References to mortgage rates in the AIB prospectus

Brendan Burgess

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On 16 May 2016, a bill entitled the Central Bank (Variable Rate Mortgages) Bill 2016 was initiated in the
Dail (the lower house of the Irish legislature) which, if passed into law by the Oireachtas, would specifically
authorise the Central Bank in prescribed circumstances to impose a maximum SVR on PDH mortgage
loans made by AIB. The bill passed through the First stage and the Second stage of the Dail in May 2016
and has progressed to committee stage.

The bill proposes to permit the Central Bank to carry out assessments on the state of competition in the
market for PDH mortgage loans and upon completion of an assessment, the bill will permit the Central
Bank to form a conclusion as to whether the state of competition in the market for PDH mortgage loans is
such that a ‘‘market failure’’ exists. A ‘‘market failure’’ exists where a lender is, or lenders are, charging a
variable interest rate or variable interest rates for PDH mortgage loans which are higher than what the
Central Bank considers can be reasonably and objectively justified. The ECB has identified a number of
concerns it has with the bill in an ‘‘Opinion of the European Central Bank of 17 November 2016 on the
conferral of powers on the Central Bank of Ireland to assess competition in the market for mortgage loans
and to issue lenders with directions on variable interest rates (CON/2016/54)’’. The Central Bank has also
expressed concerns about the bill to a meeting of the Joint Committee on Finance, Public Expenditure and
Reform, and Taoiseach on 8 December 2016. (Source: Oireachtas website). In a paper entitled ‘Central
Bank (Variable Rate Mortgages) Bill 2016—[Private Members Bill]—Observations of the Competition and
Consumer Protection Commission to the Joint Committee on Finance, Public Expenditure and Reform,
and Taoiseach’ (dated 29 March 2017 on the CCPC’s website), the CCPC has stated that it has serious
concerns about the bill’s proposals and that the CCPC believes that, if enacted, the bill would likely limit
competition in the market for PDH mortgage loans.

If the bill is passed into law in its current form (or if other similar rules or regulations are introduced),
AIB’s SVR PDH mortgages, which form a significant portion of its mortgage portfolio, may become
subject to further supervision and scrutiny by the Central Bank. An increasing regulatory focus on AIB’s
SVR mortgages to customers or an alignment of the SVR with those charged by lenders in other Eurozone
markets may also result in a reduction in AIB’s interest income from SVR mortgages.


Any further supervision and scrutiny in relation to AIB’s loan book could result in a reduction in AIB’s
level of lending, net interest income and net interest margin and/or increased operational costs, any of
which in turn could have a material adverse effect on AIB’s business, financial condition, results of
operations and prospects.
 
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Page 51 (PDF 59)

29 AIB is required to comply with a wide range of laws and regulations. If AIB fails to comply with these laws and
regulations, it could become subject to regulatory actions, including monetary damages, fines or other
penalties, regulatory restrictions, civil litigation, criminal prosecution and/or reputational damage.



As a financial institution, AIB must comply with numerous laws and regulations across the jurisdictions in
which it operates. The level of scrutiny to which it is subject is generally increasing, particularly in the
treatment of its customers....


There is also a risk that pressures from the media, consumer groups and/or politicians could influence the
agenda of the ECB, the Central Bank, the FCA or the PRA. For instance, a wide-ranging review of
competition within the Irish banking sector has been commenced by the CCPC as part of the current
programme for the Irish Government (a similar review having been completed on the UK banking sector
in 2016). As a part of such a review, AIB may be required to modify its business and the pricing of its
products to satisfy the regulatory requirements arising from the review. Any failure to manage the
foregoing risks adequately could result in AIB’s business, results of operations, financial condition and
prospects being materially adversely affected.
 
They disclose their cost of funds which is a lot lower than they had been reporting in the Annual Reports


From page 165 (pdf 173)


Average cost of funds
The average cost of funds (defined as interest expense and similar charges divided by average interest
bearing liabilities as set forth under ‘‘—Average Balance Sheet’’ below) excluding the ELG Scheme charge
decreased from 118 basis points to 60 basis points. The reduction in the average cost of funds was driven by
the redemption of the CCNs in July 2016 and a positive mix impact from a reduction in higher interestbearing
deposits to an increase in non-interest-bearing retail current accounts. These factors combined
with
the ECB main refinancing operations rate moving to nil on 16
March 2016 and a further decline in the
short-term EURIBOR rates. This resulted in the gap between asset yields and the cost of funds increasing
from 172 basis points in the three months ended 31 March 2016 to 231 basis points in the three months
ended 31 March 2017.
 
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