AIB Eases 2,000 Mortgages a Month as Investor Wooing Starts

Allied Irish Banks Plc, the state-owned recipient of a 21 billion-euro ($28 billion) bailout, is easing terms on 2,000 mortgages a month, aiming to clean up its troubled loan book in time to woo new investors by 2014.

Ireland’s second-largest lender by assets is tackling arrears mostly by splitting mortgages, or hiving off a portion of a loan that has repayments put on hold until a borrower’s circumstances improve, Chief Executive Officer David Duffy said in an interview in his Dublin office. He said the bank stepped up mortgage restructuring from an original target of 1,500 a month, and is also beginning to write off irrecoverable debts.

“All the arrears book will have long-term restructuring in place by the end of the year, bar a small percentage,” according to Duffy, 51, who said he’s worked to change the bank’s “entitlement” culture and “sedentary nature” in his 14 months as CEO. “2013 is a massive execution year.”

Duffy said Allied Irish doesn’t see a need to raise extra capital and has started talks with potential equity investors, and will “engage materially” with them next year. He has sped up resolution of distressed mortgages as regulators and the government criticize Ireland’s banks for being too slow to clean up their balance sheets in the wake of the nation’s economic crisis, which has seen home prices collapse and unemployment triple since 2007.

Credibility Challenge

Allied Irish was taken over by the state in December 2010, weeks after the government sought a 67.5 billion-euro international bailout as the cost of shoring up its banks became too much to handle.

“Given that mortgages make up half AIB’s book and the fact that it is more concentrated on the Irish market than its main rival, Bank of Ireland, the impetus really is on Duffy to work through the troubled loan book to give the bank greater credibility around its capital base,” said Stephen Lyons, an analyst with Dublin-based securities firm Davy. “AIB also has a challenge building up a credible investment case for new investors.”

Ireland’s housing crash has differed 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. Duffy said that will change, and Allied Irish and its rivals will turn more to repossessions.

“If you start with our principle, which is to protect the home,” the emphasis will be on seizing buy-to-let properties first, he said. “Every case isn’t solvable.”

‘Crazy Outcome’

Anthony Murphy, a senior economist at the Federal Reserve Bank of Dallas, called the lack of repossessions in Ireland so far “a crazy outcome” at a presentation in Dublin last week. While 11.3 percent of loans on Irish private homes were at least three months in arrears in the third quarter of 2012, repossessions were 0.1 percent of all mortgages, he said.

That compared with 3 percent of U.S. home loans in arrears while banks’ inventory of repossessed homes was equivalent to 4.2 percent of their loan book during the same time period, he said. Murphy said he was speaking in a personal capacity and not on behalf of the Dallas Fed.

Irish Central Bank Governor Patrick Honohan said last week that he is “ramping up our engagement with the banks,” saying they’re “behind the curve” in addressing mortgage arrears. Lenders have so far relied on temporary measures, such as switching borrowers to interest-only payments and lengthening the term of loans to avoid recognizing losses.

‘Very Demotivating’

Public criticism of the banks has been “very demotivating” for the 2,000 workers in a division Allied Irish set up last year to deal specifically with problem loans, Duffy said. “I’d much rather if people would ease off on the rhetoric.”

The share of Irish private home loans in arrears for more than 90 days rose to 11.3 percent of borrowers at the end of the third quarter, up from 10.6 percent at the end of June, the Dublin-based central bank said on Dec. 13. For buy-to-let mortgages, 17.9 percent of loans were more than three months in arrears, up from 16.6 percent.

Standard & Poor’s said on Jan. 16 that Irish banks may need more capital to meet international requirements under Basel III rules that began taking effect this year. Still, Duffy said that may not be necessary for Allied Irish.

Basel III

To comply with Basel III, he said the bank has a five-year plan to cut its pension deficit and use past losses to lower its tax bill and return to profit in 2014. At the end of June, the lender had 3.85 billion euros of deferred tax assets from previous losses that can be used to reduce future liabilities, according to its interim report. Its pension deficit stood at 1.46 billion euros at the time.

“We still envisage the bank making a 300 million-euro loss next year before returning to profit in 2015,” Eamonn Hughes, an analyst at Dublin-based Goodbody Stockbrokers, said in a note today. “We welcome the developments on tackling mortgage arrears, where we expect” loan-loss provisions to “continue to sequentially improve this year.”

Duffy said he doesn’t see “another call on capital” after regulators perform a fresh round of stress tests later this year, adding that he advocates delaying the tests until 2014 so banks can concentrate on resolving bad loans.

The CEO said he sees the Irish government remaining a long-term minority shareholder, seeking to benefit from a higher share price after it decides to sell most of its 99.8 percent stake in the company.

‘Crystal Clear’

While the bank “would not really look at venture capitalist or short-term” investors, it would entertain sovereign-wealth funds, “though we’d have to be thoughtful about which ones,” he said.

The Irish government is campaigning to sell stakes in nationalized banks to the European Stability Mechanism bailout fund. Duffy said a hybrid of ESM and private investment may work for a period, once investors were “crystal clear” on the bailout fund’s strategy, he said.

Before the government sells its stake, Allied Irish must become an “investible proposition,” Duffy said. In addition to cleaning up bad loans, he said it must become more profitable by rebuilding its net interest margin, the difference between the rate at which Allied Irish borrows and lends to customers.

Net interest margins had contracted over the past decade, reaching 0.9 percent in the first half of last year before expanding near the end of 2012, Duffy said. He doesn’t expect the measure to reach last year’s lows again.

The nation’s banks have been lowering the interest rates they pay on customer deposits over the past year as competition for cash eases and they shrink their balance sheets. The lenders have also increased rates on variable-rate home loans.

Allied Irish may raise rates again this year, “but it’s not going to be a whole series of raises,” Duffy said. AIB is on track to reach its goal of shedding 2,500 jobs by March, though the final figure will probably be “marginally ahead of the target” by the year’s end, he said.

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