AIB Group plc (A5G) Earnings Call Transcript & Summary

Hello, welcome to the AIB Group Private Limited Company Quarter 3 2024 Trading Update. My name is Caroline, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand over the call to your host, Donal Galvin, to begin today's conference. Thank you.

Good morning, everyone. Thanks for joining the call. Colin Hunt here, and I'm delighted to be joined by our CFO, Donal Galvin. We're going to focus most of our time this morning on questions coming from you. But first, I want to say a few introductory opening remarks. We are really, really pleased with how AIB is performing. We've had an excellent outturn in the year-to-date, and we are well set for another exceptional performance for the full year. In addition, we are confident about the outlook for the business, and we will be entering 2025 with great forward momentum. So some highlights we called out. Gross loans moving above EUR 70 billion, an increase of 5% since the end of last year. That's the first time we've had gross performing loans at that level in about 15 or 16 years in a fundamentally transformed group. New lending up 17%, 35% of its greener transitional. Mortgages up 10%, very solid performance in the mortgage market, 36% year-to-date. Personal lending growing up 8%, SMEs growing up 4%, Capital Markets up 11%. And meanwhile, credit quality remains very robust, which reflects not only the strong economic backdrop, but also our continuing conservative approach to underwriting. So it's a really strong performance. Reflecting the lead role that we play in the consolidation of the Irish banking industry and the enduring strength of the economic backdrop in Ireland in our core markets, the outlook is for solid economic growth above 2% over the medium term. And indeed, our own PMIs are highlighting a brightening of conditions, which I suppose is not too surprising given the strength of the Irish fiscal position, a growth support of budgetary stance and more accommodative monetary policy. Given the performance year-to-date and the domestic economic environment, we're upgrading our loan book guidance to growth for the full year between 5% and 6%. So before I turn it over to you, let me leave you with a few final thoughts. Our business is really well positioned. It is performing very, very strongly, and we look to 2025 and beyond with confidence. Our strategy is clear, the plan is working, and we remain committed to delivering sustainable returns for our shareholders. Turn over to you.

[Operator Instructions] We will take the first question from line Sheel Shah from JPMorgan.

I've got two on NII, if you could help me, please. Firstly, can I ask your thoughts on the moving parts on NII into 2025 and how you're thinking about consensus 2025 and '26 NII? This is in reference to the comments that you made at the half year stage around you being comfortable with some of these numbers. And secondly, on the hedge. You've talked about the management of the structural hedge program in reference to the outlook for 2025 in your statement or in reference to the outlook, should I say, in the statement. How are you thinking about the hedge in the context of the stability that you've seen in the deposit base both in terms of the size and the duration?

Thank you very much for those questions. I'll take those. I think with respect to net interest income, it's good just to get a solid baseline on the liability side. Throughout 2024, we've had a really strong performance in our deposit portfolio. It increased in the year by around EUR 3.2 billion. 92% of our deposits are in the Republic of Ireland, which means at the end of the third quarter, we had around EUR 100 billion of liabilities, which is an increase of around EUR 3 billion in the year. The performance underlying those interestingly, in the first half of the year, the movement of term was reasonably consistent at around EUR 600 million per month flowing from that, say, current accounts into term. But what we've noticed throughout Q3 is that there's just been a slight slowdown as you would naturally expect with the falling of -- with the reduction in ECB rates. That's now reduced around EUR 300 million or EUR 400 million a month. So certainly, as we look to the end of the year, betas for the year are likely to be less than 15%, and they're around 12% as we sit here today. Moving into 2025 and 2026, we see ECB rates at the end of '25, '26 at around 2%. So I'm not going to go into all of the moving parts, but certainly, where consensus is at the moment for these -- those years at around EUR 3.5 billion. We're very comfortable with those levels. And the reasons why we're comfortable is probably threefold. Number one, we've got a better understanding of the underlying movement of deposits. Number two, throughout 2022 and '23, we obviously significantly did increase our structural hedge, not just in terms of quantum, but in terms of duration as well. There's no material change to the strategy from the half year, but that's really going to begin to perform in '25, '26. The exit we see fixed rate is around 2.5%. So that's going to come -- that's going to show a strong performance into '25 and '26. And probably, the only thing that we've got a little bit more visibility now is on the asset growth. So this year, we're going to have 5%, 6% asset growth, and that's across all of our main markets. This is going to move. We think this is going to continue into 2025 and '26 as well where we see asset growth of around 5% per annum going forward. So putting all that together, gives us a lot of comfort around the NII in the outer years.

We will take the next question from Diarmaid Sheridan from Davy.

Maybe just a quick follow-up. Firstly, on your last point there, Donal, around asset growth and the 5% per annum, obviously, a very strong performance in Q3. Maybe you could just -- if you could just talk to the moving parts, particularly around the capital market side, what areas are growing strongly there. And just maybe more broadly around the next couple of years, what areas do you expect to see that kind of strong growth to deliver that 5%? And maybe secondly, just around capital returns, if I may. Obviously, very strong capital position, again, points to a greater than 100% payout if you look at the entirety of 2024 distributions. Is that something that you think is possible? And to the extent that you still have a very strong capital position next year, is that something that could occur with full year 2025 also?

Diarmaid, Colin here. I'm just going to cover the loan growth segment. Well, not withstanding the fact that we've significantly diversified our balance sheet, our loan book in the last number of years, largest single component is still mortgages. So that's the key driver of the loan book. And given the shape of the demographics of our customer base, the -- there's a very strong influence brought to bear by the pace of construction. But we'll do 35,000, 36,000 units this year, and it seems that within the next three years, we'll be hitting levels of about 50,000 units. So that gives great balance to the prospects for loan growth in the Mortgage business. Personal lending continues to grow at a decent clip. We can see the pipeline unfolding in front of us. SME, certainly, I think at the half year, I said that we were of the view that we might have passed the point of inflection in terms of business lending. I think we have. We can see that a greater appetite coming through for SME borrowing. U.K. business is performing well. I think about 8% up. Capital performing strongly. Corporate banking performing well as well. So really looking all the way across the entirety of the business, we cannot pick one area out as being a significant underperformance. Every part of the business is performing very, very strongly at this stage, and we expect that to continue. You are going to see shift in terms of the composition of the book over time, a very gradual shift in the composition as climate capital, which has a significant number of exposures in developed international markets. You will see slightly less exposure to the Irish economy and more to the economies of the United States, Britain and Europe. But that's driven very much by our activity in the renewable lending space.

Yes, Diarmaid. It's Donal here. Just with respect to your question on capital returns. Look, our focus is always, until the year is completed, focus on ensuring that we can deliver a stronger financial performance as possible. I think you can see the trajectory here from quarter 3 results is that we're going to have a very strong outturn for 2024. And that puts us in a very, very strong position to have discussions with both our Board and our regulator around distributions. Obviously, we will be looking to close our first SRT in November. We've guided what we believe are some of the positive impacts and benefits in Basel IV. And the way we look at capital is over a multiyear period to see what the most appropriate level of payout is for our shareholders. So I think from that perspective, we're painting a really, really strong picture, both for our Board and our regulator. And we will obviously continue to look to move towards our medium-term targets. And I think if you look at our track record and returns, I think that would back up our ambitions and our ability to return capital to shareholders.

We will take the next question from the line Andrew Stimpson from KBW.

Could you just talk about the difference, if there is one, between the growth in risk-weighted assets versus the loan growth that you're going to see and whether you think the risk-weighted assets are going to end up growing faster than loan growth before you do any SRTs? And then secondly, on the SRTs, could you just talk us through the costs and the volume of the loans that would be in that transaction and how long that benefit amortizes over? I appreciate if you have to wait until full year before you can answer that second one.

Thanks very much. Look, broadly speaking, our loan growth in RWA growth move in tandem, okay? So that's at the highest level. If we go down a few layers, there's always quite a number of moving parts. Obviously, in the last quarter, we've had the onboarding of some [ Tasman ] assets. And we're in a perpetual state of IRB model incorporation improvement, et cetera, over a multiyear period. So there's always going to be some ins and outs. Certainly, what's in front of us at the moment, what we can see, is the benefits that we'll see by the end of 2024 from the SRT. And this was a reference portfolio of around EUR 1 billion of corporate assets. We'll have an RWA benefit of around EUR 800 million or 20 bps of CET1. And the cost of that in the greater scheme is fairly negligible, EUR 6 million or EUR 7 million. Really, the rationale for that transaction was for it to be, number one, a new asset class for us to securitize in corporate loans. We have infrastructure in place already for mortgages. And it was really important to us that we got a clear understanding with the regulator on our ambitions in this area and indeed, with investors in this asset class so that they could understand our credit score and our credit model. So although this transaction is likely to pay down quite quickly, I see it more as a multiyear program. And I think as we move forward, we can look to be a little bit more ambitious in terms of structure and size, and that's really just on the corporate asset class. As we go forward, we will look to securitize mortgages and other types of assets as well. And over time, that's obviously going to give us a smoother RWA trajectory or indeed in areas where we feel we might have egregious RWAs try to soften that blow a little bit. But I'll be able to give a better update at the full year on that and what the trajectory is going to look like. But that's broadly speaking, what the trajectory is going to look like.

We will take the next question from line Rob Noble from Deutsche Bank.

Can you tell us what your experience of rate cuts has been so far? How much have you changed the loan and deposit rate [ since 2024 ]? And if you could highlight any pricing lags on those books as well? And then secondly, on the structural hedge, so the exit rate is 2.5% at the end of the year is broadly where swap rates are at the moment. Are the maturities next year at a lower yield? Is that how you get to expecting tailwinds in '25, '26? And similarly, ex the mortgage portfolio, right, so how is the role of that look like going into next year?

With respect to rate cuts, obviously, we've been fairly static overall. We haven't really -- we haven't moved on any deposit rates. And with respect to our mortgage products, we've just implemented some rate cuts for high-value mortgages. I do expect towards the end of the year or indeed, next year, that this is going to be under review as ever. But we always look at both sides of the balance sheet really over the medium to long term, ensuring that we can maintain that strong NII and NIM profile. With respect to the structural hedge program, really where you're seeing the benefits -- I mean, if we have an exit yield of 2.5% on effectively EUR 35 billion a hedge, that was obviously a big drag to our 2023 and 2024. So obviously, as swap rates move towards that 2.5% level year, you're coming back to being at the money, should we say, on swaps. Certainly, we believe throughout 2025. And then indeed, as we go into 2026, we will see benefits from those hedges. The maturity profiles of the hedges is quite heavy for '23 and '24, over EUR 10 billion per annum, maturing us at lower rates. But as regard to '25 and '26, the maturities of the SHP are going to be far lower, maybe EUR 5 billion, EUR 6 billion. And that's really due to the fact that we had extended the duration quite a bit throughout 2023. So I'll just go into '25, '26, the structural hedge component will be a material contributor to NII or protect or, should we say, in that falling rate environment, which is what gives us the comfort on those outer years.

We will take the next question from line Denis McGoldrick from Goodbody.

Just two, if I may, please. What are your latest expectations for fee income growth as we move into 2025? And then secondly, how do you see the cost base evolving into next year? And what's the right mix we should think about in terms of inflation and investment versus ongoing savings?

Yes. Overall, on other income, we had guided greater than EUR 700 million 2024, having a strong performance overall this year. I'd expect that we'll do a little bit better than that. Overall, the underlying fees and comps are probably up 6% for the year, and that's the kind of trajectory that we would imagine going forward, certainly 5%, 6%. The challenge for us is having onboarded a huge amount of new customers with the changing at banking landscape, ensuring that we get them fully integrated on our platform and begin to offer them a lot more products. So that really is the -- going to be the opportunity for us. But we're really happy with how the businesses are operating. We're seeing good performances in wealth and in our Goodbody platform with AUM up from around EUR 11 billion up to EUR 12.5 billion in Goodbody. So very happy with the trajectories there. With respect to cost, it's -- coming out of this highly inflationary environment, we're really focused on managing headcount. Headcount is what -- is really what attracts costs at the end of the day, ensuring that we can keep that at a flat level and then gradually reduce it over time is going to be one of our key goals. That's going to require investments in the business to automate to different processes that already exist, and that's an ongoing multiyear process. So I wouldn't imagine that you will see a significant change in our depreciation line from investments, though we will obviously, continue to invest in technology. But the area that we're really focused on to manage cost is on the headcount line, and that's going to be a multiyear challenge, not just for AIB, but for all banks.

We will take the next question from line Grace Dargan from Barclays.

So just coming back on NII, if I may. Thinking about the Q4 exit. So you've upgraded your loan growth guidance for the full year. And actually, I think Q3 NIM was probably coming in a little bit stronger than maybe people are looking for. But you have kept your NII guidance and change for the full year, which is potentially implying a bigger step down into Q4 than may be previously looked for. So I guess my question is, has your view of Q4 NII changed? Is it any worse than it was? And then secondly, just on mortgage competition and just to ask kind of how you're seeing that evolving at the moment and then how you're expecting that to kind of progress? And I guess, in a falling rate environment, how you're thinking about mortgage spreads in particular?

Grace, Colin here. I'll cover the mortgage question. I'm sick of the people saying I'm talking about us not targeting a mortgage market share. And I know nobody believes me, but we don't actually explicitly target a mortgage market share. Our focus is on ensuring that we've got decent products delivered efficiently in the way our customers want cautiously and conservatively underwritten and priced in a rational way given the prevailing monetary policy environment. So we're not overly obsessed with what anybody else is doing out there. And we're not going to chase market share. We think that is chasing fool's gold, to be absolutely be honest with you, because we've seen the impacts in the past of people irrationally building market share in Ireland. We will not do that. And look, the mortgage business is performing really, really strongly. We have introduced some new green rates. We were -- and on the fixed side, we were limited to a 5-year fix. We now have shorter tenure fixes there as well. The products seem to be well received by the customers. Fulfillment is something that we do very well at AIB. And that is a key concern for customers. I know that when people in the investment industry look at the mortgage business, they immediately focus on price and focus on margin. But customers actually look at a far, broader array of influences, including fulfillment. And that is something that we do and we do very, very well. So I wouldn't expect to see any significant change in mortgage margins from here to be perfectly frank with you. And as I said, very encouraged with what we've seen in terms of the performance of the business year-to-date, up 10%. And given the fact we're going to have probably more mortgages being sold next year as the housing market output picks up, I think it's reasonable to assume we have another very good performance next year. And we can see the pipeline. The great thing about this is that people come to us well advanced of actually inking a document to buy a house. So we see the pipeline months in advance. And we are very, very strongly encouraged with what we're seeing coming though at the moment.

Yes. And I definitely know no unusual surprises there. I mean rates have obviously been a little bit volatile. Previously, when we gave guidance, we would have imagined an ECB rate at the end of the year at 3.25%. That looks like it's going to be more like 3% now, but very comfortable with the guidance. And I would reiterate that it's greater than EUR 4 billion. So very, very, very happy with that. Look, as rates begin to fall inevitably, you will see a gradual decline in NII. But you're coming from NIM, 3.30%, even for Q3, 3.20%. What we're really focused on now is ensuring for the medium and the outer years that we can kind of land on a really strong unsustainable NIM, and I've effectively kind of guided you towards where I think that could be overall. So definitely no negative surprises. And probably for 2024, the only surprises that we have had are positive surprises. So only a couple of months more to go and we'll close out the year.

We will take the next question from line Guy Stebbings from BNP Paribas.

The first one was just going back to capital distributions. I mean, understanding how your excess distributions has been very much the forefront of investors' mind. So I guess you start from about 15.8%. Sounds like we should expect 20 basis points in November from the SRT. The Q3 run rate post dividend accrual was 30 basis points. So perhaps you're expecting something similar for Q4. And that gets you comfortably north of 16%. So is there anything more you can say about what you'll have particularly in mind when determining the potential size of any excess buybacks? And then the second question was on asset quality. Could you elaborate any further specifically on asset quality in the third quarter? I mean, should we be thinking that robust as referenced in the statement means that cost of risk that was in the 20 to 30 basis points range. Your comments certainly sound like you're very confident on delivering at the lower end of the 20 to 30 basis points this year.

Yes. Look, on capital distributions, I think all your calculations there are obviously very accurate. When we -- when I put together kind of capital plan, looking at financial plans, I'm always just trying to create a stronger picture as possible. And you want to have a financial outlook that's realistic and you want have a capital position that is -- that's very strong. And that's how you put yourself in the best position possible to have discussions with -- particularly with the regulator, but also with your Board. So that's really what we're doing here. And I think the financial performance this year and the outlook really does paint a very strong picture, and we believe puts us in a very strong position to have those conversations, but still a little bit too early to begin those. But in terms of distributions, overall, how do we think about those? We want to maintain a strong and progressive cash dividend, and with any excesses above that, look to execute at these levels buybacks. And indeed, in that space, our preference is always to look to transact with the government on a directed basis so that we can help them achieve their goals of reducing their shareholding in AIB. And we believe we've been very successful in working with the government, the Board and the regulator over the last number of years in achieving those objectives. I will certainly look to continue that momentum from '24 into 2025. With respect to asset quality, normally, we say 20 to 30 basis points cost of risk. I think it's going to be at the lower end of that range. The Irish economy performing very well overall. The one area that people tend to talk about is commercial real estate, and there has been a material repricing of assets in this space. Retail would have devalue post-COVID, never recovered, but managed to take another leg down. I'd say, office space, challenged, particularly secondary. And we've seen valuation drops of 30%, 40% in those asset classes. But they are at levels that we would have a margin than expected, probably from day 1 and would have provided very heavily. But our experience is on refis throughout '23, throughout '24, even in those asset classes where you're seeing large asset price reductions has been really, really positive. And also equity has been put in where required or assets are being restructured or restructured at slightly higher levels. And the flow into default is really, really -- probably a lot lower than what we would have expected, and everything is still operating, I would say, in a very orderly fashion, not dissimilar to what we're seeing in the U.K. as well. So it's been a fairly orderly pricing revaluation of the commercial real estate market from where we sit.

And all the early warning indicators across the entirety of the retail and corporate state continue to be straight. So we're not seeing any noteworthy deterioration or indeed movements in either direction in terms of what our early warning indicators are saying about the state of credit in the economy.

We will take the next question from the line Christopher Cant from Autonomous.

I had two, please. One on NII and then one on your longer-term targets. So on NII, Donal, I think you may have changed guidance a little on the call. So I think as stated, it's circa EUR 4 billion for this year. And I was going to come back to Grace's question actually, the guidance has written circa EUR 4 billion does imply a very material step down in NII Q-on-Q. I think trying to back out the maths, your NII has been dropping about 1 percentage point of fraction over sequentially for the last three quarters. And I think to get to your EUR 4 billion guidance, you need something like a 13% decline Q-on-Q. So you said during the discussion, the guidance is greater than EUR 4 billion. Putting it slightly differently, is there any reason to assume a big acceleration in the pace of NII decline when you still actually haven't really responded on deposit pricing? It's not like you've passed on initially and now you've run out of gas. So any further color you can give us around the expectation into 4Q, as I said, it's about 1% a quarter, I think, so far. And then the other question I wanted to ask was on the longer-term RoTE guidance. Just drawing together some of the things you've said on this call. As I look at consensus, you said you're comfortable with the NII consensus. Business fees and commissions growing 5% to 6% a year. I think consensus is probably a little bit below that. The OpEx guide consensus is above that. I'm not really sure what consensus missing in actually arriving at a better RoTE than you're targeting. So consensus [indiscernible] 16%. Your guidance is 15%. And it looks like the other income is better than consensus has in, the costs are better than consensus has in. Is there something consensus missing in its interpretation of what you're saying? Or actually, are you now more constructive and that 15% target you set could be revisited?

Look, overall, in NII, comfortable with greater than EUR 4 billion. I think the guidance was circa EUR 4 billion, but I think that's marginally conservative. So we're very comfortable with the year-end position. So we don't see any immediate collapse in NII. Like I said, we look at our assets and liabilities together. And I think as the rate environment evolves, you'll see various pricing movements on both sides of the balance sheet and we'll be able to maintain that strong NIM profile in '25 and '26. And that's why we're pretty comfortable talking about our consensus of '25, '26 and given that comfort. Yes, a lot of moving parts, obviously, '25, '26 go into return on tangible equity number. If you take those consensus numbers on NII, other income can be slightly volatile, pretty comfortable with that overall. But we'll be able to lay all of this out in a little bit more detail when we do our year-end results. The purpose today was really just to give analysts, in particular, a little bit of comfort around the NII trajectory and outlook around 2025 and 2026, which is really underpinned overall by a very strong liability performance and a beta profile that we're all getting a little bit more comfortable with.

Yes. And just on target, there's two reasons we issued targets. One is to guide the market. But secondly, also, it acts as a discipline on the business because we regard these targets as very, very hard bottom line commitments to the market. And that has a massive influence in terms of how we run the business day to day because of the externalization of those commitments. When we set those targets 12 months ago, they are 3-year targets. And we remain very, very comfortable with them, but we're not in the business of changing targets on a high-frequency basis. They are medium-term guides and disciplines for our business.

We will take the next question from the line Borja Ramirez from Citi.

I have two quick questions. The first is on the term migration -- deposit migration to term. It's great news that it is slowing down. This figure, I think, EUR 300 million of migration in the quarter, that is below the -- what some peers are reporting. So I would like to ask if you could provide a bit more color. And then also the rate sensitivity, if you could please update? And lastly, if you could please also -- I think you said the deposit rate of 2% by -- in 2025, if you could please confirm as well?

Just some brief comments in relation to the migration to term. It shouldn't be at all surprising that we are seeing a moderation of pace because the reduction in ECB rates was amongst the most well heralded changes in monetary policy in modern economic history. So everybody knew that rates were going to be reduced. The question was when are we going to see it happening. So you would assume that the vast majority of customers who are minded to push their money on a 2- or 3-year fix will do us in advance of the reduction in rates. So what we're seeing is precisely in line with our own -- well, certainly, the trend is precisely in line with our own expectations. The volume may be different to that. But certainly, we have seen a marked step down in flow to term in the third quarter of the year.

Yes, that's -- we've probably seen a slowdown, I mean, throughout 2024 gradually. And I would say now for Q3 that, that is settling at a new level of around EUR 300 million or EUR 400 million per month. From an overall NII perspective, this has been less impactful than what we would have imagined because the overall portfolio has continued to grow. So as we are seeing movement into term, certainly in our main ROI portfolio of around EUR 4.5 billion throughout 2024, we've also had inflows of around EUR 3 billion. So the overall, the effect has been far less than what we would have imagined. I think as we see further ECB rate cuts, one could imagine that, that these new levels will be maintained. So we're very comfortable with same basis for the end of the year, it will be less than 15%. Overall sensitivities, I would say, very little change from the half year. I think from memory, they're around EUR 350 million for a 1% change. And for '25 and '26, yes, I did say we imagined an ECB depot rate of 2%.

Okay. I think that we are drawing stumps at this stage. So it was lovely talking to you this morning, and we very much look forward to update you on the full year performance in the spring. Thank you again for your attention and for your questions.

Thank you for joining today's call. You may now disconnect.