I thank the Chairman and the committee members for the opportunity to brief the Oireachtas on AIB’s ongoing progress and on how we plan to address outstanding issues facing the bank. This is my third time meeting the Joint Committee on Finance, Public Expenditure and Reform since becoming chief executive, and I have found it a most valuable forum for explaining the bank’s position to members - and, by implication, to our customers and the wider public. It also serves the purpose of informing us about the committee's thinking and how best we can work together.
Our primary concern is to brief the committee, in as much detail as possible, on our strategy to deal with mortgage arrears and lending, but I would first like to give a short overview of the current position of AIB. We have completed two years of a three-year strategic plan to restore stability, achieve sustainable growth and return to profitability. AIB recently reported a return to pre-provision operating profit for 2013. In essence, after major restructuring, deleveraging, and securing a much reduced cost base, the bank has progressed to a point where it has stabilised its balance sheet, successfully returned to the funding markets, met Government lending targets, and is now positioned for lending growth. We are reducing the level of impaired loans in the bank and targeting a full return to underlying profit during 2014. Ultimately, the goal is to see the bank make a return to the Irish State over time. That is the primary objective.
While we are encouraged by this, we remain steadfastly focused on mortgage and SME arrears management and implementing solutions for customers in financial difficulty. We will discuss that in detail during questioning. Resolving these cases is difficult, labour-intensive and a constant operation in the bank. It demands our time, empathy and resources, but, as I hope to demonstrate, it is not intractable. Our enduring priority is to keep people in their homes where possible and to safeguard jobs and businesses while ensuring taxpayers’ capital is appropriately utilised.
We have developed a range of tailored permanent solutions and are achieving results in implementing these with customers who engage and work with us. I have full confidence that these models are allowing us to make real inroads into the problem. The issue of SME distress and arrears receives a disproportionately small level of coverage in the national debate despite the fact that its resolution is critical for the long-term sustainable growth of the country. In monetary terms, it is by far the larger proportion of AIB’s troubled loan book.
I am pleased to say that we have made very strong progress in resolving our SME arrears book and are seeing much higher rates of customer engagement with regard to our mortgage book. We are confident that we will have completed the substantial majority of the SME restructures over the next 12 months.
I will not labour the point, but our key theme is that engagement is the key that unlocks the conundrum for most distressed borrowers. Having established positive engagement, we can then proceed to agree an outcome that provides certainty to all parties and allows both the customer and the bank to move on to a sustainable financial arrangement. In a bid to maximise the bank's reach to customers in financial trouble, and after reflecting on feedback from Oireachtas Members at our last meeting, AIB has explored new avenues, including the involvement of customer and consumer advocacy groups – a development that has already led to breakthroughs in a significant number of areas.
All resolutions offered to customers in difficulty are assessed on the basis of affordability in respect of the borrower’s mortgage. It is important to clarify the definition of the term “affordability”: this is calculated on the totality of a customer’s net income from which reasonable living expenses are subtracted - in AIB, we calculate these expense as being approximately 20% in excess of the Insolvency Service of Ireland guidelines. What remains is net disposable income, NDI, for the purposes of our calculation. Cognisant of its responsibility to the Irish taxpayer, AIB must, as a core fiduciary principle, seek full repayment of mortgage debt where the customer has the ability to meet that payment from his NDI. Any other outcome is unacceptable from a commercial perspective and would be grossly unfair to the significant majority of mortgage customers across the country who continue to meet their full mortgage obligations despite changed circumstances.
The committee is aware of recent media reports of mortgage debt write-down and we are aware that some commentators have questioned the consistency with which we are dealing with our customers. It is therefore necessary for AIB to be unambiguous in this regard. AIB will compromise on debt with co-operating customers only if there is no prospect of that debt being paid, where there is no affordability to pay it, or when considered against the economics of alternative options open to the bank and, of course, against our requirement to optimise our recovery. All AIB's decisions regarding the nature of the forbearance solution offered to any given customer is grounded in the principle that customers must pay the maximum they can afford from their net disposable income. This principle equally applies in situations where debt compromise forms part of the solution. Decisions are based strictly on customer affordability. I will talk about that in more detail when responding to questions.
Meanwhile, it is not possible or practical to set out absolutely strict guidelines in relation to applicable levels of compromise. The principle is consistent but each case is indeed different and circumstances vary from customer to customer. However, once it has been determined that a customer’s level of net disposable income does not allow for a standard forbearance solution, it is sometimes necessary and commercially sensible to involve debt compromise as part of the resolution. This debt flexibility can arise in the application of a split mortgage or a voluntary sale for loss arrangement, although it is not the case that it always arises in every situation of a split mortgage or voluntary sale for loss arrangement. Where a customer has affordability in such situations, the issue of debt compromise does not arise and is not offered. At our last meeting with this committee in September 2013, we considered at some length the issue of the bank’s legal processes. I again reiterate that AIB only pursues the legal option where customers do not co-operate or engage with the bank and do not maximise their payments of their mortgage based on their affordability after the calculation of reasonable living expenses. These actions are predicated purely on the need to protect capital and to ensure that the bank operates commercially and in compliance with the regulatory guidance. Customers always receive ample opportunity to engage in an effort to reach a financial arrangement, and the possibility of having to resort to legal proceedings is repeatedly flagged by the bank. In fact, the Central Bank has set down clear guidelines on the responsibility of both bank and customers in respect of that engagement.
We engage with people who are in the legal process to seek a sustainable solution for their mortgage difficulties. We cannot leave the legal process until agreement is reached on a sustainable solution based on the affordability principles, as discussed, and the customer demonstrates a commitment to sustain the payments as part of that sustainable solution. However, even in a legal process AIB is amenable to pausing that process when a customer chooses to engage meaningfully to reach a non-legal sustainable solution.
I believe AIB has demonstrated a clear and differentiated willingness to pragmatically engage with co-operating customers in reaching sustainable solutions and also to leave the door open to those in the legal process who are non-co-operating to re-engage despite being in the legal process with the bank. However, the flip side of this is that we must, as a commercial entity, enforce our rights over the property in the event that the customer continues not to engage with us. To do otherwise would be a misuse of the capital that has been provided by the State and would ultimately lead to an unfair transfer of taxpayers' funds from one citizen to another.
Overall, we are seeing a reduction in the bank’s total impaired loans. In addition, the number of early and pre-arrears in our mortgage portfolios reduced materially in the second half of last year. All of this meant that our provision charges in 2013 were €625 million lower than in 2012, including consideration of substantially all of the findings from the Central Bank of Ireland balance sheet assessment. I am optimistic that over the next 12 months AIB will have completed the majority of SME and mortgage restructures, allowing the recovery and growth of viable businesses, the protection of jobs - very importantly - and an improvement in retail confidence.
The bank exceeded the Government’s lending target in 2013, approving credit to 32,000 customers, and issued almost two in every five mortgages drawn down - that is, utilised mortgages. The bank is focused on a €7 billion to €10 billion target of lending approvals over the next five years and is positioned appropriately in capital terms for that. These cover mortgages, personal and business loans. While there is much public conjecture as to whether banks are lending or not, I can categorically state that, having undertaken a significant level of balance sheet restructuring in recent years, AIB is squarely focused on positioning our bank for lending, as the primary balance sheet and as part of our overall strategy to return to profit.
In summary, on behalf of AIB, I want to use this opportunity to again express thanks to the Irish taxpayers for their support, without which we would not be here. Our objective is to re-establish AIB as a profitable investment bank and this is the optimum way to deliver a return on the shareholders' investment over time. Let me reassure members that our team, AIB’s workforce and myself will continue to pursue relentlessly the goal of restoring this bank to good financial health in the shortest possible timeframe.
While we are focused on addressing legacy issues of the past, we must continue to invest in developing a customer-centric banking model that is fit to meet the challenges of our recovering economy and the needs of our customers. We are dedicated to that project until it reaches a successful conclusion.
I thank the Chairman and members, and we are happy to answer questions on our submissions.
