Allied Irish Loan Losses to Decrease Further in 2013

Allied Irish Banks Plc, which cost taxpayers about 21 billion euros ($27 billion) to rescue, expects bad loan losses to decrease for a second straight year in 2013, Chief Financial Officer Paul Stanley said.

Loan impairment charges fell 70 percent to 2.5 billion euros in 2012, the lowest since 2008, the nation’s second-largest lender by assets based in Dublin said in a statement today. It expects a further “reasonable drop-off” in loan losses in 2013, with residential mortgage arrears peaking around mid-year, Stanley said in a telephone interview.

“AIB has now largely completed the restructuring phase of its strategic plan as the bank targets a return to sustainable profitability and growth during 2014,” Chief Executive Officer David Duffy said in the bank’s statement.

Duffy, who has held the job for almost 16 months, is implementing more than 2,500 job cuts, reducing executives’ pay and selling loans to help return the lender to profit and attract investors in 2014. Allied Irish plans to restructure almost all of its troubled residential mortgages by the end of year, Duffy said in an interview last month.

The 99.8 percent state-owned bank is beginning to offer struggling borrowers split mortgages, where repayments on a portion of the loan are put on hold until the debtor’s circumstances improve, and the lender writes off irrecoverable loans, he has said.

Arrears Growth

The pace of arrears growth in the Irish mortgage book “slowed when compared with 2012,” Allied Irish said, echoing comments from other lenders, such as Bank of Ireland Plc and Permanent TSB Group Plc, within the past month.

By value, the level of Irish owner-occupier residential mortgages at least 90 days in arrears rose to 14.9 percent at the end of 2012 from 10.8 percent a year earlier. Buy-to-let loans behind in repayments increased to 43.6 percent from 31.3 percent, the bank said.

While Allied Irish’s net interest margin, the difference between the rates at which it funds itself and lends to customers, narrowed to 0.91 percent in 2012 from 1.03 percent a year ago, it expanded in the fourth quarter from to the previous three months. The bank and Irish rivals cut deposit rates and raised lending rates last year to revive margins.

The margin, which has contracted from 2.21 percent in 2008, is set to rebound to “slightly south” of 1.50 percent in 2014, Stanley said.

‘Helpful Sign’

“The margin stabilization is a helpful sign, but bear in mind that the turnaround here is likely to trail Bank of Ireland, which started earlier on deposit re-pricing and has the benefit of a U.K. mortgage loan book where it has put through rate hikes,” Eamonn Hughes, an analyst at Dublin-based Goodbody Stockbrokers, said in a note.

The net loss increased to 3.65 billion euros in 2012 from 2.31 billion euros a year earlier, as a 2.1 billion-euro gain from buying back junior bonds at a discount wasn’t repeated.

The bank has completed almost 90 percent of central-bank target to shrink its loan book by 20.5 billion euros in the three years through 2013. Its loan-to-deposit ratio fell to 115 percent in December from 138 percent a year earlier, helped by a 5 percent increase in deposits.

Deposits have remained stable even as Cyprus prepares to inflict losses on customer savings of more than 100,000 euros as part of the Mediterranean island’s international bailout, agreed this week, Stanley said.

Allied Irish expects costs to fall “materially” this year as a result of job cuts, the government’s removal of its banking guarantee at the end of this month, which cost Allied Irish 388 million euros in fees in 2012, and other savings measures.

“Allied Irish Bank’s results confirm that the group is making good progress toward its deleveraging target,” said Emer Lang, an analyst at Dublin-based securities firm Davy. “Restoring the group to profit continues to hinge on rebuilding margins, imminent removal of the” state guarantee, “reduced costs and containing impairments.”

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