Allied Irish Banks, p.l.c.
Oireachtas Committee on Finance, Public Expenditure and Reform
Wednesday, April 9th
Opening Statement by AIB Chief Executive Officer, David Duffy
Chairman and Members of the Committee, thank you for again allowing us 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 to meet the Committee on Finance, Public Expenditure and Reform
since becoming Chief Executive of AIB and my team and I have found it a most valuable forum for
explaining the bank’s position to you, and by implication, to our customers and the wider public. Itt
also serves the purpose of informing us on your thinking and how best we can work together to help
resolve the critical challenges facing the bank and the economy.
Our primary concern today is to brief you, in as much detail as possible, on our strategy to deal with
mortgage arrears and lending, but I would first like to give you a very short overview of the current
position of AIB. We have just completed two years of a three-year strategic plan to restore stability,
achieve sustainable growth and return to profitability. As you are aware, 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,is
now positioned for lending growth, is reducing the level of impaired loans in the bank and is
targeting a return to full underlying profit during 2014. Ultimately, we intend to see the bank make
a return to the Irish State over time, at the Government’s discretion.
While we are encouraged with this strong pattern of improvement, we remain steadfastly focussed
on mortgage and SME debt arrears management and implementing resolutions for customers in
financial difficulty. Resolving these cases is a difficult, labour-intensive and constant operation – and
demands time, empathy and resources. But, 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 and I have full confidence that
these models are allowing us to make real inroads into the problem.
The issue of SME 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 and,
in monetary terms, 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 relative 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 engagement is the key that unlocks the conundrum for most
distressed borrowers. Having established positive engagement, we can then proceed to agree an
Allied Irish Banks, p.l.c.
outcome that provides certainty to all parties and allows both customer and bank to move onto a
sustainable financial arrangement. In a bid to maximise its 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 consumer advocacy groups – a development that has
already led to breakthroughs in a significant number of cases.
All resolutions offered to customers in difficulty are assessed on the basis of the borrower’s
affordability in respect of their mortgage. Let me again 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 -- approximately 20% in excess of Insolvency Service of Ireland
guidelines. What remains is Net Disposable Income (NDI)
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 their
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 only
compromise on debt with cooperating customers – and only then if there is no prospect of that debt
being paid; where there is no affordability to pay it; when considered against the economics of
alternative options open to the bank and, of course, against our requirement to optimise our
recovery. Our decision process regarding the nature of the forebearance solution offered to any
given customer is grounded in the principle that they 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.
Meanwhile, it is not possible or practical to set out absolutely strict guidelines in relation to
applicable levels of compromise as 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 cooperate or engage with the bank and do not
maximise their payments of their mortgage based on their affordability after the calculation of NDI.
Allied Irish Banks, p.l.c.
The bank’s actions are predicated purely on the need to protect capital and to ensure that this bank
operates commercially, as mandated. 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 relation to engagement.
AIB actively engages with people who are in the legal process to seek a sustainable solution for their
mortgage difficulties. But, as a bank we cannot leave the legal process until agreement is reached
on a sustainable solution based on affordability after the calculation of NDI and the customer
demonstrates a commitment to sustain the payments agreed as part of that sustainable solution.
However, AIB is amenable to pause the legal process when a customer chooses to engage
meaningfully to reach a non-legal sustainable solution.
I believe we have demonstrated a clear and differentiated willingness to pragmatically engage with
cooperating customers in reaching sustainable solutions and also to leave the door open to those in
the legal process who are non-cooperating to re-engage meaningfully with the bank. However, the
flip side of this is that we must, as a commercial entity, enforce our rights over the property. To do
otherwise would be a misuse of the capital that has been provided the bank by the State and would
ultimately lead an unfair transfer of taxpayers funds from one citizen to another.
Overall we are seeing a reduction in the bank’s total impaired loans. Additionally early and prearrears in our mortgage portfolios reduced 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
completed in Q4 2013. 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 and an improvement in retail confidence.
The bank exceeded the Government’s €4 billion lending target in 2013, approving credit to 32,000
customers and issued almost 2 in every 5 mortgages drawn down in Ireland in 2013. The annual SME
lending target no longer applies but I can confirm that AIB’s financial planning is focussed on
achieving €7 billion to €10 billion in TOTAL annual lending approvals – mortgages, personal and
business – per year up to 2017. 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 and positioned for increased lending to our
customers as part of our overall strategy to return to profit during 2014 and beyond.
In summary, on behalf of AIB, I want to use this opportunity to again express thanks to the Irish
taxpayers for their support. Re-establishing AIB as a profitable, investable bank is the optimum way
to deliver a return on the State’s investment over time. I want to assure you that my team, AIB’s
workforce and myself will continue to relentlessly pursue the goal of returning this bank to good
financial health in the shortest possible timeframe.
Allied Irish Banks, p.l.c.
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 will stick with the project to a successful conclusion.
Thank you and we look forward to your questions.