Ireland’s AIB Plans Crackdown as Borrowers Choose Default

Allied Irish Banks Plc is preparing to take legal action against thousands of homeowners, estimating that more than 20 percent of borrowers behind in repayments are opting not to pay in the hope of winning debt relief.

By value, the level of Irish owner-occupier residential mortgages at least 90 days in arrears rose to 16.4 percent at the end of June from 14.9 percent in December, the Dublin-based bank said today. The share of buy-to-let loans behind in repayments increased to 47.9 percent from 43.6 percent. Some of the rise is due to strategic default, the bank said.

“It’s not discretionary to stay in your home and not pay your mortgage” when it can be afforded, Chief Executive Officer David Duffy, 51, said in an interview, after the Dublin-based lender said its net loss narrowed 28 percent in the first half amid falling bad loan losses. “You can’t live rent free.”

Now in the job for 20 months, Duffy said “a few thousand” borrowers more than two years behind in mortgage repayments face legal action, in the wake of the real estate bust which brought the bank close to collapse. The state controls 99.8 of the banks after receiving a 21 billion-euro ($27.8 billion) taxpayer bailout.

“Our initial view is that we are very well capitalized right now,” Duffy said in a separate interview with Mark Barton on Bloomberg TV’s Countdown show. He said “everything we see in the early stages” before stress tests next year “would suggest that we are sufficiently well capitalized.”

Debt Offers

Allied Irish, aiming to return to profit next year for the first time since 2008 and win new investors, has agreed to restructure 4,000 unsustainable mortgages with easier terms, including some debt write-offs, Duffy said. It has made 12,500 such offers, he said.

Ireland’s crash differs from the U.S. subprime bust as banks have been reluctant to foreclose on properties, a cultural taboo dating to memories of 19th century evictions by British landlords. Repossessions were also hampered by a legal loophole which the government closed yesterday with new laws.

Irish home prices have fallen by half from their 2007 peak, helping blow a hole in the Irish financial system in 2008. Allied Irish said today it’s now seeing “positive signs” in the economy, as its loss narrowed to 758 million euros from 1.05 billion euros a year earlier. The loan impairment charge fell 16 percent to 744 million euros.

The lender’s net interest margin, the difference between the rates at which it funds itself and lends to customers, widened to 1.28 percent in the first half from 1.20 percent for the last six months of 2012. The bank and Irish rivals cut deposit rates and raised lending rates last year to revive margins.

Job Cuts

The bank said it has completed 99.4 percent of a target set by the central bank to shrink its loan book by 20.5 billion euros in the three years through 2013.

It’s cutting at least 2,500 job cuts, executives’ pay and shutting down a defined benefit staff pension plan, where entitlements are linked to final salaries, under a plan, outlined last year, to achieve about 350 million euros of annual savings by 2014.

“Management appear to be making tangible progress in rehabilitating the institution back to viability,” said Ciaran Callaghan, an analyst with Dublin-based Merrion Capital, in a note. “Income and cost trends are heading in the right direction.”

To contact the reporter on this story: Joe Brennan in Dublin at jbrennan29@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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