related to strong revenue growth andcosts associated with a number of mandatory and regulatory driven projects werethe key drivers of the 7% increase. A decrease in other finance income (incomeassociated with the pension fund now included in operating expenses under IFRS),which fell from • 20 million to • 13 million, accounted for 1% of the operatingexpenses growth. The cost income ratio was 51.3% compared with 54.9% in 2004(52.7% excluding the • 50 million of investigation related charges incurred in2004). Asset quality remained very good with the provision charge as apercentage of average loans reducing to 0.11% from 0.14% in 2004. Retail banking reported another very strong year reflecting good growth inincome on the back of a significant increase in business volumes on both sidesof the balance sheet. Business lending, home mortgages, personal lending andprivate banking activities all experienced excellent growth, with strong growthin customer deposits also reflecting buoyant customer demand. Profit growth inAIB Card Services was also notable, resulting from strong revenue due to higherconsumer spending, a strong increase in merchant turnover, lower costs and alower bad debt charge. In AIB Finance and Leasing there was good profit growthdue to a 14% increase in loan volumes since December 2004 and tight costmanagement. New business was particularly strong in the motor, plant andequipment sectors. Divisional commentary AIB Bank GB & NI profit was up 18% "Strong profit growth" "Loans up 29%;deposits up 17%" "Cost income ratio now at 48.7%" "Robust asset quality" AIB Bank GB & NI Retail and commercial banking operations in Great Britain andNorthern Ireland. IFRS IFRS IFRS Year Year Pro-forma Underlying % 2005 2004 2004 change 2005 vAIB Bank GB & NI income statement • m • m • m Pro-forma 2004 Net interest income 516 416 447 16Other income 148 189 142 5 Total operating income 664 605 589 13Total operating expenses 323 305 303 7 Operating profit before provisions 341 300 286 20Provisions 21 13 13 61 Operating profit 320 287 273 18Profit on disposal of property 2 1 1 - Profit before taxation 322 288 274 18 AIB Bank GB&NI reported a strong performance in the year to 31 December 2005,with profit before taxation increasing by 18%. Loan and deposit balancesincreased by 29% and 17% respectively in 2005 with volume growth reflectingbuoyant business momentum. Lending margins were well managed in a verycompetitive environment. Operating expenses were up 7% mainly due to staff costincreases relating to ongoing investment in the business. The cost income ratioimproved to 48.7% from 51.5% last year. The bad debt charge represented 0.13% ofaverage loans, compared with 0.11% of average loans in 2004. Credit qualityremains robust in a relatively benign economic climate. Allied Irish Bank (GB), with its primary focus on chosen business sectors,achieved a profit increase of 25% to • 169 million, a very strong performance,with growth in balances of 31% in loans and 21% in deposits. The bank continuesto grow its business customer base as a key provider of banking to mid-corporatebusinesses through its relationship-banking model and continued expansion. In2005, the opening of a corporate office in the regenerated Birmingham citycentre demonstrated the increasing profile of Allied Irish Bank (GB). First Trust Bank, a retail bank in Northern Ireland, also reported double-digitgrowth, with an 11% increase in profit before taxation to • 153 million,compared with 2004. Loan balances showed strong growth of 25% and solid depositgrowth of 12% was achieved. First Trust continues to develop both its businessand personal customer bases. Divisional commentary Capital Markets profit of • 403 million, up 27% "Another exceptionally strong Corporate Banking performance" "Good Treasury performance with strong customer business and low risk utilisation" "Profit substantially higher in Investment Banking" Capital Markets Corporate Banking, Global Treasury and Investment Banking. IFRS IFRS IFRS Year Year Pro-forma Underlying % 2005 2004 2004 change 2005 vCapital Markets income statement • m • m • m Pro-forma 2004 Net interest income 435 360 396 10Other income 407 390 345 18 Total operating income 842 750 741 14Total operating expenses 400 403 403 -1 Operating profit before provisions 442 347 338 31Provisions 46 29 29 59 Operating profit 396 318 309 28Share of results of associated undertakings 2 4 4 -44Profit on disposal of business 5 4 4 12 Profit before taxation 403 326 317 27 Profit before taxation increased by 27% to • 403 million, reflecting a verystrong performance across each business area. The performance in Corporate Banking was particularly strong with pre-tax profitup 33% on the comparative out-turn for 2004. We experienced significant loangrowth in both the domestic and international businesses with loans increasingby 29% since December 2004. We continue to invest heavily in expanding ourinternational and specialised loan businesses which are experiencing very stronggrowth. We retain a rigorous and conservative approach to credit risk managementand continually seek to optimise value in a quality loan portfolio. Global Treasury performed strongly in 2005 following the outstanding performancein its markets business in 2004. Despite difficult interest rate and foreignexchange markets experienced in 2005, Global Treasury closed the year withprofit marginally ahead (up 2%) of 2004. Our customer business performedrobustly, showing strong growth over the comparative period and underpinning ourleading position in the Republic of Ireland. We also experienced strong growthin our investment books and bond activities with our short term tradingactivities performing behind the very strong prior year. Investment Banking profit was up 22%, substantially ahead of 2004. The strongprofit growth and activity experienced in stockbroking services, equity trading,corporate advisory and structured investments were once again underpinned by themarket share positions held by each of these businesses. The approximate profit split by business unit in 2005 was Corporate Banking 55%,Global Treasury 29% with Investment Banking and Allied Irish America comprisingthe remainder. The divisional cost income ratio decreased to 47.5% from 54.4% in 2004. Strongcost management control coupled with selective business rationalisation enabledthe division to retain costs at the 2004 levels. The bad debt provision charge decreased to 0.22% of average loans from 0.27% in2004. Total provisions increased due to a higher nominal bad debt charge, higherinvestment provisions and some onerous lease charges on premises. Divisional commentary Poland profit was • 132 million, up 13% "Strong profit growth momentum" "Very strong growth in mutual funds" "Provision charge continues to reduce" Poland Bank Zachodni WBK ('BZWBK'), in which AIB has a 70.5% shareholding,together with its subsidiaries and associates. BZWBK Wholesale Treasury andshare of Investment Banking subsidiaries results are reported in Capital Marketsdivision. IFRS IFRS IFRS Year Year Pro-forma Underlying % 2005 2004 2004 change 2005 vPoland income statement • m • m • m Pro-forma 2004 Net interest income 205 174 180 1Other income 222 188 180 10 Total operating income 427 362 360 6Total operating expenses 280 245 245 3 Operating profit before provisions 147 117 115 11Provisions 15 29 29 -54 Operating profit 132 88 86 33Share of results of associated undertakings - 1 1 -Profit on disposal of property - 1 1 -Profit on disposal of business(1) - 13 13 - Profit before taxation 132 103 101 13 Profit before taxation was • 132 million in 2005 compared with • 101 million in2004. On a local currency basis pre-tax profit increased by 13% and adjustingfor the disposal of a business in 2004 the increase was 29%. Total operating income increased by 6% with net interest income increasing by 1%and other income increasing by 10%. Average interest rates were lower in 2005following a 2.00% reduction in the reference rate during the year to 4.50% at 31December 2005. Performing loans to customers increased by 5% since December 2004with total loans to customers up 4%. Overall the business lending market inPoland was subdued with higher liquidity levels and increased competitionresulting in stagnant business lending year on year. Personal lending grewstrongly where cash loans in particular were in demand by our customers. Lendingmargins increased as a result of improved mix in the portfolio. Customerdeposits increased by 8% with margins decreasing as a result of lower interestrates, changing mix and increased competition. Other income grew by 10%. The main area of growth was asset management fees withmutual funds income increasing by 115% and a continued favourable mix in fundsmanaged with market share increasing from 7.5% to 12.6%. The brokerage businessenjoyed an excellent year with substantial increases in turnover, buoyed by theperformance of the Warsaw Stock Exchange in 2005. E-business and payment fees and foreign exchange income contributed to a stronggrowth level. Operating expenses were up 3% reflecting higher staff costs due to increasedperformance related pay, while savings were realised in operating expenses. Provisioning has reduced further compared with 2004. The charge as a percentageof average loans declined from 0.91% to 0.40% in 2005. The downward trend inimpaired loans as a percentage of total loans continued from 8.4% at 31 December2004 to 6.8% at the end of December 2005. (1) The profit on disposal of business in 2004 relates to the sale in April 2004of CardPoint S.A., a merchant acquiring business responsible for card paymentprocessing. Divisional commentary Group Group includes interest income earned on capital not allocated to divisions, thefunding cost of certain acquisitions, economic hedging of the translation offoreign locations' profit, unallocated costs of enterprise technology andcentral services and the contribution from AIB's share of approximately 23.5% inM&T Bank Corporation ('M&T'). IFRS IFRS IFRS Year Year Pro-forma 2005 2004 2004Group income statement • m • m • m Net interest income 60 (22) 10Other income (36) 37 38 Total operating income 24 15 48Total operating expenses 141 103 103 Operating loss before provisions (117) (88) (55)Provisions 6 18 18 Operating loss (123) (106) (73)Share of results of associated undertaking - M&T 148 128 128Construction contract income 45 - - Profit before taxation 70 22 55 Group reported profit before taxation of • 70 million for the year to December2005 compared with a profit of • 55 million in 2004. Net interest income was up due to higher capital income resulting from increasedcapital balances (strong retained earnings) and the income generated frominvestment of the funds raised on a • 1 billion perpetual preferred securitiesissue in December 2004. Other income was lower due to gains of • 36 million inrelation to closing out capital invested positions in 2004. Other income in 2005includes economic hedging losses in relation to foreign currency translationexposure and capital management, and hedge volatility under IFRS. Significant additional investment in resources to facilitate AIB's preparationfor Basel II and Sarbanes Oxley were the main drivers of higher operatingexpenses. In addition, there was investment to further strengthen compliance andinternal audit structures with performance related costs higher in line withstrong revenue and profit growth. AIB's share of M&T after-tax profit in 2005 amounted to • 148 million. On alocal currency basis M&T's contribution of US$ 185 million increased by 16%relative to the year to December 2004 of US$ 159 million. AIB benefited from a23.5% share of profit compared to a 22.7% share in the year to December 2004. M&T reported its annual results on 11 January 2006, showing net income up 8% toUS$ 782 million. US GAAP-basis diluted earnings per share was up 12% to US$ 6.73from US$ 6.00 in the year to December 2004. Diluted net operating earnings pershare, which excludes the amortisation of core deposit and other intangibles,was US$ 7.03, up 10% from US$ 6.38. Pro-forma IFRS information Reconciliation of statutory IFRS accounts to pro-forma IFRS accounts for 2004 IFRS EIR(1) Insurance(2) Financial(3) IFRS Year instruments Pro-forma 2004 2004 • m • m • m • m • m Net interest income 2,072 73 - 33 2,178Other income 1,144 (102) - - 1,042 Total operating income 3,216 (29) - 33 3,220Total operating expenses 1,869 (1) - - 1,868Provisions 133 - - - 133 Operating profit 1,214 (28) - 33 1,219Share of results of associated undertaking 132 - - - 132Profit on disposal of property 9 - - - 9Profit on disposal of business 17 - - - 17 Profit before taxation 1,372 (28) - 33 1,377 Earnings per share - continuing operations 125.8c (2.5c) - - 123.3cEarnings per share - discontinued operations 6.2c - (2.4c) - 3.8cBasic earnings per share 132.0c (2.5c) (2.4c) - 127.1c (1) (EIR) Effective interest rate (IAS 39). On transition, certain feesreceivable and fees and commissions payable that had previously been taken tothe profit and loss account were treated as deferred income and deferred costsand shown within loans and receivables. These deferred fees and costs areamortised on an effective interest basis to the profit and loss account over theexpected residual lives of the financial instruments. The change in policy givesrise to a reclassification from fee income / fee expense and administrativeexpenses to interest income with an impact on the net interest margin. On apro-forma basis the effective interest rate adjustment reduced profit beforetaxation by • 28 million in 2004. (2) Insurance business (IFRS 4 / IAS 39). Accounting for contracts meeting theIFRS definition of insurance business is not impacted by IFRS 4. Accounting forinvestment products under IAS 39 serves to delay the recognition of income for anumber of reasons. There is a narrower definition of costs that can be deferredon the sale of investment products. Initial charges on sale of investmentproducts are deferred and accrued over the expected life of the product. Thereis no opportunity to account for the future surpluses on an embedded valuebasis. As a consequence, there was a reduction in equity on transition as thevaluation of the discounted future earnings expected to emerge from the businesscurrently in force in the balance sheet will decrease. Income will be recognisedon these contracts in later periods due to the change in the valuation basis. Ona pro-forma basis the insurance business adjustment reduced earnings per shareby 2.4c in 2004. (3) Financial instruments (IAS 32 / IAS 39). Under IAS 32 and IAS 39,all debtsecurities are classified and disclosed within one of the following fourcategories: held-to-maturity; available-for-sale; trading; or designated as fairvalue through the profit and loss account. Some of AIB's financial instruments,which were previously held as financial fixed assets, are classified asavailable-for-sale on transition to IFRS. On a pro-forma basis, classificationof financial instruments increased profit before taxation by • 33 million in2004. Pro-forma IFRS informationIFRS segmental pro-forma information (continuing operations) Year 31 December 2004 AIB Bank AIB Bank Capital Poland Group Total ROI GB&NI Markets • m • m • m • m • m • m Operations by business segmentsNet interest income 1,145 447 396 180 10 2,178Other income 337 142 345 180 38 1,042 Total operating income 1,482 589 741 360 48 3,220Total operating expenses 814 303 403 245 103 1,868Provisions 44 13 29 29 18 133 Operating profit/(loss) 624 273 309 86 (73) 1,219Share of results of associatedundertakings (1) - 4 1 128 132Profit on disposal of property 7 1 - 1 - 9Profit on disposal of businesses - - 4 13 - 17 Group profit before taxation 630 274 317 101 55 1,377 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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