AIB Group plc (A5G) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the AIB Group plc First Quarter 2023 Trading Update Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Colin Hunt, CEO. Please go ahead.

Good morning, everybody. Eight weeks ago, we presented AIB's full year results for 2022. And at that time, we gave an upbeat assessment of the outlook for this year. And today, we're delighted to see that positive outlook taking material form in the shape of our Q1 RMS. Our bigger and broader customer franchise is delivering strong results and is doing so against the backdrop of robust economic performance here in Ireland. We are very pleased with the results we're sharing with you, as highlighted by the upgraded income and NIM guidance, with RoTE now expected to reach the high teens in 2023, materially exceeding our medium-term target. I'll stop at this point and hand the floor over to those of you on the call.

[Operator Instructions] And the first question comes from the line of Raul Sinha from JPM.

It's Raul here. I don't know if you can hear me.

We can hear you loud and clear, Raul.

A couple of questions from me, please. The first one, just -- I guess, we're still getting used to your conservatism. As you mentioned, 8 weeks ago, and the outlook for NII seems markedly more positive now. So I was just wondering if you could break out for us sort of what's changed within your assumptions. It doesn't look like you're using a different rate assumption. So perhaps what has changed in terms of pass-throughs in terms of your balance sheet composition that drives the uptick. That would be useful. And then the second one around capital, obviously, a good print on CET1. I was just wondering if I could invite you to talk a little bit about the timing of the various big moving parts ahead this year. So in terms of the closure of the acquisitions, when you expect that, the timing of the stress testing and your SREP process, when you expect that, and related to all this, the timing of any capital return discussion. Just wondering if that is still likely to be at the end of the year, early next year or could it be slightly earlier.

Thank you very much, indeed. I think that the outlook is -- the outlook today is obviously reflective of the actual performance in the first quarter of the year rather than an expected performance. And I think it is fair to say that the group is performing ahead of that with regards to the optimistic expectations when we presented our results at the end of the year. But as we move through the year, you will inevitably get less forecast and more reality. And today's numbers are simply a reflection of what we have seen happening and what we see coming at us in terms of the emerging pipeline for the rest of 2023.

Yes. It's Donal here, Raul. From my perspective, in a fast-moving rate environment with the passage of time, things become a little bit clearer. So I think we're all a little bit more confident on the shape of the euro curve. I think in terms of variability around balance sheet movements, we obviously were a first mover in our domestic market with respect to asset pricing. We're not entirely sure what competitors were going to do around that or react. I would say it has probably panned out slightly better than we expected. Obviously, being a first mover can create different outcomes. But overall, we didn't see many redemptions. Obviously, other players in the local markets acted quite rationally as well. So really between the end of Q4 and performance in Q1, that's probably the only balance sheet change. On the liability side, things remain very steady. Overall liability is pretty consistent from year-end to now. I haven't seen, despite the market volatility, changes in liability makeup, et cetera, and again, our deposit base is predominantly a retail deposit base, very granular, and indeed, that is still the case. So putting all of this together, looking at the outlook for the euro curve, gave us the confidence to upgrade our guidance for 2023. I think on the capital question, it's, again, it's early days in the year. We have -- the main block of work to conclude will be the onboarding of the Ulster tracker portfolio, which will take place in June of 2023. The capital impact of that is already incorporated, but we would expect to have that closed in one shot by the half year. And also that will be a balance sheet effect of around EUR 5 billion of tracker mortgages. I think the Ulster Bank onboarding of the corporate and commercial deals is very, very fluid at the moment, and that's all going very much in line with plan. So we really would hope to hit the half year with all of the inorganic items close out on our balance sheet. What that means for capital, I would say that our story here hasn't changed. We're really focused on 2023, ensuring that we manage our asset-liability position very thoughtfully. Q1, obviously, very strong. Throughout. Q2, Q3, I think you can expect to see some more changes around asset and liabilities, just given the change in the interest rate environment. We're really focused on delivering a really strong return for 2023 for all of our shareholders. And then in '24 from '23's profits, looking to utilize our existing dividend payout policy and indeed, in the coming years, move towards that medium-term target.

And the next question comes from the line of Diarmaid Sheridan from Davy.

Two, if I may, please. Just on -- following up maybe on a couple of rules questions there. Just the deposit beta that you're seeing. I think at full year, you talked about a 30% deposit beta as being kind of the assumption what we're seeing to date, and certainly it's apparent from what you reported this morning that, that isn't something that we're seeing. Do you think that's a timing issue and over time that, that will migrate towards the 30%? Or do you think structurally, just given the very high level of deposits in the Irish market, that structurally is maybe a very conservative assumption at this point? And maybe secondly, just to pick up on the mortgage comments, Donal, I think you made just in terms of your own pricing at this point. Do you feel comfortable with where you are? And I guess, at full year, you talked about being conservative just given some of the uncertainties in terms of credit underwriting. Is that still the terms or are you a little bit more comfortable with where the market and the environment is at this point?

Thanks very much, Diarmaid. I'll take the liability side. I think for the full year, I would have guided in the positive [ if ] less than the 30%. I think we would still say that, that is an appropriate number, has been less than 30%. And what you're going to see into Q3 is, I'd say, more liability products being introduced by AIB targeted at different business customers or students or whether it's retail customers or coming online. And then we'll just have to see really what the behavioral activity with the customers moving in between these different deposit products. I would say to date, that move in between the liability, the liability product has been low. But I think it's just due to the fact that rates have moved so quickly. I think at '23, we'll see things settle down a little bit and become a little bit more normalized as we go through the year.

Yes. And in relation to the mortgage markets, Diarmaid, we have taken a very careful and measured approach to addressing our pricing changes in official interest rate settings and we will continue to do precisely that. In the first quarter of this year, we had a mortgage market share of 31%. Mortgage market share in terms of [indiscernible] is quite volatile at the moment. It has been since the back end of last year on a month-by-month basis. If you look at the 5 months since we announced we were changing our fixed rate back in October, our mortgage market share over that period has been 43%. I am Quite happy with that. And as we look at the pipeline in terms of applications and approvals, far rigid stability there than we're seeing in terms of actual drawdowns, and that volatility in drawdowns is driven by and leading and lighting impacts in terms of rate changes throughout the market by various competitors. But we're very confident with what we're seeing in terms of actual applications from our customer base.

And the next question comes from the line of John Cronin from Goodbody. Now we're going to take the next question from Aman Rakkar from Barclays.

Yes, I just had a question on probing around NII and NIM again. Clearly, you're benefiting from a stronger run rate on NIM and NII than the prior guide and where the Street is. Could you help us kind of just think about the shape of NIM or NII? There's too much noise in NIM, the kind of run rate for NII through the course of the year. I mean you've got a number of moving parts, rising deposit costs maybe, narrowing asset spreads, but also the rising structural hedge. I guess I'm kind of trying to think about the shape of net interest income through the back end of this year with a view to seeing how much of this kind of NII run rate is sustainable into 2024. And I guess the related question more broadly is this level of RoTE feels high and perhaps unsustainable, but the moving parts around income and costs suggest that actually you're likely to operate at quite a high RoTE for a number of years here. So what's your view about the level of RoTE that you're set to do now versus a more sustainable level? And do you -- is this conservatism that you're giving us? Or actually, is there scope for us to come up with upgraded targets and guidance at H1?

Thanks very much, Aman. Donal here. I think what we're seeing in Q1 and you're going to see in Q2 is just that continued trajectory that we saw in -- coming from 2022. Obviously, even pre '22 and coming into '22, our balance sheet was very geared for rising rates, okay? And that was a very specific and deliberate position that we had accumulated. And throughout '22 and indeed, for '23, you're really just seeing all of that benefit coming through, which is positive. So moving from me showing a sensitivity table to me showing you actual prints. I think really where you're going with that is once we accept that, where do we go from here. I mean the underlying driver for this NIM was obviously a very quick move in official rates. I mean depending on your view on where rates go from here, I think that the variability around that is narrowing quite significantly. And the variability, I would say, is quite significantly as well. So I would say that the -- that kind of momentum that you've been seeing quarter-on-quarter is obviously going to slow down as rates have slowed down. A lot of it will depend in the second half of the year, the way in which our customers, let's say, interact amongst the different types of liability products that we will bring online. But overall, we do think that the NII trajectory is going to be very strong overall for 2023, albeit tapering towards the back end. I mean there's so much variability still, particularly in the behavioral activity on the liability side. So we're not giving guidance for '24, '25 other than to say that where consensus currently is at the moment, looks about appropriate for '24 and '25. But that's all going to become a lot clearer, I would say, in Q2 and Q3 as we get a better handle on understanding on those behavior license. That's number one. Number two is, obviously, the fact that we benefited from the rise in rate environment was really due to the fact that we had a very short duration on our overall balance sheet. And I would have mentioned at the year-end results that we have been slowly extending the duration of our balance sheet through the use of the structural hedge program and indeed that extension of duration even from the year-end has continued, and we think that it will continue at least until June. What we want to do by increasing our structural hedge is by adding duration really putting a floor on the outer years with respect to RoTE returns to ensure that we can maintain very strong RoTEs in the coming years to allow for a clear pathway for shareholder returns.

I mean it sounds like from what you're saying there, there's potential near-term additional upside on NIM from the moving parts, rate hikes, that actually towards the end of the year, you should expect actually that exit them to be a lot lower?

Well, I don't know if it will be a lot lower. And it's -- we're moving into the sphere of guesswork here, both I mean one would reasonably assume in a higher rate environment with more liability deposit products that customers will choose to invest cash at a different tenors for different rates. So I think that, that is a reasonable assumption. But we're undoubtedly Q4 last year, Q1, Q2, getting a large benefit just from the speed at which the official rates have risen and the fact, obviously, that 75% of our -- the asset side of our balance sheet is effectively floating and immediately attracting those returns. So I mean if you look at consensus for '24, '25, I think kind of that's NIMs of 2.40%, 2.50%. And that will be very much where we would be expecting like reasonable outcomes for us.

And in terms of RoTEs, it's worth reminding ourselves that when we established that target, we've established as a medium-term target of delivering a RoTE above 13%. We said when we delivered the results for '22 that we will materially exceed that this year, we've put some numbers around that now, and we equally remain confident in our ability to exceed the 13% targets in '24 and '25.

And the next question comes from the line of Chris Cant from Autonomous .

I just want to talk about the sort of return trajectory, and I guess this links into the previous question around our expectation into '24, '25. Obviously, the positive surprise relative to your expectations and that is driving you to significantly upgrade your returns expectation for this year. What is it that you think brings that return path back down to target in the subsequent years? Is there any particular negative headwinds you're thinking about when you're assuming that the returns will deteriorate from that high level back towards your target begin '24, '25 period? Is deposit betas catching up with you in the next couple of years? Give it cost pressure? Actually, what is it that you worry about? Or is it just conservatism?

Chris, I think the -- it really -- it's not the cost side. I think we have a reasonable amount of visibility on that. It's going to be around the behavioral side of the -- on the balance sheet on liabilities. We've had such a benign rate environment for such a long period of time, it's hard for us to predict what their behavior is going to be in the different, let's say, liability cohorts. There's obviously fewer banks in the Irish environment. I think everyone is a little bit sensitized over what happened with regional banks in the U.S. and the speed at which liabilities would have disappeared from various banks there. I mean we're in a really strong liquidity position with a really strong franchise. We just want to maintain that position. And it's just the variability or the unknowns around how customers are going to interact on the liability side. I mean in the U.S. and the U.K., obviously, their rate hiking cycles started before they did in the Eurozone. Within the Eurozone, we've certainly been slower on assets and liabilities on passing through rates. So it's still quite early days, certainly too early to see any patterns emerging, but we do obviously think that as we introduce more liability products that these are going to be taken up and naturally then, that's going to increase the cost of liabilities notwithstanding the fact that we'll be taking actions on the asset side of the balance sheet as well. So it's just still a few on unknowns. But overall, as we look through the year with the trajectory, we have -- we felt very confident in upgrading guidance for 2023.

That's helpful. I guess essentially, the concern you have is around beta development. So is it fair to say that your returns guidance, which is obviously unchanged for the outer years, is still based on the view of betas you had of full year '22 results, whereas your guidance for 2023, you've had to change because the betas are playing out more favorably than you anticipated?

That's exactly, yes. And we've actually -- we're assuming the same year-end position. It's perhaps just a bit slower to get there in the first quarter of the year.