We are very pleased to have the opportunity to give the Oireachtas and the public as comprehensive a picture as possible of AIB's progress - from recovery to its current position of sustainable profitability - to what I believe can be a period of continuing growth for it and the country. The crucial task for all of us is to ensure Ireland is clearly seen as an attractive location for business in which to invest capital and resources. This challenge has grown considerably in recent times. This is my first opportunity since I became the bank's chief executive in May 2015 to meet the joint committee and I look forward to hearing members' views on how we can move forward together in the economy in facing up to these challenges and availing of many opportunities.
The committee will have received our written responses to the questions in its questionnaire, to which we will return. I would also like to give it an overview of how I see AIB contributing positively to the growth of the economy and to assure members that the bank now has a sustainable business model and is in a position to continue to facilitate the return of capital to the State when the Government decides.
First, I will introduce the members of my management team who are with me. They are Mr. Mark Bourke, chief financial officer; Mr. Jim O’Keeffe, head of financial solutions group; and Mr. Robert Mulhall, managing director of retail, corporate and business banking.
AIB is a critical part of Ireland's economic infrastructure. The banking system and the supporting infrastructure were rescued from collapse at great expense to the taxpayer because of the crucial economic role of the banks. The financial crisis and the role the banks played in its creation led, understandably, to a reputational battering of the banking sector which will take a lot of time to heal and will never be forgotten. Fortunately, the reality is that the banking sector in Ireland is now in far better shape and delivering on a daily basis the economic support it has been designed to deliver.
Overall, while the GDP growth rate is expected to lessen slightly next year, the economy is forecast to continue to perform well in the next three years, prompting demand for new loans and banking products and reducing pressure on problem loans. AIB's role is to be a strong net contributor to Ireland's prosperity to demonstrate why it was an organisation that was well worth saving. We can do this by providing reliable financial support for every aspect of the economy, including business, farming, families, individuals and communities. As evidence of its progress, the bank is recording a strong underlying profit, has made substantial repayments to the State and is ready for sale at a time of the Government's choosing.
In summary, after a period of enormous transformation, AIB's financial performance has improved, with a sustainable underlying profit of approximately €1 billion, excluding write-backs and one-off benefits which are incremental to it; a reduction in our cost base of €450 million over three years to 2015; an €18 billion reduction in impaired loan balances to €11 billion in June 2016 from €29 billion in 2013; new lending approvals of €14 billion in 2015 and €6.1 billion in the first half of 2016, an increase on the figure for the previous year; a total of 37,000 forbearance solutions provided for mortgage customers in difficulty; owner-occupier arrears greater than 90 days past due at a figure of 5.8%, significantly below the industry average of 8%; significant capital generation and strong capital ratios; and repayments of capital in the past 12 months of €3.5 billion to the State, bringing total payments to €6.5 billion, including fees, coupons, dividends and levies.
AIB received a €20.8 billion investment from the State and our objective is to facilitate the repayment of this amount in full. The timing, nature and structure of a return to the public markets are matters for the Minister. From my perspective, the aspect within my control is the management and performance of the bank and ensuring international investors have a clear understanding of our strategy, progress and future trajectory. Members will have recently seen that the Department of Finance has begun the process of appointing investment banks as "global co-ordinators" as part of a banking syndicate to assist in a potential future initial public offering, IPO, of AIB. The selected investment banks will assist the State in the initial stages of preparation for an IPO and the Department has confirmed that the global co-ordinators selected will be appointed for an 18-month period with an option to extend.
If proof were needed of the importance of a strong banking sector, it has rarely been more starkly illustrated than in very recent times. Economic uncertainty has been introduced in unprecedented measure by the Brexit vote and possible policy changes under a new US Presidency. I strongly preface my remarks by stressing how premature it is at this stage to accurately foretell what lies ahead in either the EU, US or UK scenarios. However, as a small open economy which is particularly influenced by developments such as those we have just seen in two of our most significant trading partners, we must give serious thought to the risks and benefits that might yet result for the country. In the short term a weakening sterling is affecting some of our indigenous exporters and we are working hard with our customers who are impacted on to address these effects and plan with them for alternative and diversified markets. I believe that in the longer term Ireland can present itself as a bridge between two major economic regions on either side of the Atlantic. This must be the most attractive location in which to invest capital and resources. This must be true for local entrepreneurs, domestically headquartered businesses and the multinational sector. This goes well beyond headline tax rates. If we have a truly supportive and agile approach to attracting all investment, we can maintain the healthy job creation that has been a feature of the past few years. There is no reason we cannot benefit from additional foreign direct investment inflows and possibly the relocation of financial firms from the United Kingdom, but in order to attract business we must have the required supporting infrastructure such as commercial office space, housing, transport and efficient access to finance. As a well capitalised bank with excess liquidity, AIB is strongly placed to help to drive and support that strategy.
During the summer the publication of the ECB stress test results attracted negative media attention. The market reaction was more muted. The methodology used is particularly penal to banks such as the Irish banks, with their relatively high levels of non-performing loans, NPLs, and a recent history of losses on distressed loans. The tests were a snapshot in time and do not fully reflect the current state of the bank and the pace of our recovery.
Crucially there are no required capital actions. Earlier this month, Moody’s outlook on Ireland’s banking sector was positive in spite of the Brexit vote, saying the uncertainty introduced by the result was manageable and that Irish banks had materially strengthened their solvency ratios owing to a mix of factors including strong internal capital generation and simplification of their capital structures.
After the initial phases of the financial crisis, the level of non-performing loans, NPLs, still on AIB's balance sheet was almost €30 billion at the end of 2013. AIB has in the intervening years engaged with customers in difficulty to implement a range of forbearance and restructuring solutions. This work meant that by the end of June 2016 these NPLs were 61% lower at €11 billion. Despite this progress and the fact that we hold almost half of this in bad debt provisions, we recognise it is still a high number when compared to other peer European banks. Elevated NPLs attract both regulatory and market attention and the ECB in particular is very keen to oversee the lowering of NPLs across the entire European financial system. Their stress tests will continue to focus very heavily on this aspect, as will other regulatory actions. Therefore, we must continue to address the challenge of non-performing loans as a matter of the utmost strategic importance. We will continue to seek and implement sustainable solutions for those customers who engage with us while also recognising that after years of consistently working to restructure the number of loans in long-term arrears, we must keep all options open that reduce the overall level of NPLs.
We are essentially a core Irish bank. With 2.2 million AIB customers and 360,000 EBS customers, the AIB Group is rooted in the country’s economic life and communities. A total of 60,000 customers use our 205 AIB branches every day, with a further 7,000 customers visiting our 71 EBS locations daily.
Our partnership with An Post, with its 1,100 offices, provides banking services to 15,000 customers every day, with approximately 4 million transactions expected to be recorded by the end of this year alone. These combined banking services amount to a deeply embedded and widespread network across the country. Our network bank staff are drawn from within the community, bringing with them local knowledge and an understanding of our customers and their needs.
Close engagement between AIB and our customer base is important to the success of our business and underpins our performance. We have recently reorganised our banking model in order to work more closely and connect better with our customers across our retail business and corporate activities. We created 19 new local markets which are now in place and headed by an individual senior manager responsible for AIB’s overall engagement with customers in that region.
The bank is organising around customers at a local level, eliminating duplication and unnecessary complexities in the system. The new structure aims to provide customers with a convenient one-stop-shop flexible form of service, allowing more local management autonomy when it comes to decision-making, including lending. It is designed to be more tailored to individual customer needs, allowing far greater agility of service and enabling us to move working capital faster and more efficiently.
When I joined AIB in 2010, I could not have predicted the amount of change in customer behaviour that would occur in a relatively short period of time. The systematic move by customers to digital and technological banking means that AIB is more than half way through an €870 million investment programme focused on improving the customer experience, digital innovation and information technology resilience.
AIB is leading the expansion of digitalisation of services. For example, 76% of all AIB’s personal loan applications are now done through digital channels and 95% of all customer transactions are automated. This activity is by no means conducted just by a younger generation of customers. The use of digital channels by older age groups is growing consistently, regardless of geographical location. In line with European norms, banking online and through remote channels has been embraced across the country. Almost 50% of customers in rural counties now use digital banking of one kind or another. More than 40% of our 500,000 daily transactions are conducted outside of normal banking hours, and are transacted online or on mobile.
There is a balance to be maintained between providing our customers with personal, one-to-one services and an accessible and robust digital or mobile service. AIB opened three new branches last year, in Little Island, Cork, Carrickmines and Grand Canal Dock in Dublin. Earlier in 2016, we opened the only in-store banking outlet in the Republic of Ireland through SuperValu in Lucan. It is an illustration of the increasing number of flexible banking options available to our customers, to be used when and where they choose.
AIB is also increasing its mobile salesforce where trained staff travel to meet customers where and when it suits their needs. In addition to the core retail opening hours, by the end of this year the bank will be operating 20 bank lobbies across the country providing a wide range of services, seven days a week from 8 a.m. to 9 p.m. In addition, students now have access to exclusive on-campus banking services at 13 universities and colleges from Waterford to Sligo, and from Dublin to Galway. Where there is a lack of physical branch infrastructure, AIB operates community banks in rural areas of Cork, Kerry, Clare, Limerick, Tipperary, Mayo, Galway and Donegal via mobile branches. We have recorded over 40,000 transactions at these branches this year.
Supporting our customers with speedy and efficient credit decisions remains central to our aims. Overall, the bank is approving approximately €14 billion a year in new lending to SME, corporate, mortgage and personal customers. The bank is now clearly performing its fundamental role of facilitating our retail and business customers in protecting as well as creating jobs. On the SME and corporate side, the bank sanctioned €4.8 billion in lending last year to existing and new businesses and the current momentum is positive.
The bank has 250,000 SME customers and can now provide a decision within 48 hours on a credit application of up to €30,000. Since this initiative’s launch in September 2014, some 28,000 applications have been approved through this process. The performance of loans in what was a very challenged SME sector has improved significantly, a welcome metric as it directly involves saving jobs and creating employment. Meanwhile, we have been building out bank sectoral teams, developing specialists to work specifically with key areas of the economy. These teams have gained an insight into the needs of farmers, retailers, the hospitality sector, transport, technology, exporting, energy and health sectors. This approach of building sectoral capability has been very effective. It has given the bank a high level of understanding of the specific requirements of businesses and allowed us to shape products and funds suitable to their needs. For example, our agri-team now includes eleven specialist advisers with front-line experience of farmers’ needs and opportunities and who can respond rapidly and pragmatically to issues such as flooding, price volatility and poor crop yields. Farming is a major aspect of our business and, following the full drawdown of the first €500 million agri-loan fund, at the end of last year we launched a second €500-million agri-loan fund to support the sector.
Recently, AIB has been engaging with the Department of Agriculture, Food and the Marine and with the Strategic Banking Corporation of Ireland or SBCI in regard to the Low-Cost AgriCash Flow Support Loan Fund announced in the budget. AIB’s successful partnership with the SBCI in helping the expansion of small businesses and farming is reflected in the aforementioned figures. Since the launch of AIB’s €400 million SBCI fund in 2015, which is available at a 4.5% rate, AIB has approved more than €5 million of credit each week to businesses and farmers under the fund. Last year, the average loan drawdown under this fund was €28,500 but loans ranged in size from €1,000 to €1 million.
AIB is the largest provider of mortgages in the Irish market. We have a 34% share of market by drawdowns and we approved €2 billion of loans to customers last year alone. Conscious of the need to treat customers fairly, as soon as the bank’s underlying performance allowed, and in particular as our cost of funding improved, AIB moved to cut its standard variable rate. The joint committee is aware that we have implemented four mortgage rate cuts totalling 1% to new and existing customers in the past 24 months. Our SVR rate is now a market-leading 3.4% and LTV variable rates start as low as 3.1%. It means savings of approximately €1,300 a year on the average mortgage. We also introduced a €2,000 contribution to switching costs to facilitate that process.
Case by case restructuring of problem mortgages continues to absorb a high degree of bank resources but, as the figures show, we are making good headway. We have produced a comprehensive range of sustainable solutions including split mortgages, low fixed-rate options, term extensions, arrears capitalisation, reduced repayment and voluntary sale for loss. All of these measures are underpinned by the bank’s determination to keep people in their homes where possible, when customers engage with us and prioritise mortgage debt. Repossession is always a last resort and, in spite of popular misapprehensions, less than 200 repossessions of owner-occupier homes took place last year as a result of enforced security. Our engagement with third-party channels such as the Irish Mortgage Holders' Organisation and Stepchange has also led to the resolution of thousands of what appeared to be intractable cases.
As everyone is acutely aware, we are operating at present in a very constrained housing market. The societal and economic impact of the lack of housing supply makes an early solution to this crisis imperative. AIB recognises the critical role it plays in the housing supply chain and is actively engaged with the Department of Housing, Planning and Local Government, as well as other relevant agencies, to ensure we play our role in establishing a normalised housing market. The bank is also providing a pipeline of hundreds of empty houses to the Housing Agency to provide homes for families.
In summary, on behalf of AIB, I want to again express thanks to the committee for inviting us here today. From our perspective, these engagements with the Oireachtas are a valuable means of explaining our position to the committee and to the broader public. They allow space for debate and also provide us with a clear view of the opinions and expectations of the committee.
Once again, with the bank now profitable, our priorities are to maintain the focus on delivering a strong and sustainable financial performance, to be ready for an IPO when our shareholder decides, to continue to reduce impaired loans, to strongly support Ireland’s economic growth and jobs and to keep our customers' needs at the heart of all our policies.
The Irish banking sector is an integral part of the Irish economic infrastructure. In addition to supporting our indigenous industries, we play our role in establishing Ireland as the European location of choice for international investment. I assure the committee my team and I will continue to build on the advances already secured by AIB and support our customers in the challenges ahead. It is through the delivery of professional, efficient, reliable and experienced service that we intend to match our strong financial performance with a full redemption of customer trust in the bank. We welcome the committee's questions.
