AIB runs off €3.2bn since €20bn NAMA transfer as loan quality deteriorates

Allied Irish Bank (AIB) reduced its property and development loan exposure by €2.24bn in 2012, to €22.25bn, and by €3.16bn since the transfer of €20bn of loans to NAMA in 2009, as the quality of the loan book deteriorated last year with the proportion of impaired loans rising to nearly two-thirds.

AIB big logoLoan impairments provisions held against AIB’s €22.25bn aggregate property and development loan book – comprising €10.2bn in the non-core division and €12.1bn in core – rose by €1.9bn last year to €8.1bn, compared to €7.57bn at the end of 2011.

However, the proportion of impaired loans at the end of last year, against the total loan exposure to predominantly Irish and UK property and development, rose by 13.4 percentage points to €13.8bn of the total €22.25bn book, meaning 62.0% of AIB’s loans are impaired compared to 48.6% of loans at the end of 2011.

This deterioration in AIB’s combined exposure to Irish and UK property and development assets is also manifest in the broader “total criticised” proportion of loans, including loans which are expected to default in the near future, which rose by €1.09bn to €17.09bn over the 12 months to the end of 2012.

Getting worse, but the pace of deterioration slows

However, AIB pointed out in its annual results, published this morning, that while its loan book continues to deteriorate in quality it is doing so at a slowing pace – an increase of €1.09bn over last year, compared to a year-on-year increase of €3.0bn at the end of 2011.

A further €893m of loans are past due but not impaired at the end of 2012, while €7.55bn of loans, or 33.9%, are unexpired and performing.

Net of provisions, AIB’s combined core and non-core property and construction loan book has a carrying value of €14.15bn, which compares to €16.92 for the end of 2011.

In the wider financial context, AIB reported an operating loss before exceptionals of €2.8bn for 2012, down 65% from €8.1bn in 2011.

AIB’s €2.24bn net exposure reduction was driven by repayments, external refinancings, consensual and enforced asset sales as well as loan portfolio sales, including last year’s Irish non-performing loan portfolio, Project Kildare, which traded to Lone Star for around €265m, reflecting a circa 60% discount on the €660m nominal unpaid balance.

AIB is currently selling a portfolio of performing syndicated senior loans with an unpaid balance of around £200m out of a total £750m, dubbed Project River. The syndicated loans are secured by a portfolio of seven UK airport hotels owned by Surinder Arora’s eponymously-named company Arora Hotels.

Last year, AIB attempted the aborted sale of a UK non-performing loan portfolio, Project Pivot, after final bids failed to adhere to an imposed minimum hurdle price.

Slow run down for non-core, marginal fall within core

AIB’s non-core property and construction loan book reduced by €1.48bn to €10.15bn over the 12 months to 2012, and at the end of last year comprised:

  • Commercial property – €3.85bn (2011: €2.98bn);
  • Residential investment property – €1.38bn (2011: €2.38bn);
  • Commercial development loans – €920m (2011: €1.49bn); and
  • Residential development loans – €3.63bn (2011: €4.36bn).

By comparison, AIB’s core property and construction loan book reduced by €758m to €12.1bn over the 12 months to 2012, and at the end of last year comprised:

  • Commercial property – €8.2bn (2011: €10.74bn);
  • Residential investment property – €1.5bn (2011: €746m);
  • Commercial development loans – €529m (2011: €91m);
  • Residential development loans – €1.36bn (2011: €706m); and
  • Contractors and housing association loans – €499m (2011: €574m).

The €13.8bn of loan impairment provisions held across the combined loan books is comprised of €6.4bn in core and €7.39bn in non-core, with the greater deterioration over the 12 month period in the core book, for which impairments at the end of 2011 were €4.2bn, while the non-core loans were at €7.69bn.

In its annual results, AIB reported: “This sector continues to be very challenging, particularly in Ireland. However, latest information available on the commercial segment indicates that while asset prices continue to fall there are indications of a stabilisation reported by some sectors in prime rents and yields, nevertheless, pressure on rental cash flows continues as a result of tenants renegotiating lease terms including rental holidays.

“There are also positive signs in the housing market with activity levels improving, albeit off a low base, and prices beginning to stabilise and rents recovering. In the UK, while there have also been signs of improvement in prime markets, such as London and the South East, secondary markets remain relatively illiquid.”

Geographic exposure breakdown

By geography, AIB has reduced its entire Irish commercial, residential investment and construction loan book by €1.24bn to €15.98bn over 2012 – and by €17.3bn in the five years to the end of 2008.

By comparison AIB’s entire UK commercial, residential investment, land and construction loan book reduced by €710m to €6.23bn over 2012 – and by €4.08bn in the five years to the end of 2008.

Over the last five years, AIB has reduced its aggregate commercial, residential investment and construction loan book by €25.2bn – from €47.45bn at the end of 2008 to €22.25bn at the end of 2012.

This figure includes around €20bn worth of performing and non-performing property and development loans which were transferred to NAMA during 2009.

Excluding development loans, AIB’s combined commercial and residential investment loan book fell by €1.89bn in 2012 to €14.93bn, comprising:

  • Republic of Ireland loans: €9.1bn (2011: €9.1bn);
  • UK loans: €5.0bn (2011: €6.4bn);
  • US loans: €0.2bn (2011: €0.4bn); and
  • Poland: €0.6bn (2011: €0.9bn).

AIB’s land and development loan book fell by just €202m to €6.42bn, comprised of €4.6bn Irish loans and €1.8bn of UK loans.

David Duffy, chief executive officer at AIB wrote in this morning’s annual results: “Our strategic plan to achieve a return to sustainable profitability during 2014, remains on target. While 2012 was another difficult year for the bank, we have taken a number of important steps to position ourselves for recovery.

“During 2013, the bank will continue to focus on improving our overall operating performance including net interest margin expansion; delivery of our cost initiatives; implementing work out strategies for our customers in financial difficulties; focus on balance sheet and capital optimisation strategies.”

jwallace@costar.co.uk

About CoStar News

Finance Editor, CoStar News
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