AIB plans to buy back €1bn of shares from State amid spike in profits

Bank’s net profit surges more 170% to more than €2bn

AIB said it plans to buy back a further €1 billion of its shares from the State after unveiling a higher-than expected spike in profits last year amid heightened interest rates, to deliver the strongest financial performance in its history.

The money set aside for a directed buyback of Government shares would reduce the holding to about 34 per cent, based off where the stock is currently trading and an expected cancellation of the repurchased shares. Adding in the Government’s current share of a planned €700 million cash dividend for investors, the total cash return to the State would rise to €1.28 billion in the coming months.

The €1.7 billion AIB plans to pass on to to shareholders is about €300 million higher than what the market expected. Davy analyst Diarmaid Sheridan said that the outlook “supports material distributions in the coming years”.

Shares in AIB soared over 4 per cent to €4.52 to hit their highest level since late 2018.

AIB has so far paid back €13.7 billion of its €20.8 billion crisis-era rescue bill. Discussions with the Department of Finance are under way relating to the planned stock buyback, which will also need approval at the bank’s annual general meeting in May.

Further reductions in the State’s stake are likely to increase pressure on Minister for Finance Michael McGrath to lift crisis-era pay restrictions at the bank. AIB chairman Jim Pettigrew said in the annual report that he has, and will continue, to engage with the Minster on the matter, which the board considers a “a material risk” to retaining senior staff.

The bank’s net profit jumped 170 per cent to €2.058 billion, topping consensus expectations for a result of €2.006 billion. Net interest income amounted to €3.84 billion, up 83 per cent on the year, and ahead of AIB’s most recent guidance for a figure in excess of €3.75 billion.

AIB raised its 2023 net interest income forecast three times over the course of last year. This was driven as European Central Bank (ECB) rate increases pushed up how much the bank earns on surplus deposits with the Central Bank, and as savers had been slower to move from low-rate on-demand accounts into its more attractive savings products.

AIB’s €33.3 billion of excess customer deposits that are resting in the Central Bank are earning a rate of 4 per cent, up from minus 0.5 per cent in July 2022, before the ECB started to increase its rates in an effort to fight inflation.

Chief executive Colin Hunt raised the group’s medium-term profitability target – or return on tangible equity shareholders (RoTE) hold in the bank – to 15 per cent from a previous goal of more than 13 per cent. The exceptional surge in earnings last year resulted in a RoTE of 25.7 per cent.

AIB’s running costs increased by 10 per cent to €1.83 billion, including wage and general inflation, higher staff numbers and money set aside to cover bonuses. While the Government has eased pay restrictions to allow for bonuses of up to €20,000, AIB has already outlined that bonuses paid out this year on 2023 earnings would be capped at €12,700. AIB’s cost-to-income came to 39 per cent last year – below its 50 per cent target.

“As we embark on our next three-year strategic cycle, we do so with a transformed, reshaped, and revitalised group,” said Mr Hunt. “Our priorities for 2024 and beyond include an enhanced focus on our customers, further greening of our loan book and driving greater operational efficiency.”

AIB has taken over more than €2.8 billion of commercial and corporate loans from Ulster Bank following the UK-owned bank’s decision to quit the market, with the final amount down from the originally estimated figure of about €4 billion. Meanwhile, some €4 billion of the €5 billion of Ulster Bank tracker loans that AIB is taking over have migrated so far.

New lending last year amounted to €12.3 billion, with €3.7 billion of this coming from green lending. Irish mortgage lending fell 12 per cent to €4 billion, as the previous year had benefitted from a high level of loan switching as borrowers looked to lock in low fixed rates. Property lending slid 26 per cent to €2 billion amid a slowdown in the sector. Non-property lending jumped 18 per cent to €5 billion.

Gross loans at AIB increased by 9 per cent to €67 billion, driven by the Ulster Bank transactions.

The bank’s non-performing loans ratio fell to 2.96 per cent, in line with target, from 3.5 per cent a year ago, helped as it shifted most of its remaining crisis-era problem loans by selling a portfolio for about €100 million to US distress debt giant Cerberus and loan servicing company Everyday Finance.

Reporting On:irishtimes.com