AIB flotation - are the earnings fairly stated?

[Brendan Burgess]

Note: We are making an exception to the rules on discussing share prices for AIB. This is because the brokers have been told not to publish any analysis before the IPO is completed.
https://aib.ie/content/dam/aib/investorrelations/docs/protected/AIB-Prospectus-final-12062017.pdf
However, this is a very limited exception. You should contribute to this thread only if you have read the Prospectus or Investor Presentation or to provide a link to some other published commentary on it.

The thread will be very heavily edited. Only information and analysis will be allowed. Noisy comments, rumours and gossip will be deleted.

Disclosure: I do not have and will not be buying any bank shares, other than a handful of shares in AIB(6), BoI(550), and ptsb(70) to enable me to attend the AGM.

Brendan

Prospectus

Investor Presentation


From page 89 of Prospectus

1.5 Overview of Key Banking Products

The main trends affecting key banking products in Ireland are described below. For details of the competitive dynamics in relation to each of these products, see ‘‘—Market Overview—Competitive
Landscape’’.

1.5.1 Mortgages

The weighted average interest rate on new mortgages stood at
3.38 per cent. in February 2017. ...

The equivalent euro area rate was 1.80 per cent. ...

Residential mortgages: €35 billion (54% of total loans)
Other loans: €30 billion
Total loans €65 billion

My analysis
35% of these are trackers.
So the value of non-tracker mortgages is €23 billion
A reduction of 1.5% on €23 billion of home loans would result in a reduction in interest income and profits of €350million

That would be an approximately 25% reduction in its operating profit of €1,348 million in 2016

Brendan

 

[Brendan Burgess]

It's worth looking at the impact on EPS

A reduction in mortgage rates to the eurozone average would reduce the EPS from 48 cents to 36 cents.

Brendan

 

[Andy836]

Brendan, if you're trying to create pro forma figures for a reduction in SVRs you have to exclude all other exceptional items in your analysis.

Post #4 - Impact on OpIncome
You're looking at "Reported" Income Before Provisions

You need to knock out income classed as "Other Income" which typically includes non-operational income including gain/losses on sales of assets or revaluation of reserves or liabilities or FX gains.
The €403mm figure in 2016 includes €272mm relating to the sale of a stake in Visa Europe (can only sell this once). Most of the others are non-cash or non-recurring items.
If you knock off the €403mm figure you're adjusted Income Pre Provision figure is €945mm so taking out €350mm for reduced SVRs would reduce this Income figure by 37% to ~€600mm.

Post #5 - Impact on EPS calculation.
Same thing there. You need to knock out Other Income & normalize the Provision Rate.
So your 2016 Net Income to shareholder of €1,476mm above is reduced by (i) €403mm Other Income, (ii) €294mm Provision WriteBack, and (iii) assumed normalized run-rate provisions of €180mm (Average Provision in period 1998-2004 was ~0.27% of gross loans by Y/E 2016 gross loans of €66bn).
This gives you Adjusted Net Income of ~€600mm or 19c / share (diluted).
Knocking off a further €350mm for the SVR rate reduction would result in pro forma net income of €250mm or 8c / share (diluted) so would in fact be a 59% fall in adjusted EPS compared with your 25% figure.

 

[Brendan Burgess]

If you knock off the €403mm figure you're adjusted Income Pre Provision figure is €945mm so taking out €350mm for reduced SVRs would reduce this Income figure by 37% to ~€600mm.

Wow!

I had seen the 1,356 figure and assumed it was the same as the operating profit before provisions. Now I see from page 235 that it is

Operating profit before provisions: €1,348
add back write back of provisions: € 294
Less tax ( €326)
Profit after tax from continuing operations attributable to shareholders: €1,356

I took this at face value. I see from note 9 on page 281 that you are , indeed, correct:

 

[Brendan Burgess]

So here are the revised figures in table form. Does this look correct to you?

That is a huge difference - it halves the reported EPS

It's not surprising that they don't want the brokers to do this analysis.

Brendan

 

[Andy836]

So here are the revised figures in table form. Does this look correct to you?

View attachment 1982
That is a huge difference.

It's not surprising that they don't want the brokers to do this analysis.

Brendan

Yep, that looks closer to how I'd look at it.

You would really need to insert an assumption for normalized provisions (i.e. a negative charge) as simply removing a positive add-back doesn't go far enough - it just shows they over provided historically.

Although I've only briefly looked at the prospectus.

 

[Brendan Burgess]

Although I've only briefly looked at the prospectus.

Andy

You have seen a lot for a very brief look.

I took the term "profit before tax from continuing operations" to mean just that.

I presume that the tax charge of 20% is about right? They won't be paying any tax for a long time, but they will be writing down the deferred tax asset.

It's a while since I had a look at Deferred Tax. I need to get my head around why this is an asset in the balance sheet.

With total shareholders' funds of €13 billion, it's a significant figure.

Brendan

 

[Andy836]

Andy

You have seen a lot for a very brief look.

I took the term "profit before tax from continuing operations" to mean just that.

I will have a look at the tax tomorrow morning. Not sure why they have a tax bill at all if they have such losses forward.

Brendan

I look at companies for a living so normally know what to look for. Although I have only ever looked at Banks once (a long time ago) and don't normally deal with IFRS statements.

Cash taxes & book taxes are different things. Outside of hiring a tax consultant its nearly impossible to reconcile the two. Given AIB won't pay cash taxes for decades it might be best to ignore them.

 

[Brendan Burgess]

OK, I have reduced the tax charge to the actual tax paid in the UK of €30m.

I have ignored the write-back of the deferred tax.

Under current Irish tax law, AIB won't be paying tax in Ireland until they have used up around €15 billion of losses forward. This law may change, but let's assume it won't.

They did actually pay tax in Ireland last year, but it was probably to do with the profits on the sale of Visa Europe. So for consistency, I have deleted both.

Andy, I presume that the bank levies are not included in the tax charge?

Brendan

 

[Savvy]

Should we expect that this similar analysis(and much deeper and broader of course) would be carried out by the large institutions that may invest and so be reflected in the price they are willing to pay and in turn into the overall IPO share price?