AIB overcame the cashless branch debacle to report better half-year results, but a deteriorating economic outlook threatens to make life much more difficult for Ireland’s second largest bank. AIB’s profit before tax in the first six months of 2022 rose by almost 85% to 537 million euros this time.
Excluding these unique factors, AIB’s operating income increased by a still impressive 21 percent to €220 million. Markets reacted positively to the results announcement, with AIB shares rising 3% to €2.22.
Improved first-half performance will help AIB cover up the unfortunate cashless store controversy. On July 19, AIB announced that 70 of its 170 stores would be “repurposed.” After the usual rant about the “repurposing” that allowed the 70 branches to “focus more on account opening, financial planning, mortgages, credit, savings and investing,” AIB slipped into the killer: “As digital usage rises, so do the The cost of providing cash services has become increasingly unsustainable. As a result, cash, ATM and check services will be removed from these branches.”
Despite warnings that its customers would still be able to access cash through An Post’s 920 branches, the AIB announcement sparked an uproar and affected communities and their political representatives came together to voice their outrage.
With the state still holding a 63.5 percent stake in AIB, a legacy of its €20.8 billion post-crash bailout, the ultimate outcome of this showdown between bankers and politicians was never in doubt. Three days later, AIB was forced into a humiliating descent. One can only ask, what on earth was AIB boss Colin Hunt thinking?
While the surge in bad debt chargebacks was unexpected — many analysts had been forecasting a lower chargeback — AIB’s luck might not last.
The British bank Lloyds published its half-year results on Wednesday. While the preliminary pre-tax figure of almost £3.7bn was slightly above expectations, investors were spooked by the change in the bad debt position from a £734m write-down in the first half of 2021 to a £377m write-down in 2021 first six months of this year a turnaround of £1.1 billion.
Despite clear signs that UK banks are experiencing turmoil, on July 22 stockbroker Davy raised its 2022 forecasts for both AIB and Bank of Ireland (write-downs) of €803m for full-year 2022, up 1 per cent than their previous guidance, and have raised their 2023 EBITDA guidance by a massive 16 percent to €1.31 billion.
“We are updating our forecasts to include the impact of higher interest rates, with the conservative assumption that the ECB’s deposit rate will reach 1 percent by the end of 2023. This will result in significant upgrades through 2023 and again higher revenue tracking in 2024 and 2025,” they write.
In other words, higher interest rates are good for a bank’s bottom line.
And it’s not just higher interest rates. The withdrawal of two foreign-owned retail banks, Ulster and KBC, from the Irish market has opened up new opportunities for their domestic competitors, including AIB.
While Bank of Ireland and Permanent TSB were the main beneficiaries of the exit of the foreign-owned banks, AIB also managed to collect some of the loot. In June 2021, the firm acquired a €4.2 billion book of performing corporate and commercial loans from Ulster Bank, while last month it raised a €5.4 billion tracker mortgage portfolio, also from Ulster .
The exit of foreign-owned banks has also resulted in an estimated 470,000 checking accounts looking for new homes. Step forward AIB. 160,000 new checking accounts were opened by AIB customers in the first five months of this year, up from nearly 100,000 for all of 2021. AIB CEO Colin Hunt expects his bank to have onboarded 47 percent of churn bank customers.
Davy now believes the takeover of the Ulster Bank loan book will feed into AIB earnings sooner than expected, while the recently acquired Tracker mortgages will allow him to swap cash he currently has on deposit with the ECB against the higher swap -Compliant trackers.
Unfortunately, despite the increase following the announcement last year, the price of AIB stock has remained virtually unchanged. That’s still much better than for most other banks, with the Euro Stoxx index of the eurozone’s top 50 banking stocks falling nearly 17 percent on fears of a worsening economic outlook and bad debts related to Ukraine.
“Elevated geopolitical risks, rising inflation and tighter monetary policy have all combined to create a more uncertain business environment,” says Hunt. He describes the bank’s half-year result as “solid”.
The challenge for AIB is to maximize the benefits of higher interest rates while minimizing the higher costs caused by rising inflation. The bank has withdrawn its medium-term guidance but is confident that “the benefits will outweigh the negative [the cost of] the headwind”.
https://www.independent.ie/business/irish/aib-profits-provide-some-welcome-relief-but-new-challenges-lie-ahead-41878802.html AIB gains offer welcome relief, but new challenges lie ahead