AIB at Oireachtas Finance Committee

Brendan Burgess

Brendan Burgess

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The transcript of the meeting is here

http://oireachtasdebates.oireachtas.../committeetakes/FIJ2015042200002?opendocument


David Duffy
Mark Bourke - Chief Financial Officer
Bernard Byrne - Director of Retail Banking
Brendan O'Connor - Head of Arrears

Let me deal with the SVR
The cost of risk
The operational cost of running AIB
The cost of funding - given its credit rating
  • the funding costs have improved over the last few years and is expected to improve
The need to generate sustainable returns to shareholders
  • must be able to rebuild capital
  • Profits are for the benefit of the state
We are seeking to improve all of these metrics

Further reductions are something that we will consider but it is critical to bear in mind where we have come from. We have moved from losses to profits in 2014.

WE have to balance the health of the bank with providing sustainable lending rates to customers in the market.


Supplemental statement: When we cut our last rate we did so. There is no ECB rate. It's not relevant. We have our cost of risk. If we charge below those rates,we will lose money e.g. trackers. The last cut - we asked could be cut it and remain profitable. As we look at those variables this year. If that continues over the next few months, we will consider a further rate cut. If they come down, we will be willing to consider a cut in the next couple of months.
 
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Michael McGrath kicks off ( Great, I thought he would be at the Banking Inquiry)

Most people understand that a variable rate will vary in line with market conditions.

You have 140,000 or so variable rates.

You are not the worst offender - you have cut your rates for new customers as well.

Your cost of funds? It's now 1.57%

How is this calculated

63% comes from deposits

Mark Bourke CFO

€50 billion 1.3%
other debts 3.5b
sub debt 18.6 b

We lend at 1.33% (?) 20% of that would be

McGrath: What was the Net Interest Margin on SVRs
Bourke: WE don't break it down

McGrath: So it's low for trackers and high for SVRs?
Bourke: waffles

McGrath : How many SVR accounts do you have:
Bourke: 52% of our book 135,000 in total - homes and buy to lets

McGrath: If present trends continue, will there be downward pressure on mortgage rates
Duffy: If they come down, we will be able to pass on the benefit within the next month or two

McGrath: Why is the level of switchers so low?

Bernard Byrne: WE want to be fair to all our customers. It's easy to put up a good rate to attract new customers. That is not our policy.

Deputy Michael McGrath: Why is the level of switcher mortgages so low or "minimal" as the bank described it? We need a market in which banks try to persuade customers of other banks to switch their mortgage to them. This is how one creates dynamism and competition in the banking system.

Mr. Bernard Byrne: One of the key issues for us is to ensure we build a sustainable model. Encouraging switcher activity at the front end through very cheap forward rates is not where we want to be at. One of the driving forces behind the change we made in December was to make sure we benefited front book and back book customers. The change meant our existing customer base got the benefit of the reduction. That philosophy is one we will take into anything else we do from a pricing point of view in order that we are fair to the entire customer base. It is much easier to put out an attractive rate in the front of the market and not suffer the cost into the back book. Our view is that we should try to be fair to all our customers, whether they have been with us for a long time or just about to come to us, so that the customer will know what he or she will get. In regard to switcher activity, our objective is to make sure that people know what they will get. It is a choice as to whether the customer moves to us or not. We are very open to it
 
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Kieran O'Donnell

Cost of funding
Why is the one year fixed rate lower than the variable rate?
Bourke: When we launch a new product, we can get sources of funding for it.
O'Donnell: Does it indicate that you expect variable rates to come down?
Duffy: That is fair. We don't know the future. But the factors are going in the right direction

O'Donnell: You raised €750 at .625% recently. Which is lower than your 1.57% cost of funds. That is the 2014 rate.
I can't see why you need to wait . All the costs have come down.
Why don't you reduce the rate now?
Duffy: It's the cost of capital, cost of funding and cost of risk.

O'Donnell ; This could be €400 per month for the ordinary customer.
Do you accept that your cost of funding is so much lower €1.25 billion @ much lower rates so far.
I would contend that risk is coming down.

Why don't you provide specific margin details on SVRs.

Can we take it that there will be a reduction in the mortgage rates?

What risk factor do you put in for the defaults. They are improving all the time.

Duffy: In the short term we expect to make a rate cut
O'Donnell: what does short term mean
Duffy: In the next month or two

Bourke: When we look at €1 billion at a low rate. Our total debt went from 3.63% to 3.09%

O'donnellP: If you cut the rate by 0.25% , what would be the impact on profitability
Bourke: I would prefer not to answer that.
 
Sounds like the committee are asking the right questions - hopefully they continue with this line of questioning.
 
Peadar Tobin from Sinn Féin

Has the government given any directions?

Duffy: The costs and pricing decisions, are ours and ours alone. We don't have those discussions

Tobin: If the government asked you to cut rates, would you do that?

Duffy: We would look at everything
That would be a matter for the board.
They are not the only shareholder

Tobin: The government wants to fatten AIB with a view to sale
Duffy: our margins are below our European peers. We are not fattening the bank as such.

Tobin: Is the attractiveness of the bank to an investor any part of your thinking
Duffy: Vague answer

Tobin: What percentage of business loans has been written down
Duffy: €4.6 billion of non mortgage loans has been written down.

Tobin: It is alleged that lenders are not lending to property developers, so that houses can't be built
Bourke: There are two problems - Developers have lost a lot of equity, so that's a real problem. Debt is available if there is equity. We have a €500m problem. The debt side is not the problem. A bank would usually fund 60% of the development and equity would be 40%.
O'Connor: We provide working capital to customers in distress to enable them to finish developments.
 
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Senator Aideen Hayden (Labour)

Repossessions, while low, have gone up. There is huge concern out there. The number of cases before the courts. We are facing a tsunami of repossessions.

You are not the worst. You are engaging with customers.


Brendan O'Connor:
You can't decide the write off until the property is sold. We would not disclose the figure.
We give a write down when someone does a voluntary surrender and there is no income. If there is no affordability we will write an agreement writing it off.

Hayden - Buy to Lets; Receivers - you honour leases and the PRTB regulations.
Do you have any service level agreements with your receivers for the way in which they treat tenants


Duffy: For anyone to be in the repossession basis, they will not have engaged with us or paid us anything in a number of years.

We are actively seeking an adjournment in 50% of court cases where we have a date because they have started paying

We brought 2,000 people who were in the legal process out of the process because they restarted paying.
Follow up on this when the transcripts are out

Full extract here:
AIB:"We only seek repossession where we have not been paid anything in a number of years"
 
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Stephen Donnelly: Do you have a valuation of the bank today?

The state has valued it t €13 billion

AIB: €4.7 billion was written off in 2014 in non mortgage debt [ This information is incorrect ]
Donnelly : How much mortgage debt? €460 million

[No follow up on this!]

Donnelly: Since 2012, all your costs have fallen, but your rates have risen. So the shareholder funding is the sole driver
Duffy: I don't understand

Bourke: In 11,12 and 13 we had big losses. We have to get the bank back to profitability.

Donnelly: The margin on the Standard Variable rate

4.15% vs 1.57% - that would suggest that the margin on variable rates is about 2.7% . Is that around industry norms for the Eurozone. Cost of risk is significantly higher here.

At a total level, our total margin is in the lower quartile.

For the SVR holders, it's not whether the total margin on the bank is reasonable, it's whether the margin on the SVR book.

I don't know if it's competitive or not. It might not be

Mr. Bernard Byrne: The variable rate mortgage product does vary across every jurisdiction, so there is not a like-for-like comparison. The closest example is the UK marketplace, a marketplace in which we operate so we are very familiar with it. The average standard variable rate in the UK is 4.85%. Obviously, the base rate is 50 basis points, meaning there is a slightly higher base rate. The actual customer rate for a standard variable mortgage is 4.85%.
 
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Sean Fleming

What write backs do you expect in 2015?

Bourke: We expect it to be higher

Sean Fleming: So you have overprovided ? You wouldn't write it back, if you thought you might need it.
The SVRs are paying for an overprovision
You have been overhard on the SVRs by overproviding
You have factored that into the cost
Use the writeback to reduce the SVR


Why are you repaying the state €250m when you are overcharging customers.
 
Senator Paul Coughlan

1) Would you be open to a third party review of the SVR in hardship cases - extreme cases only
2) On repossessions - Voluntary assistant sales
3)
4) How many repossessions do you expect
5) Have you sold any loans to vulture funds

O'Connor

5) We have not sold any home loans - just commercial loans
1) Independent review - we have a pre-arrears protocol , a pre-arrears unit which assesses affordability. We add 25% on top of the ISI's RLE's. I have no problem with an independent assessment of affordability
2) We go after residual debt on the basis of affordability for a period less than the insolvency period

4) Signficantly less than the papers are talking about.
 
Brian Walsh

Receiverships are a wasteful way of collecting rent. A constituent got a receiver's bill for €400,000

O'Connor: We only appoint receivers when we are not getting any payment.

Sets out the process very well here. Follow up from transcripts.

50% resume payment when they are told they are non engaging. A further 50% resume paying when they get a civil bill. we put 50% of civil proceedings on hold.
 
Michael Creed

You refer to your cost of funds, given your credit rating. What is your credit rating.
How would it be affected if you were seen as a puppet bank manipulated by politicians.

Bourke: Our rating is lower than the premium banks across Europe because we have so many non-performing loans.

Creed: Why is only 3% of your loans coming from the ECB?

Bourke: That is driven by the TLTRO , QE, a function of the increase in our book. We have availed of the maximum.

Duffy: The Credit rating agency looks at the independence of our board

Creed: What is the impact of trackers on your cost of funds?

AIB: WE don't look at cross subsidisation between portfolios

Creed: If the obligation to make returns to shareholders was less, could you do something more for SVR holders.
 
Richard Boyd-Barrett

Good questions on the relationship between the board and the Minister.

Duffy: The board makes the decision independently . We have a shareholder agreement.
 
Tom Barry Cork TD ( Hasn't a clue what he is talking about )

"Belfry investors lost all their money. I hope you never do another one."

Who is this guy? Almost using random words he has heard along the way.

Used up his 5 minutes asking questions, so no time for answers.
 
Pat Rabbitte

Most people will be surprised that you wrote down €450m in 2014. Will it be more in 2015.

AIB: The analysts who monitor the bank expect the write backs to be bigger next year.
 
Missed the start of it but watched the 2nd part.

It would appear nearly all the politicians were mainly there for electioneering purposes.

Some sought info to use against the govt, others to be seen to do something for constituents (Waterford mortgagee, Clare SME owner), with most of them seeking to ensure sound bites in support of SVR headlines. The SVR margin question was repeatedly asked with no heed paid to the responses from AIB.

I actually thought some of the more salient questions came from P Murphy - timing of provisioning, NOL carryforwards etc. While I fundamentally disagree with everything him & his ilk stand for he at least had he asked questions pertinent to his nationalize everything agenda.

The most interesting presentation & discussion I would expect will come when BOI come before the committee.
 
Andy836 said:
Missed the start of it but watched the 2nd part.

It would appear nearly all the politicians were mainly there for electioneering purposes.
Click to expand...


Hi Andy

That is definitely a fair summary of the 2nd part. The first part was much better.

The first part is assigned to the main speakers for each of the parties or groups. So Michael McGrath, Kierán O'Donnell and Peadar Tobin had 10 minutes each and were able to probe a bit. In the second part, they have only 5 minutes, so they do sound bites or ask a question on behalf of a constituent.

It would be much better if the Committee appointed three people to represent them and really probe the bank.
 
(BB will probably delete this. But here goes anyway.)

Dermot Gleeson, you know what to do with your apology.

Must be great to work where you capitalise your losses and socialise your gains every couple of decades and swan off into the sunset with your obscene pensions and benefits while you leave a trail of destruction in your wake.
 
Brendan Burgess said:
Hi Andy

That is definitely a fair summary of the 2nd part. The first part was much better.

The first part is assigned to the main speakers for each of the parties or groups. So Michael McGrath, Kierán O'Donnell and Peadar Tobin had 10 minutes each and were able to probe a bit. In the second part, they have only 5 minutes, so they do sound bites or ask a question on behalf of a constituent.

It would be much better if the Committee appointed three people to represent them and really probe the bank.
Click to expand...

Is anybody else able to access the first part of this meeting on the oireachtas daily or hourly video files?
It appears that only the 2nd part of the meeting, starting with Regina Doherty's questions, is available.
Is there a transcript available?
 
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