6th Dec 2007 07:01
Allied Irish Banks PLC06 December 2007 EMBARGO 7am 6th DECEMBER 2007 Allied Irish Banks, p.l.c. Trading Update Allied Irish Banks, p.l.c. ("AIB") (NYSE:AIB) is issuing the following update ontrading before its year end close period. Please note that all trends in thisupdate are in constant currency terms. Our performance in 2007 reflects the quality and strength of our franchises. Weexpect profit growth* this year in each of our operating divisions - Republic ofIreland, Capital Markets, United Kingdom and Poland. Customer demand for ourproducts and services remains good although the operating environment hasrecently become more difficult. In the US, M&T has a well proven business modelwhich we expect will underpin its performance relative to its peers in a verychallenging environment for regional banks. Overall, we expect productivity to further improve and to achieve a positive gapof around 3% between the rates of income and cost growth. We are targetinggrowth of around 13% in 2007 earnings per share* off a 2006 base of 182.8c, inline with our previous guidance issued on 1st August for low teen growth inearnings per share this year. The effects of the global market dislocation inthe second half of this year have created significant headwinds for the bankingsector. Despite AIB not being immune to some of these effects which we willoutline in this update, our earnings target underlines the resilience of ourfranchises and underpins our confidence in the future. * Excludes profit on property sales and leaseback transactions, businessdisposals and interest rate hedge volatility PRINCIPAL EFFECTS OF GLOBAL MARKET DISLOCATION 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 programmes has positioned uswell. Our most significant source of funding at c. 47% of our total requirement,is our solid, highly predictable retail and business customer deposit basecomprising c. 2m customers. These deposits, when combined with wholesale fundingthat matures after the middle of next year provide liquidity that is c. 100% ofour total customer loans. Wholesale funding with a remaining maturity of over 1year is c. €20bn, representing c. 80% of total term funding. In addition, wecurrently hold c. €30bn in qualifying liquid assets which represents asignificant excess over both the regulatory requirement and our own higherinternal policy level. Net unsecured interbank deposits are less than 9% of ourtotal funding. In summary, we have solid, well diversified sources of fundingthat are sufficient to support our planned business growth. The cost of funding has increased but will not have a significant effect on our2007 performance. Our working assumption is that current market conditions willcontinue well into next year Asset Portfolios There are 3 distinct portfolios affected by the market dislocation. 2 aremanaged by Group Treasury and 1 by Corporate Banking and we outline hereunderthe different effects which are determined by the distinctive assets in eachportfolio and accounting convention. Group Treasury manages a trading portfolio of qualifying liquid assets (c. €9bn,held for liquidity management purposes). This trading portfolio principallycomprises bank bonds (c. €5bn) and collateralised prime residential mortgageobligations (c. €3.5bn). 76% of these securities are rated "AA" / "AAA" withvirtually 100% rated "A" or better. It is important to note the ratings have notbeen achieved through synthetic structuring of the securities. The mortgageportfolio primarily comprises prime European mortgages which have an averageloan to value of c. 65% and are owner occupied. The average life of the assetsis c. 3 years and we are entirely satisfied that they will redeem at par valueon maturity. However, asset value writedowns in current markets have beenindiscriminate and these assets currently have mark to market values less thantheir par values. The accounting convention is to fair value these assetsthrough non interest income in the profit and loss account and it is ourintention to do this in the most clear and transparent way - by applying quotedprices. Based on current quoted prices, the reduction in value is c. €100m andis included in the earnings per share target already referred to in this update.It should be noted that the actual reduction will be determined by the pricesquoted at our year end on 31st December. Our "financial investments available for sale" portfolio managed by GroupTreasury is c. €19bn and contains assets of equally high quality (also held forliquidity management purposes) that have not suffered any permanent diminution.The accounting convention is to fair value these assets through the equityaccount and not the profit and loss. We will apply the same approach tovaluation as outlined for our trading portfolio financial assets and the currentwrite down is c. €170m which does not affect our regulatory capital position. Our total credit exposure to US sub prime mortgages is low. We have 2 portfolios- a "whole loan" i.e. not tranched portfolio of c.$200m and an asset backedsecurities (ABS) portfolio of around $300m. The whole loans were purchased in2007 from a top US originator and comprise collateral selected by AIB andpurchased after extensive due diligence and the onset of the sub prime crisis.These loans offer strong risk adjusted returns and are performing well withinour expectations. Within the ABS portfolio, c. 80% of the collateral wasoriginated prior to 2006. All payments are current and the portfolio is held tomaturity. This portfolio is marked to model, regular reviews are undertaken andfollowing a recent examination we have taken a charge to our income of c. $35mwhich we consider adequate to cover all likely losses. We have no exposure toconduits or SIVs, either directly or through backstop facilities. Other CDO/CLOexposures total c. €550m and are all performing well. This is greater than thefigure disclosed at the interim stage primarily due to the reclassification ofsecurities already held together with the addition of 1 new security. REPUBLIC OF IRELAND DIVISION The Irish economy is performing well and growth remains ahead of the eurozoneaverage. The pace of growth is slowing as the housing market undergoes a rapidand significant period of transition in which developers are materially cuttingthe supply of new houses. The speed and extent of this transition and the pricecorrection taking place will restore the housing sector to a more stable andsustainable part of the economy. The housing market has materially changed and,as activity slows, so too will our income from residential development andmortgages. However, our lending to residential developers is heavily weighted toborrowers with extensive experience, assets and cashflows derived from diversesegments of the property market. Asset quality in this sector remains solid,although it is inevitable that impaired loans and credit provisions willincrease in the future from current unsustainably low levels. Key leadindicators and the comprehensive reviews we have undertaken point to the futureincrease being moderate in all likely scenarios. Quality of the residentialmortgage book remains very strong. Activity remains strong in other key sectors of the economy, includingnon-residential property. Overall employment continues to grow and any increasein unemployment is expected to be moderate. In 2007 we expect GDP growth ofclose to 5% and around 3% in 2008. In the still relatively benign although less buoyant environment outlined above,we expect loan growth in 2007 of close to 20%. Demand from our businesscustomers is strong and we continue to increase market share, further extendingour no. 1 position. We are maintaining our share of the slower growing mortgagemarket, despite our continued underweight position in the first time buyersegment. In deposits we are also increasing our share. We expect a volumeincrease of around 3% for the full year due to better momentum in the secondhalf following a flat performance in the first half when significant SSIA fundsmatured. Our wealth management business is performing strongly. This business includesour joint venture with Aviva which is continuing to outperform in the investmentand protection market. CAPITAL MARKETS DIVISION Our expectation for profit growth in this division this year, despite highlyunfavourable market conditions, underlines the quality, nature andsustainability of income in this franchise. Corporate banking continues to generate a high percentage of the division'sprofit and is performing strongly again this year. Customer demand for loans hasremained strong and we continue to achieve superior returns. The profile andquality of the loan book remains robust. We expect loan growth of close to 20%this year and importantly, do not hold any material underwritings in our book. Customer demand is very good in Global Treasury particularly in recent monthswhen heightened market volatility has increased sales of protection products.Our wholesale activities are being well managed in the difficult marketconditions already outlined in this update. Investment Banking is on track to deliver significant operating profit growththis year. Key contributions are being made by our asset management,stockbroking and corporate finance businesses and by the disposal of some tradeinvestments. UK DIVISION Customer demand is driving good volume growth on both sides of the balancesheet. Both loans and deposits are expected to increase by around 20% this year. Significant benefits are now being derived from the reconfiguration of ournetworks. In Great Britain, we have centralised all SME business in one locationto enable our branch and specialist teams focus on selected mid corporatesectors. Cross sales to customers in these sectors are increasing, notably inprivate banking, interest rate hedging and foreign exchange services. We areconsistently adding new customers in our chosen sectors; two out of three newcustomers tell us their decision to bank with us was prompted by arecommendation from an existing customer. This advocacy by customers of ourrelationship management model is a very powerful catalyst for new businessdevelopment, underpinning momentum and the growth potential in our franchise. In Great Britain, our property book is robust and we have minimal exposure tothe consumer sector. The other key sectors in which we operate - professionalservices, private education, healthcare, waste management and leisure - arelikely to prove resilient in an economic downturn. In Northern Ireland good progress has been made in centralising administrationactivities and processing. We have carefully segmented the market and created amix of full service branches and sales outlets. This approach has sharpened ourfocus on opportunities in the market; product sales are increasing andproductivity is improving. POLAND DIVISION Our premium quality franchise is growing very strongly in a positive environment- Polish economic growth is expected to be around 6% in 2007. Our loan book is on track to increase by over 30% and deposit percentage growthis expected to be in the mid teens, stronger than the 10% previously guided.Outperformance in our corporate and business banking portfolios continues to bea feature and is driven by dedicated, experienced teams operating from a growingnumber of well located business centres. Personal lending and zloty mortgagesare also increasing strongly and we are distributing our suite of competitiveproducts through an expanding number and range of channels. This channeldevelopment includes internet, call centres, mobile sales teams and agency salesto complement over 380 branches - a number we are now increasing at a rate ofmore than 1 per week. A key part of this major ongoing investment programme ispeople and we expect the number of employees to rise by almost 1,000 in 2007; wenow have more people in Poland than any other division of the bank. Non interest income growth is also very strong. We hold a clear no. 2 positionin the mutual funds market and this business is also benefiting from our channeldevelopment and additions to the product suite. Our fast growing brokeragebusiness now holds a leading market position while foreign exchange, insurance,banking fees and commissions are also important sources of growth. The investment we will continue to make in Poland is being done in a measuredway, drawing on the experience we have in the market over many years. There is aclear focus on quality and returns from the business and 2007 will reflectfurther gains in our already high productivity. M&T BANK CORPORATION In common with their US regional banking peers, slower revenue growth and highercredit costs are creating difficult conditions for M&T in 2007. Management isresponding by managing costs very effectively, evidenced by an improvement inthe Q3 efficiency ratio compared to the same period last year. The profitcontribution we expect this year will continue to deliver a good return on thecapital supporting our c. 25% shareholding. In its investment securities, M&T has a mezzanine CDO portfolio of $132m,comprising 3 securities. In Q3 this portfolio was deemed to be temporarilyimpaired and in accordance with US GAAP was partly written down in the M&Tbalance sheet with a charge to stockholders' equity. Management is currentlyreviewing the securities to determine whether any are other than temporarilyimpaired. In the event that they consider impairment other than temporary, awritedown would be taken as a charge to the profit & loss account this year.While this determination is pending, we have reduced the projected M&Tcontribution to us by cautiously assuming that M&T management decide to writedown the portfolio of $132m to $31m and that this writedown is charged to theprofit & loss account. We have made this assumption for the purpose of our 2007earnings per share guidance contained in this update. The impact on AIB would beto reduce the profit contribution from M&T by c.$25m pre-tax, $17m after tax. MARGINS The rate of net interest margin attrition due to business factors (excludesvolume effect / reclassification of income on treasury assets) is expected toreduce from 16 basis points last year to around 10 basis points in 2007. Loansgrowing faster than deposits are the main cause of attrition with thereinvestment of customer account funds likely to have a close to neutral effecton the net interest margin this year. Both loan and deposit product margins arebroadly stable while we estimate that c. 1 basis point of the attrition is dueto higher funding costs. NON INTEREST INCOME We are targeting an increase of around 6% this year. Banking fees andcommissions remain an important component of non interest income while Polishasset management and brokerage, investment and protection, cards and customertreasury services are all growing strongly in 2007. Growth in our non interestincome this year will be affected by global market dislocation effects alreadyreferred to in this update. COSTS Growth of around 10% is expected this year. Key drivers include business growth,investment in our single enterprise agenda, performance remuneration and Polishbusiness expansion costs. As already stated, we expect income growth to exceedcost growth by around 3% in 2007. Significant progress has been made in oursingle enterprise agenda and we have reached a point at which the level offurther investment spending will moderate. We have also largely completed majorregulatory programmes and these factors will slow the rate of future costgrowth. ASSET QUALITY Credit quality remains good and there has been no material increase in impairedloans in any of our loan portfolios. We expect a bad debt charge of around 10basis points of average loans in 2007. As indicated at our interim resultspresentation, the charge is higher in the second half of the year reflecting thenon recurrence of the high level of provision recoveries and writebacks in thefirst half. This expected variation in the half year charges was also evident in2006. CAPITAL We target a minimum tier 1 capital ratio of c.7% and a core tier 1 ratio (beforethe addition of preference shares) of c. 5%. We expect these targets to beexceeded at 2007 year end and they are also achieved in our 2008 plan. Our planincorporates continuation of our progressive dividend policy. In regard to BaselII we continue to expect the effect on our capital ratios to be broadly neutral. 2008 OUTLOOK Activity levels and business pipelines are good across all our franchises. Ourbusiness is well diversified by carefully chosen geographies and sectors andrelies on recurring, sustainable, customer activity driven revenues. In 2008 wecurrently expect to achieve profit growth in each operating division and atoverall group level. We have previously and consistently said that we expect a through the creditcycle charge to be in a range of 30 - 35 basis points of average loans. Ourclose monitoring of all key lead indicators of credit quality do not justifyincorporating an increased charge to within this range in 2008. However, theoperating environment is becoming more challenging. We anticipate the bad debtcharge in 2008 to rise compared to the very low level expected in 2007 as we donot expect the strong level of recoveries and writebacks this year to recur. As already noted, we assume that current market conditions and their effect onour cost of funding will continue well into next year and this assumption isincorporated in our 2008 financial plan. We intend to provide specific guidance for 2008 on presentation of our 2007 yearend results which will be announced on 20th February 2008. -ENDS- For further information please contact: Alan Kelly Catherine Burke General Manager, Group Finance Head of Corporate Relations AIB Group AIB Group Dublin 4 Dublin 4 Tel: +353-1-6412162 Tel: +353-1-6413894 John O'Donnell, Group Finance Director and Alan Kelly, General Manager GroupFinance, will host a conference call for analysts and investors today at 09.00GMT Conference call dial-in details: Title AIB Trading Update - code 4481008Republic of Ireland (01) 655 8886UK +44 20 7806 1955USA 1888 935 4577 Replay facility available until close of business 20th December 2007 - accesscode 4481008#Republic of Ireland (01) 659 8321UK +44 20 7806 1970USA 1866 239 0765 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. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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