AIB Group plc (A5G) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and Colin Hunt here, CEO of AIB, and welcome to our Q3 trading update. 90% of the population of Republic of Ireland of 12 years and over are now fully vaccinated. And the Irish economy practically fully reopened, we are seeing a strong rebound in economic activity. We're now expecting GMP to grow by 8% in real terms this year, with 5% expected real growth penciled in for 2022. We're seeing a significant improvement across all the key indicators, both real and survey based, with key PMIs remaining above 60%, albeit off the highest seen during the summer. Critically, the construction sector is now expected to deliver 21,000 completions in 2021, in line with the pre-COVID performance, notwithstanding the Q1 lockdown of this year. And we're now expecting 24,000 completions in 2022. That improved economic backdrop has been reflected in our own business performance and in the confidence of our outlook. Our business is performing well across mortgages and business lending, and we are pleased that our mortgage market share has recovered to 31% in September. Positive about the evolution of our lending pipeline across both business and mortgage lending with personal lending remaining somewhat sluggish. In December of last year, we set out our strategic refresh for life post COVID. We're making good progress on the implementation of our T plan, which is our plan to deliver identified cost savings, and we're also pleased with the progress on our strategic initiatives. We welcomed companies to the group on the 1st of September. We're making good progress with our life JV in collaboration with Canada Life. And the Competition and Consumer Protection Commission approval process for the proposed acquisition of the performing Ulster Bank corporate and commercial loan portfolio is now underway. We are also well progressing on our plans to exit the GB SME market. And this morning, we are pleased to report that we are now at preferred bidder stage. In addition, we've made further progress in advancing the sustainability agenda at AIB, with circa 20% of new lending in the year-to-date characterized as green or transitional lending. In October, underlining our ambitions in this area, we doubled our Climate Action Fund to EUR 10 billion as we aim to provide finance to customers transitioning to a lower-carbon future. Our Q3 performance was robust, and we are confident for the remainder of this year. We remain relentlessly focused on implementing our strategy at pace in the interest of our customers, our shareholders and all our stakeholders. I'll now pass it over to Donal.

Thank you very much, and good morning, everyone. Donal Galvin here, CFO of AIB. I'm just going to run through some of the key P&L items for quarter 3. I won't be giving guidance beyond 2021, given there's a lot of activity which AIB is yet to conclude such as the onboarding of Ulster loans, et cetera. So this -- I'm really going to focus on '21 and give you as much color there as I can. Interest income overall, I'd say, are on track for our year-end outturn, which I think I said was going to be a moderate decline which would be down 4% or 5%. And within that, there's headwinds and tailwinds. Excess liquidity remains a drag, obviously offset by a negative rate strategy. But also, I would say, the new lending trajectory that we are seeing coming through in Q3 and Q4 is having a very positive effect. Other income, very strong overall. Fees and comms line for 2021 will be above 2020, returning more or less to pre-COVID type of levels, which is very encouraging. And obviously, from the 1st of September, we'll have the Goodbody acquisition P&L incorporated on our income statement as well. Overall costs, I'd say, will be very much in line with expectations, in line with consensus. We also would have just called out specifically the Goodbody cost impact as well to ensure that analyst cost numbers were on track. Overall, for the larger cost-saving program which we initiated last year, I would say things are very much on track, and I'm sure we'll be able to touch on that a little bit later. Asset quality, very strong. Half 1, we had a write-back of around EUR 100 million. I would have indicated at that time that second half of the year could look something like that again. And I would say that my thoughts on that remain the same. But I would add in addition that for year-end, we will update our macro scenarios. That is likely to have a positive impact as well, recognizing that the really strong environment and rebound which we're seeing throughout Europe and more specifically in Republic of Ireland. New lending, I think I'd forecast overall EUR 10 billion for the year. Trajectory from Q3 was really, really strong. And as we look at moving into Q4, we see that momentum continuing in all of the core business lines that Colin would have alluded to. So that sets us up really, really well for 2022, where we do see significant growth in all of our markets and net growth on the balance sheet, and that's excluding the impact of any Ulster loans or balances. Nonperforming exposures, we made a huge amount of headway in 2021, particularly on the deeper-end mortgage space. So at the end of September, AIB's nonperforming exposure is around EUR 3.5 billion. Obviously, if we include the recent portfolio sale, that's around EUR 3.1 billion, which is an NPE ratio of around 5.3%. So very focused on achieving that 2023 NPE target of circa 3%. Capital overall, a very strong 16.6%. That includes the impact of Goodbody's. It doesn't yet include the impact of Ulster Bank. But overall, we would feel like we're in a very strong position from a capital perspective. So I will leave it there, and I will hand it over then for some Q&A.

So the line is yours. We're open to questions.

[Operator Instructions] We now have your first question from the line of Grace Dargan of Barclays.

Just a couple of questions from me, please. I appreciate you are reiterating the modest decline in NII. I note the commentary, but it would be good to hear if you kind of changed your views of the key drivers that make up that movement in NII and, I guess, some thinking about the moving parts into next year. And then secondly, good to see sort of the language around the dividend restart. It would be good to hear sort of what are the key considerations for the quantum of dividends given, as you know, sort of you haven't got the impact of Ulster in there yet. And are there any sort of specific things you would be looking for to restart dividends?

Thanks very much for the question. I would say on the net interest income and the moving parts, I don't think that there's been really any material change. Obviously, lockdown in Ireland remained a little bit longer than what we would have expected that led to an increase in liabilities, hence that related drag. That's always a difficult one to predict. And obviously against that, we have the negative rate strategy. At the end of December '20, we had around EUR 4 billion, EUR 5 billion in negative rates. As we sit here today, we have EUR 12 billion or EUR 13 billion of liabilities on negative rates. And depending what the trajectory is going to be of the interest rate expectations, we remain always alert to further possibilities or requirements in that area. But that would be the area where we're able to offset some of the drag. TLTRO, obviously, we would have maxed out our capacity to up to EUR 10 billion, and we would have -- as per the statement said that we will look to take the benefit of that in 2021 given the trajectory that we're seeing in new lending. We're very confident that we are going to make that. And overall, I would say that the impact or the decline in NIM, net interest margin, firstly, the largest part of the decline was, I would say, arithmetic, okay, just around the calculation. If you look at the real underlying NII, obviously, the excess liquidity has had a bit of a drag. But if I was to point at one area, which was creating the decline, it was really the loan volumes, and that throughout 2020, in particular, on the earlier part of '21, they were sluggish. So I think what gives us a lot more optimism now is the trajectory that we are finally seeing. We knew it was coming in Q2. I think we're finally seeing it in Q3. And I think that momentum will continue to grow into Q4 and certainly into 2022 in all of the core markets, whether it be mortgage, whether it be business, whether it be SME, et cetera. So I think it's going to be the new lending, which is going to stabilize and grow the net interest income. And specifically, it's not a margin type of debate around NIM. All of -- in all of our core products and our core markets, margins have remained very resilient over the last number of quarters, and we don't see them changing materially either in the coming quarters. I think with respect to dividends, clearly, we're focused this year in 2021 returning to profitability and ensuring that we had a strong apprentice possible. Obviously, we're coming towards the end of the year, and we've got a lot of confidence now that we're going to be in a strong position. The way we look at this is 2022, we look back at '21 results, and we look to implement our dividend policy, which we would have externalized around 2019 with respect to payout ratios. We look to -- we look at the time to see whether a cash dividend or some form of buyback is the optimum solution. Obviously, given where bank shares are at the moment, we're very alive to the fact that there's -- it makes a lot of sense buying back shares at these kind of levels. But there's lots of stakeholders involved in that, and it's a little bit too early to conclude on that. But that's our thinking about dividends and the restart of those.

We will now go to our next question. It's from the line of Raul Sinha of JPMorgan.

Maybe a couple from me. Just firstly, coming back to loan book outlook. Obviously, gross loans are still broadly stable in the quarter, and you alluded to how the pickup in new business is likely to drive NII. I was wondering within that, what you think about personal lending and personal loans. In particular, if you can talk about what are your expectations for a pickup there and whether or not that would be more NIM-accretive or NII-accretive than the other categories. The second one is just around the time line of the process of normalization of your capital stack. It's just a broader question really. If you go back and think about AIB over the past few years, the normalization of your NPE stack has been one of the sort of main targets. And looking at where you are now in Q3, I think pro forma for Ulster, you're below the 5% NPE ratio already now. So how should we think about the normalization process of your capital structure? Is this something that happens with the next SREP process, and that's sort of when we should expect an update in terms of anything further beyond your normal dividend policy? Or is that something you will also be looking at, at the full year results for '21?

Thank you so much, indeed, Raul. And just on personal lending, it isn't necessarily surprising that personal lending has been a bit of a laggard. The opportunity to spend has been very limited, given the scale of the lockdown and the limitations on international travel. It's also complicated by the surge we've seen in savings over the course of the pandemic period. But as the opportunity to spend and as the opportunity to go abroad is reopened to our customers, we would expect to see an ongoing pickup in terms of personal lending. We have seen it moving closer to plan as the year has progressed, as the economy has reopened, but we're still somewhat adrift of our expectations as we opened the year. But that gap is narrowing practically with every passing month at this stage.

Yes. I think with respect to the capital stack and overall, how we're looking at capital, I mean, we have quite an amount of work to get through in 2022. And what I mean by that is specifically looking at the Ulster corporate, commercial book. I mean, the time lines for that are that, number one, we have to get competition authority approval. And once that takes place, which we think will probably be in Q1 but we don't know of 2022, then like an onboarding process will begin, and that's going to take various tranches, various drops. So 2022 is going to be a busy year for workload and onboarding different assets. So I think certainly the way I'm thinking about this at the moment is that focus in '22 will be onboarding all of these assets and all of these customers in a safe and secure manner, utilizing our normal dividend payout policy based off attributable profits and then in 2023 make some announcements or work towards getting our CET1 ratio towards the medium-term target of 13.5%. But I would say that there is an amount of work to be done on the Ulster side, but we do also see a significant amount of growth in our core markets in '22 and '23, which will obviously utilize some of that capital as well. So I think in conclusion, way too early to be having a conversation over CET1 versus medium-term target. Everything is going very much in line with expectations. In fact, our CET1 and NPE ratio as of the end of September are probably better than what they were at the end of 2019 at the beginning of the pandemic. So we're in really, really strong shape, and the outlook has probably never looked better.

And just to close out on the NPE point, I think it's worth pointing out that our NPEs as a percentage of gross loans are at the lowest levels since the global financial crisis. And that very clearly indicates not only our determination to deal conclusively with this issue but our ability to do so as well. And we have a medium-term target of 3% NPEs by the close of 2023, and we are very, very confident that we're going to hit that.

We will now go to our next question. It's from the line of Eamonn Hughes of Goodbody.

Maybe just firstly, if I can kind of stick on the NPEs and just look at the impairment number. Donal, you kind of talked about similar possibly now H2 versus H1 and maybe more with the impairment right outside the macro provision kind of review at the end of the year given the positive developments. Like there's about -- is it EUR 500 million of kind of management kind of guidance or kind of overlay sitting there? So potentially, could the number be quite significant then as we head to the final results? Maybe just to kind of get your latest thoughts around that. Secondly, fees and commissions looked like that they were actually quite strong in Q3. So any kind of particular parts of the business that you would call out in relation to that? And then maybe just finally around the new lending. I know you've been kind of saying there, clearly positive trends, and we can see across the board. But just specifically on the mortgage side, there was quite a good improvement in your mortgage market share. So maybe your thoughts around kind of what drove that. And what are you seeing on the SME side as well? You were plus 3% year-to-date in new lending. Are you getting more optimistic on that side as well?

Okay. I'll take the first couple there. Around ECLs, I think we still have and will have post-model adjustments in place for various parts of the balance sheet. These are specifically either individuals or businesses that have been very directly impacted by COVID. And within Ireland still, certain businesses are having to operate on a limited basis, which obviously means there's individuals associated with these are also, I would say, getting various levels of support. So post-model adjustments that we have in place for businesses and individuals directly impacted will remain in place over the year-end, and we do think that it's unlikely to be until Q1, Q2 of 2022 that we really see the final impact of how that's going to play out. But what I would say is it's -- we have a very good understanding of these businesses and individuals that are impacted, and we feel like they're well provided for. And that's going to remain the case. Specifically to your question around '21, what you should be thinking about is, I mean, you've seen the half 1 print. I said half 2 would be something -- maybe something similar. So you're up around EUR 200 million now. I mean, the macroeconomic scenario, the macro scenarios, where they have outperformed has been in GDP, house price assumptions, unemployment or key parts to our ECLs. An area where we probably weren't conservative enough was around CRE pricing. We had seen sort of some moderate declines. But I think particularly in retail, they're a little bit higher. But overall, okay, when I update the macros for Ireland, for the U.K., it's going to have a positive benefit. But it's going to be far less than EUR 100 million, okay, for 2021. And then as we look to 2022 and beyond, I think I always have said that for a bank with our shape and size, leaving a pandemic aside, a normalized cost of risk should be something like [ 30 ] basis points. I'd say, as we sit here today, that looks to be a little bit on the high side given -- for AIB anyway, given we had taken such a conservative stance in 2020. Second question was around other income. No one area in particular on other income, I would say just a return to a resumption of normal activity. We had adjusted some of our fees and commissions and tariffs just to account for the changing environment with excess liabilities. We do think that the fees and comms lines now is stabilized and, I would say, an area where we'll be looking to start to grow again. But I would say it was all of the lines really that were contributing. If there were some areas that were over -- probably, maybe foreign exchange, current account cities, given the fact that there's more balances in current accounts, it means those fees are higher. And then things like credit card fees may be slightly under, just given the fact that current balances are a little bit lower. But overall, very pleased with the shape and form of that. On the new lending, I think you specifically asked about mortgages. I'll let Colin then...

Yes. At a general level, Eamonn, when we stood up to report the first half numbers, we said we did EUR 4.5 billion of new lending in the first 6 months of 2021. And at that point, we said we expected to do EUR 10 billion for the year as a whole. In the third quarter, we did EUR 2.7 billion, so you can clearly see momentum building there. And we are very, very comfortable our expectation of delivering EUR 10 billion in new lending for the year. Within the various subcomponents there, on the mortgage market side, we -- I previously identified the fact or we disclosed the fact that we've seen a fairly positive momentum in applications translating into approvals in principle, and that positive momentum has now translated into actual drawdowns. So we're very pleased with the performance there in the mortgage market, and we start to put expectations on how that's going to evolve as we move towards year-end. And on SME lending, on our general business lending, we obviously can see the pipeline that lies ahead of us, and I can say at this juncture that we are very comfortable with how that pipeline is currently building.

We will now go to our next question. It's from the line of Diarmaid Sheridan of Davy.

Two questions, if I may, maybe looking out a little bit further. Donal, first of all, on rate sensitivity, and I appreciate the table in the release this morning. I just wonder if we could think about how that actually works in practice. Is it fair to say that it's the shorter end of the curve where most of that benefit would come through as opposed to kind of looking at longer-term rates? So that's the first question. And then secondly, maybe, Donal, just around the Climate Action Fund, obviously doubling your kind of new lending targets there. How different should we think about the balance sheet looking in terms of lending in a few years' time, if we think about that EUR 10 billion? And how that -- clearly, there's big opportunities there. There's obviously some areas of balance sheet that maybe there's some risk to as well. So how should we think about those 2?

Okay. Thanks very much. I definitely hand over the Climate Fund initiative to Colin given he's the architect of it, and I get in a lot of trouble if I took any of the credit for that. But on the rates, the reason I wanted to put the rates table in here is I just think that this is clearly going to be an area of acute focus for investors both now and in the future, okay? Obviously, it is for us internally as well, so really just to have an anchor of which to be able to discuss AIB's interest rate sensitivity. So I published the 2020 numbers, okay, because they were the last numbers that we can -- that we're in the AFR. I'd say since then, the position of the balance sheet has changed a little bit. The exposure to an increase in rate is more like EUR 250 million or EUR 260 million as of today, okay? And the way I think you should think about that is the way our balance sheet is set up, around 20% of that exposure would be, let's say, sterling sensitivities. And the way the sterling book is -- balance sheet is set up is the impact of rates is fairly immediate because you've got -- you have loan products linked to, let's say, sterling reference rates, okay? So that's quite immediate. In euro land, it's obviously a little bit more complicated. In truth, the benefit of rates or higher rates don't really start coming through on to, let's say, the depo rate is coming -- is increasing or going through 0. There's obviously benefits along the way from asset products that we have at market rates as well. But you start seeing those big benefits when that depo rates start increasing. And obviously, we still have a EUR 6 billion to EUR 7 billion tracker mortgage book as well, which will automatically be impacted from rising rates as well. But look, I think for year-end and going forward, we'll expand our disclosures in this area so to give people a really clear understanding of where -- in which currencies and which part of the balance sheet they should expect to see changes. But needless to say, like all banks, we are geared towards higher rates. We consciously didn't hedge out our exposures through our structural hedge programs over the last number of years because we just didn't like the idea of investing at negative rates. But look, it's definitely a little bit too early to say where that's going to land. But it's -- but that's an area that we're keeping a lot of focus on. So I'll hand it over to Colin now on the Climate Fund.

Thanks, Donal. On the climate action side, we -- 12 months ago, we said that our target, whilst to have 70% of all new lending characterized as green or transitional by 2030, so our ambition is very clear in that space. The opportunity is immense. IMF estimates that Ireland is going to need investments of something of the order of EUR 20 billion per annum between now and 2030 if we are to meet our targets. We expect about 70% of that to come from the private sector, and AIB will play a leading role there. And we will do it because we have the [ action ]. We have the capital. We have the expertise like nobody else in this country, and we have the talent. And you can expect our book to be ever greener with every passing year as we move to a lower-carbon future.

We will now go to our last question. It's from the line of Chris Cant of Autonomous.

If I could just come back to the rate sensitivity and the capital return debate. So on the rate sensitivity, that was a really interesting answer to the previous question. Thank you for that. In terms of the comments about the euro side of the rate sensitivity being more limited until the deposit rate goes through 0, is that because of your negative rate strategy so you think you will have to kind of pass on the rate rise where you cut people below 0? I'm just trying to understand why you don't think you have much sensitivity there because the consequence of all these liquidity flows, obviously, you have a very large amount of cash setup, negative rates at the CBI and that will obviously immediately move upwards. And I would presume where you've got retail deposits still floored at 0 where you haven't been able to pass it on, you're unlikely to hike those rates. So I'm just curious to understand a little bit more why you say until the deposit rate goes through 0, you don't see as much benefit on the euro side, please. And then on the capital return debate, what is -- in terms of the sort of time line you laid out where the sort of surplus capital return question is pushed out to full year '22 results, what makes you hesitant to ask the regulator to do something this year? You have one of the strongest CET1 ratios probably in European bank sector at this point. Why don't you feel able to return some of that sooner rather than later? Could -- several continental banks have got catch-up dividends lined up for 2019, which was canceled, obviously. You did that. Could you not have to do the same thing given your capital strength? And do you think the regulator would say no if you ask? Or is it a case of you just don't really want to ask the question? I'm just curious to understand a little bit more there as well, please.

Chris, Donal here. Look, on euro rates, I didn't mean to make it sound like we are insensitive. Obviously, higher rates in euro land, and we're in a strong position, okay? My point is on euros -- in euros for us, it's a more complicated basket of assets and liabilities. Obviously, you have negative interest rates and a policy there. And then you have pricing decisions around standard variable rate mortgages and fixed rate mortgage pricing. So like in theory, if everything and everyone acts rationally, it's all quite formulaic. But I just think where we are in the rate cycle, it's a little bit too early to call that. There's clearly benefit in the short term. Anything that happens in the depo rates, given the excess position we have, that's clearly straight to the bottom line. Any positions that we have, loans which are linked to market rates or bonds, of which we have EUR 15 billion or EUR 20 billion, they immediately do benefit from that as well. But I suppose my point is that the main -- when you start really seeing the benefit is, for example, if interest rates move through 0. That's where the bulk of the benefit comes, but there is obviously benefits even in the shorter term. And even a steeper yield curve means you're executing structural hedges at better rates as well. But look, the key idea or the reason why I wanted to put this table in here, it's early, let's say, in the cycle. And I have feeling we'll be discussing this quite a bit more in the coming quarters. The medium-term targets that we would've set out at the half year, they were all set off curves, negative curves as perpetuity as the way the markets or things at the time. And I think it's important to say that any the targets that we have externalized need to be viewed from that perspective. And I think the interest rate story for banks and particularly AIB is going to be an area of acute interest in the future. I think the capital return, the problem -- it's not a problem actually. And it's not a matter of not wanting to talk to the regulator about dividends. It's just most of our conversations are about things that we're looking to do with respect to acquisitions. So Goodbody's don't close, Great-West LifeCo will be seeking a new license for an insurance company. And the corporate and commercial book of Ulster Bank, like we haven't even got competition authority approval. I don't even know what the final size of that is going to be. And the landscape in Ireland is changing. It has changed so rapidly in 2021. Who knows what other opportunities may present themselves. So I think until we have complete visibility on all of that and until we have given ourselves comfort that we've onboarded all of these customers on all of those risks safely, until that's done, it's not the appropriate time to be, I think, looking to pay any surplus quantum, okay? Normal dividends, we're always going to be focused on net returns, attributable profit and an upward sloping dividend per share payout ratio. And that's my rationale for thinking along those time lines.

Okay. I think that we've run out of time this morning, but thank you all for attending, and we look forward to updating you further on the full year performance in the spring.

Thank you very much, and that does conclude our conference for today. Thank you all for participating. You may now disconnect.